Akamai Earnings Preview: Pricing & CDN Competition in Focus
Akamai (NASDAQ:AKAM) plans to announce its Q2 earnings on Wednesday. During the earnings, we will closely watch what pricing pressures that Akamai faces from competitors like Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT) for its content delivery network (CDN) service. We will look for any signs of a slowdown in customer additions as telecom providers like AT&T (NYSE:T) have started to venture into providing their own CDN services (see AT&T’s New CDN Offering, Strategic but Insignificant for the Stock). These issues have contributed to the stock’s slide this year from a high of around $52 to around $30 currently.
Our $35 price estimate for Akamai’s stock is about 15% above market price.
Pricing Pressures Persist
We expect that revenue per customer for content delivery network (CDN) service provided by Akamai will continue to increase as Internet and broadband penetration increases and as the rapid growth in e-commerce continues. However, Akamai has started to face pricing pressure from its competitors, and as a result, has renewed some of its content delivery contracts at lower price points.
On the positive side, the revenue contribution from value-added services such as advertising solutions, dynamic site solutions and application performance improvement has helped mitigate the effects of lower content delivery network (CDN) pricing. Akamai has also started to face new challenges in value-added services from smaller players (see Akamai Facing New Challenges in Value-Added Services). Hence it will be interesting to see if we observe any hint of change in the pricing trend for Akamai this quarter.
Will We See Customer Growth Additions Slow?
A lot depends on whether Akamai can continue to market its value-added services to its customers the way it has so far. Competition is emerging and telecoms like AT&T are pushing into CDN business and offering more value-added services. However, to counter this loss Akamai has been in talks with telecom operators recently to license its CDN technology, which means it is looking to monetize this bit even if it starts to lose customers (see Why Akamai is Looking to License its CDN Technology).
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