CDN and cloud provider Akamai (NASDAQ:AKAM, news, filings) is up after hours following its Q3 earnings report, something that has been a bit rare lately. Revenues were a bit above expectations, while earnings were in line. Both were at the high end of guidance, and the company’s fourth quarter projections were pretty much as expected. here’s a quick table of the company’s numbers in context:
| $ in millions | Q3/10 | Q4/10 | Q1/11 | Q2/11 | Q3/11 | Q4/11(guidance) |
|---|---|---|---|---|---|---|
| Revenue | 253.6 | 284.7 | 276.0 | 277.0 | 281.9 | 303-315 |
| COS | 77.8 | 86.2 | 89.0 | 89.6 | 93.3 | |
| SG&A+R&D | 112.6 | 121.8 | 109.9 | 109.8 | 118.8 | |
| Gross Margin | 69.3% | 69.7% | 67.8% | 67.7% | 66.9% | |
| Adj. EPS | 0.34 | 0.40 | 0.38 | 0.35 | 0.34 | 0.37-0.41 |
A solid quarter to be sure, and that’s what Akamai investors needed. The media has been full of the competitive challenges the company faces in today’s market, but it bears remembering that this company is very profitable and very well run.
But I think that the market’s positive response has as much to do with the management reshuffle they also announced today. The company’s president, David Kenny, is leaving to pursue entrepreneurial interests, and they have brought in Kumud Kalia as CIO and Rick McConnell as EVP Products and Development. Kalia was previously CIO at Direct Energy at Qwest’s business markets division, while McConnell was VP of Cisco’s unified communications unit.
That’s some high powered external talent coming in to what are, for Akamai, key management roles. They are adding some muscle to take on those competitive challenges ahead, and it’s interesting to note that both have some history in telecommunications of some sort. Kenny’s departure will leave a void, I wonder where he’ll resurface.
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It is costing them more to produce $1 of revenue, and they are not seeing signs in their business of internet video traffic growing.
How and why is that?
On the lack of growth from customer ONLINE VIDEO offerings, JD Sherman says:
Revenue from our media and entertainment customers grew 5% year-over-year, and grew 1% sequentially in the third quarter. We continue to see consistent traffic growth, but we still have yet to see year-over-year traffic growth begin to accelerate again.
On the lack of 2012 guidance along with new network relationships for growth, Paul L. Sagan says:
So Jeff, we’re not going to walk you through it. The future is always difficult to predict. We live in a difficult economic times. So we’re not going to go further. We stopped doing that a while ago. Not going to revisit that now. In terms of networks, I did talk about that earlier. We’ve now had network level of number of relationships on very similar kinds of terms that we’ve them in the past. We don’t see a fundamental change there. We’re growing that not just in terms of number of networks themselves, but countries allowing us to expand our capacity and our region. We’re very pleased with how network relationships, and that whole model is going for us right now. Operator?
On the Big Dog, Global Network Partner for growth, with specific reference to VZ, Paul L. Sagan says:
Great. I mean let’s do this questions and answers quickly to try to get to the end of the next few minutes. Very good relationship. They’re one of our best resellers. We have a very strong relationship with them, actually, around the world because they have a global footprint today. We’re very pleased with that. We’re going to continue to try to develop and grow that going forward.
Time Warner’s CEO is positioning them to be an internet provider first with gobs of video, of course, versus a video operator as subcribers flee his “paid t.v.” model in lieu of other options including internet based t.v. in droves.
This is another trend the Wall Street analyst will not release to main stream investors, especially those who are involved with companies like Akamai, one whose margins continue suffering why the look for a new trick in the “value added arena” because they can’t deliver VIDEO over the internet efficiently with their model.
They didn’t mention Netflix once on their call, like in the past!
One must also think of other reasons why those silly, vastly overpaid analysts are missing this trend or not reporting on it, while they are too rich to worry about cutting the cord of a dumb em down “cable bundle” of mostly under utilized content for a couple of hundred bucks per month!
Money comes to easy to them!
No downgrade on Akamai this morning for missing the internet video trend. For shame! 🙁
http://www.businessweek.com/news/2011-10-27/time-warner-cable-profit-misses-estimates-on-subscriber-loss.html
Wait a second! Time Warner Cable is the media property owner of HBO GO, an internet enabled video delivery product, if one chooses to go “over the top” that way.
The exclusive provider of this internet video service, is Level 3 Communications.
Does it have something to do with stream technology algorithms, bandwidth allocation, and quality of service(qos) so customers don’t flee when their streams become latent or are buffered?
If this is not the case, where is Akamai, one who has historically buried their servers inside the homes of cables and telecom companies –head ends, central offices, colo-facilities and data centers–wherever they are local or near the edge?
http://www.hbogo.com/#home/
Timothy K. Horan – Oppenheimer & Co. Inc., Research Division
Just a couple of questions. Sunit, if you add together both EBITDAs, I know you have some of this in the 8-K, but would it be a material difference on a pro forma basis on a combined basis? And I know, with Global Crossing, you’re a little reluctant to give next year’s guidance, or will soon, but can you talk about maybe for the remainder of this year? And I apologize if I missed it. And then lastly, Jim, some are talking about video growth not being as robust as expected this year. Just curious kind of what you guys are seeing.
James Crowe
With respect to your question about video growth, we would not agree with the statement that video growth is slowing, tailing off. In fact, what our view and believe and see in our network, the opposite. We continue to think that, if anyone would like a third-party assessment of this area, take a look at Cisco’s Visual Networking Index, it’s as good a third-party assessment. It’s done with rigor and detail. We agree with its general outlook and projections, that is, over 90% of network traffic will be video by 2014. And I would add, we believe that, that projection doesn’t adequately account for video to mobile devices. That is a market that is tiny today. As 4G is deployed, we fully expect that content video gaming, visual content to mobile devices, to tablets will be more and more important, and that’s CDN technologies. That is caching close to cell towers. It’s going to get to be a major opportunity for companies like ourselves who have mature, robust set of CDN tools, not just caching content, but site accelerators, site transformers, 2 things that allow you to speed up webpage delivery or reformat on the fly for various devices. A good example for us is HBO GO where we have 100% of that business, and we handle those tasks for HBO. So most affirmatively, we disagree and we also believe we’re taking share in the broad market for video media distribution.
Jim Crowe was in rare form today, and prior to hopping on his plane to meet with various Federal Agency customers and potential customers seeking high quality bandwidth and cdn services while budget constraints loom on.
Jim Crowe:
With respect to your question about CDN, CDN, I think, 2 or 3 years ago, we said CDN needs to be viewed as a part of a carrier business. If you believe what I said earlier and what a number of observers have mentioned that video, whether you think it’s going to be 90% in 2014 or 85% or 95%, if you think the trend is clear, you can’t be in the carrier business if you don’t have CDN. You cannot allocate enough capital either in access networks or in backbone networks to simply say, “I’m going to provision enough bandwidth to cover all the traffic that’s coming.” The math doesn’t work. You’re off by an order of magnitude. You cannot get a return simply by throwing bandwidth at it. You have to have, in effect, smart caching. You have to store copies intelligently. You have to have site transformers and site accelerators. We’ve said that all along. The other half of that statement is, if you’re simply providing a CDN service and you don’t own the bandwidth, you’re going to not be able to have a competitive product over time. And we would argue and we believe it’s visible that those trends are playing out.
Well, thanks, everyone for listening in. We look forward to reporting the fourth quarter full year. Obviously, that’ll be an important report. And we’ll try to provide you as much insight as we possibly can. That’s the end of the call, operator.