Edgio, Inc. (NASDAQ:EGIO) Q3 2022 Earnings Conference Call November 9, 2022 4:30 PM ET
Company Participants
Sameet Sinha – Vice President, Investor Relations, and Corporate Development
Bob Lyons – Chief Executive Officer
Stephen Cumming – Chief Financial Officer
Conference Call Participants
Frank Louthan – Raymond James
Michael Elias – Cowen & Co.
Eric Martinuzzi – Lake Street Capital
Jeff Van Rhee – Craig-Hallum
James Breen – William Blair
Rudy Kessinger – D.A. Davidson
Operator
Good day ladies and gentlemen. Welcome to the EGIO 2022 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]
I will now turn the call over to Sameet Sinha, VP, Investor Relations, and Corporate Development.
Sameet Sinha
Good afternoon. Thank you for joining the EGIO third quarter 2022 financial results conference call. This call is being recorded today, November 9, 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. Except for statements of historical facts, forward-looking statements include, but are not limited to our priorities, our expectations, our operational plans, business strategies, secular trends, product and feature functionalities, non-GAAP results, acquisition activities, and contributions from acquired businesses.
These statements are not guarantees of future performance and undue reliance should not be place on them. Forward-looking statements are based upon what management believes are reasonable assumptions and 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, November 9, 2022 and we disclaim any obligation to update any forward-looking statements except as required by law.
The company prepares its financial results in accordance with accounting principle generally accepted in the United States of America. In addition to the GAAP financial measures, the company may also present certain non-GAAP financial measures including non-GAAP net income, EBITDA, and adjusted EBITDA, non-GAAP gross profit, and non-GAAP gross margin.
The company believes that non-GAAP financial measures are important supplemental measures of operating performance. The company’s presentation of non-GAAP financial measures does not replace the presentation of the company’s financial results in accordance with GAAP. And non-GAAP financial measures should not be considered as substitutes for or better indicators of the company’s performance then in the most directly comparable GAAP measures.
Joining me on the call today are Bob Lyons, our CEO; and Stephen Cumming, our new CFO. Bob will start today’s call with a brief discussion of the results and an update on business and our solutions structure. Stephen will then review financial results and guidance. Following that, Bob will use the remainder of the call to summarize our strategy and corporate initiatives going forward.
I will now turn the call over to Bob. Bob, the floor is yours.
Bob Lyons
Thank you, Sameet, and welcome, everyone. The third quarter was the first full quarter of our transformational combination with Edgecast. We remain very excited about this combination, which has expanded our scale and further diversified our Edge-Enabled Solutions. Both key building blocks to improve profitability and accelerate growth.
Before I jump into the details of the quarter, I want to welcome Stephen Cumming, who joined us as our CFO. Stephen has led an exemplary career as a finance executive at a [indiscernible] technology company and has a strong history of creating shareholder value. He brings a depth of experience and now it’s critical to our plan to make Edgio, a leading platform solutions company powering speed, security, and simplicity at the edge.
In the third quarter of 2022, we continue to build on our four previous quarters of positive momentum with revenue of $121.2 million, an increase of 119% year-over-year. We made good progress in increasing utilization of our excess capacity from the second quarter, which drove up non-GAAP gross margin 140 basis points quarter-over-quarter. Adjusted EBITDA was a loss of $3.2 million, largely driven by the anticipated Edgecast impact that we’re addressing with planned operational synergies.
Let’s review some of the highlights from the quarter. First, we continue building awareness about Edgio and our solutions across the industry. We are starting to capture industry recognition that will help us continue building commercial momentum. Since last week, CyberSec Asia recognized us as a Rising Star in security after its survey of hundreds of people and cybersecurity practitioners. We are proud of this achievement and will continue to build on it.
Our pipeline has grown high-double-digits in the beginning of the year. And even more robustly for our strategic recurring, high growth revenue application solutions. Our pipeline includes major global brands that understand the demonstrative value our solutions offer. These opportunities are at various stages, including many and active proof of concept.
Bookings of our Applications solutions this quarter were our highest to date and we are on track to grow that number meaningfully in the fourth quarter, driven by our Security solutions. We signed our first eight figure deal with a leading security company and also deploy our application solution into one of the world’s largest fintech companies displacing a major competitor.
These customers chose Edgio due to our unique ability to seamlessly integrate scale enabled performance, security, and programmability at the edge. We are excited to see the early wins from our large tech savvy companies, further validating the efficacy of our strategy and our solutions. Given our ongoing pipeline growth and bookings trajectory, we remain confident in our ability to continue accelerating our commercial momentum going forward.
