Content Delivery heavyweight Akamai reports Q3 earnings today after the market close. The CDN market has been quite an interesting place this year, with literally dozens of upstarts raising money and building out competing products, lawsuits clouding the skies, P2P going in and out of fashion, and a half dozen network operators jockeying for pole position. Through it all, the only company that really matters from a revenue standpoint is Akamai which should ring the bell at over $750M in revenue from all its various CDN-related services this year. As much noise as we might hear from all those newer CDNs, or even from Limelight or Level 3, it is Akamai’s report that will tell us the most about how the CDN business has fared through this ugly spell in the financial markets.
First, here’s a quick table to summarize their numbers thus far and a basic estimate of what Q3 might look like:
| Q1 | Q2 | Q3 est | |
|---|---|---|---|
| Revenue | $187M | $194M | $195-200M |
| Gross Margin | 72.4% | 72.3% | 72-73% |
| Adj.EBITDA | $87.2M | $92.7M | $95-$97M |
| normalized EPS | 0.41 | 0.41 | 0.35-0.45 |
So what should we look for? Some thoughts:
- Revenue trends: There can be no doubt that the industry is pushing more bits each month. But is Akamai getting the lion’s share of the new ones? More competition surely means that Akamai’s awesome revenue growth over the past few years will not continue, but that doesn’t mean Akamai will stop growing. The question is, at what rate will they grow in this new, more dangerous environment?
- Margin stability: Pricing pressure is returning to the CDN space, in the short term perhaps driven by Limelight but it is really inevitable given the steady drumbeat of IP transit pricing declines. Akamai seems sure to stay at the high end of the market, using its brand and its top of the line services to bring top dollar. The question is, will top dollar also come down? Has it already? Akamai has enjoyed truly awesome margins for many years, the market expects them to fall but it isn’t clear when that will happen. Probably not this quarter.
- Effects of the financial crisis: Does Akamai see any pullback in spending from credit-dependent content providers? Level 3 mentioned some in its Q3 report, but said it was balanced by increases from larger content providers. Anything Akamai tells us about the mood of their customers will be critical to watch.
What strikes me the most in poking around Akamai’s numbers is its valuation. Anyone who follows this blog knows I have been obsessively watching fiber-based telecom valuations collapse, but I hadn’t been watching Akamai’s as closely. Is this company really trading at $13.89? That’s not a misprint? Their ‘normalized’ EPS for 2008 should be something like $1.60, isn’t that a P/E of under 9? Wow, nothing like a 75% haircut for the crime of possibly, one day long from now, seeing competition that might make a dent.
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Categories: Content Distribution · Financials
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Did anyone listen to their conference call?
Their blended, overall margins are being hit notwithstanding higher margin “value added” services while they wrote down some of their cash principal that has been invested in student loans, a very risky debt category.
No guidance with a very murky and uncertain environment being referenced inclusive of uptake for newer services for garnering advertising assisted revenues.
Apparently, their model is based on a shared sales revenue basis assuming success ensues, rather than a licensing fee for the algorithms designed to pick up dropped sales.
However, with the slow down in the macro economy, Mr. Sagan doesn’t see clarity during the next eighteen months, he says.
This is not an investable growth story based upon what I heard.
carlk, we must have listened to a different call! Well, at $50 I’d say ugly, at $13, I thought their results were very solid. One has to remember that Akamai is not a startup struggling to achieve critical mass, they have real cashflow that has real value.
To clarify though, they did give guidance for Q4, just not for 2009. Not sure about the student loands, but it sounded as though those are federally guaranteed, and the adjustment came from changes in interest rates not defaults etc.
As for clarity, only the datacenter sector so far seems willing to project 2009 guidance, everyone else is cautious, Akamai is no different.
They might not be a start up, but their previous moat-affording it high multiples across varying metrics- is under attack by “network owners” with lower delivery cost basis’ when factoring for bundled services in large file distributions where the world’s networks have graduated to.
They’re only annualizing on a significantly less than 1B revenue base about 8.25 %. I don’t understand how one pays 4X today’s price to sales for a business in decline mode that is under severe attack inclusive of today’s report.
The write down was for 9M in this quarter alone. Considering the domino effects which are now touching the auto tranches of risky credit card debt, their student loan investment portfolio looks very scary indeed.
Of course, as an old professor from Kansas who used to pump Fannie Mae as a safe haven investment used to say, “Your mileage may vary.”
As for my mileage, I’ll take a ten year start up with 25B in RCV, based upon a digital world craving “large video files” over the struggling AKAM, who historically, has had the advantage of a “free ride” across expensive internet backbones in advance of today’s changing paradigm which no longer favors that solution based upon bit sizes.