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Limelight: The growing tech company
Posted by: Anh Hoang (IP Logged)
Date: July 15, 2011 11:30AM

Limelight is a provider of content delivery network services. It provides software services to improve the quality of online media, web applications, enable secure online transactions, manage and monetize digital assets, and optimize advertising campaigns.

Business overview

The company operates in one business segment: providing content delivery network services and in three geographic areas — North America, Europe, Middle East and Africa (EMEA) and Asia Pacific. The main region that attract most of the revenue is from the North America, however, the percentage is decreasing for the last 03 years, staying at 71%. The contract with customers is normally one year or longer. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum.

Customers

Limelight customers operate in the media, entertainment, gaming, software, enterprise, and public sectors. According to its annual report, at the end of fiscal year 2010, the company got 1,824 active customers worldwide including Amazon, Deutsche Bank, Electronic Arts, Goodby, Silverstein, and Partners, GroupM, General Electric, HBO, Microsoft, MySpace.com, Netflix, Nintendo Wii, Nissan, Ogilvy, Oracle, Pokeman, Sony Playstation, Toyota of Japan, TWBA, Universal McCann, and Yahoo. No customer that accounted for more than 10% of our revenue. Only Microsoft took more than 10% of total revenue in 2009 and 2008,

The diversification of customers gives the company more flexibility for its operation efficiency. In any case that the company encounter the discontinuation of service usage by one customers, it will not affect very significantly on the company’s long term performance.

For sales and marketing, the company is doing sales via several channels: via telesales, field sales force, distribution partners and resellers.

Research and Development

For the fast growing industry like this, R&D is very important for keeping the company maintain its position in the market place as well as growing it. Limelight had 118 employees in research and development group. It is located in Atlanta, Georgia and at the headquarters in Tempe, Arizona. The company is said to test services to ensure scalability in times of peak demand. It uses internally-developed and third-party software to monitor and to improve the performance of platform in the major Internet consumer markets around the world where the services are provided.

Operating performance




Having looked at the income statement, it can be seen that the revenue has been increasing really fast over the last 9 years, from US$ 2 millions in 2002 to $183 millions at the end of fiscal year 2010. While the operating income and the net income subject to wide fluctuations with instability.

The increase in the revenue from 2006 to 2008 is due to the increase in the recurring CDN service revenue contracts. And the increase in the revenue the recent year is both based on the increase in the cloud based services as well as from the consolidation of two acquired EyeWonder and Delve, contributing nearly 3/4 of the increase in revenue.

The sudden plunge of operating and net income in 2007 and 2008 was because of the provision for litigation costs. The company was involved the case of patent infringement versus Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology. The jury awarded Akamai an aggregate of around $45.5 million in lost profits, reasonable royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million.

Financial Health

The company is having ample amount of leverage, no interest bearing debts. The large items are accrued liabilities and account payable only. However, due to the acquisitions in 2010, the company records in its fiscal 2010 balance sheet the goodwill items of $94 millions, intangible assets of $14 millions, accounts for 38.1% total assets. Besides, the company got operating leases and other contractual obligations, totalling $62millions, spreading over several years into the future.

Free cash flow




The free cash flow has been always negative for most of the time over the past 06 years. It is due to the large capital expenditure that the company has to invest for growth to purchase servers and other network equipment associated with the company’s network build-out.

Management’s holdings



The key executives do not hold large position in the company (only 6.5%), the largest are Michael Gorgon (Co-founder), John Vincent (CEO of Eyewonder) and Jeffrey Lunsford (President, CEO and Chairman), each holds around 1.4-1.8% the total shares outstanding.

Competitors

TTM figures LLNW AKAM INAP LVLT Industry
Operating margin -12.48% 26.04% -0.05% -1.53% 6.42%
Net margin -12.37% 17.07% -2.02% -16.05% N/A
P/E N/A 33.15 N/A N/A 20.95
P/S 2.62 5.45 1.47 1.14 1.56
P/B 1.91 2.71 1.98 N/A

Looking at the comparables figures of competitors and the industry, we saw that only AKAM got TTM profit, and it’s currently valued at 33 times P/E and nearly 5.5 times total revenue. The sales of LLNW has been increasing quite rapidly over the years, it is now value at 2.6 times sales, higher than most of its competitors and the industry average.

Valuations

It is hard to pin point the value range for this stock. Currently the tangible book value stands at $142.33 millions. So with the enterprise value of $384.85millions, the LLNW is trading at 2.7 times the enterprise value. I do not think this current price to be undervalued for the stock, taking the past performance as well as the asset values.

Conclusions

This is in the technology industry – subject to rapid change, negative free cash flows, high amount of good will and intangibles, and no dividends history.

The company has been making several acquisitions for the growth purpose, and the top line keeps increasing due to both the increase in the number of customers as well as the acquisition consolidations.

The management doesn’t take much of the stake in the company; it represents little incentive to act for the general shareholders currently. However, for the growth technology company, the management can find several ways to enhance the value of shareholders or even buy back stocks for themselves.

The current price does not seem to be undervalued level. Nevertheless, if the company could prove in the future that they are on the right track of growing, in the number of customers, the top line, the bottom line and the free cash flow, the real value of the company would keep increasing. For now, it is not shown to be clear yet.

The rumour has been for some years whether Limelight is the target for acquisition. It is very hard to know, as the thought itself is quite speculative. What the value investor like us often based on is the intrinsic value of the company compared to the price itself currently. If any investor like to gamble on the news, just please do so only with the amount that he/she can afford to lose.

Disclosure: None

This is the subjective viewpoint of the author, it is not the recommendation to buy, hold or sell any stock. The person who wishes to do so should conduct his/her own research, act on his/her own decision, and bear his /her own risks.



Stocks Discussed: LLNW,
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