What’s Limelight Up to?

There’s an interesting piece over on Seeking Alpha railing against Limelight, but not for the usual reasons. Apparently the CDN and value added services provider has been cutting back on its peering with ISPs, offering a paid peering replacement to puzzled former peers. While the article goes on to suggest that this is crazy for a CDN and therefore doom is imminent, I think it’s a logical consequence of their de-emphasizing of the commoditized side of the CDN business.

They aren’t trying to generate more money by charging for access to their CDN on both ends — the paid peering offers notwithstanding — because the economics don’t work that way (e.g. the Level3/Comcast dispute). Networks make peering decisions economically, and what this means is that Limelight’s footprint is too extensive for its business model. Settlement-free doesn’t mean cost-free, and sometimes buying transit is smarter when you aren’t trying to conquer the world.  Limelight is quite simply reconfiguring its peering infrastructure to match its shift value-added services.

The company reported earnings yesterday afternoon, turning in results that were in-line with analyst estimates for the most part. They highlighted impressive year-over-year growth rates in their value added services: 80% for video and mobile, 50% for cloud storage, and 45% for site and app acceleration.  That last one has been the focus of many of its recent PRs, including this week’s Peugeot deal. Value added services now make up 31% of their revenue. Additionally, they announced a new $15M stock buyback program.

Rather than an implosion, what I see happening is a preparation for a sale. Last year was too soon, and the situation was too messy to get a good price.  So they’re putting their commoditized CDN business’s cost structure in order, demonstrating the potential of their value-added products, and buying back stock to demonstrate how cheap they think it is.  With their cash balance there is no pressing need to sell, so they’re trying to reach a position of strength first.

Limelight is getting very little respect these days from the market. With a marketcap of less than $300M, net cash of more than $135M, just under $200M in revenue and a global CDN infrastructure – one has to wonder why a buyer hasn’t already pounced.  Last year there was repeated speculation the company would sell to Level 3, and I was skeptical at the time because Level 3 didn’t need the deal and they were busy with Global Crossing. Now that they’re further along, it is becoming more reasonable an idea.

But what Limelight’s actions fit best perhaps is an attempt to attract private equity buyers of internet infrastructure. Someone like ABRY Partners, for instance, which might find owning Limelight a nice complement to Masergy, Sidera, Telx, and the various data center assets they’ve been buying.  As a privately held company with siblings, Limelight might find it quite a bit more comfortable to manage its transformation.

Another possibility that really might work would be NTT, which has been actively positioning itself and its tier 1 IP backbone for the cloud revolution.  Their entire portfolio and global reach would fit quite nicely into NTT’s plans, and there would be substantial cost savings to be had.  NTT already has some CDN capabilities, but nothing of Limelight’s scale.

Or there could be other strategic buyers out there, even if they are a bit more outlandish.

For instance, at these prices Icahn could decide to meld Limelight’s CDN and managed services with XO. He could do it with his pocket change, and in the right hands the combination could make more sense than most others. In fact, XO is already leveraging Limelight’s capabilities as part of its Concentric Cloud solutions.  CDN-CDN integrations are hard, but melding one on a backbone that doesn’t have such technology is relatively easy.  What better way to quickly change the value perception of a business we know Icahn will eventually sell.

Or a Cogent/Limelight combination could make sense.  If internet backbones must eventually meld CDN infrastructure into their own, Cogent could do worse than to take such a route.  Their netcentric customers often already pair IP transit with site acceleration and such, and what better way to regain their mojo after the MegaUpload debacle than to take their low-price business model to the CDN segment as well?

Whatever happens, it feels to me as if Limelight will be in play this summer — if it isn’t already.

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