Limelight Networks, Inc.’s (LLNW) CEO Bob Lento on Q2 2019 Results – Earnings Call Transcript

Limelight Networks, Inc. (NASDAQ:LLNW) Q2 2019 Results Earnings Conference Call July 17, 2019 4:30 PM ET

Company Participants

Dan Boncel – Chief Accounting Officer

Bob Lento – Chief Executive Officer

Sajid Malhotra – Chief Financial Officer

Conference Call Participants

Robert Majek – Raymond James

Jon Charbonneau – Cowen and Company

Rishi Jaluria – D.A. Davidson

Tim Horan – Oppenheimer

Jeff Van Rhee – Craig-Hallum

Lee Krowl – B. Riley FBR

Operator

Good afternoon. And welcome to the Limelight Networks’ Second Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Dan Boncel, Limelight’s Chief Accounting Officer. Please go ahead.

Dan Boncel

Good afternoon. And thank you for joining the Limelight Networks’ second quarter 2019 financial results conference call. This call is being recorded on July 17, 2019, and will be archived on our website for approximately 10 days.

Let me start by quickly covering the Safe Harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our outlook for 2019 and beyond, our priorities, our expectations, our operational plans, business strategies, secular trends and product and feature functionality announcements.

Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance. For more information, please refer to the Risk Factors discussed in our periodic filings, including our most recent annual report on Form 10-K.

The forward-looking statements on this call are based on information available to us as of today’s date and we disclaim any obligation to update any forward-looking statements except as required by law.

Joining me on the call today are Bob Lento, our Chief Executive Officer; and Sajid Malhotra, our Chief Financial Officer. We will be available during the Q&A session at the end of prepared remarks from Bob and Sajid.

I would now like to turn the call over to Bob Lento.

Bob Lento

Thanks, Dan, and good afternoon. Today, we announced the second quarter results. We made good progress on multiple priorities during the quarter, setting the foundation for a strong second half across many operational and financial measures.

Revenue in the second quarter was $45.9 million, GAAP net loss was $7.2 million, non-GAAP net loss was $3.5 million and adjusted EBITDA was $1.4 million. These results were largely in line with analyst expectations.

Our revenue in the second quarter continued to be impacted by the decisions we made last year to secure our top customers and align our customer base with our strategy. We continue to invest in opportunities expected to drive revenue growth in the coming quarters. We believe those decisions have better positioned us for growth and long-term financial success.

Many financial and operational metrics improved sequentially this quarter and we expect this trend to continue in the second half of 2019, with particular strength in the fourth quarter when many of our new deals and initiatives are expected to have a more substantial impact.

One such initiative is our partnership with Ericsson EDGE GRAVITY where we are the exclusive provider of content delivery capabilities for its global scale edge cloud platform with points of presence within more than 40 service provider networks.

While the partnership remained strong, momentum on executing our plan with EDGE GRAVITY slowed in the second quarter after the departure of its CEO in March. However, new leadership is now in place as former Verizon executive, Kyle Okamoto, stepped in at the end of June as EDGE GRAVITY’s new CEO. We are very pleased with Kyle’s engagement and enthusiasm for our partnership, and we are already seeing improvements in execution and momentum.

While we are behind plan with EDGE GRAVITY, we still made good progress during the quarter. We have now converted 19 existing EDGE GRAVITY locations across eight countries to Limelight’s infrastructure and operating software.

We also recently reached an important milestone in the partnership turning up our first next-generation PoP, which is a new build by EDGE GRAVITY, within a service provider, utilizing our software and hardware specs. This new PoP is significant as it is a proof point for other service providers that our partnership is working.

It also provides Limelight with a low CapEx mile for expanding capacity closer to the edge within service providers in locations that were previously hard for us to reach. We are excited that EDGE GRAVITY has a very strong pipeline of next-generation PoP deals with service providers. They have agreements in place with several operators already and discussions in process with many more. We expect momentum to now accelerate.

In addition to the capacity added through the converted and new Ericsson EDGE GRAVITY locations, we continue to focus on expanding our capacity through software enhancement and expansion of our network footprint into new locations that are important to our customers and support key initiatives. There are two major components of capacity that are important to us. There is server capacity at the edge and network capacity which is the access we have connecting us with local ISPs.

At the beginning of 2019, we had 28 terabits per second of edge server capacity. Our goal for the year was to achieve 50 terabits per second. We are on track to exceed that goal at this point through the year. We expect that half of the increase to come from a new version of our software that is designed to drive the increased performance and throughput.

This new software innovation has been in development for the past two years. We have begun deployment in May and are now over 80% complete resulting in an increase of at least 10 terabits per second of its server capacity without additional CapEx spend.

We are also pursuing an aggressive network capacity expansion plan that includes increasing capacity in existing PoPs and building new PoPs in new geographies that are important to our customers.

