Akamai Q2 Earnings Preview: Expect Another Quarter Of Well-Rounded Growth

Akamai (NASDAQ:AKAM) will report its Q2 2015 earnings on July 28. ^[1] We expect the company to report continued growth in its content delivery network (CDN) services. This growth will be driven by a number of secular trends, including:  1) increases in business conducted online; 2) increased online content and traffic; 3)  content providers striving to improve user experience;  and, 4)  increased demand for faster and more secure content delivery. The company will also continue to experience strong growth in its value-added (VAS) services, such as security solutions and app accelerators. These services have high margins, which suggests that despite the commoditization of content delivery business, Akamai can improve, or at least sustain, its profitability in the near term. However, unfavorable currency movements will have a detrimental effect on the company’s revenues for the quarter. Taking a long-term perspective, we believe that both CDN and VAS services will continue to grow and will be instrumental in increasing Akamai’s overall revenues from less than $2 billion in 2014 to $3.8 billion by 2021.

See our complete analysis for Akamai here

Akamai’s CDN Business Will Continue To Grow

Last quarter, Akamai saw strong revenue growth across reported segments without sacrificing much on margin front, suggesting a well-rounded performance and relatively low business risk. Its overall revenues jumped 16% year over year with media delivery solutions growing by 12%. ^[2] Even if we look geographically, we find that both International andU.S. markets saw strong sales growth. However, currency fluctuations took a toll on international revenue.   For the first three months of 2015, international revenue grew 7%  as reported and 20% in constant currency terms. We expect currency fluctuations to continue to play spoilsport in the short run, especially as Akamai derives one-fourth of its revenue from outside of the U.S. As far as the latest quarter is concerned, there are bound to be some headwinds due to currency movements, but business trends remain on the upswing. We estimate that almost 80% of the company’s value is driven by e-commerce and media traffic, which continues to surge as mobile devices proliferate and demand for social media, video streaming and online gaming grows at a frenetic pace. Consequently, we believe that Akamai’s total revenues will grow from under $2 billion in 2014 to $3.8 billion by the end of our forecast period.

Video is an integral and rapidly growing part of Internet traffic and Akamai is clearly focusing on improving its capabilities on this front. (Read More – Akamai Takes Strategic Steps With Focus On Video) It announced the integration of Adobe Primetime ad insertion capabilities into its network a while back. ^[3] This integration will use a technique through which advertisements will be stitched into content at the network level. This technique offers many benefits including better monetization opportunities, reliability, enhanced viewing experience, smoother transitions across a larger audience, increased device reach and resiliency to ad blocking. The company also acquired IP video services firm Octoshape in April. ^[4] Octoshape uses a proprietary distribution technology called UDP protocol which helps the company in improving streaming speeds and sustaining high quality video delivery. ^[5] A report by Cisco Systems Inc. states that video as a percentage of all Internet traffic will grow from 78% in 2014 to 84% by 2018. ^[6] With video gaining such prominence, Akamai’s steps to improve its video capabilities will help the company distinguish itself from its competitors in the CDN space.

Value-Added Services Will Boost Overall Growth

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 46% of Akamai’s revenues now.  Revenue from value added services grew 26% on a constant currency basis for the first three months of 2015. ^[2]

Among the various value-added solutions that Akamai sells, security products are experiencing the fastest growth and increased by 29% last year. Demand for security products has been partly spurred by high-profile data breaches such as those at Sony Corp and Home Depot. ^[7] A recent report by Forrester Research predicts that at least 60 percent of enterprises will encounter a breach of sensitive data in 2015. ^[8] Akamai observed a record number of DDoS attacks over its Prolexic network in Q1 2015, a 116.5% increase over the year ago period. ^[9] The company has also warned of an uptick in DDoS reflection attacks in the coming quarters. ^[10] Akamai senses an opportunity in the current scenario and is enhancing its capabilities in order to better serve clients. (Related – Akamai Takes Strategic Steps With Focus On Security Solutions Business)

Akamai also acquired Xerocole Inc. in March, which will help Akamai in expanding its own DNS product offerings beyond the existing authoritative DNS products and better fulfill the needs of its customers and network partners. (Read More – Akamai Bolsters Its Value Added Services With Acquisition Of Xerocole) In addition to Xerocole, Akamai has acquired companies such as Prolexic, Verivue and Blaze in the past. This will help it mitigate the impact of pure-play CDN commoditization and will help it grab a bigger share of customers. Akamai’s value proposition has evolved beyond being the fastest content delivery network. As competitors grow increasingly capable of fast content delivery at similar prices, Akamai has positioned itself as a full services provider—touting its ability to offer multiple value-added services such as security solutions, app accelerators, delivery of targeted advertising and cloud-based services for its customers. 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 2020.

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1. Akamai To Hold Second Quarter 2015 Investor Conference Call On Tuesday, July 28th At 4:30 Pm ET, July 01, 2015, Akamai Press Release [↩]
2. Akamai’s SEC Filings [↩] [↩]
3. Akamai Integrates Adobe Primetime to Increase Reach and Scale of Online Video Advertising, April 14, 2015, Akamai Press Release [↩]
4. Akamai Acquires Octoshape, April 14, 2015, Akamai Press Release [↩]
5. Technology – TV Quality, Octoshape [↩]
6. Videos may make up 84 percent of Internet traffic by 2018: Cisco, June 10, 2014, Reuters [↩]
7. 32 Data Breaches Larger Than Sony’s in the Past Year, March 10, 2015, Huffington Post [↩]
8. Planning For Failure, February 11, 2015, Forrester [↩]
9. Akamai’s State of the Internet Report Q1 2015 – Secutity, Akamai [↩]
10. Akamai Warns Of An Uptick In DDoS Reflection Attacks Using Abandoned Routing Protocol, July 01, 2015, Akamai Press release [↩]