Akamai Q3 Preview: What We’re Watching Wednesday
Akamai (NASDAQ:AKAM) plans to announce its Q3 earnings on Wednesday. From the past three quarters, Akamai has been revising its revenue outlook lower triggering sell offs following each announcement and contributed to a cumulative slide of around 50% in the last year. This earnings call we will be closely watching the pricing pressures that Akamai has been facing from competitors such as Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT) for its content delivery network (CDN) service and Cotendo for its value-added services. We will also 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. [1].
Our $31 price estimate for Akamai’s stock is about 35% above market price.
See our complete analysis for Akamai stock here
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Pricing Pressures Persist
Akamai’s revenue per customer for its content delivery network (CDN) service had seen a rapid growth in the last few years as Internet and broadband penetration increased and e-commerce grew. However, with increasing competition, Akamai has had to suffer a dismal last few quarters as competitors piled on pressure both on the pricing and performance front. As a result, Akamai has been forced to renew some of its contracts at lower price points or lose customers. This has led the company to lower its revenue outlook over the last few quarters, and we expect it to continue for a few more.
On the positive side, 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 so far. However, we don’t expect this reprieve to last long as smaller and nimbler competitors such as Cotendo emerge as strong contenders. (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.
Customer Additions Might Slow
A lot depends on whether Akamai can continue to market its value-added services to customers the way it has so far. Competition is emerging and telecoms like AT&T are pushing into the CDN business and offering more value-added services. As more carriers start to build and deploy their own CDNs, Akamai’s value inside many of these networks is diminishing. In order to counter any loss there might arise from the recent developments, 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).
Akamai’s stock has seen a lot of volatility this quarter on various acquisition rumours. We are expecting this earnings call to be the next big trigger for the stock, a view we have discussed earlier in an article titled Amid Akamai Acquisition Chatter, Earnings Could Again Sink Stock.
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Notes:- AT&T Content Delivery Network Enables Highly Secure, Fast, Reliable Web Experiences, PR Newswire, Jun 22 2011 [↩]