Edgio, Inc. (NASDAQ:EGIO) Q2 2022 Earnings Conference Call August 8, 2022 4:30 PM ET
Company Participants
Sameet Sinha – Investor Relations & Corporate Development
Bob Lyons – President & Chief Executive Officer
Dan Boncel – Executive Vice President & Chief Financial Officer
Conference Call Participants
Mike Latimore – Northland Capital Markets
Frank Louthan – Raymond James
Operator
Hello, and welcome to today’s EGIO Q2 2022 Financial Results Conference Call. My name is Elliot, and I’ll coordinating your call today. [Operator Instructions] I would now like to hand over to Sameet Sinha with HAL. The floor is yours. Please go ahead.
Sameet Sinha
Good afternoon. Thank you for joining the EGIO second quarter 2022 financial results conference call. This call is being recorded today, August 8, 2022 and will be archived on our website for approximately 10 days
Let me start by quickly covering the safe harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical facts such as our priorities, our expectations, our operational plans, business strategies, secular trends, product and feature functionalities, pro forma results, acquisition activities and contributions from acquired businesses. Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance. For more information, please refer to the risk factors discussed in our periodic filings, including our most recent Annual Form 10-K and quarterly reports Form 10-Q. The forward-looking statements on this call are based on information available to us as of today’s date and we disclaim any obligation to update any forward-looking statements except as required by law.
Joining me on the call today are Bob Lyons, our President and CEO; and Dan Boncel, EVP and CFO. Bob will start today’s call with a brief discussion of the results and an update on business and integration with Edgecast. Dan will then review financial results and guidance. Following that, Bob will use the remainder of the time to discuss aspects of our strategy and corporate initiatives going forward.
I will now turn the call over to Bob.
Bob Lyons
Thank you, Sameet, and welcome, everyone. It has been less than two months since we closed on the acquisition of Edgecast and formed EGIO. We remain very excited about this transformational combination. EGIO is not only more diversified edge-enabled solutions company and has the skill [ph] to building blocks to improve profitability and accelerate growth.
In the second quarter of 2022, we continue to build on three previous quarters of positive momentum with revenue of $74.3 million, an improvement of 54% year-over-year. Limelight contributed $61.5 million, demonstrating 27% organic year-over-year growth across all aspects of our business.
Edgecast contributed an additional $12.8 million. We expanded our capacity by approximately 100% headline way [ph] largely in support of the forecasted needs later this year. This capacity was ordered in a row of 2021 and when combined with the acquired Edgecast capacity, we have mitigated previously highlighted supply chain concerns. We are well positioned for continued growth through this year and into next year, albeit resulting in a temporary gross margin impact for this quarter. We expect gross margins to continue improving sequentially going forward. Our pipeline also continues to grow hourly [ph] at 50% this year and heavily focused on our high-margin, high-growth AppOps opportunities.
In the recent closing, we have successfully implemented the first phase of our integration plan. Our initial diligence indicated at least $50 million in synergie, half of which will be achieved in the first twp quarters after low. Post-closing, our deep analysis has resulted in an expanded synergy opportunity of at least $50 million. Of that, we have already achieved $17.5 million well ahead of plan. All of these are planned to be net run rate figures.
We have also completed the first detail of 2023 bottom up profitability and revenue levels for the combined companies. There is more work to be done before we can lock in our 2023 plan and provide solid guidance. However, we do feel it’s important to provide some very – on our current outlook. We expect 2023 revenue to be somewhere between $550 million and $560 million with an adjusted EBITDA that exceeds $65 million. This would imply year-over-year revenue growth of approximately 24% and adjusted EBITDA expansion from 4% in 2022 to 12% in 2023.
Currently, this outlook does not include commercial synergies or platform utilization improvements, providing additional upside opportunity and downsize risk. And last year [indiscernible], we committed to taking bold steps to become a leading edge-enabled solution provider. We outlined what we believe to be large unmet market opportunity to provide edge-enabled solutions that simplify development for builders and meaningfully improves speed and security for operators. We have, in fact, delivered on that commitment.
