What's Wrong With This Networking Stock Today?

With a brand-new second-quarter report on the books, Limelight Networks (Nasdaq: LLNW  ) is earning its attention-grabbing name today. Unfortunately, I don't mean that in a good way.

Shares of the network services specialist plunged as much as 7.9% on the report. Sales rose 7% year over year to $44.4 million, led by rampant growth in mobile and video presentation services. The content management segment, which is the first business operation that comes to mind when thinking about Limelight, was basically flat year over year. Management is going after business in this market very selectively nowadays, chasing only the most profitable accounts in an effort to preserve profit margins.

The company reported a non-GAAP net loss of $0.05 per share, right in line with analyst expectations. The newfound discipline in Limewire's deal-making puts a lid on management's sales guidance for the next quarter. This company is working hard to become more efficient, but at the cost of looking bad on the top line.

Rival Akamai Technologies (Nasdaq: AKAM  ) soared on a brilliant second-quarter report of its own last week, but Limelight's gloomy outlook appears to have dragged that stock down a bit as well. Both stocks are underperforming an already listless market today. Add in part-time competitor Level 3 Communications for a full trifecta of negative market waves.

The video delivery service did not suffer from Netflix (Nasdaq: NFLX  ) introducing its own caching solution last quarter. Even though Netflix claims to deliver about 10% of its video streams over its own Open Connect hardware, Limewire insists that their Netflix traffic is increasing. That account represents more than 10% of Limewire's revenue stream, but at very low profit margins. This is the kind of business the network service guys won't mind losing in the long run.

Chalk Limewire's market action up to nervous short-term traders this time. The long-term opportunity for efficiency experts remain tremendous, with or without high-volume traffic from the Netflixes of the world.

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Fool contributor Anders Bylund owns shares in Netflix and has also created a bull call options spread on that stock, but he holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy.

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  • Report this Comment On August 02, 2012, at 6:37 PM, jvining3 wrote:

    LOL..."Limewire"....served.

  • Report this Comment On August 09, 2012, at 12:28 PM, YumeConsults wrote:

    Limewire is dead audio software that has a legal injunction against it.

    I thought this article is talking about Limelight... the CDN delivery service.

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