Adding Up Akamai

Good news, Akamai (Nasdaq: AKAM  ) investors. The Web content-delivery king beat top- and bottom-line estimates in the third-quarter earnings it reported last night. As a result, its shares were up more than 6% in midday trading.

Anders Bylund's got all the numbers for you. I'm writing today because I think it's time we paused, took a deep breath, and looked at Akamai's long-term strategy for winning.

What Fools say
Most of you are bullish, especially our Rule Breakers subscribers and those of you following Akamai in our 120,000-strong Motley Fool CAPS community:

Metric

Akamai

CAPS stars (out of 5)

****

Total ratings

2,351

Bullish ratings

2,248

Percent bulls

95.6%

Bearish ratings

103

Percent bears

4.4%

Bullish pitches

356

Bearish pitches

16

Data current as of Oct. 31, 2008.

"Helps Internet companies optimize massive bandwidth usage," writes CAPS investor rfaramir. "Apple's (Nasdaq: AAPL  ) iTunes Music (and Video) Store is big customer, but only one among many who cannot do without Akamai."

That "many" includes Microsoft (Nasdaq: MSFT  ) , which this week expanded its partnership with Akamai to include a new video-delivery system based on Mr. Softy's Silverlight technology. Called "Smooth Streaming," the software senses and adapts to connectivity speed so that buffering isn't required. Akamai is also delivering HD video via iTunes.

Akamai detractor Internettech still isn't impressed:

Both Level 3 (Nasdaq: LVLT  ) and AT&T (NYSE: T  ) have recently deployed new working content management networks that are in place and will be getting customer wins happily with prices that are half of what Akamai charges. The difference is that they are both running global networks alongside the CDNs which Akamai does not. Moreover, they have deeper pockets to invest in the new faster, emerging hardware.

There's logic in that argument. When you own the backbone, you can drive costs out of the infrastructure and offer very cheap service. That certainly would kill Akamai -- if the company offered nothing more than content delivery.

What management says
Fortunately, that's not the case. Akamai also provides tools for clients hoping to earn more from their Web businesses. One such service, Application Acceleration, as Akamai calls it, speeds the delivery of corporate content -- say, a virtual private network -- via the cloud.

That seems like an appealing prospect for potential customers. Of the 83 net new customers that Akamai signed during the quarter, roughly half signed up for other services, such as Application Acceleration.

Longtime clients are also spending more. Average revenue per customer, or ARPU, rose 14% year over year to $23,500. Gross margin, meanwhile, remains well above what peers manage:

Company

Gross Margin

Akamai

71.3%

Level 3 Communications

57.8%

Limelight Networks

55.1%

Sources: Akamai earnings release, Capital IQ.

That substantial gulf suggests that Akamai's competitive advantage remains intact. But Akamai isn't satisfied with that gap. CEO Paul Sagan believes there's more his company can do to differentiate itself.

One more thing, specifically
That's why Akamai last week announced a plan to get into the advertising business. Not to compete with Google (Nasdaq: GOOG  ) or Yahoo!, but perhaps to partner.

Akamai, you see, delivers a substantial portion of the Web's traffic. Much of that content gets ads. To date, publishers have manually inserted transparent pixels on ad pages to track usage. Akamai, as a CDN, already tracks clicks and Web usage -- albeit anonymously -- thus eliminating the need for pixels. Instead, using the intelligence in Akamai's network, publishers will be able to make better decisions about which pitches to display, chief technology officer Mike Afergan told me in a recent interview.

Akamai has yet to roll out any products from its new Advertising Decision Solutions group. But, when it does, Sagan told analysts that the company would follow a client-friendly pricing model.

"We have been working very closely with a selective number of publishers and advertising networks to form partnerships. I can tell you there is a high degree of interest both on the publisher side and the advertiser side. We expect to get paid as our customers make more money from more efficient advertising," Sagan said. (Emphasis mine.)

So while Amazon.com (Nasdaq: AMZN  ) , AT&T, and others are pursuing pure content delivery, Akamai is using a bulging balance sheet and rich cash flows to create and acquire new services.

"Our position stands in sharp contrast to unprofitable and underfunded competitors, large and small," Sagan told analysts. "In past downturns, such firms have failed. We expect we will see a similar trend in this bear market."

Me, too. Add it up, Akamai.

Get your clicks with related Foolishness:

Fool contributor Tim Beyers and his Rule Breakers teammates recently returned from a tour of Silicon Valley, where they visited more than a dozen established and emerging innovators. Care to learn more? Just tell us where to send you our 100% free updates.

Tim owned shares of Akamai, Apple, and Google at the time of publication. He also had options positions in Apple and Google. Akamai and Google are Rule Breakers recommendations. Apple is a Stock Advisor selection. The Motley Fool's disclosure policy is faster than a speeding pixel.


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  • Report this Comment On July 21, 2009, at 4:18 PM, donnie0526 wrote:

    what dos the fool think now!

    L3? Haha... long way to go boyz.

    No body playing in that space yet but the big boyz in Cambridge.

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