We currently offer 3 solutions, Edgio AppOps, which include Security, Edgio Delivery and Edgio Streaming, each solution bodes best-in-class capabilities and each benefits from our massively scale edge platform. AppOps currently representing approximately 20% of revenue is expected to support significant high-margin work for us. This solution is made up of our App Edge, App Security and App Platform products. Collectively, they provide most powerful comprehensive cloud security suite, development platform and application of CDN in the world. We believe this solution will be highly disrupted in the emerging high growth pf [indiscernible] sector.
We have successfully completed the first phase of broader security strategy and have the most complete web application and API protection product in the market. Our solution includes DDoS, WAF and Bot Management capabilities, and we have just place some y better solution at Accenture, Scripts, Symantec, Verizon and Citibank to name a few.
In digitalized our security product reported 355 million package for [indiscernible] one of the larger tech ever recorded that had no impact at all. Our delivery solution boast approximately 230 terabits per second of edge-capacity delivered to more than 300 hops across the globe, making us the second largest and most performing in the world.
We have also added 10 terabite entree additional capacity this quarter and are able to offer combined Limelight and edge gas capacity seamlessly to our clients. This enables us to provide clients with high performance capacity that was previously not possible and positions us well for continued organic growth going forward.
Streaming may prove to be the most underrated solution in our portfolio, representing approximately 25% of our revenue, and streaming head mission-critical applications for some of the most demanding and well-known companies. our streaming solution can capture viewer usage and experience data wherever the viewer goes, enabling us to continuously improve viewer spread in real time.
In fact, we will manage more than 30,000 live event s and have circled over 50 billion as fore clients this year alone. My conversations with our streaming partner indicate our solution is meeting or exceeding their daily needs, as new content and [indiscernible] rapidly expand.
We continue to work through our strategic planning process and look forward to unpacking our strategy for the contest of capabilities in greater detail at our Analyst Day. Our best-in-class solutions is powered by our massive scale and have performing edge platform, positions us well to benefit from vector tailwinds such as [indiscernible] linear-streaming TV and date. In short, we continue to successfully execute on our multiyear transformational plan. In the past 12 months, we have successfully completed two acquisitions overhauled aspects of our operating model. We moved $50 million of car and implemented a new rule of commercial team.
Our solutions are demonstrating to the value of our clients continue to do more with is and our strategy best as we [indiscernible] We believe all of this is of course a business that will continue to capture market share and sustained growth.
As we look beyond our planning period, we remain confident in our ability to be a growth oriented technology company with a greater than 60% gross margin, 15% EBITDA and positive free cash flow. We will continue to be un-waivered heading for suite.
At our upcoming Analyst Day, we will go in greater detail, unpacking our strategy, property plan and financial road map. We plan on announcing more details and finalizing the date to market calendars.
At this time, I will turn the call over to Dan to unpack second quarter financials.
Dan Boncel
Thank you, Bob. Revenue for the second quarter was $74.3 million, up 54% from the second quarter of 2021 and our third consecutive quarter of double-digit percentage revenue growth over the prior year.
Limelight contributed $61.5 million, supporting a 27% year-over-year growth and Edge Cap contributed $12.8 million for the 16 days and the results were included. Pro forma gross margins expanded to 38.4%, up from 32.7% in the second quarter of 2021, an increase of 570 basis points.
We added over 10 terabits per second of capacity during the second quarter in order to support expected growth in traffic. As traffic ramps and utilization improves, and we realize synergies from the integration of Edge Cap, we expect continued gross margin expansion over the next few quarters.
Pro forma operating expenses, excluding stock-based compensation, restructuring and acquisition-related expenses were $28.9 million or 39% of revenue up from 32% last year. The increase in operating expenses is driven by the inclusion Edge Cap expenses post June 15 close.
Second quarter acquisition and legal-related charges in connection with the Edge Cap transaction were approximately $14 million. Also, immediately following close, we began taking steps to implement our target operating model, resulting in a restructuring charge of approximately $4.4 million primarily related to severance benefits for 51 employees across the business. This will result in an estimated annualized savings of over $10 million.