Second, we are making meaningful progress on improving profitability. On the second quarter call, we increased our annualized run rate synergy estimate from $50 million to $60 million. To date, we have achieved over $20 million against this estimate and are well ahead of plan. We continue to identify additional synergies and we’ll provide further updates as we operationalize them.
These synergies are run rate in nature are focused on both gross margin and operating expenses and will continue to support profitability improvements well into next year. Third, we continue to integrate the combined capabilities of our Layer0 and Edgecast acquisitions. We now have a much more complete set of solutions with a credible right to win.
Let me take a few minutes and share some highlights. Our applications platform offers a suite of products that provide a one-stop shop for developers looking to build the third generation highly performance and secure web properties. This meets the need to improve performance, productivity and protection across distributed architectures, which have increased complexity, latency, and attack surfaces.
Most sites on the Internet are failing Google’s core [web wireless benchmark] [ph] and our solutions offer industry leading sub second websites that improve business outcomes for our customers. [Indiscernible] the rise, and the size, pace and sophistication of the tax continues definitely. We are handling some of these larger tax on digital properties around the world across highly sensitive verticals such as e-commerce and financial and services.
Last year, we outlined our plan to become more relevant in the cybersecurity market with a focus on automation and machine learning. These capabilities are vital to any modern cyber strategy and are required for companies to get appropriate protection from their WAF, DDoS, and Bot Management investments.
Our acquisitions of Layer0 and Edgecast have enabled us to execute on that strategy and we are now a credible provider of a leading web application and API protection products. We will further expand the value of this platform with the upcoming launch of our advanced [indiscernible] solution currently in [beta] [ph]. This approach has proven to be a differentiator for us and enables us to take market share as evidenced by the two wins and rapidly growing pipeline we have highlighted.
In addition to performance and security, our application solutions allows development teams to shift twice as fast. Today, more than 70% of IT budgets are spent on maintenance and plumbing rather than focused on growth initiatives. Our solutions enable developers to eliminate the agency costs associated with [indiscernible], allowing them to spend more time building things that create business value.
In short, our application solution powers the fastest websites in the world, reduces the attack surface, all while lowering operational cost with customers. Performance protection and productivity were the pillars of the strategy we outlined a year ago and remain the pillars of our existing value proposition today. We believe we are well on our way to becoming a platform of choice for builders to productively power the fastest and most secure web properties.
Our media platform have the capacity to deliver approximately 250 terabytes per second to more than 300 hops across the globe, making us the second largest and most performing network in the world. Our media products continue to benefit from secular tailwinds as consumers cut the cord. According to eMarketer, we are at an inflection point where non-pay TV households are expected to surpass pay TV households in 2023.
The most recent report from Nielsen indicates a new milestone where, for the first time, streaming minutes have exceeded that of cable and broadcast. Additionally, sporting events are quickly moving toward 100% streaming now, as we start with Thursday Night Football. COVID-driven content constraints continue to abate and it is also worth mentioning that we now support all of the major gaming consoles.
UpLink, our solution for streaming provides an industry leading set of features that reduces the complexity of mission critical tasks for media companies, further entrenching our platform in their workflows. The value of our platform is best articulated by the recent feedback that we received from a leading media customer who said, we would need 10x the current staff if we did not have your platform available to us.
We will continue to invest in its solution and look forward to UpLink quickly returning to its place as the gold standard. We believe there is an opportunity to improve customer and shareholder value simultaneously with the new pricing model that shares economic benefits created through better platform utilization. We are also transforming some of our capacity to be embedded and directly delivered from ISP networks. This model improves the performance and quality for the viewer, reduces energy consumption, and supports better margins overall.
We are maniacally focused on performance and customer support and know that doing so will allow us to earn more share of our client spend. These actions all support our ability to continue growing while improving our profitability and cash flow. As you can see, we have taken and continue to take steps to strategically align our company with secular tailwinds that benefit from an edge-enabled solutions platform that natively power speed, security, and simplicity.
We have established a right to win and this is supported by a go-to-market team that is aggressively targeting the funnel at the top and bottom. I am proud to say that our product efficacy shines during competitive valuations and we win a disproportionate percentage of proof of concepts with some of the most sophisticated companies in e-commerce, technology, and fintech. We will continue fine-tuning our go to market motions to further accelerate new logo win, up-sells and cross-sells to both our direct sales teams and channel partners.
At this time, I will turn the call over to Stephen to share third quarter financials.
