Akamai Expanding In Central Europe

Akamai (NASDAQ:AKAM), the content delivery network (CDN) market leader with annual revenue of $1.02 billion, recently announced its plans to expand in Central and Easter Europe (CEE). Akamai is also reported to be looking at licensing its CDN technology. Let’s take a closer look.

Akamai recently announced its formal expansion in five countries in Central and Eastern Europe: the Czech Republic, Hungary, Poland, Romania, and Slovakia. Research firm Forrester predicts that the CEE region will reach overall Internet adoption rates of 54% within two years, and according to PricewaterhouseCoopers, the number of broadband connections in the region will reach 43.2 million in 2012, an increase of 10 million over 2010.

Recently, Dan Rayburn on his Streaming Media blog reported that Akamai has discussed with telco companies about the possibility of licensing Akamai’s CDN technology to enable telcos to build out their own content delivery services. Rayburn further suggests that part of the reason for Akamai taking this step is the fact that telcos are becoming more keen on developing their own CDN services. AT&T recently announced its new cloud-based CDN platform. Ryan Lawler on GigaOM reports that AT&T licenses CDN technology from startup Edgecast, whose other major customers include Global Crossing and Deutsche Telekom. Akamai definitely has superior technology that telcos could benefit from but there could be challenges ahead the most pertinent being how soon it comes up with the licensing service.

Akamai’s Financials
Akamai in April reported first-quarter revenue of $276 million, an increase of 15% y-o-y. Net income increased 24% y-o-y and decreased 4% q-o-q to $50.6 million or $0.26 per diluted share. Akamai ended the quarter with $1.26 billion in cash and repurchased shares for $42.8 million. Gross margin was 68%, down two percentage points from the prior quarter and four percentage points from last year driven by depreciation growth as Akamai continued to invest in its platform.

Media and Entertainment revenue grew by 15% y-o-y and declined 4% sequentially in the first quarter, driven by contract renewals at lower price points from some of its largest media customers. Revenue from the Enterprise vertical grew 31% y-o-y as customers moved more of their business to the cloud while revenue from the Commerce vertical grew 25% y-o-y. Public sector revenue grew 16% y-o-y. Revenue from the high-tech vertical was down 3% y-o-y driven by lower software download buys in Q1 compared to an elevated Q1 last year. There was continued traction among software-as-a-service customers purchasing its Application Performance Solutions, and value-added solutions now account for over 50% of the revenue in this vertical.

During the first quarter, sales outside North America increased to 30% of total revenue, up three points from the prior quarter. International revenue grew 22% y-o-y and 5% sequentially.

For the second quarter, Akamai expects revenue in the range of $270 million to $280 million or 10% to 14% y-o-y growth. The company expects GAAP gross margins to be between 67% and 68%. Last, quarter, Akamai mentioned that it expects the long-term contracts it recently signed to drive significant growth later in the year. Reports suggest that Apple in January renewed its contract with Akamai for additional volume for “new services.” Akamai is speculated to be doing the delivery for Apple’s new streaming music service, the iCloud. Dan Rayburn puts the value of the iCloud business at about $2,500 to $10,000 a month but adds that if iCloud ends up supporting video content, its value would be much higher. Akamai is trading around $29.62 with market cap of about $5.53 billion. Its 52-week range is $28.69 to $54.65.