Limelight Networks shares are tumbling after an earnings report that triggered multiple ratings downgrades and raised concerns about pricing in the content-delivery network market.
For the fourth quarter, Limelight posted revenue of $55.4 million, down 8% from a year earlier, and well below the Wall Street consensus forecast of $61.3 million. The company reported an adjusted loss for the quarter of 3 cents a share, while the Wall Street consensus expectation had been for a profit of 2 cents. Under generally accepted accounting principles, the company lost $8.3 million, or 7 cents a share. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, were $3.6 million, down from $11.4 million in the year-earlier quarter.
Last month, Limelight changed CEOs, naming
who had been CEO of a security software company called Alert Logic, to succeed
who had been running the company since 2012 and is now retiring. In announcing results late Thursday, the new CEO said in a statement that his immediate focus is to address the challenges the company faced in the fourth quarter, “specifically top-line growth and the resulting pressure on margins.”
Added Lyons: “Quite frankly, performance in these areas is not where it should be. I believe in our ability to close the gaps and position Limelight as a leader delivering edge-based solutions. While there is no doubt much has been accomplished, I know that our best days are ahead of us. I am confident in the direction we are headed, in our ability to better execute on a refined strategy and pursue rule-of-40 performance.”
The rule of 40 is the idea that the sum of the growth rate and net profit margin should be at least 40. The calculation is often applied to software businesses.
The analysts who cover the company were not pleased. Truist analyst Greg Miller cut his rating on Limelight shares to Hold from Buy, and trimmed his target for the stock price to $3, from $4. Miller noted that the quarter “yielded meaningfully lower than expected revenue and Ebitda at a time where the balance of the industry is still growing rapidly.”
Miller said “the sudden and inexplicable change in senior management after the close of the quarter does little to bolster confidence that a change in this new revenue trajectory will be achieved. With Akamai (AKAM) and others becoming more aggressive we are not hopeful with a turnaround in 2021.”
Raymond James analyst Robert Majek likewise cut his rating to Market Perform from Outperform, and withdrew his old $8 price target. “While we are excited that new CEO Bob Lyons is taking a fresh look at the company, which should result in a more diversified customer base and a lower cost structure, we found some of the company’s commentary around near-term prospects concerning,” he wrote.
Majek points to steeper-than-normal price compression with the company’s largest customers, a need to cut costs and service performance issues. He said that major repricing actions in the quarter apparently concessions to
com,, which accounted for 30% of Limelight revenue in 2019, and “on which it is reliant to fill capacity and sustain its cost base.” Majek said he is moving to the sidelines on the stock until it becomes clearer when the company can return to revenue growth, and there is more evidence that Limelight is still in a position to achieve “material free cash flow profitability.”
D.A. Davidson analyst
cut his rating to Underperform from Neutral, with a new target of $3, down from $4.50. He described the quarter as “disastrous,” noting that the results came despite favorable developments in streaming video and gaming. A lack of forecasts from the company about the outlook for 2021 adds to his concerns, he said.
“Revenue was down both year-over-year and, more puzzlingly, sequentially, in spite of a quarter with multiple tailwinds, including a second wave (with lockdowns and colder weather), two gaming console launches, a strong e-commerce season, and record [streaming] consumption,” he wrote. “This begs the question: if Limelight cannot execute when everything is going right, then when?”
Piper Sandler analyst James Fish cited the Limelight issues in reiterating his Underweight rating on Fastly (FSLY), which reports results on Thursday. “Limelight’s 10% top-line revenue miss provides a negative pre-cursor for Fastly, as the company will face similar price compression, coupled with lower net-adds in 2020 and its previously largest customer [TikTok] moving [to its own CDN],” or content-delivery network, he wrote. “We continue to believe Fastly’s stock is not appropriately evaluating the negative data points and underlying business risks at current levels.”
Fastly investors should be cautious heading into the announcement, he said.
Write to Eric J. Savitz at email@example.com