Stephen Cumming
Thank you, Bob. Revenues for the third quarter of 2022 was $121.2 million, up 119% from the third quarter of 2021 and 63% quarter-over-quarter. This includes the first full quarter of revenues contributed from the Edgecast acquisition. Our application solutions achieved our best booking quarter and our pipeline continues to be very strong driving momentum into the fourth quarter.
Moving to gross margin, non-GAAP gross margin, which excludes the impact from stock-based compensation, acquisition-related expenses, and depreciation expanded to 39.8%, up from 38.4% in the second quarter of 2022, an increase of 140 basis points and flat versus the year ago quarter. The sequential improvement was primarily due to increased capacity utilization and synergy realization.
Non-GAAP operating expenses, excluding stock based compensation, restructuring charges, acquisition, and legal related expenses, and depreciation were $51.4 million or 42.5% of revenues, up from 38.9% of revenues in the second quarter of 2022 as we included the first full quarter of Edgecast operating expenses. We saw sequential leverage in SG&A, which declined from 27% of revenue to 24% quarter-over-quarter.
R&D increased as a percent of revenue from 12% in the second quarter to 19% in the third quarter, due to additional headcount from Edgecast, as well as hiring to drive new product innovation. We expect operating expenses will continue to benefit from cost synergies, which we anticipate to materialize over the next few quarters.
Share based compensation including operating expenses was $7.5 million, compared to $7 million for the second quarter. Restructuring charges were $4.1 million, compared to $4.4 million for the second quarter of 2022. Acquisition and legal related charges included in operating expenses in connection with the Edgecast transaction were approximately $7.9 million, compared to $14.2 million for the second quarter.
Third quarter 2022 adjusted EBITDA was a loss of $3.2 million, compared to a loss of $350,000 in the second quarter of 2022, and adjusted EBITDA of $6.1 million in the third quarter of 2021, primarily due to a full quarter of operating expenses from Edgecast.
Moving to the balance sheet and cash flow. Cash and cash equivalents and marketable securities totaled $70.8 million, a decrease of $6.6 million from the second quarter of 2022. Capital expenditure during the quarter was $2.2 million or 1.8% of revenues, primarily due to more focused spending on higher margin business.
In addition, we have mentioned earlier we are benefiting from increased capacity in our network, which minimizes the need for continued network build-out reducing our capital expenditure requirements. Additionally, we have taken advantage of our increased scale, an incremental collateral from the Edgecast acquisition and have recently increased our borrowing capacity to $50 million from the previously undrawn $20 million credit facility.
Our liquidity position today is now stronger than it was before the acquisition. We’ve strengthened our balance sheet and now become a company with the scale to handle macroeconomic challenges and have the ability to continued discipline investments in our business to drive future growth.
Now, for an update on the integration. We’ve been busy integrating all aspects of Limelight and Edgecast and are already seeing the benefits in the improved capacity we can offer our customers. On the network front, we’re using our increased scale and buying power to negotiate favorable rates with bandwidth providers and data center operators.
We’re also working on platform consolidation, as well as re-engineering some task to leverage the cash and compute on our network, which would further reduce third-party spend and ongoing CapEx requirement. On operations, we’ve made good progress on unifying our IT systems and building new processes that will provide us the scale to grow more profitably. This process is allowing us to assess spend in all areas of the organization and continue pursuing further efficiencies that will materialize into 2023, driving to our long-term goal of double-digit adjusted EBITDA margin.
Now moving to guidance. The fundamentals of our business are strong. We remain bullish on Edgio’s transformation story and in our ability to drive long-term value creation for our shareholders. Having said that, the current macro environment has made us more cautious in the near-term. We anticipate companies will delay or defer capital spending in the fourth quarter. This could impact our ISP deployment, which depend on capital investments from our clients.
Additionally, while we are progressing well on the integration of our Edgecast acquisition, we have seen some churn across a group of smaller customers. This is not unusual during an acquisition of this magnitude. We see both of these as temporal in nature and have already taken steps to address them over the next few quarters.
With this backdrop, we expect a more measured top line in Q4. Given our clear line of sight to where further synergies and efficiencies are available to us, we will prioritize improving our gross margin, adjusted EBITDA, and cash flow as we complete the integration of Edgecast.
Incorporating these trends into our guidance for the fourth quarter, we are expecting revenue range of between $109 million to $114 million. Adjusted EBITDA range of between a loss of $8 million to a loss of $6 million. This implies an adjusted EBITDA margin between negative 7.5% and negative 5.5%, and capital expenditure in the range of $2.0 million to $3.5 million. This implies CapEx as a percent of revenue of 2% to 3%. We will provide our 2023 guidance on the fourth quarter earnings call, which we expect to announce in February of next year.