We have expanded capacity across the globe and in some regions by more than three times where we started the year, as a result of these initiatives and our work with EDGE GRAVITY we have 105 PoPs and over 50 terabits per second of network capacity.

We expect these efforts to have a positive impact on our customers and drive revenue growth in the future. Customer acquisition was solid in the second quarter with numerous new logos added across all regions. I am especially pleased that expected revenue from new bookings in the second quarter were at record highs, which we expect will drive revenue growth in the second half of 2019 and beyond.

We are seeing significant opportunities to drive revenue growth in line with our strategy of being the leading provider of delivering low latency high quality video on a global scale. Examples include Amazon Prime Video who recently won exclusive rights to broadcast some English Premier League matches in the U.K. or with Apple and Disney who are both expected to launch their own direct to consumer offerings this fall.

We are pleased to be one of the CDNs to working closely with these customers to address their delivery capacity needs. We believe that initiatives like these are indicative of a longer term trend that supports our strategic focus. We are excited about these opportunities as well as others we expect to share with you in the near future.

Throughout the second quarter, we delivered record traffic, which was over 10% higher than our previous record set in the first quarter, while we participated in some major customer events during the quarter including HBO’s Game of Thrones in April and May. I am particularly pleased that we generated record traffic in June without any major customer events. We are excited about this momentum in our baseline business and expect it to continue in the second half.

We continue to see a high degree of interest in Limelight Realtime Streaming, which is the industry’s first global scale sub-second live video streaming solution that is natively supported by major browsers and devices.

During the second quarter, we closed several more Realtime Streaming deals and have a number of new deals actively engaged in trials. We also continue to have a robust pipeline. We are working on additional software releases to introduce new feature functionality, important to our customers, which we expect will accelerate our momentum.

While this offering is not yet driving a material increase in revenue or traffic, it is a differentiator for us that is changing the nature of our discussions with broadcasters as we are the only provider that can do this at scale. Realtime Streaming is a long-term opportunity for us and we are pleased with this new offering clearly establishes Limelight as the industry leader in sub-second global video delivery.

We are also pleased with our continued progress in edge services, which leverages our infrastructure to address our customers’ needs at the edge for low latency and connectivity. In the second quarter, we closed a number of new edge service deals and have a strong and growing pipeline. We continue to be excited about the opportunity to grow our edge services business.

In summary, our financial performance in the second quarter and first half of 2019 was largely in line with analysts’ expectations and we continue to be on track to generate four quarters of sequential growth.

Since the beginning of the year, we have generated momentum across multiple dimensions with much activity and expansion across all regions, multiple product lines both existing and new customers and at our various partnerships, which we believe has positioned us for a strong second half.

As I look forward, I remain confident that 2019 will be our best year ever on many fronts. We believe our industry is healthy and growing, and we are in an opportunity rich environment as new and existing customers come to us with major events, new launches, innovative offerings and other important low latency, high quality video delivery needs.

We continue to build our capacity, expand our footprint, drive product and network innovation and invest in people to serve customer needs and we believe our efforts and decisions will yield the right results and lay the foundation for an even better 2020.

I am pleased with the hard work of our global team and would like to express my gratitude for the momentum they together have generated in the first half in 2019. I have never been as excited as I am at this moment about the industry we serve and our future.

With that, I will turn the call over to Sajid to discuss the second quarter financial performance in greater detail and our guidance for 2019.

Sajid Malhotra

Thanks, Bob. Good afternoon. Starting at the top, revenue in the second quarter was $45.9 million, down 9% year-over-year, but increased 6% sequentially. The sequential growth is our third highest in the last 30 quarters.

Foreign exchange headwinds in the quarter amounted to approximately $300,000, almost 1%. International customers accounted for 37% of total revenue in Q2, compared to 28% a year ago. Approximately 16% of our second quarter revenue was in non-U.S. dollar denominated currencies. Our top 20 customers account for approximately 71% of our total revenue, compared to 72% last year.

Second quarter and third quarter revenue is typically lighter than the first and fourth quarters. Knowing that, we are very pleased with the sequential growth. The core business continues to grow in volume delivered and we believe we had a faster pace than industry growth. We are adding capacity, it is getting consumed and our edge services continue to see good momentum as we have added new customers during the quarter and the pipeline is strong.

Our relationship with Ericsson and the work both our teams are performing will allow us to expand with local ISP network in new geographies. This project is a huge undertaking and while we are slightly behind in its implementation, we see many opportunities to broaden its scope.

Moving beyond revenue, at the end of the second quarter, our total network capacity reached approximately 50 terabits per second. Our continued network expansion is necessary to deliver the record amount of traffic we delivered in the second quarter. We saw a steady increase in traffic throughout the quarter and we expect that to continue.

G&A expense increased $800,000, and sales and marketing increased $1 million. R&D decreased $100,000. Interest income expense and other income and expense netted to immaterial income in second quarter, compared to $100,000 of expense last year, excluding the $14.9 million Akamai settlement income recorded in the second quarter last year.

