Summary by David Dixon (Overview by Alan J Weissberger is below):
Akamai (AKAM) delivered another quarter of robust financial results that largely exceeded Wall Street expectations. The security products continue to sell well while the prior departure of two of its largest customers weighed on media delivery solutions revenues but were mostly expected.
Although it is easy to gloss over the significance of the decline in media delivery solutions, as few customers have the scale to go DIY today, we believe the industry is in the early innings of a fundamental shift in network topology toward distributed computing over the next 12 months, coupled with the proliferation of datacenters and fiber that will greatly increase performance and reduce incremental costs associated with delivering media content directly via end-user cable and telecom networks. This should pave the way for further DIY adoption. Management has purposefully lowered the rate of head-count additions and pulled back on spending, which, we believe, is an attempt to preserve margins as revenue growth remains under pressure. We continue to believe that Akamai is on a downward dominance curve and anticipate greater revenue pressure going forward.
Consolidated revenues of $567.7M (+7.8% YOY) were ahead of consensus of $564.0M and our estimate of $558.1M. Media delivery solutions revenue declined 4.2% YOY, to $205.9M, below consensus of $208.7M. Performance and security solutions revenue grew 16.1% YOY, to $315.9M, versus consensus of $311.6M. Service and support solutions revenue increased 15.6% YOY, to $45.9M, versus consensus of $46.0M.
Adjusted EBITDA of $234.1M topped consensus’ expectation of $228.4M, driven by growth in the top line. Adjusted EPS were $0.66, versus consensus of $0.63.
Will sales force investments and international expansion pay off?
Akamai continues to accelerate investment in its sales force. Most of the company hiring will be done with a focus on international, where the company believes the revenue opportunity could one day equal North America. We think that the growth seen in international revenue supports the company decision to aggressively expand sales capacity and that the move could ultimately pay off.
Can newer products contribute enough to offset maturing core markets and drive sustained midteens, or better, growth?
Akamai s focus over the past few years has been to increasingly diversify its business beyond media delivery and Web performance. Through acquisitions and investments, the company entered new end markets and doubled its addressable market. Akamai s newer product groups Web security, carrier products, and hybrid cloud optimization are growing well, but overall growth is still determined by performance in Akamai s slowing core markets. These businesses are achieving scale, but the rate of slowing in the core CDN business is occurring faster than expected, and the magnitude and timing of OTT opportunities are unclear.
Will Akamai s business model be pressured over time by the irreversible mix shift of Internet traffic toward two-way content increasingly distributed on cloud-based architectures that provide compute and storage?
While the amount of Internet traffic is growing, there is an increase in DIY CDN business, and the amount of static, Akamaicacheable data on the Web is falling as a percentage of the total amount of data with which customers interact. In 1999, the Web was a read-only medium with very little user-generated content, customization, etc. Today, the flow is much more bidirectional (and therefore uncacheable). We do not see that Akamai has a play here; it may resist this architecture shift, as moving into these growth areas would likely cannibalize the CDN revenue base. More acquisitions to enhance the enterprise security portfolio in the interim are likely as the company continues to diversify away from the commodity CDN business segment. Yet the market has responded to the unification of software accessing three types of storage by moving toward distributed, layered IaaS/PaaS systems (e.g., AWS) using HTTPS APIs (versus FTP), providing compute and storage (versus caching of object storage). Improved performance, reliability, and scale are occurring fast, and we expect many cloud customers that are not scaled up will still require a CDN for performance enhancement.
We believe Akamai Technologies is in transition as its core media delivery business matures. The company has stepped up its diversification efforts, including (1) broadening the product set, (2) ramping sales hiring, and (3) expanding internationally. The long-term impact of these efforts could be positive, but we see increased pressure on Akamai’s CDN-based business model over time, driven by the irreversible mix shift of Internet traffic toward “two-way” content increasingly distributed on cloud-based architectures that provide compute and storage. We view the risk/reward at current levels as negative: Near-term positive momentum is more than offset by fundamental challenges in the CDN segment.
Remainder of this post is by Alan J Weissberger, IEEE ComSoc Community site content manager.
Akamai is the largest provider of content delivery network (CDN) services. A content delivery network or content distribution network (CDN) is a globally distributed network of proxy servers deployed in multiple data centers. The goal of a CDN is to serve content to end-users with high availability and high performance.
Akamai competes with Level 3 Communications (LVLT) and Limelight Networks (LLNW), as well as startups Fastly and CloudFlare. Verizon Communications (VZ), Amazon.com‘s (AMZN) Amazon Web Services, IBM (IBM) and Comcast (CMCSA) are also emerging as new rivals in some parts of the CDN market.
“Revenue guidance is slightly under consensus, due to year-over-year decline in revenue from two major media delivery customers (Apple and Facebook) that are taking more of their volume in-house,” Michael Olson, a Piper Jaffray analyst, said in a research report. “Importantly, the impact from these customers is becoming less material as they go from 11% of revenue in 2015 to around 6% in 2016.”
Colby Synesael, an analyst at Cowen & Co., says Akamai’s guidance might be too conservative.
“While we appreciate management’s decision to err on the side of being overly cautious after its surprising revelation regarding these two customers on its Q3 (2015) call, it highlights management’s lack of visibility with its own top customers,” he said in a report.
“Akamai has been very clear that the first half of 2016 would be marked by slower growth in the media segment, but then it expects (Internet TV) video to begin to accelerate growth. Similar to other large, secular growth opportunities, it is often difficult to project the exact timing of the opportunity, but we believe growth from (Internet TV) will begin to manifest in second half 2016,” said Michael Bowen, an analyst at Pacific Crest Securities, in a report.