As Bob mentioned, we already have realized $17.5 million in annualized synergy savings and expect to realize an additional $40 million-plus tons of synergies. Second quarter 2022 adjusted EBITDA was slightly below even due to the incremental spend on capacity added during the quarter as well as additional operating expenses from Edge Cap.
Cash and marketable securities totaled $76 million, an increase of $15.4 million from the first quarter of 2022. We have an existing unused $25 million credit facility and the ability to outsize that based on the added bench back [ph] collateral. We spent $13 million for capital expenditures in the quarter.
Our liquidity position today is stronger than it was before the acquisition. We believe that our current balance sheet and target operating model provides adequate liquidity and the strength to continue investing in our business as capital markets continue to tighten and recessionary years continue. We have and will continue to take aggressive cost actions further strengthening our balance sheet.
Accounts receivable increased to $108 million due to approximately $50 million of receivables from Edge Cap. We have reviewed the agent in detail and as expected, it is composed of high-quality blue-chip customers with stronger credit history. We expect DSO to be in the 50- to 60-day range post integration.
For the full year 2022, we are updating our guidance as follows, we expect the revenue range of $380 million to $390 million and adjusted EBITDA range of $13 million to $16 million. These numbers capture the previously disclosed streaming client locks and assume 45% of overall revenue will be from high-margin AppOps and streaming solutions.
We expect gross margins and adjusted EBITDA to continually improve throughout this year and next year as we realize the benefit of planned synergies and increased utilization and diversified revenue mix.
As we look beyond this year, our preliminary outlook for 2023 indicates a revenue range of $550 million to $560 million in adjusted EBITDA of at least $65 million. Beyond 2023, we continue to have confidence in our ability to achieve our longer-term objective of double-digit revenue growth, 60% gross margins and 15% adjusted EBITDA and with sustained positive free cash flow.
With that, I will turn the call back over to Bob.
Bob Lyons
Thanks, Dam. We committed to taking bold steps toward really improving client and shareholder e, and we continue to deliver on that commitment. While we are no doubt on the progress we have made in short order, we remain focused on the opportunities in front of us and was required of us to capture those opportunities. We are now one of the largest independent edge platforms in the world with unparalleled performance, security, live event and streaming capabilities, while we are a client-first company, our products are, in fact, best in class.
I’ll close by sharing some observations we have across our industry and how that changes our outlook. We currently do not see any weakness in the number of hours a day people have iboss and glass [ph] we do see some subtle shifts in where they are viewing, but I believe our current portfolio, which includes streaming, applications, gaming and social media, positions as well to cover these eyeballs wherever they are.
Our growth is no longer tied to streaming trends but rather and our ability to capture market share. The aforementioned of the cash is indicative of a continued environment of risk for clients around the world, larger, more sophisticated high-stage cyber security attacks make headlines every day, delivering a secure brand is the only way to meet consumer expectations and continues to help differentiate Edgio across our add box, delivery and streaming solutions.
We continue to see a large unmet need for outcome-based solutions versus tools. The tools for all is incremental to productivity, speed and security, and we are currently positioned to address those needs for our competitors. The economic environment creates opportunities for companies that have momentum and a strong balance sheet. We have both, as well as a strong partner at Colo [ph] who believes in our value creation strategy.
We believe that our strengthening performance coupled with the challenging capital markets will provide us additional expansion opportunities to consider. We will remain inquisitive and as always, we’ll focus on deals that expand our relative scale, extend the use of our edge platform, expand our security capabilities and that will again be accretive to shareholder value.
We have made meaningful progress in the past six quarters and have delivered three quarters of year-over-year positive revenue growth. Our leading indicators support a continuation of this momentum with expected year-over-year growth of 44% in 2023 and continued improvement to gross margins and adjusted EBITDA.
We continue to strengthen our team from the Board to management. We are very excited to have added three Board members and the talent and expertise they bring to Edgio. We are also excited about the recent appointments such as our Chief Information Security Officer and our Chief Legal Officer.