On a GAAP basis, we lost $0.06 per basic share this quarter, compared to earnings of $0.14 per share last year, $0.30 per share coming from the Akamai settlement. Adjusted EBITDA was $1.4 million for the second quarter2019.

We had cash and marketable securities of $29 million at the end of the second quarter. Cash generated from operations was $1.1 million in the second quarter. We expect that to increase in each of the remaining quarters in 2019.

During the second quarter, we made our final payment to Akamai related to our $54 million settlement in 2016. We spent approximately $11.5 million in capital expenditures in the second quarter, bringing the total for the year to $16.5 million. As you can see, we are spending to meet the demand on customers and prospective customers are requesting in the back half of the year.

At the end of the second quarter, DSO was 53 days, compared to 52 days at the end of last year, within our expected range of 50 days to 55 days. Our balance sheet remains very strong. We remain debt free. Receivables are up on higher revenue, while payables are down compared to the previous quarter. As of June 30th, we had approximately 115.8 million shares outstanding.

Total employee count at the end of the quarter was 594, up 45 from the end the second quarter last year. The increase primarily relates to additional sales personnel and is consistent with our strategy. Employee count in non-customer functions should remain stable.

Before getting to guidance, let me highlight a few key points. First, we are moving our headquarters from Tempe where we have been since inception to Scottsdale. We signed the 11-year lease for a new location, which is currently under construction. Occupancy begins in September and we are currently in temporary quarters.

The construction move and occupation carries with it some significant cash spend even as most of it is amortized over the life of the lease. There are no one-time charges called out related to this as we are absorbing all of this within our operating results.

Next, in the second quarter of 2018, we did negotiated six major contacts representing well over 50% of our revenue base. Some investors will concern that their anniversary now would yield a similar result again this year. Meanwhile, we have said, we don’t expect any material renegotiations of that magnitude and continue to believe that to be the case. We have no major price renegotiation to address at this time.

Then at about the same time last year, we parted ways with three customers, the content and price points did not align with our strategy. It was a tough decision as all three were among our top 20 customers. It hit our result hard, but starting in the third quarter that impact is fully absorbed. Taken together, the price renegotiations and customer departures impacted our first half results to the tune of over $13 million. In about a year, we have replaced it all with revenue, traffic and customers aligned with up video and edge strategy.

It’s now time to start growing and the best way to measure and monitor our future expectations is to look at the exit rate of the previous quarter and multiply it by four and then add the expected industry growth rate. For example, we ended 2018 at $195 million in revenue, but we also exited 4Q 2018 with $44 million in revenues on a run rate of $176 million.

When you provide infrastructure-as-a-service or platform-as-a-service as we do, this run rate its consistency, its predictability establishes the baseline for coming quarters. And for this reason sequential growth is varied relevant.

When I look at analyst consensus numbers for our competitors, it appears we are predicting the higher sequential growth within the group. We believe we will continue to exhibit sequential growth for the coming quarters that we will beat higher than the peer group. And we believe we have turned the tide from revenue declines of 17% year-over-year in the first quarter to 9% from the second quarter to single-digit growth in the third quarter and very high possibly industrial leading growth in the fourth quarter.

This even as some of the more significant revenue generating events, we expected to take place have been delayed for reasons beyond our control. We fully expect these projects to come to fruition and some are even expected to expand in scope from what we originally envisioned.

Based on our current view we expect revenue in the range of $200 million to $210 million. We expect Q3 to show sequential improvement over Q2 and year-over-year growth. At the midpoint of our updated range, this implies a 30% second half increase over the first half of 2019 and almost a 25% growth rate over the second half of 2018.

We see those growth rates exceeding — extending into 2020, but more about that when we give 2020 guidance. We expect GAAP loss to be around $0.10 per and non-GAAP EPS to be around breakeven. We expect capital expenditures to approximately $25 million.

With that, let’s open the call up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Michael Turits with Raymond James. Please go ahead.

Robert Majek

Good afternoon. This is actually Robert Majek filling in for Michael today.

Bob Lento

Hi, Robert.

Robert Majek

Hi. You addressed it in your prepared remarks, so I was just hoping you could give us some further reiterate what is driving your confidence in the back half. I know part of that is from Realtime Streaming and some of that is from the new partnerships you have made like EDGE GRAVITY. But just wondering if in the core business there are some large contracts that you have already signed and ramping give you strong visibility?

Bob Lento

Well, it’s a combination of a number of things, right? One, we are gaining momentum at Realtime Streaming. We are gaining momentum with our edge services business. The customers that we onboarded in the first half of the year will obviously be stronger in the second half, because we will get the full second half value of that and they typically ramp up as you go into the fall.

And then there are some major projects, Disney and Apple, for example, both announced very, very strong initiatives to go directly to consumers and there are others out there, other projects out there as well. And so, as we look at the growth in our traffic from our existing customers and the new customer layering in on top of that, the new customers that we already signed.

