I bought Limelight Networks (LLNW) after reading MountainDog18’s post, and the thread that ensued. https://discussion.fool.com/llnw-better-than-fsly-34539893.aspx&… Thank you, MountainDog18! Big thanks to 12x and Smorg for their posts, as well. I also read the Q1 conference call and most of the articles the Fool has published on LLNW in the last few years.
Let’s address the elephant in the room: LLNW is cheap. And not just ESTC cheap or ROKU cheap. LLNW is so cheap, it’s an order of magnitude cheaper than FSLY. That’s right, their PS ratio is 3.1 (not a typo). Why is this the elephant in the room? Because as most of you know, Wall Street is not stupid. There are good reasons LLNW is cheap. Management issues (like when they had to reduce 2019 guidance), customer concentration, a poor gross margin (but that, like Fastly’s, I believe will improve), and a business that has been through a transition.
But I didn’t buy LLNW because it’s cheap. I bought because I see a story unfolding that makes me think they could go on a Fastly-like run if the future plays out in a certain way. I don’t know that this will happen, of course, but it’s a plausible enough possibility that I’m willing to hold a small position (about 2.5% and some options, as of now). I think it will become a lot more clear in a few weeks when they report Q2.
The interesting part of the story starts at some time in the last few years, when Limelight started ramping up their capacity to prepare the way for mega-customers that are so large that they immediately move the needle for Limelight. Amazon was the first of these, I think. The article Smorg linked to said that Amazon made up 30% of their revenue the last two years (I think the author meant 2018 and 2019). This brings up a big concern that should not be ignored: customer concentration risk. Limelight’s top 20 customers account for 77% of their revenue, which is borderline hazardous. However, these mega-customers can also spur a lot of rapid growth. (And I believe they are doing so.)
While all this has been happening, they’ve also shed a ton of smaller customers that didn’t really move the needle. I’m totally ok with this, as it seems a “quality over quantity” move, and those are usually good. (I would hope they haven’t done this in a way that makes them look bad in the marketplace, but it doesn’t seem to me that this is the case.)
Here are the raw customer numbers:
Year Q1 Q2 Q3 Q4 2018 703 689 667 649 2019 643 621 609 599 2020 573
But check out the revenue numbers:
Year Q1 Q2 Q3 Q4 2018 52.1 50.2 49.3 44.0 2019 43.3 45.9 51.3 60.1 2020 57.0
At first, revenue dropped too. But it seems that the strategy started to pay off in 2019. In the first half of the year, they actually had to reduce guidance (ouch). My theory is that they expected Disney Plus to launch earlier in the year, and when they found out it wasn’t going to, they had to pull back on guidance. However, Disney Plus debuted in November and as you see, LLNW’s revenue went up almost $9m sequentially from Q3 to Q4.
Then in Q1, with a full quarter of Disney Plus, revenue was only down $3m even though COVID hurt them badly. Streaming sports, including March Madness, is big for them, so that portion of revenue went to zero since there are no sports now, but the CFO said that the OTT revenue has more than made up for it.
I’m eager to see what Q2 will bring. HBO Max launched on May 27, so that could be a boost. Peacock launched its sneak peak for Comcast customers on April 15, but the nationwide launch (July 15) will hit in Q3. My theory is that they are seeing a two-fold boon:
These mega-customers are coming on board (these are real game changers for them, with each customer probably paying Limelight millions of dollars each quarter)
The overall increased traffic is huge for their usage-based model (just like it is for Fastly)
Admission of tech-ignorance, but a challenge
I am not in any way a techie. Muji and Smorg and others do not feel Limelight’s tech is especially impressive or competitive. I won’t argue, but I would appreciate it if someone could explain how this could be the case when Limelight has earned these mega-customers, including the likes of HBO Max, Disney+, NBC’s Peacock, and even Amazon freaking Prime.
One other caveat
Lastly, I have to concede that Limelight’s own guidance is disappointing. But I think that may be why we have this opportunity. Why did they do it? I think Limelight management is skittish. It’s possible they are just taking advantage of the situation and straight-up sandbagging…or maybe they can’t look analysts in the eye and predict real rapid growth, because other than the last couple quarters, they haven’t seen anything close in a long time. That’s why they talk about “double digit” growth and hitting $300m revenue “a full year” before 2024 (Wall Street’s expectation), when I could see them doing it in 2021. …Or I could just be wrong, and revenue from these these mega-customers could turn out to be not so mega.
Hopefully I’ve clearly recorded the positives and negatives here. I am following the numbers, and the story they tell makes sense to me. If I’m right, we might see real signs next month when they give Q2 numbers. I would expect the shares to see a rerating at that point, much like Fastly has seen since they reported on May 6th. Maybe even more of a triple or quadruple – at which point LLNW would still be “cheap,” relatively speaking. I’ll probably keep my position small until they report.
PS - not sure what this means, but traffic to their website in April and May has been more than double what it was pre-March: https://www.similarweb.com/website/limelight.com#overview
…but then, Fastly’s has pretty much tripled in May alone
PPS - if you search Indeed.com for jobs with the keywords “limelight engineer” you can see a handful of listings by NBC and Disney and their other customers.