With that, I’ll turn the call back to Bob for some closing remarks.
Bob Lyons
In summary, the third quarter played out as anticipated. We continue to transform Edgio into the platform of choice that provides unmatched speed, security, and productivity at the edge. Our business fundamentals are strong and improving. When I joined the company, I shared my philosophy of investing in asymmetric risk. Today, as then, we have an unlimited upside but must remain focused and discipline in capturing the opportunities in front of us.
Our integration efforts over this past quarter have enabled us to meaningfully diversify our revenue and establish ourselves as a credible security vendor. Our improved product positioning combined with planned sales improvements positions us well to benefit from secular tailwinds. We are tracking ahead of plan with our acquisition synergies and we remain laser focused on capturing further opportunities.
We continue to strengthen our team from the Board through management. We are excited to have added three new Board members and three C-level executives. Building on this progress, we are in the final stages of hiring a Chief Marketing Officer and last week we added an experienced Chief Accounting Officer to further bolster our [fiscal rigor] [ph].
Beyond these [rules] [ph], we continue to build on the bench strength required to successfully execute on our transformative plan. All of this gives us confidence in our ability to grow while improving gross margins and adjusted EBITDA into 2023. We thank our investors for their continued support and look forward to working together to achieve what we all know to be uniquely possible for us.
With that operator, please open up the lines for the question-and-answer session.
Question-and-Answer Session
Operator
Absolutely. [Operator Instructions] The first question comes from Frank Louthan with Raymond James. You may proceed.
Frank Louthan
Great. Thank you. Can you quantify the customer losses in terms of annual revenue? And are we at the end of this or is there more to come? And at what point can we see a positive EBITDA run rate? Thanks.
Stephen Cumming
Hey, Frank. This is Stephen here. Yes, let me talk you through a little bit of the dynamics on what’s happened in – for our guidance for Q4. Firstly, I think it’s worth noting it’s not uncommon when we make a large acquisition of this type like Edgecast. So, you experience some amount of customer churn. We are seeing some of that in the longer tail accounts within our Edgecast acquisition. And this is contained to a group, I would say, of smaller accounts.
It’s worth noting in fact that our top strategic accounts, both in Limelight and Edgecast show very healthy net dollar retentions. So, this is contained into a smaller account base that really have not been given the attention they deserve as a result of, I guess, many different owners between Yahoo and Verizon.
We’re addressing that now and we’ve increased account coverage and retention programs that we expect to have this corrected in fairly short order. But secondly, we’ve also had a strategic initiative over the last few years to deploy more infrastructure deep within our networks, which we call EdgeXtend, where we’re basically deploying our CDN directly into our ASP network.
IFPs like it because they can serve traffic directly from their network. So, the performance is better and we do a [rev share] [ph] with them so we can share the economics. So, we get to expand capacity [indiscernible] ASPs and it’s a win-win all round. But this business is, I would say, a little bit more lumpy, and sort of given the current macro environment, CapEx budgets are being tightened and scrutinized.
So, I try to de-risk that in our guidance. I think it’s important to note that we’ve seen this before and anything sort of snap back quickly. In terms of quantifying the numbers, I mean, we came in at 121. We’ve guided down to somewhere around about 111 million, so I think that sort of gives you an idea of the run rate.
Normally, you’d expect our seasonality to be to slightly up in Q4, given holiday patterns, etcetera. But I think sort of from where we were in Q3 to where we’re sort of guiding now is a rough range. It’s important also to note that we feel pretty good about our large account momentum and we see great opportunities in the AppOps business as we go into 2023.
In terms of EBITDA, we’re going to give you guys a full update after we get through our Q4 results and come up with a comprehensive plan after another 90 days of consolidating the Edgecast acquisition.
Bob, I don’t know if you want to have any further comments to that.
Bob Lyons
Yes. I just had one other piece, more of a qualitative approach we took to this. One of the things that we didn’t want to do is, have any surprises going into next year. And given the nature of the environment we’re in, I mean, we’re all living in a Fed simulation right now where they’ve stated that they’re going to break the economy for reasons that we know [indiscernible] to bring inflation under control. And so, what I, you know, I’ve been doing turnarounds my whole career.
And one of the things that I’ve seen a lot is companies convince themselves, everything’s going to be fine and let’s carry costs and let’s do the things that we normally would do. And given the nature of our CapEx oriented business, as Stephen pointed out, and the fact that we see so much opportunity from us for synergies in the deal that we could focus on, we thought it was more prudent to assume a more headwind environment, make the adjustments accordingly so that we can be really positioned to be able to deliver that [indiscernible] the number next year, regardless of the environment.
