Akamai Piles Up CDN Assets

Dec. 3.12 | About: Akamai Technologies, (AKAM)

Akamai Technologies (NASDAQ:AKAM) has decided to acquire Verivue for an undisclosed amount as it expands its cloud computing infrastructure solutions operations. Verivue is a Content Delivery Network (CDN) solutions provider with a strong client portfolio which includes Nokia Siemens and Ericsson. Akamai has been expanding its CDN operations through earlier acquisitions of Cotendo for $268 million in 2011 and FastSoft about earlier this fall. It competes directly in this sector with Limelight Networks (NASDAQ:LLNW) and Level 3 Communications (NASDAQ:LVLT). Akamai's Cloud Infrastructure Solutions segment contributed 58% to its total Q3 total revenues of $345.3 million. Both content delivery and cloud infrastructure solutions increased by 22% and 23% Y0Y.

Akamai has been facing intense competition in CDN services market which has put a downward pressure on prices. Although its quarterly operating income went up by 22.5% to $85.4 million operating margins have remained flat at 24.7%, implying a linear growth path. In our last look at Akamai, we noted the worry about margin erosion as competition in the CDN space was driving prices down. For Q3 Akamai saw net margins increase slightly over Q1 and Q2 , but they are still down drastically over previous years. Q4 will give us a better idea of whether this is the beginning of a trend or an anomaly.

Net Margins

 

Q1

Q2

Q3

2010

20.2%

15.7%

-

2011

18.3%

17.3%

23.1%

2012

13.5%

13.4%

13.9%

Click to enlarge

Meanwhile, like Akamai, Limelight also beat analysts' estimates by reporting a 6.3% increase in revenues to $45 million versus the expected $44.4 million but was hit hard by price competition. It failed to breakeven by reporting a net loss of $828 thousand, down from a profit of $5 million in the year-ago quarter. But, given Limelight's performance this past year it points to a turnaround, after booking more significant losses in the previous 3 quarters. The company however has taken the right step by focusing more on value-added-services operations that offers higher margin than CDN.

Similarly, Level 3 has been able to reduce its losses by 24% YoY to $166 million as revenues grew by 71% to $1.59 billion. Recently, Serco Group plc chose Level 3 for providing network services.

Cloud services market is exploding, ready to touch $177 billion in revenues in the next three years while total expenditure on public cloud services alone will touch $100 billion in the next four years. Moreover, this increase in demand is coming from all over the world. Akamai's North American revenues were up 23% but the international revenues have seen an even bigger rise, 30%. CEO Jeff Lunsford will be leaving his post from Jan-2013 while his company expects to earn up to $46.5 million revenues in Q4. But the move to the cloud has arrested their losses.

The global economic slowdown has forced many organizations to shift towards cost effective internet channels. The demand for cloud infrastructure, CDN solutions, online videos and mobile is rising but so is the competition. Network giants Verizon (NYSE:VZ) and AT&T (NYSE:T) are now also working on their own CDN networks. Interestingly, both Verizon and AT&T have been operating in the CDN market for more than a couple of years now and so far, they haven't been a serious threat to Akamai or even Limelight and Level 3. A survey carried out earlier this year at a network summit suggested that out of 408 firms spending more than $100,000 on video delivery, none were using wither Verizon or AT&T while out of 306 firms spending less than $100,000 a year, just 13 were with either Verizon or AT&T.

 

Akamai

Limelight

Level 3

Stock YTD

10.38%

-43.24%

8.58%

Beta

0.88

1.05

1.63

Market Cap ($Mil)

$6,323

$167

$4,020

P/E

33.14

N/A

N/A

EPS

1.08

-0.28

-2.86

ROA

8.1%

-8.4%

-5.3%

ROE

8.9%

-9.5%

-176%

Net Profit Margin (5 Yr. Avg)

17.1%

-22.2%

-17.5%

Click to enlarge

As evident from the table above, much bigger Akamai has clearly outperformed both Limelight and Level 3. The Cotendo acquisition and others have begun to impact Akamai's bottom line. We like these acquisitions as accretive and see the company as well-placed to continue delivering superior performance as the world transitions to the cloud.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.