Thursday, February 5, 2009

Akamai Accelerates Delivery

Akamai (AKAK) investors were presently surprised by 4th quarter results released Wednesday. Starting after hours and continuing into Thursday new money poured into the stock, thrusting the price up. I own Akamai stock, but I looked at it for years before purchasing it. If you want some deep background on Akamai, go to my Akamai analyst conferences summaries page, which includes links to my articles on what Akamai does, how they do it, and how the profits are generated.

Fourth quarter 2008 results were not even spectacular by Akamai standards. Revenue was $212.6 million, up 8% sequentially from $197.3 million and up 16% from $183.2 million year-earlier. In past years revenues have grown faster. But this is in sharp contrast to 95% of the technology companies reports on the December quarter. During 2008 everyone said their company gave such great ROI (return on investment) that they would continue to see growth through a recession. Most did until Q2. Many did in Q3. But in Q4 almost every company saw a significant downturn. Even mighty Cisco reported falling revenues yesterday.

Akamai profits were good by any measure. Using the most conservative measure, GAAP net income was $40.5 million. But cash from operations was $92 million and the ending balance for cash and equivalents was $772 million.

Akamai has been periodically raided on rumors that competitors were going to steal its thunder. I don't want to underestimate the role of competition in technology. Akamai has a profitable model, and big companies with lagging sales will eye those profits and try to capture them, and startups will eye them. But so far Akamai has had a significant technological advantage over its competitors. Its systems work well. No competitor has introduced as capable of a system, so they have to compete on pricing. When they win an occasional deal, they often lose money or just break even. Meanwhile Akamai generates cash and uses that cash to see that its technology is the best. They have also added what Cisco likes to call "adjacent" technologies. Akamai calls them value-added technologies. When Akamai has a contract for its basic service - speeding up the delivery of Internet content - it is in a good position to offer higher margin, more specialized services as well.

Guidance is for flat to down revenues in the first quarter of 2009, but that is a typical seasonal effect from the post-holiday drop in e-commerce. The Web is still in explosive growth mode, with video downloads becoming prevalent, soaking up bandwidth. Akamai's fortunes are carried along by that explosive growth.

I think Cicso CEO John Chambers is right in believing that Internet traffic is not going to slow down; just the opposite. So ISPs and carriers are going to have no choice but to lay more wire and install higher capacity routers. They delayed doing that in the December quarter, they might delay capital expenditures in the March 2009 quarter, but they are just getting behind the curve and will have to make up for it at some point.

In the meantime Akamai is not dependent on major capital expenditures by its customers. There are a lot of customers, and Akamai services are a relatively small recurring part of their Web delivery budgets.

There have been times when, by my analysis, Akamai stock has been overpriced, but now is not one of those times, even with today's pop.

Don't forget the risk even for good companies, and

Keep diversified.

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