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Akamai (NASDAQ:AKAM), which operates in the content delivery and value-added solutions business, recently reported its Q3 2010 earnings. Akamai makes money delivering web content for its customers and by providing value added service like dynamic site acceleration and advertising decision solutions. In this segment is competes with Level 3 (NYSE:LVLT), AT&T (NYSE:T) and Limelight (NASDAQ:LLNW).

The company is witnessing growth across all of its business verticals with the highest growth observed in the public sector. While revenues from the e-commerce and media verticals have registered growth of close to 20% [1] in the first 9 months of 2010 compared to same period last year, the public sector has registered a growth of over 32% [1]. This has been driven by an increase in revenue per customer as well as increased customer count.

While our price estimate of $31.11 is well below the market price, we believe there is upside to our forecasts in light of the structural tailwinds in its core business.

The majority of public sector business for Akamai comes from the US, and within the US, from the federal sector. Akamai’s customers include both G2C (government-to-consumer) agencies and military. However there is still plenty of growth for the company when it comes to the state sector. In its earnings transcript, Akamai noted that states have not really invested in improving process efficiency and this could be a future area of growth for Akamai’s web services [2].

Despite growth in the public sector vertical, we estimate that public sector (government & NGO) constitutes about only 4% to Akamai’s stock. This is because it has a significantly fewer number of customers when compared to other verticals like online shopping and media.

We estimate that Akamai will have close to 100 public sector customers by end of 2010, and we expect this figure to rise past 130 by end of our forecast period.

While the uptick in public sector growth is encouraging, we note that there is limited upside. If Akamai reported 200 customers by the end of 2010, the upside would be just under 2%


Notes:

  1. Calculated based on revenues reported in quarterly releases
  2. Taken from Akamai’s Q3 2010 earnings transcript

Disclosure: No positions

Source: Akamai Experiencing Growth in Public Sector Services