Edgio is quickly realizing our transformative vision and demonstrating our ability to improve profitability and growth. We have assembled the building block and establish a foundation of solutions that have a clear right to win in a highly attractive $40 billion market. Our company continues to strengthen. We thank our investors for their continued support and look forward to working together to achieve what we know to be uniquely polite for us.
With that, operator, please open up the line for the question-and-answer session.
Question-and-Answer Session
Thank you. [Operator Instructions] Our first question today comes from Mike Latimore from Northland Capital Markets. Your line is open. Please go ahead.
Q – Mike Latimore
Thank you. Congratulations on all the news here. Diversification is an important part of the acquisition, I guess, as you look through the second half of the year, what would you expect your largest customer to contribute as a percent of revenue?
Bob Lyons
Mike, how are you doing? it’s Bob. I’ll let Dan. But that was one of the key parts of this acquisition is that not only did we diversify our product revenue and have a higher mix of high-margin revenue, but also client diversification. We’ll only have one client above and that client will be around 13%. You can probably get who that is. It’s been traditionally a very large customer for us. So historically, they’ve been running closer to 30%. So that’s significant in the concentration of a large client.
Dan Boncel
Yes. The only other thing I would add there is the other large clients from Edge Cap was Verizon and we have them locked into a 3-year contract based on agreements that we put in place along with the acquisition. They continue to be very strong in traffic, not only with their delivery service, but with their streaming service. And so that could be another one that gets up to that level, but that’s a good thing based on the traffic delivering for them and how we’re performing for them.
Mike Latimore
Okay. And then you touched a little bit on the potential influence of the recession or inflation on consumer activity. What about just kind of enterprise sales cycles? Have you seen any changes or?
Bob Lyons
Yes, that’s a great question, Mike. That — historically, in my experience and what we’ve seen here as well is that is where you tend to see enterprise sales cycle slowdown. I mean people are not spending money to holding on to it.
Interestingly, with us, our thesis on that is we definitely are seeing that. But when you look at our solutions, our solutions are really focused on giving more for less in reducing TCO. So we actually believe that there’s an opportunity for us to come in and provide a better answer where people can trim their budget still move their companies forward with better security, better performance and better productivity.
And so we’ve actually spent a lot of time with our marketing team putting together campaigns that we started launching about 30 days ago. really focused on that. Basically, you can have more or less kind of campaigns. And so we’re going to try to take advantage of that to the best of our ability. But that is a traditional thing in the FR sales and the sales cycle extending out basically.
Mike Latimore
Great. Good luck. Thank you.
Operator
Our next question comes from Frank Louthan from Raymond James. Your line is open.
Frank Louthan
Great. Thank you. Have you — as you’ve looked at the sort of the portfolio business out of EdgeCast, any concern either CD customers may want to diversify a little bit more now that they maybe have some higher concentration of business with you. And then on the — for next year on the CapEx, is it in a similar range of — as a percentage of revenue would we expect or would it be running a little higher initially? How should we think about that? Thanks.
Dan Boncel
Great. Thanks Frank. I’ll take the first one. That was actually one of the really important parts of this deal is that there was very almost no overlap at all in customers. And so we don’t see that at all. You might recall we had one client that over that client actually wants to do more with us. They want a big client on either side and actually like the stability of Edgio better.
So we’re actually expanding that client meaningfully. And so we’ve had actually the opposite effect. We had no overlap other than that — and I would say that probably overall, the sentiment is, geez, Go is a much more stable company than the 2 individual ones were given where they were so they’re willing to lean in more. They look at us as a true alternative to maybe somebody else in the market that they’re a little rated on today. So that was that one. I’m sorry, what was the second question again?
Frank Louthan
On the CapEx, that could be similar to a similar percentage of revenue? Or will it start out a little higher before you get into the longer term?
Dan Boncel
Yes. I’ll tell you how we think about it qualitatively and then how it shows up at will come out as we give you better guidance later in the year. But if you think about the 2 factors, we definitely expect the company to get reducing our capital intensity. Historically, as you know, we’ve run at 10%. That will reduce for 2 reasons. One, as we have a higher concentration of revenue that’s non-CDN related those are low CapEx businesses.