On top of that, customers that we have done business with for a long time, but are now going to market with their own initiatives. We feel very confident that we can continue sequential growth quarter-to-quarter and drive pretty significant year-over-year growth.

Robert Majek

That’s helpful. And just one more from me, I don’t see an EBITDA guide in press release. Can you just give us some additional color on what EBITDA or margins might be for the year?

Sajid Malhotra

Yeah. There’s only one adjustment to our EBITDA number, which is stock-based comp. So we really gone ahead and adopted the GAAP accounting measures. And so, it — I will go ahead and I mean, it’s easy to just map to that, then the stock-based comp number for the year is above…

Bob Lento

Above $5 million.

Sajid Malhotra

…$5 million.

Robert Majek

Got it. Thanks a lot.

Operator

The next question comes from Jon Charbonneau with Cowen and Company. Please go ahead.

Jon Charbonneau

Great. Thanks for taking the questions. Just to clarify, how much of the decline in 2019 revenue guidance would you say is coming from, I guess, major customer delays versus the Ericsson partnership? And then can you also just give us an update on the competitive environment and the pricing environment? There obviously has been a lot of talk recently between how fastly and others given their IPO. How would you talk about that in terms of this competitive environment?

Bob Lento

So let me start and then Sajid can add with his thoughts. I mean, we — actually when we look at the difference today relative to our expectations and our forecast that were — might have been three months or six months ago, there’s always tons of moving pieces. But there’s really three big movers in that that are somewhere in the $10 million to $15 million range.

Now the good news is, they didn’t — they are not projects or initiatives that we lost. They are just either behind in their implementation or the implementation has been pushed by a couple of quarters for corporate reasons.

And so while we still feel strong about their ability to succeed in the — in their marketplace and our ability to help them succeed in our position in terms of delivering for them, the impact was probably material. Ericsson’s a good example of that.

We came into the year including our original forecast was the number that think of it this way, we hedged their number by about a third before going into our plan and we hedged that by 20% to 30% or concluding in our analyst guidance and even with all that hedging it will be half of what we thought it would be.

But at the same time there — that contract is still exclusive, it’s still multiyear with new leadership in place. We are seeing a reenergizing of momentum and so our view hasn’t really changed in terms of the value to Limelight. Its impact on 2019 has changed pretty dramatically, but we feel as we go into 2020 it’s still going to be material for us.

In terms of competition, we really don’t see much of a change in the landscape, there’s a handful of people out there that could do what we do at scale. It hasn’t really change much over the last few years. We see more or some from time — it’s shifted a little bit in terms of whose more aggressive this quarter or this year versus last quarter or last year.

But we don’t really see much of a change in the competitive environment and we — based on the feedback we get from our customers, we like our ability to deliver high quality video versus our competition and we like the position that we have today with our major customers. Sajid?

Sajid Malhotra

Yeah. And I will just clarify a little bit, because I think you are trying to figure out, we had said that we had expected somewhere between $7 million and $9 million from Ericsson. I think going from high-single digits, I think, now the expectation would be low-single digits. And the question becomes one around [ph] where were you in guidance before because we had a range before. So from the low end then to the high end now, you can actually attribute all of that change to one customer or one situation.

But I would tell you, I mean, there are a couple of things that are taking more time. For example, we talked about our relationship with Tencent. Tencent is now a revenue generating customer for us. So we had to kind of break that. It was really important to get from zero to one, get their base of customers on, begin to generate some revenue which we started to do and that now opens up field of other opportunities within their ecosystem.

Bob Lento

But it will take time that was about two or three quarters.

Sajid Malhotra

Correct. We shouldn’t be further along.

Bob Lento

Right. Than we originally thought it would be.

Sajid Malhotra

Right. So it’s taking more time. But it’s very much there. The opportunity is still very large and it requires some specialization in terms of billing and APIs that needed to be done for their customers from the way we present our data, etcetera. But the integration is done, we are moving forward, right?

So that’s kind of what I would say about the guidance in terms of where it is. The base business continues to perform well. You get a report on a quarterly basis. We pay a lot of attention on a monthly basis, did run rate on a monthly basis had continued to improve from April to May to June in Q2 over Q1. We expect the June rate to continue to improve into July, August, September and the third quarter to be better than the second quarter.

And then with the projects that Bob talked about coming on from the significant events that are happening in the marketplace, we expect a lot of opportunities. These are all existing customers for us and we expect to get a sizeable share of that whether it’s with Amazon or Disney or with Apple. So, there is real understanding, belief, I mean, the project work is underway and we are trying to get that done.

When we talk about the new IPO in the marketplace and how do we compare ourselves. I mean, listen, we are very cognizant of the difference in the valuation between the two companies. But as I sit back and look at it, I think, I can explain some of that to the growth rates and those attributes and I think we will be there as we approach fourth quarter, going into first quarter and second quarter next year.