If we end up having a soft landing, then great, that’s all the better for us. But if this is a tough road for the next six to nine months, we want to make sure that we’re getting in front of it and driving our cost structure to match that. So, we decided to jump in front of it and be aggressive.
Frank Louthan
Okay, great. One quick follow-up. [What part] [ph] of the longer-term guidance when you announced the Edgecast deal with R&D spend was going to decline, it picked up in Q3, is this sort of a new normal level for this going forward and what’s sort of driving that need for additional R&D?
Bob Lyons
No, it’s just timing more than anything. I think you have R&D being spent in areas where we were adding in security, for example. And then you brought a brought a lot of new R&D people on, and that’ll normalize itself out over time.
Frank Louthan
Okay. Great. Alright. Thank you.
Operator
Thank you. You next question comes from…
Bob Lyons
Yes, I was going to say one other point, you might recall, we said it was going to take us a couple of quarters to really get those costs out of the system. Edgecast wasn’t really one for profitability. So – and we’re tracking ahead of plan on that. We feel pretty confident with our ability to do so.
Operator
Thank you. Our next question comes from Michael Elias with Cowen & Co. You may proceed.
Michael Elias
Great. Thanks for taking the questions. First, could you just give us a sense for one, when this churn event essentially actually took place? And then two, part of that, what your visibility is into future churn? It sounds like based on your comments a few moments ago, it sounds like there might have been some pent-up frustration among that customer base? Just what visibility do you have into potential future churn?
Bob Lyons
Yes. I’ll take that and then Stephen, you jump in. The couple of things that take – keep in mind, Michael, if you think about Edgecast, Edgecast was a part of both with – in Verizon, then they went in BDMS, and they got into Yahoo! and then they got carved out. So, they’ve been for the last two years, been faster on quite a bit. And as a result of that, they’ve been rather distracted. Most of this churn is focused on small accounts. There’s nothing big at all. It’s just 300 accounts that have gone down a little bit and they add up to a bigger number.
Some of them aren’t really churns, some of them aren’t just using less with us and maybe moving more to other where they’re using multi-CDNs. So, I would say that Edgecast probably didn’t have a lot of insight into that. They were rather distracted. We do now. We’re actually talking to every one of those accounts, getting it back on track. And you might recall in Limelight, we had a similar problem when I joined at the beginning of 2021. And we said it would take us a couple of quarters to get that under control.
We did that. By the end of the year, we are growing that pace. And I think the same thing happens here as we demonstrated with Limelight. So, we’re going to run the same playbook, better account coverage, talking to every customer, [tell them the story] [ph], making sure they understand that, you know, they don’t need to feel uncertain with all the changes that have gone on with, you know, with Edgecast and so we’re doing all those things.
Stephen Cumming
Yes. And I would just add to that. I mean, it’s certainly contained within the Edgecast accounts. And we’re not really seeing any similar same issues within Limelight. It’s purely a sort of mid-market and long tail within the Edgecast accounts. And as I said earlier, the Limelight and Edgecast, larger strategic accounts, net dollar retention is very healthy.
In terms of your other question, and sort of how do we improve the – getting arms around the forecast of ability and predictability of the business? Since I’ve arrived now two months on the job, I’ve spent a lot of my time assessing that that’s a key component to my finance organization. And we spent a lot of time in terms of tools, systems, and people to get our arms around it, and improving that predictability within the company to better align our go to market investments and overall cost structure to optimize and drive our EBITDA.
So, we’re not perfect yet. There’s still more work to be done, but certainly driving sales bottoms up forecast, systems revenue generated forecast as well. So, we can get multiple points to get a better handle on the predictability of the business.
Michael Elias
All right. Thanks for that. And just as a follow-up question, maybe more on the legacy Limelight side. One of your peers has been talking about declining Internet traffic growth. Just wondering what you’re seeing in terms of traffic growth as we think of year-over-year compares, anything to call out there? Thanks.
Bob Lyons
Yes. We’re not seeing that. In fact, as Stephen mentioned, when you look at our, you know, we track now, one of the metrics we’ve added that we track is our net revenue retention, which got – and our net traffic retention as well. And when you look at our large accounts, they’re all both very healthy and positive above 100. So – and we also have a pretty good pipeline in having a pretty good conversation about adding to that. So, I would say from that part of the business that’s running very well and that’s why we think the fundamentals of the business are sound. We just got to focus on these smaller accounts and then monitor this macro environment and see how that impacts our CapEx oriented revenue and time will tell with that.