And so you generally are going to have a lower percentage of revenue on CapEx, number one, — and then number two, the investments that we’ve been making in Linux and other things actually reduces that. And then the third thing is our Edge Xtend product actually allows us to have more capacity without having to spend the CapEx. So those are the 3 things that we’re driving.
We see very good indicators and early success in all 3 of those things. And as we go into next year, there’s a point in which we definitely get better at CapEx and that get more efficient at that. We’re not really willing to call it yet because there so many opportunities available to us to invest in the short term to get a very quick payback, and we want to make sure we capture all those things because it translates into getting that gross margin where we want to get it to. So I would say as we get closer to the end of the year, we’ll have a better idea there. But generally speaking, we will get more efficient with CapEx. The only question really is the timing and how much we’re not to call that even.
Frank Louthan
Okay. And where are you as far as the percentage of complete on the lending conversion?
Dan Boncel
So we’ve actually done it is the completion of putting it in production and really now it’s a rollout conversation. And so it’s a combination of getting the equipment and then also ensure that we roll it out without creating any kind of impact, particularly going into Q3 and Q4, we’re having more traffic. We’ve got to do that thoughtfully and take advantage of that. So as far as a specific time frame, I would say we’re in the probably second or third inning of the 9 engagements.
Operator
We now turn to David Martin from Lake Street. Please go ahead.
Q –Unidentified Analyst
Its Eric Martinuzzi [ph] Lake Street. Just a question regarding the gross margins in the — it seems like you made a sufficient using capacity expansion but is that after you and given the outlook for the quarter or was it already being in as you came out of
Dan Boncel
Yes. So we added capacity, a amount of capacity in the quarter is 10 terabits. And so coming out of last year, we didn’t have clear visibility into when we are actually going to get the equipment in order to add that capacity that we we needed for the second half of 2022 in order to support the volumes to support the revenue forecast that we were rolling up.
And so it just happened that we had a lot of — a lot of CapEx that actually came in, in order for us to build that out during the quarter. And so we took that opportunity to roll that out without knowing exactly when the edge can deal is going to close. As Bob mentioned, we think that the CapEx can come down in the second 23 by better utilizing the capacity that we’ve recently rolled out, but also better utilizing the hedge gene that we now have that we didn’t know we were going to get as quickly as we did because those are kind amost vendors.
Q –Unidentified Analyst
Got you. And then as far as — you talked about a sequential improvement of federal utilization in Q3, Q4. What are we looking at as far as can kind of narrow things down for us as far as that a noncash gross or that the cash gross margin expansion opportunity, are you talking bit? Are we talking we’re talking 20 to 100 minutes or is it a larger step up than that?
Dan Boncel
Yes, I think we’re pretty safe in saying that we expect greater than in the triple-digit Viper the sequential gross margin improvements as we continue to increase and build on that utilization. And then increase the amount of revenue that’s coming from the higher-margin Apax revenue as well as stream to.
Q –Unidentified Analyst
Okay. And then last question for me is around the incremental synergies that red to her. — synergies from the Edge Guest acquisition, up from $50 million. Whereas what the source of that incremental synergy
Dan Boncel
So it’s a combination of a couple of things. A big part of that synergy is actually going straight to the gross margin line. When you look at — we have a stack of server sitting in the same building as EdgeCast had and maybe 2 rows apart from each other in the data center, and we can collapse those — we have a lot more pricing power now in these centers as well. And so it was really — before we could close, there was only so much information we can get our hands on. Once we were able to close, we were able to let the engineers really get under the covers and dig in and look and the good news was that we our initial estimate was a little bit more conservative. And so we’re able to take more of that bottom line. So it’s largely just taking advantage of the redundancy — the natural redundancy in the system and other opportunities related to that bndwidth costs and then obviously go over the savings.
Q –Unidentified Analyst
Thank you,
Operator
This concludes I’ll now hand it back to Bob Lyons, CEO, for final remarks.
Bob Lyons
Okay. Great. Thank you, Elliot. Thank you, everyone, for joining us today. We look forward to sharing our progress and continuing our conversations with analysts and investors, and have a great day.
Operator
Today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.
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