I feel pretty good about our growth characteristics which I think is the biggest delta. Otherwise, we both operate within a CDN industry. They operate in one sub-segment, we operate in another, but we are all part of that CDN business.

Within that, we both have edge businesses. I believe ours is as large as theirs, maybe larger. We had seven-digit numbers coming from this business in 2018. It’s grown significantly in ‘19 over that. It will grow again in 2020. We have a strong pipeline on the edge business and so that growth continues.

Beyond the revenue growth, when I look at the financials, I think, our financials are much stronger. I mean, we are able to generate positive EBITDA. We are able to generate free cash flow. We have been doing it for some time. We intend to do it for the foreseeable future. So that delta I don’t kind of understand.

And then there’s the question of capital intensity with the business, and at a smaller scale, they are spending a lot more capital to go run the business than we are. So those are kind of the financials.

Then comes, okay, feature functionality. I mean, we can speak on anything we like. I am just going by what’s available from a public disclosure standpoint, I mean, look at things that we have the ability to push data. I mean, we put a press release out in terms of our ability to do sub-second first two years ago. So it may be relevant with some of the other players in the marketplace, but that capability really does not separate them from us.

So I think there is a real opportunity for us to correct our business, our trajectory and get back on track to actually reporting what we are seeing, making our numbers and delivering against those, and we are working hard to go get that done. Sorry for the long answer, but, I mean, it needed to be addressed.

Jon Charbonneau

No. That’s great. Thank you very much.

Sajid Malhotra

Yeah.

Operator

The next question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.

Bob Lento

Rishi, welcome.

Rishi Jaluria

Hey, guys. Thank you. Good to be back on the main. A couple of questions from me and I think let me just start with the guidance and I don’t want to belabor points, I just want to make sure I fully understand. So you are bringing the full year guidance down about $15 million. There’s — we can call it somewhere around the $5 million type impact from the Ericsson partnership. Can you just maybe without giving exact numbers, just help quantify the other factors for bringing down the guidance?

Sajid Malhotra

So, firstly, I think, where we started at the start of the year, we had a range of outcomes. Some of the things needed to go really, really well for us to hit the upper end of the guidance. On the other things, we thought if things were just take the ordinary course of business, we should be at the lower end.

As we talk to the analyst community and we talked about what was built into that guidance. I think the group as a whole, at least the sell side kind of say, what this is so back half loaded and we will wait for when that actually begins to transpire.

So the sell side community as a group has been closer to the dual seven to eight number which is within our reference guidance. Whereas, we were hoping that if all of these things happen in a timely fashion and get executed as well as they do, we could be north of 250 and then how far north was the question on how well and what is the rate of adoption, et cetera.

Included in that were things like the business from Ericsson. Included in that was what we could do with Tencent and then there were a couple of large edge deals. We had a very large customer with an edge deal that instead of a launch happening in the fourth quarter is pushing the launch into the first quarter. It is very significant. We were hoping it would happen in the fourth. I think it would have been a game changer for us.

But that’s the customer’s prerogative and if they decide to go ahead and put together their digital strategy and want to do a bigger launch at a later date, that’s fine. But we got selected from a pool of companies to be the provider. We did the alpha with them. We did the beta with them. The testing is continuing. It is expanding.

But instead of being in the millions and millions of dollars of revenue, it is going to be small single-digit millions. So we have, I mean, this business, I think, we just have to take it in stride and move on.

Rishi Jaluria

Okay. Got it. That’s helpful. And Sajid, just from a gross margin perspective, right? I mean we did see a sequential improvement from Q1 to Q2. Should we expect there to be continued sequential improvement through the year especially now that you are talking about returning the revenue growth in Q3 and definitely in Q4?

Sajid Malhotra

Yes.

Rishi Jaluria

Okay. That’s very helpful.

Sajid Malhotra

Yes. We had made material improvements in our gross margin that took a big hit with the re-pricing. And we were left with stranded infrastructure underutilized and price point with customer was very different. That’s what took the gross margin down over the course of last year and we will just go build that back.

Rishi Jaluria

Okay. Got it.

Sajid Malhotra

So the absorption of the infrastructure test and I don’t have any major price renovations. At the same time we continue to tackle our COGS and so, yes, I expect improvements across the quarters.

Rishi Jaluria

Got it. Okay. And then I think two from a housekeeping perspective and I will hop off. First, with the new headquarter build out, when should that start to show up on CapEx, is any of that going to be this year or is that all starting next year?

Sajid Malhotra

No. There are some this year. And there is other — there are expenses associated with that that would be taking, right? Like of the items on the income statement side, we talked I think pretty candidly at least I believe so about all of the items and the puts and takes that are taking place. The one item that was not there and the largest of the unknown items that you might not be able to reconcile to was this one item. It’s a significant move for us. We have got over — almost 250 people in the area and so moving them physically along with you can well imagine brand new spaces, furniture fixtures and…

Bob Lento

All the cash is being this year.