Michael Elias
Thanks.
Operator
Thank you. Our next question comes from Eric Martinuzzi with Lake Street. You may proceed.
Eric Martinuzzi
Yeah. I just wanted to revisit the downward revision and kind of get to an 80/20 understanding of, is this 80% macro, 20% bunch of smaller accounts base that, you know, were poorly treated by Edgecast. I don’t understand our seeing this dramatic step down? And then secondly, just wondering given the CapEx nature of the ASPs in that part of the guide down, do you have any indication of how long before they’re willing to kind of go back to business as usual?
Stephen Cumming
Yes. So, as I said, I spent a lot of time since I joined Edgio, looking at the forecast ability of the business. And we really have started to strengthen the processes and build-out some of the IT systems to get visibility and better understanding of [guarantee our business] [ph]. We’ve also made some key new hires both in finance and sales operations to drive these new processes.
So, this is always going to be evolving, we’ll continue to make things tighter and tighter, but I feel our guidance is reflective of what we know today. There’s a little bit of judgment in it to model the impact of, sort of holiday season and shipping patterns along with sporting events and software downloads, but I think it’s reflective appropriately now in our guide.
In terms of the splits between the capital and the overall traffic, it’s tough to really give you a quantifiable number, and break that out in any meaningful fashion. And I’d say, that’s largely because we’ve probably de-risked it more so on the capital side than we have on the traffic.
Eric Martinuzzi
Okay. Alright. What about the gross margin expectations given where the revenue outlook is for Q4?
Stephen Cumming
Yes. To summarize Q3, we made good progress on our gross margins. You saw from our Q3 numbers, we reported 140 basis points up sequentially to 39.8. Going into Q4, we’ve obviously got a high amount of fixed cost in the business, so sequential revenue decline will weigh on our gross margins. So, while we work through this temporary challenge, we expect our gross margins to Q4 to be down roughly between 150 basis points and 200 basis points sequentially.
I think it’s worth noting that we’ve got a lot of cost synergies that we’re working and expect them to be kicking in as we go through into 2023. And a lot of those synergies are appearing up in the gross margin line. Things like, we’ve increased with our scale, our renegotiation on our vendors for bandwidth.
We have opportunities in [Colo] [ph] for reducing rack space and lowering our rents. And – as well as you’ve heard from our prepared remarks, we see very strong momentum in our software sales that will have favorable mix and a nice lift to our gross margins over time.
So, we’re uniquely positioned to drive out our costs given these synergies from this Edgecast acquisition. And I think from my side as a CFO coming into the company, it’s pretty exciting that [doing] [ph] a company with scale and having multiple levers at my disposal to drive that gross margin up and EBITDA expansion. But we are going to see a little bit of a headwind in Q4 from this sequentially lower revenue.
Eric Martinuzzi
Okay. And then last question, the eight figure deal, was that a displacement or was that an internal solution that chose to use Edgio?
Bob Lyons
Well, yeah, that was both of those deals that we mentioned. One was the fintech and the other one was the eight figure deal. They’re both displacements.
Eric Martinuzzi
Got it. Congratulations.
Bob Lyons
Thank you. We’ve actually been – as Steve pointed out, we’ve been having very good traction, winning a lot of proof-of-concepts and our strategy around using machine learning and analytics to differentiate our security – value proposition is really working. So, we’re pretty excited about that.
Operator
Thank you. Our next question comes from Jeff Van Rhee with Craig-Hallum. You may proceed.
Jeff Van Rhee
Great. Okay. Several from me. Number one, what was Limelight revenue in the quarter? And more importantly, what’s Limelight revenue in the Q4 guide?
Stephen Cumming
Yes, Jeff, this is Stephen again. I’d say it’s becoming tougher and tougher to talk about Limelight and Edgecast business separately. We’ve moved fast to integrate sales motions and overall go to market efforts. And we’ve combined and started to combine the networks and rationalization of the products.
So, those business lines are getting very blurred now as we operate as one company. But ultimately, this is going to allow us combining these companies as quickly as we have to achieve even more synergies and efficiency in the long-run, but we can’t really break it out in an effective manner going forward given how we’ve structured things and amalgamated the companies.
Jeff Van Rhee
Other than the ISP reduction for Q4, have you reduced the base Limelight forecast to the extent that you can discern?
Stephen Cumming
No. I said in the earlier remarks with regards to our strategic accounts and large accounts, the net dollar retention overall is pretty strong for both Edgecast and Limelight, but Limelight both in terms of the longer tail and the larger accounts is in good shape.
