Edgio, Inc. (NASDAQ:EGIO) Q2 2023 Earnings Call Transcript

Edgio, Inc. (NASDAQ:EGIO) Q2 2023 Earnings Call Transcript September 12, 2023

Edgio, Inc. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.11.

Operator: Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Edgio 2023 Earnings Call. [Operator Instructions] Thank you. I will now turn your conference over to Sameet Sinha, Vice President of Investor Relations. You may begin your conference.

Sameet Sinha: Good afternoon. Thank you for joining the Edgio’s second quarter 2023 financial results conference call. This call is being recorded today, September 12, 2023 and will be archived on our website for approximately 10 days. A copy of our Form 10-Q for the second quarter along with today’s press release can be found in the Investor Relations section of our website. Please note that today’s comments include forward-looking statements regarding future events and financial performance, including statements regarding guidance for the 2023 fiscal year. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

The factors include any impact from macroeconomic trends, the integration of any acquisitions and any impact from geopolitical developments. Please see the forward-looking statement disclaimer on our company’s earnings press release issued after the close of market today, as well as the sections entitled Risk Factors included in Edgio’s filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Edgio disclaims any obligation to update these statements to reflect new information, future events or circumstances except as required by law. During the course of today’s call, we will be referring to certain non-GAAP financial measures.

The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of our differences between such measures are provided in the earnings release in our Investor Relations section of our website. These non-GAAP financial measures are not intended to be substituted for our GAAP financial results. I’ll now turn the call over to Bob Lyons, President and CEO. Bob, the floor is yours.

Robert Lyons: Thank you, Sameet. Good afternoon, and welcome to our earnings call for the second quarter of 2023. This quarterly report and the associated 10-Q filing addresses the outstanding compliance issues with applicable NASDAQ listing rules. With this filing, we can now put the restatement and compliance issues behind us. Throughout this entire process, we have continued to be laser-focused on executing our strategy and customer feedback continues to show that Edgio is the preferred partner for creating more valuable connected digital experiences. With each passing month, we are adding new customers and seeing existing ones reaffirming their trust and the value that Edgio brings to the organization. We have built a very capable leadership team who recognizes the work in front of us, but is equally motivated by the opportunity available to us.

We have accumulated several industry awards in recent quarters from industry analysts and experts for innovative solutions. We have also seen a growing number of notable customer wins, many of whom switched to us from competitors. Let me share the operating highlights that we believe will enable us to continue building on and capitalizing on this momentum. First, the successful implementation of a client success team, the redesign of our commercial teams and the improvement of our sales enablement motions has, in fact, begun to demonstrate that we have turned the corner. Churn in our acquired applications business has been reduced to rates in line with industry norms, and we expect expansion revenue to exceed churn into the back half of the year for the first time since the acquisition.

Our qualified pipeline continues to grow, and more importantly, we are converting more of that pipeline to bookings at higher rates than we have historically. By the end of the third quarter, we will have had three sequential quarters of bookings growth. With our commercial motions now positioned for success, we believe that momentum is building into the next year. Second, we continue to aggressively manage costs. We remain committed to our plans of reducing run rate operating costs by $85 million to $90 million by year-end. In the second quarter, we reduced our cash operating expense by 24% compared to the fourth quarter of 2022 and are on track to successfully complete our cost roadmap for this year. Third, our product strategy continues to establish Edgio as a leading edge-enabled solution provider in applications, security and streaming.

The number of awards received after releasing Applications Version 7 validates our strategy of having best-in-class products powered by our globally scaled edge network protected with native enterprise class security and delivered with deep expertise. We have established Edgio as a credible and recognized enterprise security solution for high stake web properties. We continue to have the most complete suite of streaming capabilities in the industry. All of this builds on the strategy that we outlined in August of 2021, a strategy that pivots us away from a heavy reliance on low-margin usage-based revenue to profitable and growing edge-enabled solutions with a revenue profile that is both recurring and high margin. We remain committed to aggressively improving profitability this year, while laying the foundation for growth next year.

We believe that 2023 will prove to be an inflection point for the company, and we are happy to have the distractions behind us. Let me take a few minutes to unpack each of these important milestones in more detail. The first key takeaway, we have now stabilized revenue with clear support for revenue expansion in 2024. We have made significant progress reducing previously discussed customer churn in our acquired applications business. Churn in the most recent quarter was approximately 1% as compared to 6% in the first quarter and 4% in the fourth quarter of last year. This is a significant improvement in two quarters and is now in line with industry norms. Our renewal bookings continue to grow and are up double digits quarter-to-date versus the second quarter.