Sajid Malhotra

Yeah. So the cash is getting spent now, which you will see in the cash flow statement, and of course, much of it is amortized over the life of the lease and then there are some expenses that are not in that taken in period.

Rishi Jaluria

Got it.

Bob Lento

From an expense…

Rishi Jaluria

Okay. That’s helpful. Yeah.

Bob Lento

Yeah. From an expense standpoint, we are roughly in line with the expenses that we had in Tempe…

Sajid Malhotra

Right.

…moving forward, right, so.

Sajid Malhotra

Yeah. This is not going to add to a major rent update or an increase.

Rishi Jaluria

All right. Okay. And then I think the last one just Amazon, were they a 10% customer in the quarter?

Sajid Malhotra

Yes.

Rishi Jaluria

Okay. Got it. All right. Very well. Thank you so much, guys. I appreciate the time.

Bob Lento

And they were the only 10% customer.

Rishi Jaluria

Thank you. Yeah.

Operator

The next question comes from Tim Horan with Oppenheimer. Please go ahead.

Tim Horan

Thanks, guys. Sajid, do you think the whole industry is going to accelerate to the type of growth you are seeing in fourth quarter and into next year or do you think you are just going to be kind of gaining material share or are you just in the right segment of the market?

Bob Lento

I think that the video segment is growing at a much faster rate and I think that the quality that those customers want matches up better with our capabilities. And obviously, the price point for delivering quality video are higher than delivering non-discriminate software, for example, in the middle of the night.

So we think that we are participating in the right part of the market where the growth rates are particularly high the move toward DT, all of the subscription-based services coming on Board kind of lend themselves well to the strategy that we adopted and we will see.

Now, for us, our video business is more than 50% of our total business. I think I told you that last quarter. So as that is the case, I don’t know if other companies experience the same kind of breakdown between their businesses, what is video versus non-video, I don’t have any idea.

But because we built an infrastructure to care for that and because we focused on that part of the market whether it’s low latency, ultra-low latency, video-on-demand, streaming video, store video, we are participating in every element of this industry and it bodes well for us or our customers. We bring a lot of attention to this and I think that will yield results as we go on. I look forward to seeing what others have to say about this, but I think it’s a healthy trend for the industry. I continue to believe we will do better than the industry overall.

Tim Horan

And because you think you are going to be gain share also it sounds like?

Bob Lento

Within the video market for sure, yeah.

Tim Horan

And then can you talk about your asset utilization on the network you have added a massive amount of capacity and you have lost a lot of customers, I know volumes are growing a little bit. But can you just give a little bit more color there?

Bob Lento

Well, I mean, the underutilization occurred with the price changes that happened last year, right? So you get rid of three customers and you have price renegotiations and so we were — you see that in the gross margin. Of course, price renegotiations don’t impact utilization, but they do impact gross margin, but the departure of customers still that we believe absolutely hit the utilization.

At the same time we have been building back into the network and we have been doing that — we have actually placed a lot of effort on our R&D team to come up with the necessary software and the necessary environment where we can maximize how much we can get from industry standard servers.

So the whole idea is not to get purpose-built servers to somehow deliver 40 gigabit per server or 50. But to be able to take generic off the shelf servers and push as much traffic to them as possible. The price point between those services is a lot and if we can squeeze as much capacity as we have been able to get out of them, I think, that’s what lends itself to better capacity and asset utilization and return on the capital expenditures and so that’s what we have been focused on.

Now as this has happened, we have seen the benefit from software coming about and help us increase our capacity in a very, very significant way. At the same time, we have been adding capacity by procuring more, because we are getting a very good idea from our customers telling us how much capacity they need, when they need it and where they need it. So because of that we are willing to go ahead and invest and then get ready for the demand coming on Board and I will just leave it at that.

Tim Horan

Well, I guess, I am trying to get — you needed like doubled capacity this year and your revenues around 10%. I mean, are you at with your — does that imply that you have a lot of excess capacity in the network, because you are implying essentially 30% revenue growth next year and I am trying to get to that, that we need a lot of CapEx to meet that 30% revenue growth for next year?

Bob Lento

No. As things stand right now, I do not envision our CapEx going beyond the 20s. I don’t know if it’s going to be doing 22% or 26%, but the range of our capital expenditures and the guidance we have been giving for the last few years has been in the 20s range and I suspect that it should be sufficient for us to meet our gross demand.

Tim Horan

Thank you.

Bob Lento

Thanks.

Operator

The next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead. Mr. Van Rhee, your line is open.

Jeff Van Rhee

I have got you now. I was on mute. Sorry, I am here. So just a couple from me guys. Thanks. The RTS product, the features I think you referenced the — you had some upcoming features that you are going to bring that were somewhat of a gating factor to really blown it open there. Could you just expand on that a little bit?

