Limelight Networks: Losing Netflix, but Is It a Turnaround Play?

Limelight is working hard to turn around its business, but Netflix’s loss is a big concern.

Apr 3, 2014 at 2:30PM

After Akamai Technologies (NASDAQ:AKAM) released solid results in February, it was the turn of fellow cloud services provider Limelight Networks (NASDAQ:LLNW) to join the limelight. However, Limelight's results were nowhere near Akamai's as the content delivery service provider's revenue fell year over year.

Limelight turned in a weak performance as a result of customer churns and high customer acquisition costs. However, it has been in turnaround mode for the last year, and it was able to deliver a smaller-than-expected loss in the quarter. In addition, Limelight's loss declined slightly to $5.1 million from last year's $5.6 million. 

Limelight has been hurt by customer churns as stated above. So, the company is working on various strategies to make a comeback and address the various issues that it faces.

Gunning for a turnaround
Limelight is aggressively looking for improvements. It is expanding its product suite in order to gain more customers. In addition, it is expecting to gain traction across all its solution offerings by offering a more compelling product suite. Limelight has increased its focus on product management and software development in an effort to solidify its solutions, so the company should see better times in the future as a result. 

To address the problem of customer churns, Limelight is focusing operational efficiencies. It has made some improvement on this front as it was able to reduce one-third of the churns in the second half of last year. Further, Limelight is working upon improving the employment environment in order to reduce employee turnover. Even this has led to positive results as Limelight was able to bring down employee turnover from 20% in the first half of the previous year to single digits in the fourth quarter. 

Limelight is also focusing on improving productivity by moving some of its development capacities to lower-cost geographies. Further, to improve customer satisfaction, the company is deploying a new customer service platform to unify ticketing, automated communications, build an enterprise knowledge base, and drive efficiency.

In 2014, Limelight is focused on improving cost efficiencies and delivering new software, features, and functionality. It will introduce features such as enhancing adapted format streaming for mobile devices, updated digital rights management, and instant purge capabilities globally to provide better services to customers. Further, it is moving to an automated environment to remove inefficiencies in the business model. 

Concerns ahead
But Limelight will face weakness in the business as its largest customer, Netflix (NASDAQ:NFLX), is going to move away from its platform in the middle of the year. Limelight had invested heavily to build its network in order to support Netflix, but last year, the online media streaming giant announced that it is building Open Connect, its own content delivery network. Netflix was delivering just 5% of its content from Open Connect last year, but as it continues the transition to its own platform, Limelight will feel the pinch. 

However, Limelight expects organic and new customer growth to offset the decline at Netflix and lead to revenue growth this fiscal year. This is identical to what peer Akamai said when it released earnings in February.

Apple is Akamai's biggest customer, and there are reports that Apple will also be building its own content delivery network. However, Akamai believes that it is in a good position to weather such a storm since it has a broad client base. Akamai counts leading carriers such as AT&T, Orange, Swisscom, Korea Telecom, and Turk Telekom on its client list and recently entered into an agreement with Qualcomm to provide 4K videos to customers. 

On the back of this diversification, Akamai believes that it can withstand the effects of an Apple loss.

Bottom line
Limelight is having a tough time as of now. The company is trying to turn around its business and has made some progress. However, the loss of Netflix will be a concern and could weigh on the results. So, in times of such uncertainty, I think it will be better to wait on the sidelines and see how much effect Netflix's loss has on the company. There's no doubt that Limelight's other moves are interesting, but investors can get a better point of entry if they wait.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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