Earnings Review: Akamai Continues To Fire On All Cylinders

Akamai (NASDAQ:AKAM) released an extremely strong set of Q4 2014 figures, beating the high end of its guidance on both revenues and earnings. The company generated revenues of $536 million in the fourth quarter, about 23% higher than the prior-year quarter and well above the consensus estimate of$526 million. ^[1] EPS for the quarter excluding extraordinary items came in at $0.71 as compared to $0.56 for Q4 2013 and consensus EPS of $0.63. The outperformance was driven by an exceptionally strong holiday season, as people increasingly took to the web for shopping, streaming videos, accessing social media, playing games and downloading software on newly purchased as well as existing mobile devices. As a result, the company saw increased media traffic growth and strong demand for its value-added services (VAS) such as security solutions and app accelerators. These services have high margins, which suggests that despite the commoditization of content delivery business, Akamai can improve, or at least sustain, its margins in the near term.

Akamai expects Q1 2015 revenue to be in the range of $517 to $534 million and EPS to be between $0.60 and $0.63, which is in line with consensus estimates. This cautious outlook takes into account the effects of a stronger dollar and moderation in Internet traffic due to the lack of major sporting events. ^[2] Note that the video transmission of the Sochi Olympics had a favorable impact on Akamai in Q1 2014.

See our complete analysis for Akamai here

Strong Growth Helped By Holiday Demand

Akamai’s holiday quarter saw strong revenue growth across business verticals as well as geographies. While online sales saw the usual surge in traffic during the holiday season, media and software traffic benefited from increased gaming services demand. We estimate that almost 79% of the company’s value is driven by e-commerce and media traffic, which continues to surge as mobile devices proliferate and demand for social media, video streaming and online gaming grows at a frenetic pace. Akamai’s media delivery business saw its revenues grow by 21% year over year  and 8% sequentially. ^[1]

A big factor in the growth of Akamai’s media delivery business is the surge in the consumption of streaming video on the Internet. According to Nielsen, video consumption on the Internet grew by around 60% in 2014. ^[3] The time spent consuming content through video streaming is only 7.6% of the time spent watching content on TV. Hence, there is ample opportunity for the streaming medium to grow as audience shifts its preference from traditional TV to Internet video. Additionally, user demand for high-quality content, driven by new formats such as 4K and ultra-HD, which require higher bit rates than normal, means that media delivery requirements are likely to increase significantly in the coming years.

Among the various value-added solutions that Akamai sells, security products are seeing the fastest growth. The demand for security products has been partly spurred by recent data breaches at Sony Corp, Target Corp and managed health care company Anthem Inc. For the fourth quarter, security revenues grew 25% over the same period last year and 7% sequentially. ^[1] Akamai acquired Prolexic in February 2014 which has also helped boost Akamai’s sales. Akamai integrated the acquired technology into its flagship Kona Site Defender and will continue to leverage the combined user base to upsell solutions going forward.

Potential Headwinds

Pure-play content delivery network (CDN) market is becoming increasingly commoditized. Akamai is facing increased competition from rivals such as Level 3, Limelight, Edgecast, and (more recently) Amazon, which has heightened CDN pricing pressure in recent years. However, Akamai has been bolstering its performance and has been improving its value added services through new launches and acquisitions. This will help it mitigate the impact of the Pure-play CDN commoditization and will help it grab a bigger share of the market.

Another potential headwind could be the fact that large companies such as Apple are trying to build their own content delivery networks. Apple is an important client for Akamai and is reported to have delivered updates to its operating system through its own content delivery network in 2014. ^[4] However, Apple is still using Akamai’s services and any shifting to their own content delivery network will be a phased and prolonged project. There are fears that this trend might catch on and other customers might decide to follow in Apple’s footsteps, but the resources and time required for establishing their own CDN will not make economic sense for most of Akamai’s clients.

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1. Akamai’s SEC filings [↩] [↩] [↩]
2. Akamai Technologies’ (AKAM) CEO Thomson Leighton on Q4 2014 Results – Earnings Call Transcript, February 10, 2015, Seeking Alpha [↩]
3. THE TOTAL AUDIENCE SERIES – Q3 2014, Nielsen [↩]
4. Apple’s iOS 8 included one more surprise, Deepfield [↩]