Bob Lento

Customers are always, I think getting to it, asking for more feature functionality. But the two big things that we — have either already come out whether or in the process of coming out with, were mobile SDK and so that we can cover that capability, that’s already in our customers hands and then ABR which is our needed bit rate. So we can accommodate adjustment of bitrates on the fly and that’s already been completed.

So in the first half of the year, we brought our customers. The feedback was these areas are important to us. We now have them in the third quarter available to customers and then obviously there’s always a road map. But those were two what I would call revenue blockers that we have addressed.

Jeff Van Rhee

Got it. And could you talk just a bit, then, with respect to retention, I think, you touched on it last quarter that you were getting record levels of customer retention, and in that context, it looked like the total customer count had somewhat stabilized. I understand the focus on the higher-quality/larger customers. But just talk to retention and talk about thoughts about total customer counts going forward.

Bob Lento

So we would like to see the customer count grow, but we are less focused on that than we are revenue. And so the thing that I like is, in the second quarter, for example, there were customers that we lost, for sure, and then obviously customers that we have signed up as new.

The expected revenue from new exceeds the revenue from the ones that we have lost, and obviously what that implies and which is true is that the average revenue per customer of the customers we are signing is much higher than those that we are losing.

So we are pleased with that performance. To your point, we have seen stabilization. Customer churn, in the years that I have been here, has improved year-over-year-over-year. And at this point, we are really looking to add more HBOs of the world as opposed to small customers and we will continue to focus, we believe that we will have greater success with customers that meet the highest quality and global scale and so that’s where we are focusing on.

And the customers — as we look at customer segmentation, small and small medium-sized customers, there are lots of places that people can go to get that capability and capacity. But for customers that are looking for lots of capacity with global reach, there is only a few places that they can go.

And typically the larger customers are interested in having multiple suppliers and so we believe once we get a seat at the table despite having competition in the mix that we can win not only as the customer grows but because of our proven ability to take market share.

Sajid Malhotra

And so a couple of data points that I’d just point you to and I think we talked about it on both — we said in the script. But our top 20 customers account for about 72% of the total revenue stream, right? So that — even with the departure of three customers out of our top 20 within last year, if that number had dropped down to, let’s say, 65% or 63%, you have got to say, okay, you are having trouble replacing them. But one year later, our top 20 customers, just like last year, still stable, accounting for 72%.

So we are replacing big with big along the lines of what we want and 650 customers and 20 customers that are accounting for 72% of the total kind of gives you an idea of why we place so much importance at the very, very high end.

But even with that, I haven’t seen numbers from anybody that suggests that they have got a higher ARPU. Our revenue per customer is the best and highest in the industry and if I was sub-segment that and say, okay, what is my revenue per enterprise customer, needless to say it will be even higher.

Jeff Van Rhee

Got it. Got it. And then just one more — actually two more. The $15 million roughly reduction in the guide, let’s call it half is the Ericsson delay. Of the remaining half I just — can you segment that, is that more related to couple of these very large deals that just took a little longer to get going. They were new but took longer to ramp or would you say that’s more due to just the existing base maybe not hitting volume targets. Just something more related to sort of existing legacy customers versus new projects?

Bob Lento

Well, it’s about existing customers and more about what we were expecting from new beside you brought up Tencent as an example it’s taking a lot longer to get the first bit of revenue from them than we thought. It required a lot more development work on our side than we initially thought. And now we are just starting with them. And so we are where we are today. We thought we would be six to nine months ago and building from there.

And then there’s — there’s one project for example where the company just made a decision to launch two — one or two quarters later than what they originally told us to plan for and so stuff like that happens.

But largely new initiatives with existing customers or new customers versus the existing base doing less than we thought they would or us losing traffic to a competitor or flat out losing deals. It’s more about taking longer to achieve the revenue goals that we had originally set.

Jeff Van Rhee

Yeah. Got it. And just…

Bob Lento

I saw there has been — look at customer too that I could point to and say here is one customer departure cost me more million or something that. I have none of that in my base, nothing.

Jeff Van Rhee

Got it. Got it. Yeah. And then just one clarification on the CapEx, I think, the guide was 20 to 24, if I recall last quarter, its 25 now, kind of what’s top of the list? You talk about a lot of things you are spending on, but what’s the delta from April to here in terms of where your expectations on spend changed?

Bob Lento

Yes. So I am still saying at approximately 25. I mean, hopefully, we will come in slightly below that. It could still be within 20 to 24. I was just trying to put a number out there to make sure that — I think of that as largely unchanged as I look at it.

And I think there is nothing out of the ordinary from what we set out to do at the start of the year to how we are progressing over the course of the year. There’s a little bit more of CapEx that’s related to the build-out of our move that you will not have known about before. But other than that, I think it is largely the go ahead in that capacity for the demand that is being requested of us.

