Akamai Continues to Sustain High Margins Despite Price Competition

Akamai (NASDAQ:AKAM), which delivers fast and secure web content on behalf of websites to end users, recently released its earnings for the first quarter of 2010. Akamai continues to sustain high gross margins despite getting increasingly competitive on pricing, thanks to growing demand for its value-added services.

Akamai charged higher prices to its customers historically than competitors like Limelight and Level 3. However, since 2009, the company has started getting competitive on pricing and has outbid its competitors on certain deals.  Despite rising competition, Akamai sustained high margins in the first quarter of 2010 and the trend is expected to continue.

Fast Growth of Value Added Services Is Helping Akamai Sustain High Margins

In addition to content delivery service, Akamai offers value-added services like advertising decisions, application performance, and dynamic site solutions to its customers.  These services have higher margins than Akamai’s core content delivery business.

Akamai’s value-added services are growing at a faster pace than its overall revenues. This, coupled with higher margins, are offsetting the company’s margin declines in the content delivery business. Value-added services constituted about 54% of Akamai’s total revenues in the recent quarter, up 13% on a year-on-year basis.  About 77% of Akamai’s customers use at least one value-added service, and these services have gained most traction among e-commerce customers.

We expect that the margin growth to remain flat in 2010, but slightly decline thereafter as competition intensifies both in the content delivery and value-added services space.

Increased Traction for Value-Added Services like Advertising Decisions

Akamai saw a significant rise in new customer sign-ups in the recent quarter for its advertising decision solutions. With an improvement in the overall advertising market, Akamai’s solution attempts to leverage shopping data to increase effectiveness of advertising campaigns.

Akamai also saw increased traction of Application Performance Solutions (APS) among software as a service (SaaS) providers. Value-added services will continue to be the primary growth factor for Akamai until the company starts facing significant competition in this segment.

You can modify our forecast above to see how Akamai’s stock will be impacted if its online shopping margin were to remain flat rather than decline slightly as we forecast.

For additional analysis and forecasts, here is our complete model for Akamai’s stock.