Saturday, 24 October 2020

Limelight Networks (NASDAQ: LLNW) drops by 30% after Q3 2020 results


Source: Finviz

Fastly (FSLY) also dropped by 30% after their earnings revision.

Source: Finviz

Comparing the P/S before their respective drops, LLNW was trading at a much more reasonable valuation.

Data from RocketFincnail
For a stock trading at a P/S of 3, a 30% drop for missing EPS estimates by $0.03 seems to be an overreaction.

EPS alone was hit by $0.02 because of the convertible note offering that was made in July.

Earnings Call (Source:

Operating expenses increased approximately $600,000, primarily due to one-time costs related to organizational realignments

Revenue in the third quarter was $59.2 million, up 15% year over year.It marked our highest third quarter ever, and second highest in company history.
EBITDA was $3.7 million, up a very strong 49% over the third quarter of last year. Adjusted EBITDA was $5.6 million this year.

EBITDA may have been fine to use before given that that their equipment and hardware have depreciation. However, they now have a huge interest expensive (no) thanks to the convertible notes and is no longer a good measure of performance. Interest on the convertible notes alone cost them about 962,500 a quarter (110 million * 3.5%).

We are leaving our full-year guidance unchanged except for GAAP and non-GAAP EPS, solely due to the impact of our convertible debt offering, and the additional cash and non-cash interest expense. Interest expenses will have a $0.03 impact on GAAP EPS adjusting to a $0.03 to $0.13 loss, and non-GAAP EPS is adjusted to a $0.02 loss to an $0.08 gain. Annual cash interest expense from the July convertible debt offering will be $4.4 million, payable in February, and August. Non-cash interest expense for the fourth quarter of 2020 will be approximately $1 million.

No change in FY guidance.

In the July call, the customer that we were hopeful that we were on the one-yard line of closing it. Actually hasn't closed, and may not close 'till the middle of next year, due to some geopolitical things that are going with that. I've gone on with this company.

Hints that ByteDance/TikTok is their potential 'outsized' customer.  

And so with that convertible market operating efficiently as it was, we felt that it was appropriate time to take advantage of that market, and then do something with that cash. And whether that's just going to be internal improvements, added capacity, accelerated capacity, moving into adjacencies internally with added R&D expenses, and sales expenses, I think it's going to be a combination of all that. And then it gives us the wherewithal if something comes around that we want to go out and pick up on the M&A basis that we have that flexibility in order to do that.

Nothing planned with the convertible note offering, this is very disappointing especially when it hits their bottom line a lot.

Unfortunately, I'm still holding shares and have some 20 Nov puts that are probably going to get assigned to me. I still have 20+ days and the $5 puts shouldn't be that bad after assignment. The $6 puts are going to hurt though. Hopefully I can close them if IV drops. FSLY reporting worse than expected results could be be positive for them since they did much better despite demand dropping, or may end up dragging it down it together.

While the results are rather disappointing, I don't think it warrants the 30% drop given the current price and valuation. This is a sector with a lot of tailwinds but the management hasn't managed to meet their guidance. Its also kind of scummy that they released the "Streaming Video Viewing Reaches All-Time High According to Limelight Networks Research" press release a week before the results were released.


The growth in ex-US markets also present opportunities for growth. With streaming wars taking off, LLNW presents an opportunity to take part in it without having to choose a single company.

Back in 2006, Akamai (NASDAQ: AKAM) wanted to acquire LLNW and Tuition Build in 2014 for 645 million. The current market cap at 4.20 is about 512 million which is even lower than that. Maybe Amazon, Microsoft or Google can acquire them since its just chump change to for them at 2-3x of the current valuation.

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