Akamai (NASDAQ:AKAM) announced its Q3 earnings on Wednesday evening reporting better-than-expected revenue growth of 11% over the same period last year sending its stock 15% higher Thursday.  The company saw strong customer additions that boosted the top-line and alleviated market concerns as the stock rose almost 15% in pre-market trading and then held on to its gains though the the closing bell yesterday. However, gross margins fell by a full percentage point from last quarter as pricing pressures increased due to competition from Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT).
We have revised our Akamai estimates slightly to$31, which is about 10% higher than the market price.
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Customer additions, a positive surprise
In our earnings preview for Akamai, we had talked about how a lot depends on Akamai’s ability to strengthen its value-added services division so as to add customers and not lose market share. The company managed to show a positive growth for its value-added services which has resulted in enterprise customers adopting its platform for their online businesses and security solutions.
The management noted:
During Q3, we saw continued solid growth for our value-added solutions. Enterprise was our fastest growing vertical, grew 30% year-over-year and 3% sequentially, as our customers shifted more content and applications to the cloud.
Our commerce vertical increased 23% over Q3 of last year and increased 5% sequentially. These results were driven by continued demand for our Dynamic Site Acceleration solutions, or DSA, as well as solid early traction for our security portfolio. We had almost 100 DSAs signings in the quarter across all of our verticals, and that’s just shy of the record signings we saw in Q2. In addition, we had over 30 customers adopt our security solutions in Q3. In less than a year of general availability, we already have over 125 customers leveraging our security solutions in the cloud.
Pricing pressures continue for Akamai
Although Akamai saw good revenue growth, its margins continued to shrink as expected due to pricing pressure from competitors as the company had to renew some of its content delivery contracts at lower price points. The company also provides discounts for contracts with high volumes.
With increasing Internet and broadband penetration as well as rapid growth in e-commerce, we believe that the revenue per customer for content delivery network (CDN) service provided by Akamai will increase.
However, if you think pricing pressures will force Akamai to slash its prices more than we expect it to, you can move the forecast down and check out the corresponding drop in price estimate.
- Akamai Q3 2011 earnings conference call transcript, SeekingAlpha, October 26th, 2011 [↩]