Jeff Van Rhee
Okay. So basically, you’re sensitive there’s no change outside the ISP factor in the guide to what would have been standalone Limelight forecast for Q4?
Stephen Cumming
Yes, best as we can see given the blurriness of the – putting the two companies together, I would say that’s a fair assessment.
Jeff Van Rhee
What was the estimate internally for the ISP revenue stream in Q4? And what is it?
Stephen Cumming
Well, as I said earlier in my comments, we pretty much de-risk all of that activity. So, it’s very nominal. It’s nonmaterial for our Q4 number. We don’t break out specifically, but I would say, it’s immaterial for our Q4 number now.
Jeff Van Rhee
Now, and what was it prior to you de-risking it?
Stephen Cumming
Yes, we don’t break it out at that level.
Jeff Van Rhee
Okay. And last question for me. Sales, how do we discern whether or not – I mean, I hear the ISP comments, I hear the comments in general about churn, but the magnitude of it and the lack of precision about quantifying those, sort of leads it wide open to figure out what’s going on here. If I look at sales execution, I haven’t heard a lot of talk there. Can you talk about sales and sales execution at this point? What evidence do you have that this is not in fact a sales execution process, competitive loss, other related issues?
Bob Lyons
Yes, I’ll give you a couple of data points. Our bookings in Q3 was I believe 30% to 40% over Q2 and we plan to be another 30% over in Q4, general numbers. Our pipeline is up 75% from the beginning of the year. This is not including any of the Edgecast added pipeline, just organic growth pipeline. Of that, the majority is focused on security applications, which is up triple digits of that 75%. So, we’re actually seeing the traction on sales and bookings that we expected to see.
We’ve got a number of large deals in proof of concept and the pipeline. I think deals are probably taking a little longer now for obvious reasons. I think people are all trying to decide what they do with their deals, but generally, we’re tracking with bookings and sales. We expect it to and feel pretty good about that.
Jeff Van Rhee
Okay. I’ll leave it there. Thank you.
Operator
Thank you. The next question comes from James Breen with William Blair. Your line is open.
James Breen
Thanks. Can you talk about on the revenue side, your customer concentration amongst your larger customers and how that may have changed quarter-to-quarter with Edgecast in there, and then the growth that you’re seeing in the top 20 customer base you’ve often referred to? And then, just secondly on the cost side, as you’re seeing the revenue step down in the fourth quarter, is there a way to accelerate cost reduction to help the margins stabilize going forward, based on what you think synergies will be over the next couple of quarters? Thanks.
Stephen Cumming
Let me take some of those and then Bob can weigh in towards the end. But in terms of customer concentration, I mean, we said before one of the many benefits of this acquisition was lower concentration in large accounts, which historically was I think nearer the high 70s and so that’s come down now to the lower [70s overall percent] [ph], which is in-line with what we were expecting.
In terms of how do we offset some of this decline in improving EBITDA. As I think, I touched on some of these, we’ve got a tremendous amount of cost synergies that we’ve only just started to scratch the surface on. We’ve already spoken and up the number to about $60 million and a large portion of that’s going to materialize into 2023. So, we do sense that we’re quite uniquely positioned even in a tougher revenue environment that we can help drive not only our gross margins, but our overall EBITDA leverage into 2023?
James Breen
Yeah. I mean, I guess, I’m a little confused because if you were at the high 70s before and you basically doubled the size of the company, shouldn’t the customer concentration of those large customers be significantly lower than where it was pre-deal close?
Stephen Cumming
Well, those customers we acquired were also larger customers of similar sizes.
Operator
Thank you. Our next question comes from Rudy Kessinger with D.A. Davidson. Please proceed.
Rudy Kessinger
Thanks for taking my questions. So, on the churn, I mean, you’re saying it’s customers who maybe weren’t treated the best and the change in the [plan of] [ph] Edgecast, but I mean, how much of the churn is really just customers who have got CDNs previously and then they had four CDNs once the deal closed and they wanted to go back to having CDNs, so they took some of the traffic away from you guys and spread it back out to another CDN? How much of that was the cause for the churn as opposed to customers just reducing traffic or leaving because they were uncertain of the future of the business or just being treated poorly?
Bob Lyons
I think it’s probably – there’s a little bit of a lot of that [in this] [ph]. If you have multiple CDNs, if you were uncertain or you had to talk to anybody, and you’re wondering where the new company is going, you’re going to just need to track it somewhere else. So, most of those questions we’ve talked about, there’s no large numbers in there.
