Akamai Q3 Earnings: Future Headwinds In Media Delivery Business Overshadow Current Performance

+5.80%
Upside
110
Market
116
Trefis
AKAM: Akamai logo
AKAM
Akamai

Content Delivery Network (CDN) provider Akamai (NASDAQ:AKAM) released its Q3 2015 earnings report recently. [1] The biggest takeaway from the earnings call was the fact that the company predicts that the media delivery business coming in from some of its biggest clients will decrease in coming quarters, reducing the business’s rate of growth. [2] The stated reason for this drop is that these clients are diverting some of their traffic to their own content delivery networks. We believe that even though the loss of business from some of its biggest clients will eat into Akamai’s future revenue growth, the company is not at immediate risk of losing a major portion of its revenue stream. Looking at the quarter in hand, the strong demand for Akamai’s value-added services (VAS) such as security solutions and app accelerators led the growth in the company’s revenues. However, unfavorable currency movements also had a detrimental effect on the company’s revenues for the quarter.

Akamai expects Q4 2015 revenue to be in the range of $557 to $577 million, which is below the consensus estimate of $597 million. [2] [3] The cautious outlook takes into account the loss of revenues from the biggest clients and continued foreign exchange headwinds.

Our price estimate for Akamai stands at $72, implying a premium of close to 15% to the market.

Relevant Articles
  1. Akamai Stock Has Seen Little Change Since 2021. Will A Q3 Earnings Beat Drive The Stock Higher?
  2. What To Expect From Akamai’s Q2 Earnings?
  3. Cloud Business In Focus As Akamai Reports Q1 Results
  4. Will Akamai’s Cloud Computing Push Pay Off?
  5. Up Almost 6% Last Month, Can Akamai Continue Its Run?
  6. Here’s Why Akamai Stock Has Failed To Outperform The S&P Since 2017

See our complete analysis for Akamai here

Akamai Could Suffer If Clients Shift To Internal CDN’s

Pure-play content delivery network (CDN) market is becoming increasingly commoditized. Akamai is facing increased competition from rivals such as Level 3 (NYSE:LVLT), Limelight (NASDAQ:LLNW), Edgecast, Amazon (NASDAQ: AMZN), etc., which has heightened CDN pricing pressure in recent years. Adding to Akamai’s troubles is the fact that the company predicts that the media delivery business coming in from some of its biggest clients will go down in the near future. [2] This seems to be the after-effect of important customers such as Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) diverting some lower performance traffic to their own content delivery networks. [4] Clients such as Apple contribute significantly to Akamai’s revenues. [5]

There is a possibility that these big clients could divert all of their traffic to their internal delivery networks on an accelerated schedule. Companies such as Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG) were able to develop sustainable networks at a fast clip. Amazon went one step ahead and started offering CDN services to other companies, effectively becoming a competitor to Akamai. Nonetheless, companies such as Apple are still using Akamai’s services and we believe that fully shifting to an internal content delivery network would be a difficult and prolonged project. Few could justify the expense of replicating the scale of the infrastructure Akamai has established for its highest performance content delivery. But given the expense of using Akamai’s service, its customers will seek lower cost content delivery for traffic for which it is sufficient. This has always been the key challenge for Akamai as few attempt to compete with the company on performance. This challenge is forcing negative revisions in consensus and has been a key negative for the stock price, which fell 17% on the news.

Akamai’s Value-Added Services Continue To Drive Revenue Growth

Even though Akamai’s CDN business is facing headwinds, the company has managed to insulate itself to a certain degree by focusing on offering security and other value-added solutions (VAS). VAS services make up almost half of Akamai’s revenues now and also have higher margins compared to pure-play CDN services.  Revenue from VAS services grew 24% on a constant currency basis during the third quarter. [6] Among the various value-added solutions that Akamai sells, cloud security solutions products are experiencing the fastest growth and grew by 44%. [6] Akamai observed a record number of DDoS attacks over its Prolexic network in the second quarter of 2015, a 132% increase over the prior year period. [7] The company has also warned of an uptick in DDoS reflection attacks in the coming quarters. [8] The increased threat to online security presents Akamai with an opportunity and the company is enhancing its capabilities in order to better serve clients. (Related – Akamai Takes Strategic Steps With Focus On Security Solutions Business) Akamai’s growing niche in the value-added services market should enable the company to wield more pricing power in the coming years. The additional revenue brought in by value-added products will push Akamai’s average revenue per subscriber higher. Accordingly, we believe that revenue per media business customer could cross $1 million by 2021.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Akamai Reports Third Quarter 2015 Financial Results, October 27, 2015, Akamai Press Release []
  2. Akamai Technologies (AKAM) Frank Thomson Leighton on Q3 2015 Results – Earnings Call Transcript, October 27, 2015, Seeking Alpha [] [] []
  3. Akamai down 14% on soft Q4 guidance, , October 27, 2015, Seeking Alpha []
  4. Apple, Microsoft & Facebook Bring More Traffic To In-House CDNs, Impacting Akamai’s Media Business, October 28, 2015, StreamingMedia.com []
  5. Apple Building Out Their Own CDN To Deliver Content To Consumers, February 3, 2014, StreamingMedia.com []
  6. Akamai’s SEC Filings [] []
  7. Akamai’s State of the Internet Report Q2 2015 – Security, media.scmagazine.com []
  8. Akamai Warns Of An Uptick In DDoS Reflection Attacks Using Abandoned Routing Protocol, July 1, 2015, Akamai Press release []