We believe that our progress in reducing churn and improving renewals will support expansion revenue outpacing churn in the back half of this year for the first time since the close of the acquisition. Our rebuilt marketing organization has implemented the first phase of our DemandGen plans. This has resulted in meaningful growth in our qualified pipeline and an improvement to our first 60-day conversion rate by more than 5x from 2% to more than 10%, now in line with industry norms. This speaks to improvements in both rate of growth and the quality of our pipeline going into 2024. Todd Hinders joined Edgio as Chief Revenue Officer during the second quarter. Todd promptly organized the commercial teams into a more productive territory model and implemented a number of sales enablement improvements.

Sales productivity has improved by 4x year-over-year. Our customer acquisition cost to bookings ratio is quickly trending to a 1:1 ratio and more in line with SaaS industry norms. As of the end of August, bookings for our application solutions have more than doubled from the first quarter and are already ahead of second quarter levels with a month ago. This improvement has been broad-based across new logos and renewals. As uncertainty surrounding our restatement wanes, we expect continued improvements in the growth of qualified pipeline, the conversion rates of that pipeline and subsequent bookings. In the quarter, we continued to expand our routes to market with the expansion of our relationship with AWS as a channel partner. We anticipate this partnership will prove to be a meaningful contributor to our channel-enabled growth objectives.

We will continue to explore opportunities to add additional high-quality partners throughout the balance of this year and into next. Key performance indicators for our commercial motion suggest we are, in fact, laying a strong foundation for growth. Our qualified pipeline is growing faster and with improved quality. Our sales productivity is improving, and we continue to add new high-quality routes to market. While there is plenty of additional work to do, we expect the second half of 2023 to demonstrate slightly positive net revenue retention and sequential growth with continued improvements into 2024. The second key takeaway, we continue to execute as planned on our profitability and positive free cash flow objectives. We continue to execute on our plans to achieve between $85 million and $90 million of run rate cost reductions by year-end.

We remain committed to that number and have a solid roadmap beyond that number to continuously improve profitability well into 2024. We have largely completed implementation of our operating model synergies post-acquisition, resulting in cash operating expenses declining by 24% in the first six months of this year. We continue to focus on improving our unit economics with detailed plans that reduce our hosting, bandwidth, and pairing costs. While we have had success this year, we are in the early stages of what will prove to be multiple quarters of notable improvements. Leveraging our Open Edge platform, we are becoming more asset-light and have reduced capital intensity for more than 10% of sales in 2022 to under 3% in 2023 at the midpoint of guidance.

We will remain focused on becoming a more asset-light company as we continue to expand our high-margin edge software and security applications business. We have executed and will continue to execute well against our cost savings initiatives. Progress should accelerate in the back half of the year to reach adjusted EBITDA breakeven in the fourth quarter with anticipated sequential revenue growth, gross margin expansion and additional cost savings, we expect to deliver substantial year-over-year improvements in adjusted EBITDA and free cash flow in 2024. The third key takeaway, we continue to make meaningful progress, transforming our company from a usage-based CDN utility to an edge-enabled ARR-based technology solutions company. Let me start by highlighting some of the exciting progress we have made with our applications, security and media solutions.

In the second quarter, we released our award-winning Applications Version 7. This release is a fully integrated workflow and orchestration technology stack that enables companies with high stake web properties to deliver unmatched business outcomes with sub-second speed, lower operating costs and meaningfully better security. Our seamlessly integrated next-generation architecture powered by our globally scaled edge platform and protected by our native enterprise class security capabilities removes the latency cost and complexity associated with traditional point solutions. Edgio now enables unmatched monetization, operating costs and securities for our customers. In 2021, we unabatedly stated that we would have a much more compelling cybersecurity story to tell.

We continue to build on that promise and can now say that Edgio is recognized as a compelling security company for enterprises. In Q1, we launched our Advanced Bot Management solution, which was well received and resulted in double-digit attach rates for trials across our existing customer base. More importantly, in Q2, we validated that trials could successfully be converted into contracted and paying customers. We recently released our API security solution, which leverages machine learning to inspect both application traffic patterns and content to ensure API endpoints are discovered, managed and secured. Having exceptional security operations is increasingly critical as Edgio becomes a more essential partner to protect our customers’ critical applications.