Jeff Van Rhee

Got it. Great…

Bob Lento

I mean, I am not — yeah, I am not building capacity in regions anticipating demand, actually most of my capital or a lot of my capital now is against demand that has been articulated to us that this is the region and this is the time and this is the amount that they would like to see.

Jeff Van Rhee

Got it. Got it. Good deal. Okay. Thank you.

Operator

[Operator Instructions] The next question comes from Lee Krowl with B. Riley FBR. Please go ahead.

Lee Krowl

Hey, guys. Thanks for taking my questions and sneaking me in at the end. I just want to take everyone’s questions on the second half guide and maybe ask it’s slightly different, but taking it all in together. And just you guys talked about — you had some new customers in the first half that were additions. And I just wanted to figure out if what part of the second half guidance is contingent upon customers that you have recently added versus just the existing customers operating status quo versus prior expectations?

Bob Lento

So let me ask what maybe a different question. I mean, as we go into the second half, we obviously know which customers are — have been onboarded and whether they are trending towards out expectations or not.

In terms of risk in the second half of customers that we have yet to sign and are counting on revenue from, we — by bringing the guidance down, we have minimized that in a pretty dramatic and material way.

And so what is true is we are expecting to close some business and have some revenue contribution in the second half. But what I would tell you is that it is dramatically reduced from where it was to the — what we are expecting to be at the current range of outcomes.

Lee Krowl

Yeah.

Sajid Malhotra

So — and Lee, I just kind of add, I mean, we have gone out of our way to derisk the plan for those variances, because I think the back half story is good on its own as it is today. And I don’t want to get to a situation where I am reporting third or fourth quarter results and while the results on their own are really, really good but because we are off by $1 million or $2 million, the question deviates to why did you miss by $1 million versus why were your results were me.

And I think we have got a good story to tell as we put the first half behind us and going into the second half. I think revenue begins to grow sequentially. It begins to grow year-over-year in the third quarter and then at a very high rate, possibly the highest in the industry in the fourth or amongst the highest in the industry.

And the analyst community was not as it is as reflected in the consensus numbers, putting much faith in our numbers. So this — I — it was a prudent, take the risk out of the plan, take the unidentified out of the plan, focus on what we feel certain about and then just go ahead and execute and tell the story as it is that transpires.

Lee Krowl

Got it. And then just a point of clarification, I know, you guys previously expected UDN to begin contributing revenue in 2Q. Just kind of curious, is it generating revenue for you currently or has it yet to come online?

Sajid Malhotra

It is.

Bob Lento

Yeah. It is, less than we expected at this point but it is generating revenue.

Sajid Malhotra

There’s major milestone that needed to be hit. We needed to do a conversion of the gen 1 process, done. We needed to convert the gen 2 process done, start to see revenue flows back and forth between the two businesses, done, begin to make sure that the billing, etcetera, was fully integrated, go ahead and tie that all together, taken care of, do the customer convergence. So I think things that had to be done are getting done.

I think it’s — again, it’s not unnatural when you have a leadership change, business takes a little bit of a pause and then it restarts. As that gets behind — and we are having good conversations with them and we are really happy about pass rule in that and see and I think good things will happen.

Like I said, I mean, we are having conversations that are broader in scope than when we began. I mean keep in mind they have a big play in 5G. They have a big play on the edge and IoT side of the business. So this conversation with the partner with virtually we are engaged with can become much broader than just the CDN conversations that we have.

Lee Krowl

Got it. That makes sense. And then, just kind of an OpEx question, you guys have been adding some sales headcount to address some of these newer products. Is the expectation that you have built the headcount you need or do you expect to continue hiring for the rest of the year?

Bob Lento

I think we have built fast initially. So don’t expect the rate of change to continue at the same pace. But we expect incremental additions and some of it is also for not just adding volume, but also covering more geographies.

So when we are entering the Latin America market, we want feet on the street and presence there. When we are entering China, we would like to be able to have presence there. When we are entering into some new geographies in the Middle East, we would like to have physical presence there.

At the same time, we are attacking a breadth of the marketplace sometimes with very unique capabilities, for example, what we are doing with low latency with the gaming customers. So you look more in that, through expertise in that area. So we have gone ahead and added on that, and we will continue to support the business and the plan that we have.

Lee Krowl

Got it. Thank you for taking my questions.

Bob Lento

And again welcome to you and to Rishi. Congratulations on the appointment and any other questions?

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Sajid Malhotra for any closing remarks.

Sajid Malhotra

Great. Thanks. And so, just before we close, I just want to let you know, if you would like to schedule a visit, just right or call me. I mean, we would be happy to visit with you for a face to face meeting or I am happy to get on the phone call, I am available for the rest of the day today, tomorrow. And thanks again and as always, I will be available to answer any questions after the call. All right, with that, we will conclude the call. Thank you all.

Bob Lento

Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.