Personal Finance

Here's the Secret Sauce Behind Limelight Networks' Q2 Surprise

Computer money

Content delivery specialist Limelight Networks (NASDAQ: LLNW) presented a fine second-quarter report last week. The company beat Wall Street's earnings and revenue estimates, management raised its full-year revenue guidance by 1%, and share prices surged more than 12% higher the next morning.

Even better, CFO Sajid Malhotra took the time to connect with yours truly on the phone to dive deeper into what made Limelight tick this quarter.

Here's what I learned:

How to control costs without ditching quality

In the earnings release, Limelight kept coming back to the fact that it is winning higher-quality customers while also reducing its capital expenses. I had to ask Malhotra how his company can deliver good service despite a shrinking capital-expense budget.

The answer, he said, is found in a disciplined approach to R&D and equipment purchases:

Our servers can push a lot more traffic today, you know, sixfold or sevenfold what they were doing just two years ago. As a result, we can deliver the same or better results to our customers without investing more capital. Or, for a little bit more capital, we can deliver a lot more bits.

Using off-the-shelf systems instead of expensive custom-built rigs also makes a difference. This is true both for Limelight's main line of business -- delivering large files and media streams through networked storage and content-management systems close to major internet connection hubs -- and for the newer push into edge computing, which puts number-crunching horsepower right next to those digital storage bins. As Malhotra explained:

Our investments are optimized. You know, we're not spending $40,000, $50,000, $100,000 on a server, like I've heard some of our competitors do, to get you a good outcome. We're using standard servers and standard parts to get to a good outcome.

That's what industry standards and best practices are for: letting people and companies do their best work without worrying too much about the details of their technical setup. Limelight used this simple strategy to help push its capital expenses below $4.3 million in the second quarter, 9.3% below the year-ago period.

Computer money

Image source: Getty Images

The race to the bottom is over

As I mentioned above, Limelight is also pushing its client mix in a more profitable direction.

The content delivery industry is a brutally competitive sector, with a handful of inveterate specialists like Limelight and larger rival Akamai Technologies (NASDAQ: AKAM) , but also a plethora of solutions thrown together by general technology titans, or by the content producers and distributors themselves.

Limelight used to get involved in a lot of cost-focused negotiations, but has now found peace with the idea of leaving the downright unprofitable deals unsigned. Malhotra said:

I'm dropping my lowest-priced customers who don't care about quality, they just want

As a direct result, Limelight's average revenue per customer rose 25% above the year-ago period, landing at $73,000 per client. "It is my belief that we command the highest [average revenue per user, or ARPU] in the industry," Malhotra said on the regular earnings call with financial analysts.

We'll see how Akamai compares when it reports its own earnings next week. That company doesn't generally report ARPU on a quarterly basis, but analysts might push Akamai's management to provide it, now that Limelight's impressive figure is fresh in their minds.

10 stocks we like better than Limelight Networks

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Limelight Networks wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

LLNW AKAM

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More