We have recently expanded our security operations center with new leadership and services that we bundle with our security products. Best-in-class products enabled with expert services ensure Edgio can deliver unmatched protection to our customers. Independent research firms continue to recognize Edgio with awards in strong published rankings. We were recognized by GigaOm as leader in its recent Edge Platform Radar Report. Frost & Sullivan awarded Edgio the Best Practices Competitive Strategy Leadership Award and Edgio won a coveted Global InfoSec Award at the RSA Conference early in the quarter. Our Applications Version 7 suite directly enabled a competitive takeout from a large North American pet supply retailer, who chose Edgio over the incumbent competitor.

EGO’s advanced architecture was able to achieve performance levels within a very short time that were not attainable on their existing architecture. Other notable wins include a 15,000 employee safety and security solutions in Europe, a leading Asian webtoon company and a global consumer product brand. Applications Version 7 also resulted in the expansion of our solution within the world’s largest AI semiconductor company. Our advanced bot security features drove by key renewal with an Asian airline and upsell with a regional bank and a new contract with a large hardware company. Building on this success, we will soon be releasing a more advanced version of our edge functions, which empowers developers to better personalize content, improve performance and have more control over the user experience at the edge.

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Our media solutions continue to offer the most complete suite of streaming capabilities in the industry. Today, the product is difficult to consume by other than the largest media companies, so we are addressing that. In the coming weeks, we will be making improvements that will simplify the buying experience, making the product more accessible to the top 2,000 media streaming companies. This will include a more modular design, so companies can acquire what they need, a robust set of APIs for easy integration and expanded ecosystem of prebuilt third-party integrations and a more simplified pricing model. In fact, yesterday, we announced an alliance with other leading streaming vendors to help companies manage the complexity of the entire streaming workflow.

As part of this partnership, Edgio will act as the primary solutions provider, streamlining the entire workflow for customers. We are excited to be able to offer out-of-the-box complete enterprise-class streaming capabilities to a broader market. We expect our delivery business to remain flattish for the foreseeable future. We have seen further industry consolidation, a slowdown in subscription rates and lower post-COVID volume growth, but have also seen pricing trends begin to stabilize. We are managing this business to prioritize profitability and return on invested capital. Our commitment to reduce our asset and capital intensity by leveraging our Open Edge product, coupled with our roadmap to improve unit economics will support improved profitability for our delivery business in 2024.

In summary, with the restatement and associated reporting requirements behind us, our full attention is on executing the transition plan initially articulated in 2021. We continue to make notable progress on that plan and believe we have put the building blocks in place for multiple years of profitable growth. Our leading indicators suggest we are on the right track and have established a foundation for profitability improvement and growth in 2024. Now I will turn the call over to Stephen to discuss second quarter results. Stephen?

Stephen Cumming: Thank you, Bob. Revenues for the second quarter 2023 was stronger than expected at $95.8 million, up 50.6% from the second quarter of 2022 due to the inclusion of the Edgecast acquisition completed on June 15, 2022. We saw a sequential decline of 6.1%, driven by normal summer seasonality and previously communicated churn primarily associated with the Edgecast business. We expect second quarter revenue to be the low point for the year as revitalized sales and commercial motions are reducing churn, driving new product adoption and increasing conversion of our growing qualified pipeline. Moving to gross margin. Cash gross margin, which excludes the impact from stock-based compensation, acquisition-related expenses and depreciation was 30.8%, down 390 basis points sequentially.

Cash gross margin was impacted by the seasonal decline in traffic, consistent with having a high fixed cost structure, partially offset by savings from previously announced cost containment efforts. Turning to operating expenses. Cash operating expenses, excluding share-based compensation, restructuring charges, acquisition and legal-related charges, depreciation and amortization were $42.9 million or 44.8% of revenue, down from $49.7 million or 48.8% in the first quarter of 2023. We continue to make significant progress in our cost reduction initiatives. We are executing well on our planned acquisition synergies and operational efficiency programs while investing in new product introductions and revitalized sales and marketing motions, as Bob has highlighted earlier.

