Limelight Burns Out

In the topsy-turvy tech market, a lot can happen in a couple of months. Since going public in June, shares of Limelight Networks (Nasdaq: LLNW  ) have fallen roughly 64%, to $7.93. That plunge includes a 46% drop following the company's Q2 earnings announcement late last week.

Limelight's network transfers rich online content such as games and video at high speeds. As the Q2 report shows, it's a hot segment of the Internet economy. Limelight's revenue surged 43% to $21.2 million, and it added 149 customers, for a total of 876. New clients include Viacom (NYSE: VIA  ) , Electronic Arts (Nasdaq: ERTS  ) , and Sony (NYSE: SNE  ) .

Limelight announced the five-year expansion of a major contract with an as-yet-undisclosed existing customer. Since part of the company's revenue is based on future traffic, it's impossible to gauge the size of the deal. But on the conference call, Limelight's management sounded upbeat on the prospects of the contract.

The company's adjusted EBITDA fell by 22% from the previous quarter to $4.4 million in Q2. Limelight predicts that EBITDA will fall to $1 million to $2 million for Q3. To accommodate its growth, Limelight has ramped up spending on R&D, sales and marketing, and general and administrative costs -- at the cost of lower EBITDA.

Meanwhile, Limelight has suffered pricing pressure. While high-quality online video is highly popular, content providers can't seem to find ways to make money from it. So why pay high fees to Limelight?

Moreover, Limelight's main rival, Akamai Technologies (Nasdaq: AKAM  ) , continues to fight hard to win over customers, and it may be engaging in a price war. Over the past month, Akamai's share price has plunged about one-third.

As I mentioned in a recent Fool article, Limelight's recent valuation - with an enterprise value-to-sales multiple of around 20 - seemed priced for near-perfection. While its valuation is much better now, its rivals appear to be gaining momentum, and Limelight's share price may deteriorate further. Given the sudden destruction of Limelight's stock, it'll probably take some time for investors to warm up to the company again.

Further Foolishness in focus:

Limelight competitor Akamai is aMotley Fool Rule Breakers recommendation, while Electronic Arts is aMotley Fool Stock Advisor recommendation. You can check out either newsletter absolutely free for 30 days.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 4,156 out of more than 60,000 total participants in Motley Fool CAPS.


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