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Akamai will be Essential for Hotspot Prevention

Posted on Monday, Dec 17th 2007

I had earlier written on Akamai as an Online Video beneficiary and the impact of Level 3’s price cuts on Akamai. You can also read my interview with its founder to see why I think guys like Howard Lindzon are rushing too soon in shorting Akamai.

On October 24, 2007, Akamai Technologies, Inc. (NASDAQ: AKAM) reported its financial results for Q3 ending September 30, 2007. Revenue was $161.2 million, up 6% q-o-q and 45% y-o-y. GAAP net income was $24.3 million, or $0.13 diluted EPS, up 12% q-o-q and 73% y-o-y. GAAP gross profit margin was 73%, about a point lower than Q2.

Akamai added 61 customers in the quarter taking its customer count to 2,616. It will also be acting as the exclusive content distribution provider in the U.S. for Starbucks stores following its deal with Apple. The deal allows iTunes users to download a wide range of Starbucks popular Hear Music titles. It is also launching a showcase portal for high definition videos from customers including the BBC, NBA, and MTV. Other exciting innovations include the launch of large file optimization and the introduction of its IP-based application accelerator.

For Q4, Akamai expects revenue in the range of $172 to $176 million. Normalized diluted EPS is expected to be $0.37 to $0.38. For the fiscal year 2007, it is on track to meet its revenue estimate of $625 and $629 million and deliver 46% to 47% annual growth. In 2008, it expects to achieve 25% to 30% growth in both revenue and normalized EPS. Looks like it will achieve its 1-billion revenue goal well before the end of the decade.

Its stock is trading around $35 after hitting a 52-week low of $27.75. Market cap is around $5.9 billion. I am standing by my recommendation that Akamai is a good company to hold on to for the long term. I own the stock myself, and have a lot of faith in the company’s ability to deliver innovative solutions to the networking problems in 2008 and beyond.

With IPTV around the corner, the video delivery problem in particular is going to become acute, and I believe that Akamai’s network traffic optimization algorithms are not only going to be handy, but perhaps essential. The me-too’s just don’t have the level of technology to tackle this enormous routing / hotspot prevention algorithm challenge.

Akamai Technologies Inc. (AKAM)

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Thanks. Under advisement for sure.

howard Lindzon Associates Tuesday, December 18, 2007 at 6:22 AM PT

It is simple to verify by going to that T is a current customer of Akamai. A tcp connection to an Akamai server shows up in any utility that shows such things.

And yet somehow they are going to take away Akamai’s CDN biz…

Abe Tuesday, December 18, 2007 at 10:06 AM PT

Actually, Howard, I did a thesis on Hotspot prevention algorithms at one point, and happen to agree with Abe, that most of the ISPs will need Akamai’s “brains” to manage this optimization problem.

Your analysis, in my opinion, is rather shallow.

Sramana Mitra Tuesday, December 18, 2007 at 1:49 PM PT

I would also suggest that AT&T will have problems placing servers in competing networks — non-AT&T networks have no obligation to allow this.

Akamai does this and I think it is very useful if not absolutely necessary. Akamai’s network-neutral stance makes them more welcome.

Abe Tuesday, December 18, 2007 at 2:12 PM PT