Faster, better, safer, cheaper. It’s an irresistible combination for businesses and government departments relying on the internet, and it’s now being offered by Akamai Technologies (AKAM). Akamai’s content delivery and cloud infrastructure services go way beyond the delivery of conventional website content. They include streaming media capabilities, private content delivery networks, internet-based applications delivery, software distribution capacity on a large scale, advertising and content targeting solutions, and superior security features.
Akamai recognizes that the internet is a convoluted system of networks never intended to deal with the size and complexity of the demands now placed on it, following the extraordinary increase in the number and types of devices used to access it. Its unplanned architecture creates congestion at data centers, inefficient connection points between ISPs, and traffic that exceeds the capacity of routing equipment. Meanwhile the widespread availability of broadband connections has led to an increase in video, music and gaming content. Internet users nevertheless expect all this to work seamlessly, and become frustrated when a web page fails to load properly. Potential business is lost, sometimes forever.
Enter Akamai. Its application and cloud performance services improve the ways in which enterprises connect with customers, suppliers and employees on the internet, without requiring clients to invest in expensive infrastructure. How? The content is delivered to them (in a process known as ‘mirroring’) by 100,000 Akamai servers in over 1,000 networks located around the US ($194 million in assets) and around the world ($99 million in assets).
Akamai’s web application accelerator service optimizes routing and connections, and provides dynamic caching and content compression. It is an ideal tool for businesses such as airline reservations, or any enterprise connecting with far-flung customers. The IP application accelerator is perfect for VoIP calling and email hosting. Akamai media delivery services allow customers to overcome restrictions like bandwidth limitations, with better handling of peak traffic and large file sizes. Mobile content can be transformed using a website optimization technique, helping businesses offer an improved service to users of mobile devices. These are only examples from a large array of Akamai tools to improve the internet experience, and new products are continually added as innovative ways of using the internet are developed.
Strategic acquisitions complement internal product development. In February 2012 Akamai completed its acquisition of frontend optimization provider Blaze Software, and in March it acquired cloud and mobile acceleration services company Cotendo. This latter acquisition will also have the effect of extending Akamai’s presence in Israel.
Akamai counts many large corporations among its customers, including Adobe (ADBE), Apple (AAPL), EMC (EMC), Home Depot (HD) and Microsoft (MSFT), as well as government agencies such as the Federal Emergency Management Agency, the US Air Force, the Census Bureau, the Department of Defense, the Food and Drug Administration and the Department of Labor. Sales are conducted by Akamai’s own sales team and by channel partners including IBM (IBM), Verizon (VZ) and Telefonica (TEF), as well as through system integrators and application service providers. The sales effort is supported by a wide-reaching marketing and advertising program.
There are of course other companies providing services to solve internet performance problems, deliver content (including streaming content), providing hosting services, and covering every other facet of Akamai’s business, sometimes offering less sophisticated products at lower prices. They may bundle their competing services with other products that Akamai cannot provide. Among Akamai’s competitors are Level 3 Communications (LVLT), Limelight Networks (LLNW) and privately-held Mirror Image Internet. Akamai management admits that its unit prices to some customers have declined as a result of increased competition.
Revenue for FY2011 totaled $1.16 million, a 13% increase on 2010. Sales to customers outside the US provided 29% of the total. Revenue has risen by more than 10% in each of the last four years, but 2011’s 13% increase was less than the 19% achieved in 2010. The growth slowdown was most noticeable in sales to customers in the media and entertainment industries. Operating income has also grown in each year since 2007, reaching $291 million in 2011. Net income was $201 million ($1.07 per diluted share). The company held $1.2 billion in cash and marketable securities at year end, having produced $453 million in cash from operations. Management describes a 17% increase in net income in 2011 as reflecting the success of its efforts to increase recurring revenues while effectively managing the expenses needed to support growth. Expenses such as R&D, Sales & Marketing and General & Administrative are remarkably stable as a percentage of revenues, year after year. Form 10-K 2011
It became clear during the Q4 2011 earnings call that although the full 2011 year presents a picture of slowing growth, the same cannot be said of the most recent quarter. Record revenue was achieved in Q4 2011, including the largest ever quarter-over-quarter revenue growth, said president and CEO Paul Sagan. Outgoing CFO J D Sherman commented on the significant increase in online shopping activity as one of the current revenue growth drivers, with the 2011 year-end holiday season being the best in the company’s history. Cloud infrastructure solutions now account for 55% of sales to high-tech enterprises. There was also accelerated growth in Europe (but this may be difficult to maintain given current economic conditions in the Eurozone). Q1 2012 will be impacted by the usual seasonal slowdown, and the company also expects a negative foreign exchange effect on the next quarter’s results. Company guidance puts Q1 revenues in the range $305-$313 million (11%-13% growth), with EPS between $0.36 and $0.39.
Akamai has demonstrated strong rather than dramatic growth in recent years, a testimony to its management’s disciplined approach to dealing with expansion while controlling costs. Although the company faces stiff competition which may erode its margins, its strategic acquisitions and product rollouts in expanding market areas seem likely to protect its revenue.