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Akamai Technologies - Looking Bright

Akamai Technologies Inc. (AKAM) is the largest global provider of content delivery network (CDN) and cloud infrastructure services. Its products and solutions accelerate and improve the delivery of content over the internet, streaming video and audio, business applications and website performance for e-commerce companies, enterprises and media, and entertainment companies. The Akamai EdgePlatform is a technological platform for its business solutions which hosts some of the world’s top internet brand names, and its network includes more than 130,000 servers inside more than 1,100 networks around the world. Reducing the impact of traffic congestion and capacity limitations on customers, bringing content closer to the end users while helping increase speed and performance. Akamai offers five core solutions to its customers: Terra solutions, an application and cloud performance services, Sola solutions, digital media, software distribution and storage services, security tools through Kona solutions, Aqua, website optimization services and other internet-based offerings through Aura solutions.

The company markets and sells its products domestically and internationally through direct sales and channel partners, which include AT&T Inc. (T), IBM Corp. (IBM), Verizon Communications Inc. (VZ) and Telefonica Group. Reporting revenues of $1.37 billion during 2013, it works through five segments: Media & Entertainment, Commerce, Enterprise, High Tech and Public Sector. Total revenues for last quarter came in at $436 million. Analysts think Akamai's strong quarter was driven by stronger than expected performance in its Media Delivery Solutions segment (representing nearly 48% of revenues) and stronger than expected gross margins. The increasing demand on cloud infrastructure solutions, as well as mobile products and online video is expected to drive top-line growth in the near term, projecting a positive outlook for 2014. Nevertheless, the company must look out as competition is intense, keeping prices highly pressured. Therefore, despite investments in R&D might hurt profitability, innovation is essential for future growth.

Recently Akamai announced the appointment of Seksom Suriyapa as Senior Vice President of Corporate and Business Development. Reporting to Rick McConnell, company’s President of Products and Development, Mr. Suriyapa will be responsible for leading Akamai's corporate development and strategic partnership activities. "Seksom has a great deal of industry and functionally-relevant experience that he brings to Akamai," said McConnell. "We believe that his global operations and business development insight from working with leading cloud services and security providers will be a tremendous asset to our ongoing strategic initiatives."

Market Expands

As a leader provider of CDN, Akamai handles around 2 trillion web interactions on a daily basis, helping customers to address the challenges of bandwidth constraints and internet traffics. A series of changes within the market have been positively affecting the company. While internet usage boosts, Internet Protocol traffic advances along with mobile data traffic, demand for online entertainment increases and cloud technologies, cloud security services expand. Given this development, Akamai is likely to see demand of its products grow exponentially. Nevertheless, this demand is only met with the proper investment; therefore the company will have to increase its R&D budgets, delivering new faster and enhanced products.

The demand for online media, entertainment and high definition video is increasing. This translates into increased bandwidth requirements and growth opportunities for the company, as it will accelerate the demand for Akamai’s solutions. Moreover, the adoption of cloud computing technologies is surging, and the company is seeking to improve its products with higher performances, availability and enhanced security in order to meet this increased demand and achieve its long-term annual revenue target of $5.0 billion by 2020. The boom of cloud computing has carried along an increased concern regarding cyber security. Akamai has developed cloud-based security solutions which have already been well received by enterprises. The demand for security solutions is likely to keep augmenting, and therefore Akamai sees significant growth opportunities over the long term.

Moreover, the upsurge of mobile data traffic, driven mainly through smartphone app download and web browsing, is likely to imply important congestion of mobile networks, and therefore require technological advancements from content delivery networks. Still, mobile traffic growth is both a result of higher Internet usage as well as the shift of some traffic from wireline to wireless networks. Although Akamai has a strong position in fixed-line Internet delivery, wireless service providers are not that openly related to Akamai, and may not allow Akamai to continue to put its servers in their networks.

Acquisitions and Relationships

Acquisitions are always an important part of a company’s growth. Akamai acquired Cotendo, Blaze, Fast Soft and Verivue in 2012, getting to expand its customer base while increasing global presence and extending its product portfolio. Recent acquisitions have also helped it to solidify its footprint in the distributed denial of service (DDOS) cyber solution market, mainly through the acquisition of cyber security software developer Prolexic. Akamai announced the acquisition of Prolexic in December 2013, and has recently unveiled the availability of the Prolexic first quarter 2014 Global DDoS Attack Report. Prolexic, a recognized leader in Distributed Denial of Service (DDoS) protection services, has observed the most abused protocols to be Character Generator (CHARGEN), Network Time Protocol (NTP) and Domain Name System (DNS). Through this team up Akamai will provide customers a comprehensive portfolio of security solutions designed to defend an enterprise's Web and IP infrastructure against application-layer, network-layer and data center attacks delivered via the Internet.

The addition of native support for the emerging Motion Picture Experts Group-Dynamic Adaptive Streaming over HTTP (MPEG-DASH) and HTTP Dynamic Streaming (HDS) formats for live and linear streaming content is expected to enable the company to offer greater flexibility to reach an increasing array of connected devices. In addition, Akamai is working with encoder vendors to qualify their offerings for compatibility, and has also added DASH support to its Adaptive Media Player. The first partner to be qualified by the firm for direct DASH and HDS ingest is Elemental Technologies.

Partners like AT&T, Orange, Cisco, IBM, Turk Telecom, Swiss telecom and KT also provide an expanded customer base within a market which is expected to continue growing. However, integration always carries its risks, and frequent acquisitions can have a negative impact in the balance sheet, in the form of a high level of goodwill and intangible assets. The company’s balance sheet is nevertheless strong, with important cash flow generation ability which enables the company to pursue growth strategies, acquisitions, and also share repurchase. This strong cash flow and continuing share repurchase activity enhances shareholders.

Market Pressures

Competition is always pressuring prices, and new players, non-traditional, are appearing, such as Amazon.com Inc. (AMZN) or Netflix Inc. (NFLX). Barriers to entry are significant though, and companies don’t easily develop these products. Nevertheless, since the market is becoming increasingly attractive and Akamai essentially provides a commodity like service significant competition and pricing pressure are likely to continue going forward. The clear effect of intense competition is price pressure, and Akamai has been forced to lower the price of its CDN services, hurting profitability. Furthermore, bandwidth costs are increasing, and are expected to keep doing so along 2014. This, although driven by a higher internet usage, which implies higher level of sales for Akamai, might hurt margins in the near term.

Final Thoughts

Last fourth-quarter 2013 earnings for the company were of $0.55 per share, increasing 10.0% year over year. Revenues were up as well 15.4% year over year, driven primarily by performance of most of the solutions. With better-than-expected outlook for the first quarter of 2014, Akamai expects revenues in the range of $426.0 to $430.0 million and Bloomberg stated the company put to rest investors’ fears regarding Apple Inc. (AAPL)’s plan of building its own content delivery network.

The expansion of Cloud computing and Internet video will signify higher investment requirements, but as well important growth opportunities for the company. Competition will continue, and Akamai will have to deal with pricing pressure while improving its networks and technology. The firm is seeing strong momentum across its video, gaming, social media, and software download customer base. Strong demand for its website and application acceleration solutions has led to growth in the performance and security solutions business.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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