Akamai Q3 Solid, HD Web Video Growth On The Horizon?


Conference Call Webcast (4:30 p.m. EDT)

Initial analysis:
A solid quarter, hitting Street expectations despite industry-wide pricing pressure. Investors not thrilled: stock down 8% in after-hours trading.

Post-call thoughts:

Akamai has weathered the CDN industry’s price war with little visible damage during Q3. The company has its analyst/investor day next Tuesday, so we expect to hear more then.

Longer term, we’re eager to hear how hi-def Web video — which is much more bandwidth-intensive than YouTube-like clips — will boost CDNs, and what Akamai has up its sleeve for peer-to-peer delivery, based on its Red Swoosh acquisition. The two could very easily play hand-in-hand.

Key Stats:

  • Revenue: $161 million, up 45% y/y
  • Operating income: $35.8 million, up 64% y/y
  • Net income: $24.3 million, up 74% y/y
  • Net EPS: 13 cents (diluted)

Conference call notes after the jump.

Conference Call Notes:

  • 4:38 Some seasonality, pickup in Sept.
  • 4:39 ARPU $20,600. No customer accounted for 10% of rev. or more.
  • 4:43 On track to meet high end of rev. guidance for year.
  • 4:44 Q4 Guidance: $172 million – $176 million revenue, normalized EPS 37 cents – 38 cents
  • 4:45 Expect to grow rev. and normalized EPS 25% – 30% in 2008. More detail to come on investor day, Oct. 30.
  • 4:47 CEO Paul Sagan says $1 billion rev likely by 2010, possibly 2009. (Let’s see if new competitors get in the way.)
  • 4:48 Pumping AAPL/SBUX deal for iTunes wi-fi store, which AKAM delivers
  • 4:49 Next big jump is HD online video. 12x more video resolution = lots more data to deliver!
  • 4:50 “HDWeb” partnership launching later this month.
  • 4:53 Q&A Begins. Conference bridge acting up. Sound familiar?
  • 4:45 Declining margins? Price declines continue. Nothing drastic. More volume = better scale.
  • 4:47 Our software rules!
  • 4:59 Too early to lay out full model for 2008 margins.
  • 5:00 No big changes in bandwidth costs. Buy a lot of bandwidth, have good relationships with network providers. Don’t pay for traffic in some cases.
  • 5:00 ARPU increase: roughly half increased volume, half customers buying added services.
  • 5:01 Sagan: Not even in “spring training” on HD over Internet. Lots of developments in next 6-12 months.
  • 5:03 Churn between 3% and 4%. Mostly smaller customers who churn out.
  • 5:05 Competition bundling transport with CDN (Level 3 offering). AKAM: “Not a new model!” “Doesn’t satisfy what customer really needs.”
  • 5:09 Growth rate has slowed. Still seeing “incredible” traffic growth rates, but not at rate at first inflection point of broadband in ’06, early ’07.
  • 5:12 Can customers build enough ad support to fund delivery? One of crucial chickens and eggs, says Sagan. Still pretty early. Rise in rich media ad serves. Still playing around for what model works. People still playing around with that. “Cautious” about user-generated and video sites with “questionable” models.
  • 5:15 A lot of business in commerce and enterprise markets: rich sites with video/audio, not just commercials.
  • 5:17 Too early to predict 2008 capex. Don’t see a tremendous uptick, especially in network equipment. Possibly facilities.
  • 5:19 Multi-sourcing CDN trend (using more than one CDN per site)? Don’t push for exclusive contracts very often.
  • 5:20 Peer-to-peer? No secret in interest for peer-to-peer client delivery (p2p). Purchased Red Swoosh earlier in year. While seems to be more hype about p2p than ever before, technologies have been around for “longer than Akamai” without much traction. Bad quality of service, ISPs hate it, connection to piracy, but optimistic that can marry p2p to CDN that raises bar on scale and cost. Most important: Bandwidth that people have at home isn’t symmetrical — can’t upload as much as download. Doesn’t scale. Seeya, Joost!
  • 5:32 Any wireless Web apps? We do a lot of wireless video already. People talk about Internet and wireless as if two markets. Truth: just one!
  • 5:33 Red Swoosh (p2p) involved in HD Web stuff? No comment!
  • 5:38 Projected guidance: Red Sox will win World Series in 4 to 7 games.