The Motley Fool has put AKAM as one of it rule breakers for the past year or so, and it's been very successful. HOWEVER, it's QUITE NOTEWORTHY that they pointedly mention growing competition from companies like INAP and others.
The cite AKAM CEO's discussion about how some customers are asking AKAM to work with them on pricing (read: profits being squeezed due to competition).
But one thing that AKAM doesn't provide is 100% guarantee on uptime and content delivery that INAP does.
Also, from the conference call, INAP has reserved, as I recall, 450,000 sq ft of space in data warehouse for their expansion. They are only currently using maybe 15% of that, so INAP is obviously expecting tremendous growth in the coming year or so. And it's quite possible that much of this growth is going to come at the expense of AKAM profit squeezing.
But make your own judgement.. Either way, this business sector is going to continue to grow as more demand is placed upon the IP infrastructure and businesses need to guarantee their content/data is not subject to disruption.
BTW, let's also not forget that AKAM has been making use of some very large tax losses incurred earlier, is boosting it's profit margins. Nothing wrong with this, but it skews the underlying strength of the business operation. It acts like a crutch that props up the stock price, while companies such as INAP have not used such means (but I'll have to research to see if INAP has the same kind of tax losses available to them).
This article discusses some of this, as well as mentioning the $40 Billion network services contract that is coming up for bid.
I have VERY LITTLE DOUBT that part of Deblasio's rationale for having such a large amount of data warehouse space reserved is in anticipation of being a participant in this contract. It's just too large a contract for any one network services company to do by themselves, so INAP will benefit.
bizjournals.com
And guess when this contract award is expected to be announced? This month..
gsa.gov
Schedule
The Networx Universal and Networx Enterprise Request for Proposals (RFPs) were released to industry on May 6, 2005. Industry responses to both the Networx Universal RFP and the Networx Enterprise RFP have been received and are currently being reviewed. Awards are anticipated in March 2007 for Networx Universal and in May 2007 for Networx Enterprise.
FOSE 2007 is March 20-22 here in DC.
fose.com
Hawk
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Fool on the Street: A More Aggressive Akamai
By Tim Beyers
March 12, 2007
After two years of constantly climbing the charts, shares of Web content delivery specialist and Rule Breakers pick Akamai Technologies (Nasdaq: AKAM) have slowed in the past six months.
That's normal. Still, the halt has some investors worried. They wonder if increased competition from the likes of Internap (Nasdaq: INAP), which recently said it expected 30% revenue growth this year, and Level 3 (Nasdaq: LVLT), which recently acquired Akamai competitor SAVVIS, would continue to hurt returns.
At least, that was the principal topic at hand when Chief Financial Officer J.D. Sherman spoke to analysts and investors at the Thomas Weisel Partners Internet and Digital Media Conference last Tuesday.
A broadband broadside
Sherman went right to work dispelling concerns by pointing out that broadband adoption, while improving, is still in its infancy globally. Statistics say he's right. Only 45% of American households, or 50 million, have broadband access now, according to Park Associates. Insight Research forecasts that number to grow to 88 million by 2011.
But to hear Sherman is to wonder if that projection is conservative. "I still believe that not only is broadband adoption going to continue to grow and the number of Internet users going to continue to grow, but the average connectivity of the end user is going to continue to increase," he told the audience.
If so, the thinking goes, fatter Web pipes will fuel further demand for streamed content and downloads from consumers who already can't seem to get enough of Apple's (Nasdaq: AAPL) iTunes and related services from Yahoo! (Nasdaq: YHOO) and RealNetworks (Nasdaq: RNWK). That, too, should benefit Akamai.
Software servicing Akamai
But it also may not be the biggest opportunity. Sherman told his audience that the increasing use of the Web as a business tool -- what's become known as software as a service, or SaaS -- has made its services for speeding the delivery of business data over the Web particularly attractive, citing hardware spending as evidence of the commitment to do more work online.
"You can see it in the way customers are spending their money on applications ... Gartner talks about a $1 billion-plus business today in appliances addressed at accelerating [Web-based business] applications, growing to $3 billion over the next few years. So, there's a pain point there," Sherman said.
He could have also referred to the success of growing firms that enable web-based business software, such as customer records specialist Salesforce.com (NYSE: CRM) or Web conferencing specialist WebEx (Nasdaq: WEBX). Regardless, Akamai today has 125 application acceleration customers.
Fighting the good fight
It's unique services like application acceleration that have long allowed Akamai to charge a premium and keep margins high. But lately, gross margin has been eroding in the face of pricing pressure from rivals. That's a concern for analysts and investors like me.
How does Sherman respond? He says that Akamai's vast network allows for operating leverage, so that even if it's become costlier to acquire new customers, it's extremely easy to earn more from existing clients.
The numbers also support this argument. Akamai's average revenue per user, or ARPU, increased 29% year-over-year in the fourth quarter alone. That could fall some as the customers of application acceleration specialist Netli, which was acquired last month, are moved to Akamai's network. (Netli's average ARPU before the deal was $10,000.)
But Sherman sees Akamai's ARPU growing or at least stabilizing long-term. "So really, what's driving our ARPU this year is just fundamentally growth in our existing customer base as they respond to what's going on in the Web, and as we respond to their needs by upselling them on features and functionality."
Still, upselling may not immediately lead to higher margins. The bigger goal, Sherman says, is to win -- and keep -- as many customers as possible.
"We're seeing larger, longer-term deals, and we're getting more aggressive on pricing to win those deals," Sherman said. "Customers come to us and say, 'I would really like to increase my business with you by four or five times, but I can't do it at these prices. I have to make this work economically for us.' And we say, 'Yes. We'd love to work with you on that.'"
Good idea, J.D. And I'm sure I speak for all shareholders when I say that we hope you continue with that.
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Fool contributor Tim Beyers, who is ranked 1,033 out of more than 24,000 in our Motley Fool CAPS investor-intelligence database, owns shares of Akamai. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. Yahoo! is a Stock Advisor pick. The Motley Fool's disclosure policy is a rebel on Wall Street.
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