Akamai Can Fatten Up On Government Work

Underdeveloped opportunity in government

Akamai, which operates in the content delivery and value-added solutions business, recently reported its third-quarter 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, AT&T and Limelight.

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% ^[] in the first 9 months of 2010 compared to same period last year, the public sector has registered a growth of over 32% ^[]. 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 risk to our forecasts in light of the structural tailwinds in its core businesses.

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The majority of the public sector business for Akamai comes from the U.S., and within the U.S., 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 generally not invested in services to improve process efficiency and delivery creating an opportunity for Akamai. ^[]

Despite growth in the public sector vertical, we estimate that public sector (government & NGO) constitutes about 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 the end of 2010, and we expect this figure to exceed 130 by the end of our forecast period. While the uptick in public sector growth is encouraging, we note that there is limited upside. If Akamai gained 200 customers in this segment in the coming years , this implies about 2% upside to our estimates.

You can see the complete $31.11 Trefis price estimate for Akamai’s stock here.

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With AT&T And Others Breathing Down Its Neck, Akamai Will Be Lucky To Be A $30 Stock

Competition is heating up

In Akamai’s latest earnings report, we observed a pickup in capital expenditures related to the company building out its servers in anticipation of more business activity. However, as competitors such as AT&T, Level 3 Communications and Limelight enter the fray, we worry Akamai will have some competitive margin compression and, at the same time, continue with significant capital outlays to stay ahead of competition. This would result in a double-hit to Akamai cash flows and the $31 Trefis price estimate for Akamai’s stock.

If investment stays at current levels rather than decline as we estimate, this would take 10% off of our current estimates. Additionally, lower gross margins on its Online Shopping and Media Delivery from competition could subtract another 7%-10%.

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Potential Lower Pricing, Higher Spending Combo

We recently wrote that AT&T’s Cotendo deal signaled its intentions to offer services like dynamic site acceleration and application acceleration that Akamai has long dominated. These services consists of servers and software that help deliver content like videos and online transaction information faster to clients like ESPN, Hulu or Amazon.com.

Given AT&T’s scale in the enterprise market, it possesses the size to challenge Akamai on a larger scale, as this business grows and has existing relationships with many of Akamai’s customers. Newer entrants such as Limelight Networks and Level 3 Communications are targeting the booming area of online video.

For Akamai, we expect 2010 capital expenditures to be around 23% of gross profits, compared to only 15% for 2009 ^[]. These current investment levels (as % of gross profits) are notably higher then historical average witnessed in past five years as evidenced in the chart below.

Recent quarters have confirmed a broad based acceleration across its two main business, Media Content Delivery and Online Shopping Content Delivery, which combined make up about 45% of the company’s overall value. These two businesses carry high gross margins — 90% for Online Shopping Content Delivery and 75% for Media Content Delivery — which will inevitably fall in a more price competitive environment.

While we currently forecast these gross margins to remain largely stable, a 10 percentage point drop in margin for Shopping and 5 percentage point drop in Media equate to a 7% lower Trefis price estimate for Akamai’s stock.

While we have not factored this in to our price estimate yet, we recognize the combined higher spend, lower margin threat a large competitor like AT&T presents, which could spell problems for Akamai in the longer term.

You can see the complete $31.11 Trefis price estimate for Akamai’s stock here.

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Akamai Looks Like lunch AT & T, stock, valued at $28

Steps to competitiveness

Dan Rayburn reported in his blog, AT & T joins with Cotendo to push on value added services such as the acceleration of the application and the acceleration of the dynamics of the site.Company has already signed up to approximately 200 customers who use their services acceleration Cotendo is a network of distribution of content that was launched in 2009 and has developed acceleration .According technology blog.

The AT & T-Cotendo partnership may be serious competition in the long term for Akamai. below we discuss the potential impacts of the new partnership AT & T and Akamai.

AT & T provides value added more

Value-added services beyond traditional content delivery are a growing part of business Akamai.Le partnership Contendo-AT & T provides AT & T capacity to sell more value added services such as the acceleration of the application and acceleration of dynamic site customers existing business by taking advantage of Contendo technology.

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AT & T indicated that approximately 40-60% of all new customers in its sales pipeline have existing DNS capability or will a ^[].This implies that the company has significant sales opportunities already in the pipeline when it comes to value added services.

In addition, value added services may permit AT & T do share in the broader market can AT & T more to appeal to customers looking for such services.AT & T stated that it the price of its products at a discount of 50% for what is Akamai and maintain comfortable margins ^[] were more WINS for AT & T can contribute to society slow its declining revenues of the company.

Pressure on Akamai

Competitive prices in the value-added services will put pressure on Akamai lowering its prices or to limit increases in prix.En line shopping (e-commerce) segment accounts of Akamai during most of the use of the value added services.Concurrence higher value added services may affect the number of online stores customers Akamai as well as revenues from the Akamai customers shopping online.

Despite growing competition, we kept Trefis price estimation for stock of Akamai unchanged as we have already taken into account in the higher price competition in the future .Cependant, you change forecasts above to see engines main Akamai stock sensitivity as its customers purchase online and the amount of revenue that akamai generates on average each customer shopping online.

You can see Trefis $28 full price estimate stock the Akamai here.

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