You know, they’re just, like, that [indiscernible] kind thing. And they’re still doing stuff with us or just doing less with us. And so, you know, we’re going to account by account and understanding each one, understanding if it’s a scenario where they might be using multiple CDNs and we can get that back or they’ve actually moved to another CDN.
In some cases, they’re doing it because they get better rates if they consolidate some of their traffic on one of the hyperscalers where they’re not meeting their minimums for other things. So, those kind of factors that are playing in as well. So, there’s really a number of different things, but it’s essentially then making a tactical choice to move traffic, you know, to a place where they feel like it’s in the best interest. And we just weren’t having enough of those conversations previously enough to get in front of those.
Rudy Kessinger
Okay. And then if I just take a step back, like if I look at last year at the [X] [ph] for Layer0 revenue, you did 213 million of revenue for the year versus the initial guide mid-point of 225 million. This year you’re guiding at [365] [ph] now versus the prior midpoint of [385] [ph], so you’re taking numbers down substantially. I would assume the preliminary outlook for 223 that you gave last quarter is completely out the window at this point. And so what would you say, I mean, why should investors place any degree of confidence in future guidance that you give? And how do we get comfort knowing that your visibility of the business going forward isn’t any improved position relative to 6 or 12 months ago?
Bob Lyons
Yes. I think there’s a couple of things. And Stephen feel free to weigh in, but I think, you know, look, anytime you require a company that’s of same size or larger size match [indiscernible] we didn’t have finance department and those things, there’s going to do some visibility challenges, and we’ve been trying to be transparent about that. We’re working through those.
As Stephen pointed out, the best way to do it is to put all the [indiscernible] that we need to do. It’s why we want to spend the time and come out in February with guidance with very substantial models behind that and details behind what that is. But up to this point, to a large degree, we’ve been relying on information that we get from people that, you know, didn’t work for us and we did the best we could with it. That’s the nature of doing these kind of turn arounds and these transformations.
Stephen Cumming
Yes. And I think to add to that, I mean, part of say my focus on joining the company. Obviously, there’s been a lot going on with this acquisition in just few months, but this is the first full quarter that we’ve consolidated this acquisition. So, we don’t a lot more now than we did three months ago.
And then coupled with that, we have been investing both in people, processes, and systems to get our arms around in a better fashion that forecast ability and predictability of the business. So, when we do guide in our Q4 results for 2023, we’re going to be a lot better equipped and a lot more confidence behind that to give a clear line of sight on what 2023 looks like.
Operator
Thank you. It looks like our next question is from Mike Latimore with Northland Capital. You may proceed.
Unidentified Analyst
Hi. This is [Adithya] [ph] on behalf of Mike Latimore. Could you give some color on what level of operating cash flow you might see in 4Q? Do you expect positive free cash flow in 4Q?
Stephen Cumming
No, I think the EBITDA number is, sort of a good indication of whether we landed on cash flow. I mean, certainly you can see that as a result of putting these two networks together, we have substantially reduced our CapEx and that will be – we expect that to be continuing into 2023. The company has historically operated around a 10% type CapEx model and we think we’re going to be somewhere in the realms of 5 to 10 as we look into next year, but yes, I think the EBITDA has a good indication for the overall operating cash.
Unidentified Analyst
Alright. Could you give some color on the current CDN pricing environment, compared to how it was earlier in the year?
Bob Lyons
Yes. We’re not seeing much in the way of anything outside of what we anticipated for pricing. I think it’s largely been consistent with what we anticipated in our plan. As we talked about with Limelight, we’re performing where we expected to perform and that’s true on the [pricing front] [ph] as well.
So – and we continue to have good performance. And so, all the things that we were challenged with last year, we cleaned up and now we’ve got to focus at that same effort on cleaning up Edgecast and turning that into the great – the same situation we did with Limelight, but we’re not seeing any headwinds there, you know outside of what we normally expect in the industry.
Unidentified Analyst
Alright. Thank you.
Operator
Thank you. It looks like there are no further questions in the queue. [Operator Instructions] With no further questions at this time, I will pass it back over to the management team for any closing remarks.
Bob Lyons
Thank you, operator. We look forward to sharing our progress and continuing our conversations with analysts and investors. We will be participating in three conferences this quarter, the Needham Security, Networking and Communications Conference on November 15, the Craig-Hallum Alpha Select Conference on November 17, and the Raymond James Technology Investors Conference on December 6. Thank you everyone for joining us today.
Operator
This concludes the Edgio third quarter 2022 financial results conference call. Thank you for your participation. You may now disconnect your line.
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