Cash R&D expenses decreased by $1.4 million sequentially to $16.7 million, approximately 17.4% of revenue from $18.1 million or 17.8% of revenue due to the savings from previously announced cost containment efforts. Cash sales and marketing expenses decreased $3.2 million sequentially to $15.7 million or 16.4% of revenue from $19 million or 18.6% of revenue due to the savings from previously announced cost containment efforts, reduction in variable compensation and discretionary spend. Cash G&A expense decreased by $2.2 million sequentially to $10.5 million or 10.9% of revenue from $12.7 million or 12.4% of revenues due to savings from previously announced cost containment efforts, as well as the conclusion of the transition services agreement for the Edgecast acquisition and reduction in other discretionary expenses Share-based compensation included in operating expenses was $3 million below the first quarter at $4.5 million.

Restructuring charges were $3.3 million compared to $0.5 million for the first quarter of 2023. Acquisition and related charges included in COGS and operating expenses in connection with the Edgecast transaction were approximately $1 million compared to $1.2 million for the first quarter. Adjusted EBITDA for the second quarter of 2023 was a loss of $13.4 million compared to a loss of $14.4 million in the first quarter of 2023 due to continuous execution and cost-saving initiatives, which have resulted in across-the-board sequential declines in all operating expense line items. Moving to the balance sheet and cash flow. Cash and cash equivalents and marketable securities totaled $36.2 million, a decrease of $12 million from the first quarter of 2023.

We’ve been very disciplined about our cash management and expect to maintain a similar level of cash balance in the second half of the year. First half 2023 capital expenditure, net of payments from ISPs was $2.6 million or 1.3% of revenues. Over the last 9 months, we have initiated tighter CapEx spending controls, which have resulted in CapEx significantly below historical levels. DSO for the second quarter was 60 days, 13 days lower than the first quarter as we continue to accelerate our efforts integrating Edgecast customers and streamlining the collections process. Now moving to guidance. Strong product execution and improved go-to-market motions have helped overcome the continued softness in the macro environment. Our broad product portfolio and the value proposition of our solutions are resonating with customers, and we are seeing improvements in our leading indicators.

We remain focused on executing on cost savings opportunities and are on track to deliver the $85 million to $90 million of run rate savings by year-end. For now, we are reaffirming our guidance for the year with revenue range of between $392 million to $398 million, which implies a growth of 16% to 18%, adjusted EBITDA range of between negative $37 million to negative $31 million and capital expenditure in the range of $10 million to $13 million. This implies business CapEx as a percent of revenue of about 3% to 3.5%. We expect payments from ISPs of between $5 million to $10 million Now let me provide you more context around our guidance. Based on seasonality, reduction in churn and improvements in bookings, we expect a flat to slight uptick in revenue sequentially in the third quarter of 2023, followed by a sequential increase in the fourth quarter.

Our pro forma second half revenue implies a meaningful improvement year-over-year revenue trajectory versus the first half. We expect cash gross margin to start improving sequentially, consistent with the revenue trajectory with additional benefits from cost savings and synergies. The first quarter was the bottom for adjusted EBITDA, and we expect to break even in the fourth quarter. To put it into perspective, midpoint of our guidance implies adjusted EBITDA loss in the second half to be about $6 million versus a loss of approximately $28 million in the first half of the year. Our cash balance at the end of the second quarter was $36.2 million. We expect our cash levels to be similar in the second half of 2023 and remain undrawn on our line of credit.

In summary, I want to reiterate our key financial priorities. Our focus is on revenue stabilization in 2023 and return to revenue growth in 2024, driven by our reduced churn, the new go-to-market initiatives, new product solutions and by leveraging our reconfigured channel and direct sales team. We’ve made great progress in rightsizing our cost structure to align with revenue growth assumptions. We expect our cost savings initiatives to continue through the rest of this year and into next year focusing on improving unit economics through managing client profitability and driving efficiency in our network and operating model. For this year, we remain focused on capacity optimization, tools rationalization, CapEx and organizational productivity initiatives.

We continue to explore additional cost-saving opportunities as we drive more operational efficiency and optimization of our network, which would be incremental to the $85 million to $90 million run rate savings we have highlighted. The combination of expected revenue growth and cost-saving initiatives should result in 2024 being a year of profitable growth. With that, I’ll turn the call back to Bob for some closing remarks. Bob?

