Akamai Earnings Preview: Expect Another Quarter Of All-Around Growth

Akamai (NASDAQ:AKAM) will report its Q4 2014 earnings on February 10th. The company had a stellar 2014 and its stock price ended the year up approximately 35%. The company reported strong numbers for the third quarter and displayed growth across all its reported business segments and geographies. We expect the company to report continued growth in CDN (content delivery network) services, due to growing media content on the Internet and accelerated demand for value-added services. This growth will be driven by the secular trends of more business being conducted online, increased online content and traffic, content providers striving to improve the experience of their users and the increased demand for faster and more secure content delivery. We believe that Akamai is fairly valued at this level and our price estimate for Akamai stands at $61.70.

See our complete analysis for Akamai here

Akamai’s CDN Business Will Continue To Grow

In the last quarter, Akamai saw strong revenue growth across all reported segments without sacrificing much on margin front, suggesting a well-rounded performance and relatively low business risk. Its overall revenues jumped 26% in the third quarter year over year with media delivery solutions growing by 22%. ^[1] Even if we look geographically, we find that both International and the U.S. markets saw strong sales growth. The company attributed this performance to better-than-expected media traffic, which usually tends to be low during summer months. As far as the fourth quarter is concerned, there could be some headwinds due to currency movements, but business trends remain on the upswing. Considering the holiday season and Akamai’s recent performance, we expect the company to achieve its guidance.

Akamai’s quarterly ‘State of the Internet’ reports indicate that global average internet connection speeds crossed the threshold of 4 Mbps for the first time in Q2 2014 and remained above that threshold in Q3 too. ^{[2] [3]} Additionally, there are several countries with average Internet speeds of over 15 Mbps, which is considered as a threshold for being 4K (ultra HD) ready. User demand for high quality content in these new formats, which require higher bit rates than normal, means that bandwidth requirements are likely to increase significantly in the coming years.

Value-Added Services Will Help In Improving Margins

Pure-play CDN is getting commoditized due to growing competition from other players such as Level 3, Limelight Networks, Edgecast, and Amazon. This has prompted CDN pricing to come down in recent years. Akamai has managed to mitigate the impact of this trend by focusing on improving performance and offering security and other value-added solutions through new service launches and acquisitions. These services, which have higher margins compared to regular content delivery, constitute close to 50% of Akamai’s revenues now.  Revenue from value added services grew 28% for the first three quarters of 2014. ^[1]

Among the various value-added solutions that Akamai sells, security products are growing the fastest. Akamai acquired Prolexic in February 2014 which has helped boost Akamai’s sales. Akamai integrated the acquired technology into its flagship Kona Site Defender and will leverage the combined user base to upsell solutions going forward. Before Prolexic, Akamai had 867 customers using its security solutions with around 260 on Kona. Prolexic increased that user base by almost 50% to 1,250. We expect that Akamai will continue to improve its value-added services in order to enhance the experience of its customers and distinguish themselves from its competitors.

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1. Akamai’s SEC Filings [↩] [↩]
2. Second Quarter 2014 ‘State of the Internet’ Report, Akamai [↩]
3. Third Quarter 2014 ‘State of the Internet’ Report, Akamai [↩]