Akamai: Broadband Consumption Clouds Outlook

Akamai (AKAM) said Wednesday that broadband speeds may have as big of an impact on its financial results as the slowing economy.

Akamai, which makes software that caches content to speed up Internet traffic, reported net income of $34.3 million, or 19 cents a share. Excluding items the company reported earnings of $76.5 million, or 41 cents a share, to match Wall Street estimates. Revenue for the quarter was $194 million, up 27 percent a year ago.

But the big news was Akamai’s outlook (statement), which indicated that the company would land on the low end of its earnings and revenue target. The company said it expects 2008 revenue to be at the low end of its $785 million to $800 million range. Earnings will also fall at the low end or below the previous 2008 outlook calling for earnings of $1.63 a share to $1.69 a share. The third quarter will also be seasonally slow with revenue between $193 million or $198 million with earnings between 39 cents a share and 40 cents a share.

CEO Paul Sagan cited a “challenging environment” in the company’s statement, but there are also worries about the amount of content that U.S. users can realistically consume. Sagan noted that Internet traffic wasn’t slowing, but growth rates are being affected by broadband speeds. Sagan’s message: Unless broadband speeds perk up the ability of consumers to watch content (the type that Akamai delivers) will see slower growth. Sagan would like to see the day where you can get high-def video over IP.

Sagan said:

We shouldn’t mix up economic factors and traffic. The consumption issue is how much can people consume. (Consumpution) can’t grow if broadband doesn’t increase.

Needless to say those comments didn’t go over too well as Akamai shares fell about 17 percent afterhours. Indeed, Akamai’s comments about U.S. broadband speeds are more worrisome than the economy. It’s safe to say that the economy will come back faster than broadband speeds jump in the U.S.

Sagan added that Web content consumption isn’t falling off of a cliff, but there are slower broadband speeds in the U.S. that will hamper growth rates. Internationally, the broadband speed issue isn’t as much of a factor.

That thread was notable since Sagan still has some economic issues to confront. Akamai’s tools speed up Web advertising and some verticals–automotive and media–are slowing spending.

“The economic issue is in verticals we sell into where there is a strong slowdown. There’s not one single event there, but we’re conservative about the second half,” said Sagan.

Comments

[Dan Rayburn:]

I don't buy the broadband speed excuse. The average broadband speed in the U.S. is 3MB, which is plenty to be able to watch a 500Kbps video, which is about what the average content is encoded at. Faster broadband does not equate into more consumption.

2008 Jul 30 10:20 PM

[Jase:]

Dan, you're on crack. 3MB is absolutely atrocious; it's a crying shame that the US, who developed the IP protocol in the first place, now struggles to catch up to world averages. Consumers in Japan don't blink when they are offered 100MB. The UK does trials of gigabit to the home. Faster broadband *does* equate to more consumption--the experiences are richer, but the broadband simply doesn't exist in the US so many content experiences are purchased by consumers in different formats. Every film watched via Netflix should have been delivered via broadband. Movies are data. Every video game DVD sold should have been delivered via broadband. Video games are data. SaaS solutions are the way of the future; if they can solve the latency issue by pushing the edge servers closer to consumers, then Google is going to dominate the application delivery space. There are no excuses for vast local storage either--platter densities are increasing at a blistering pace, solid state storage costs are plummeting, and the $/GB ratio will continue to drop at such a speed that $/TB will soon become the new metric. Akamai is extremely well poised to capture this grow, when it comes. The key is a new once-and-for-all infrastructure upgrade (802.16 will handle some of this, but hard-wired and optical to the home really are the best solutions in order to be future-proof) that sets the stage for trillions of dollars of content value to be unlocked. In the short to medium term, Akamai's stock price will be a dog. That said, and as odd as it sounds, they will someday take out the $345/share high that they made back in the tech boom. We're unlikely to see that occur until after 2012, but that's another story altogether.

2008 Jul 31 12:11 AM

[Swiss_Buffett:]

There is only so much you can do/"consume" when you're on the Internet. Useage even with the "broadest band" will level off eventually in more mature markets. You are not going to watch 3 streaming videos on demand simultaneously even if you could... Maybe the big goldrush is over for AKAM?

2008 Jul 31 10:46 AM

[Earl:]

Akamai has On2 codec VP6 that delivers HD on slow computers not needing the high broadband speeds.

Why aren't they utilizing it?

I don't buy the broadband speed excuse either.

2008 Jul 31 10:55 AM

[Scott Berry:]

I buy the broadband argument for streaming (particularly live events), but not download. "Average 3 Mb/s" doesn't begin to describe what average surfers see during peak times or when many are watching the same live event.

Last mile pipes in the U.S. are typically so oversubscribed that performance suffers measurably at just the times many want to watch video.

Which is not to say Sagan isn't blowing smoke to cover up a reduced outlook, but at least the story is fairly believable.

2008 Aug 01 04:56 PM