Akamai Will Shine Through

Akamai (NASDAQ:AKAM), the content delivery network (CDN) market leader with annual revenue of $1.02 billion, recently reported results that exceeded its guidance but its growth rate failed to meet its expectations. However, Akamai maintains that the long-term outlook for the company is as promising as ever. Let’s take a closer look.

Akamai in August reported second-quarter revenue of $277 million, an increase of 13% y-o-y. Net income increased 26% y-o-y and decreased 5% q-o-q to $47.9 million or $0.25 per diluted share. Akamai ended the quarter with $1.3 billion in cash and repurchased shares for $50.5 million during the quarter. Gross margin was 68%, down three percentage points from last year and consistent with the previous quarter.

Media and Entertainment revenue grew 11% y-o-y and declined 1% sequentially in the second quarter. Akamai reported signs of accelerating traffic growth in a typically modest growth quarter but it is yet to see a return to the accelerated rate of traffic growth that it experienced last year.

Revenue from the Enterprise vertical grew 28% y-o-y as customers moved more of their business to the cloud. Revenue from the Commerce vertical grew 21% y-o-y driven by demand for its dynamic site solutions. Public sector revenue grew 11% y-o-y. Revenue from the high-tech vertical was up 1% y-o-y as demand for our Application Performance Solutions by Software-as-a-Service customers offset declines in software download revenue.

During the second quarter, sales outside North America increased to 30% of total revenue, consistent with the prior quarter. International revenue grew 20% y-o-y. Akamai experienced strong growth in Asia-Pacific outside of Japan, but a more difficult macro environment in Japan, as well as in Europe, continued to weigh somewhat on its growth in these regions. Revenue from North America grew 10% y-o-y.

For the third quarter, Akamai expects revenue in the range of $273 million to $283 million or 8% to 12% y-o-y growth. The company expects gross margins to come down by one point sequentially to 67%. Akamai is trading around $22.72 with market cap of about $4.2 billion. Its 52-week range is $19.50 to $54.65.

CEO Paul Sagan said during the earnings call that Akamai produced solid results in the first half of the year, but its top line growth rate has slowed down mainly due to pricing and traffic dynamics as well as slowing European sales due to sovereign debt problems.

Despite the stiff competition and the slowdown, Akamai says it believes in the long-term outlook of the company and is expanding its business around four key drivers: cloud computing in the enterprise, IT security, a dramatic increase in the use of connected devices, and the consumption of rich media, especially long-form video online.

Increasing use of cloud computing, IT security, connected devices and online video are all promising drivers for content delivery market and Akamai. According to Global Industry Analysts (GIA), the global CDN market is projected to reach $4.7 billion by 2015.

Even I believe that despite the pricing pressure from competitors Akamai will shine through. Akamai has significant advantages over its competitors: one of them is its infrastructure: it has more than 70,000 servers globally and another advantage is its innovation capabilities. No other company has the kind of brain trust in Internet optimization, which is why Netflix came back to renew its deal with Akamai early in the year.