I haven’t written about a Christian DeHaemer pitch in a while, so this one popped to the top of our list today when a few readers asked about it.
And part of the pitch is similar to others we’ve seen about the “death of cable” — all about the cord cutters, and about the fact that everybody hates their local cable company.
It’s hard to argue with that, you probably hate your cable company, too. Sometimes the wireless companies squeeze into those top ten “most hated company” lists, but usually it’s the usual suspects at the top: Comcast, Cablevision, Time Warner, Charter. Cable companies are fantastically profitable companies even though they’re so aggressively hated, but hated they certainly are.
And the business of video is obviously evolving — there’s a reason why Comcast won’t let me get their best high-speed broadband service without also signing up for premium Cable TV service: They know that everyone hates them, and they know that it’s becoming increasingly easy to get most of your video entertainment online without subscribing to traditional television channels. They know that their status as the only real broadband “pipe” into most homes is their saving grace, and they’re trying pretty hard to protect that monopoly.
But I’m getting ahead of myself… what is this company that Christian DeHaemer is pitching as the “Tiny $3 Tech Stock” that’s going to be the beneficiary of the “death of cable?”
Here’s a bit from the ad to get us started:
“Angry customers have touched off a frenzied shift in viewing habits that could hand early investors gains of 778%… starting now….
“From absurd four-hour windows for installation to having to navigate a labyrinth of voicemail hell to get anything handled, these so-called providers have become the most-hated companies in the country.
“To make matters worse, their subscription fees have doubled over the last decade… going up four times more than the rate of inflation.
“And their customers have fled in droves.
“But here’s the thing: These folks didn’t pack up their cable boxes, sell their TVs, and resign themselves to a life of book reading.
“Quite the opposite.
“They joined an exploding legion of people who cut ties with traditional providers…
“And are now getting their entertainment over the Internet.
“Over 7 million people have made the switch, with 1.4 million jumping ship in the last 12 months alone.”
OK, so what’s the solution? Who’s going to profit from this “cord cutting?” Well, DeHaemer goes on a long spiel about the many companies planning to deliver more video online, from Apple to Netflix to Google to Amazon, and about the boom of other crazy things like online networks for watching other people play video games (Twitch), but it turns out that what he’s actually touting is a company that can help with the increasing internet traffic created by all this video…
“I’ve found one company that’s poised to hand you a king’s ransom by giving cord-cutters — and the entertainment providers — the one thing they both need more than any other…
“As more and more people turn to the Internet to watch whatever it is they consider entertainment, the chance for delays grows.
“And that’s because the data pipes they use are just like highways. The more people that are on them, the slower the traffic.
“And if there’s one thing that can derail this party, it’s congestion….”
Which tells us that he’s teasing one of the many companies that has sprung up over the past 15 years or so to help with data transmission — either speeding up the pipes, or creating private networks with less congestion, or compressing the data in new or better ways.
Well, he helps out the Thinkolator by including a quote from the secret company’s CEO:
“When accessing online video content, consumers now demand the same seamless experience they have come to expect when watching broadcast television, which challenges digital broadcasters to deliver a broadcast-quality viewing experience.”
Which isn’t terribly illuminating (that’s more of a “duh” statement), but it does help us verify the Thinkolator’s solution.
And one more bit of clueishness before we share the answer with you…
“… it has its own private Internet.
“One that is specifically designed to help broadcast and media companies deliver premium-quality digital content to their viewers.
“Its solution is so prolific — and turnkey — that it counts some of the largest content providers in the world as customers.
“In December of 2014 — for the first time ever — a major U.S. studio used its services to release a movie directly to video-on-demand. And over 4 million people took part in it.
“But this outfit isn’t just a threat to cable TV here in America… It has a broad worldwide presence, too.
“In fact, it has one of the world’s largest private networks for delivering digital content with over 80 points of presence.
“And it’s responsible for handling some of the world’s biggest Internet events.”
That means this is essentially a Content Delivery Network (CDN) company — there are several of them that are of meaningful size, and some that have been fantastic investments over the years, even as the evolution of the internet sometimes makes investors believe that they’ve been made obsolete, either by faster backbone speeds or by telecom companies taking their business or whatever other change is next in this (still) rapidly morphing business.
The biggest of these, and really the grandfather of the business, is Akamai (AKAM), a stock I wrote a lot about and owned for a while many years ago — they probably made their name initially because they helped to make early online video events successful (like the first Victoria’s Secret Fashion Show more than a dozen years ago), but a lot of their success also came from the ability of their distributed network (placing servers in individual neighborhoods, colocated with telecom provider equipment to avoid long-distance downloads) to let folks do things like download iTunes movies and songs more quickly.
But DeHaemer’s not pitching big Akamai here (AKAM now has a market cap of about $13 billion and trades at a premium price) … so which CDN provider is he teasing?
Thinkolator sez this is all about little Limelight Networks (LLNW), a little company that went public in 2007 in a blaze of optimism but has been mostly disappointing ever since.
And it’s pretty easy to see why, all you have to do is look at the financials. They have essentially reported the same numbers (in terms of revenue, income, operating cash flow, etc.) for four straight years. No growth — and indeed, in some years their revenue line has shrunk. They’ve reduced their selling and operating expenses slightly in the last year or two, but there haven’t been big changes to the way the financials work — it costs them 60 cents in direct operating expenses to make a dollar in revenue, and another 55 cents for overhead, selling expenses, and R&D, so for each dollar of sales they’ve reported they’ve gone about another 15 cents in the hole.
