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It's Quality Over Quantity for Limelight Networks Inc.

By Anders Bylund - Updated Feb 14, 2018 at 9:02AM

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The digital content-delivery veteran may have been forced to try a new business strategy, but now management only wishes the transformation would have happened earlier.

Content-delivery specialist Limelight Networks (LLNW 1.28%) reported fourth-quarter results last week. The company exceeded Wall Street's estimates across the board as earnings doubled over the year-ago period. Share prices didn't soar on the news because investors have been pricing in a lot of strong results lately and the company had a high bar to clear before impressing anybody.

That being said, it was a solid report with clear signs that Limelight's turnaround story continues to play out. Let me show you what I mean.

Limelight Networks' fourth quarter by the numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$48.2 million

$43.8 million

10%

Adjusted net income

$3.9 million

$1.8 million

119%

Adjusted earnings per diluted share

$0.04

$0.02

100%

Data source: Limelight Networks.

Gone are the days when Limelight was willing to race to the bottom with steep discounts for large data-delivery contracts. It's all about delivering high-quality services to quality customers who are willing to pay more for a better end-user experience. Limelight is boasting higher customer satisfaction under this revamped business model, along with richer profit margins.

You'd think that the company would be paying the price for these improvements by sacrificing its top-line revenues. That's not how Limelight's new strategy has worked out at all. Instead, the focus on higher-quality contracts has allowed the company to expand sales and margins at the same time:

LLNW Revenue (TTM) Chart

LLNW Revenue (TTM) data by YCharts.

Management's hand was forced in this direction because there was no way to keep the company alive under the old business model for much longer. With the added weight of quarterly payments for a legal settlement with Akamai Technologies (AKAM 2.82%), Limelight would soon have collapsed under its own weight. So the company tried something new and seemingly counterintuitive -- and now, CFO Sajid Malhotra only wishes that it would have taken that step much earlier.

"We improved our gross margins by 522 basis points last year," Malhotra said on a direct phone call with yours truly. "And we think we can improve again by 100 basis points this year. So the question is, could we not have come up with this improvement earlier?"

Limelight Networks' corporate logo.

Image source: Limelight Networks.

What's next?

Necessity is the mother of invention, so they say, and Malhotra is certainly happy to continue Limelight's improvements from this point. The quality focus is here to stay, either way.

The Akamai payments will continue for another six quarters, and that's the end of that legal hassle. It's also the end of $4.5 million of quarterly cash expenses, which is more than enough to make up the difference between positive and negative free cash flows. The company is setting up for a long-term run of strong financial health, even as Akamai seems to be losing its dominant hold of the content-delivery market.

Malhotra also said:

I hear our primary competitor talking about very high traffic growth -- and no revenue to show for it. Their revenue actually declined in their latest report. And we are not in that mode at all. The purpose of our company is to grow, to generate cash returns for shareholders. Not to deliver traffic and lose money.

Shots fired. Meanwhile, Limelight Networks investors have enjoyed a 68% return over the last 52 weeks while Akamai shareholders instead took a 5% haircut.

Editor's note: The Q4 2016 revenue figure in the table in this article has been corrected to show that revenue in the quarter was $43.8 million and the year-over-year increase was 10%.

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Stocks Mentioned

Limelight Networks, Inc. Stock Quote
Limelight Networks, Inc.
LLNW
$2.38 (1.28%) $0.03
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
AKAM
$94.46 (2.82%) $2.59

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