Robert Lyons: Thank you, Stephen. We are well on our way to transforming Edgio for my first generation CDN platform that historically served commodity-like utility services into a third-generation edge solutions platform that helps customers manage high stakes digital properties at the edge with better monetization, efficiency and security. We continue to develop holistic solutions and software capable of serving mission-critical workloads for many of the largest blue-chip companies in the world, some of the largest social networks, fintech, streaming companies and even the largest AI semiconductor company and entrust Edgio for solutions that drive business outcomes unmatched elsewhere. Having extended the reach of our solutions enables us to expand revenue and our rose to market, all while aggressively managing our cost structure and improving profitability.

As we continue with our transformation process, we are increasingly better positioned to leverage what we have created and are focused on profitable revenue growth in 2024 and beyond. Steven and I look forward to being actively engaged with our investor community again. We will be participating at the Lake Street Conference in New York City this week and we’ll be meeting with investors in other cities throughout the rest of the year. We have also posted video content delivered from our leadership team that helps further unpack where we started, where we are and where we are going. You can find it on the Homepage of our website at edg.io in the About section. Please take a few minutes to review and gain a deeper understanding of our strategy, progress and plans.

We will continue to add content to our website for you throughout the balance of this year. Thank you for your patience while we continue to work on building what we believe is uniquely profitable for us. With that, operator, please open up the lines for the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Eric Martinuzzi from Lake Street. Please go ahead.

Eric Martinuzzi: Yes. First off, congratulations on getting the SEC filings up to-date. I know that was a project that took a lot longer than expected, but it’s good to have it in the rearview mirror. With that, I wanted to focus on the churn color that you gave. You talked about customer churn of 1% in Q2 versus 4% in Q4. But then you also talked about logo churn of down 40% in the same period. And I wonder, could you just take me a layer deeper there? What is that 40% when you say in the same period? Is it Q2 versus Q4?

Stephen Cumming: Eric, this is Stephen here. I’ll take that one and then Bob add any additional color. Now that – it’s Q2 versus Q4. And the two metrics that we’re showing there is absolute customer logo churn, the number of customers that turn you can see in our reported results on our earnings release, we have that metric out there. And then the 40% was actually looking at the dollar values around that. It’s substantially reduced by 40%. And I think I gave that data point when we gave our Q4 update as well. So, we’ve certainly got our arms around this substantially. We’re pleased with the results. As you know, this has been a major focus for us as a company. We’ve put dedicated resources around it, along with the senior leadership team, and really targeting specifically a lot of the Edgecast customers that were churning substantially when we acquired that asset.

I think also just to add that we’ve seen an introduction of our expanded solutions with our V7 product offerings – and a simpler pricing plan. It’s also substantially helping that churn environment.

Eric Martinuzzi: So have we – I know the customer base doesn’t all renew in a given quarter. Are we – are our major exposures have we addressed our major exposures and either turn them off or renewed them?

Robert Lyons: Yes. So Eric, this is Bob. How are you doing? So you might recall that we – the two primary root causes of churn were one client engagement or lack thereof, and the second was feature gaps that we had where competitors had certain features. We had some towering strengths in some areas, but we were missing some basics. Yes, the release that we did with Application Version 7 closed those 23 feature gaps that we had. And then, of course, we implemented the client success team late Q4, early Q1, and starting to see the results of that. The net result is the churn is down. As importantly, renewals are going up in the direction where we want them to. And even more importantly, at renewal, we’re seeing more typically an expansion of use versus just a cold renewal.

So that’s why we believe in the second half of the year, you’ll start to see for the first time since the acquisition where renewals, and expansion revenue outpaced churn, which is what you want in a SaaS company, obviously.

Eric Martinuzzi: Yes. Okay. And then the health of your two largest customers, Amazon and Verizon, could you comment on those relationships?

Robert Lyons: Yes, very strong, positive on all fronts with Verizon. We – because of Application Version 7 we were able to renew that portion of their agreement recently, and they couldn’t be happier about the capabilities, and features that we have. And again, expansion conversations there as well. They’re also a big reseller partner of ours. So very strong relationship there. And Amazon, as always, has been a great partner, and a consistent partner with us, and we’re actually growing with them, which we’re excited about. So – and I’d add a third, Disney is up in that mix as well. And we have a very strong relationship there and feel pretty happy about that relationship as well.