Akamai Earnings Preview: What We Are Watching

Akamai (NASDAQ:AKAM) will release its Q3 2014 earnings on October 29th. We expect the company to report continued growth in CDN (content delivery network) services, due to growing media content on the Internet and accelerated demand for value-added services. There was also likely a mild contrbution from the Fifa World Cup, which ended in mid July. Growing Internet speeds, adoption of online streaming services and push from network providers are driving high data usage, and Akamai stands to gain. Furthermore, recent security breaches such as that of eBay and other companies have shaken up customer faith and therefore, we expect speedy steps from merchants and content owners regarding security and privacy. Akamai will have an opportunity to leverage this and grow its security solutions revenues.

Our price estimate for Akamai stands at $61, implying a premium of more than 10% to the market.

See our complete analysis for Akamai here

Growing Broadband Speeds And Data Demand Will Drive CDN Business

There is no doubt that Akamai’s CDN business and value added solutions business will continue to benefit from the same trends of growing media content and demand for security services. Akamai released its second quarter ‘State of the Internet’ report at the end of September 2014. The report indicates that global average broadband connection speeds grew by 21% sequentially in Q2 2014, and crossed the threshold of 4 Mbps for the first time. ^[1] Additionally, there are several countries with average broadband speed of over 15 Mbps, which is considered as a threshold for being 4K (ultra HD) ready. User demand for high quality content for these new formats, which require higher bit rates than normal, means that bandwidth requirements are likely to increase significantly in the coming years. With the adoption of 4G LTE rising in developed markets and carriers in emerging markets looking to transition to the standard, mobile data usage is also set to surge. According to a recent Cisco VNI report, mobile data traffic grew 81% in 2013 and is expected to grow at a CAGR of over 60% over the next five years. ^[2] Akamai, which delivers 15-30% of all web traffic, stands to benefit hugely from this huge surge in online traffic.

Security Solutions Will See Fast Growth

Akamai earns more than half of its revenues from value-added solutions. Among these, its security products are seeing the fastest growth. In Q2 2014, security revenues grew 30% over the same period last year and 10% sequentially, thus accelerating from prior quarter’s performance. Much of this can be attributed to the impact of the Prolexic acquisition. The acquisition is likely to help Akamai strengthen its sales as it integrates the acquired technology into its flagship Kona Site Defender and leverages the combined user base to upsell solutions. Before Prolexic, Akamai had 867 customers using its security solutions with around 260 on Kona. Prolexic increased that user base by almost 50% to  1,250.

Mild Impact Of Fifa World Cup

According to FIFA, approximately 3.2 billion people watched at least some part of the soccer world cup in 2010. ^[3] Additionally, the average in-home viewership for each of the 64 matches stood at a little over 188 million. ^[2] As far as FIFA World Cup 2014 is concerned, 11 matches had concluded by the end of Sunday, June 15. We gather from Akamai’s website that the company’s network saw an average streaming throughput of roughly 2.49 TBPS for these matches. ^[4] Going forward, as more important matches came up with teams entering knock out rounds,  online traffic likely grew more heavily, thus lifting this average. For the purpose of calculation, we assume that the average Akamai throughput for the overall World Cup amounted to 3 TBPS.

Given that there are 64 matches, with each match lasting roughly two hours (including the half time break and some commentary time in the beginning and the end of the match), we estimate that Akamai enabled the delivery of total media data of roughly 1.42 billion Giga Bytes. Even at a rate of 3 cents per GB, World Cup streaming likely added incremental revenues of more than $40 million. That may be small in comparison to Akamai’s overall revenues, but it was  incremental and thus additive to margins in the short term. It must be noted that the actual incremental revenues resulting from the event was likely to be higher as users tend to watch replays, sports analysis and highlights related to matches. Additionally, the company also benefited from providing value added services related to the World Cup streaming, bringing in more revenues than commoditized CDN service. Overall revenue gain could be of the order of $90 million, half of which will reflect in third quarter’s results as the World Cup stretched from mid June to mid July.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology

1. September 30, 2014 – Akamai Releases Second Quarter 2014 ‘State of the Internet’ Report [↩]
2. Global Mobile Data Traffic Forecast Update, 2013–2018, Cisco, February 5th, 2014 [↩] [↩]
3. FIFA World Cup: Breakdown of viewership statistics [↩]
4. Akamai delivered online streaming by match [↩]