Which is not shocking or unusual for a small tech company, but investors can only really accept those kinds of numbers if there’s growth. If there’s some hope that the company has such a strong position, or such fabulous prospects, that the revenue number is going to go up so quickly that the expenses that seem ingrained in their income statement will be washed away by incoming sales.
It’s not the sector that’s failing — Akamai is Limelight’s most direct large competitor, probably, and their revenue has grown over the past four years, just about doubling form 2010 to 2014. And tellingly, perhaps, AKAM was NOT able to improve its margins over those four years — doubling their revenue just led to them doubling their income. That tells me there’s something to be worried about here: That it’s hard to improve your margins just by becoming larger, the business might not be as scalable as we might imagine.
What does that mean? Well, Limelight and Akamai are not exactly the same company, of course, and their offerings are not identical — but both are selling a solution to the same basic problem (internet congestion, solved by giving you a preferable traffic path). Akamai was spending 75 cents combined in direct expenses, R&D, selling expenses and overhead to generate each dollar of revenue in 2010, and even though their revenue doubled from 2010 to 2014 they’re still spending 75 cents to earn each dollar today. They’ve only been able to grow their per-share earnings slightly faster than they’re growing revenues, and that’s only because they bought back some shares over the years (not a huge number, but a few percent of their shares have been retired since 2010).
Which makes me worry a bit about Limelight’s prospects, because they were spending $1.12 to earn each dollar of revenue in 2010, and they’re spending $1.15 to earn each dollar of revenue today, and those numbers have been pretty consistent throughout. Nothing they’ve done has really dramatically changed the top line revenue number, so we don’t know whether doubling revenue would let them improve their margins and become profitable — but we do know that when the somewhat similar Akamai doubled their revenue they did not improve their margins. It’s a competitive business, I suspect, and getting more sales costs more money… and since they’re small, losing big customers (like they lost Netflix a couple years ago) is quite painful.
So for me, in order to buy Limelight I’d have to see something other than the big picture story (“internet congestion is getting worse because of video”) — I’d have to understand why Limelight, specifically, is going to see their business improve substantially. After all, the “internet congestion” story is at least five years old, really more like ten years old, and it has been the raison d’etre of Limelight Networks since they went public eight years ago… and they have yet to show that their solution will attract more money than other solutions, or that they can run a profitable company with the customers that they have been able to attract.
I spent a few minutes browsing around Limelight’s website, and it all sounds quite impressive — they offer the content delivery network that caches files closer to end users, and accelerates content moving through their private “middle” network that uses proprietary fiber connections in many areas, they offer cloud-based security and storage. They apparently have some unique offerings or intellectual property, since they won dismissal of a suit recently when Akamai sued them for patent infringement.
And analysts see some reason for hope — they expect LLNW to increase revenues by a few percent this year, to 168 million or so, and to bump that up to $190 million in 2016 (that would be their best revenue year ever — but would still represent only 22% growth from 2010-2016, which is just a little more than inflation). They also think Limelight will still be losing money next year, though their estimates of how big the per-share loss will be have improved a bit in the last few months — that came after they beat estimates last quarter and improved their guidance, which got investors momentarily excited.
And if you sift through the financials you can, if you’re feeling optimistic, eke out reason for hope — their EBITDA numbers have improved slightly, and though they haven’t shown much scalability they have been able to trim expenses in some quarters to improve the bottom line… but really, with a small tech stock like this you don’t want a turnaround where someone can prove, over a year or two, that they can improve the business… you want double-digit revenue growth.
Last quarter’s beat helped the shares jump up from 3.70 to over $4 for a while, and rumors of possible buyouts/mergers probably helped the shares as well (Verizon decided not to buy Limelight a couple years ago, but analysts persist in hoping that fellow Akamai competitor Level 3 Communications (LVLT) or someone else might snap them up — for what it’s worth, LVLT has also been able to double revenues over the past four years, though they’re not as much a CDN “pure play” as AKAM or LLNW)… but Limelight’s stock has been drifting lower of late, and now we’re just waiting for earnings to come out on August 3 (that’s this coming Monday) to see what the latest news might be.
That all sounds pretty cynical… so can I leave you with one final reason for optimism from Christian Dehaemer?
“Six insiders just snapped up 346,577 shares of stock for over $1 million.
“And that only means one thing…
“Something big is up.”
There have been insider sales as well, and some options exercises and sales, but yes, there has been net insider buying in these shares for at least the last several months. Goldman Sachs is also a huge owner of the shares, they own about 30%.
Does that mean this turnaround story is finally going to turn into a growth story and attract investors again? They do see to be focusing more on media and video, which I suppose is good, but I don’t know if it makes them unique… and after struggling to find their way for this long, I’d rather see the proof in the numbers than bet on the talk of turnaround (of course, better numbers or growth might also mean that the stock is higher priced).
As you can probably guess from my comments above, I’m a bit skeptical… but I’ve only skimmed through their financials and read a few articles. We’ll learn a bit more from the company on Monday, and I’m willing to be convinced — if you’ve got a reason why Limelight can grow, and can generate profits as they do so, feel free to share your thoughts with a comment below.
Disclaimer: Of the companies mentioned above, I own Apple and Google. I won’t trade in any covered stock for at least three days after writing about it.