Akamai: Weathering a price war; economic slowdown

Akamai, the leader in content delivery networks--services that speed up video and Web pages on the Internet, posted solid third quarter results, but cut the outlook for the fourth quarter. The economy was cited for the lower guidance but some analysts say that price competition may be more worrisome.

Competitors like Level 3 and Limelight are trying to grab market share at the expense of price. Piper Jaffray analyst Michael Olson calls the pricing "irrational," but reckons that Akamai will be under pressure for the next two or three quarters. That take could be optimistic. Content delivery networks (CDNs) are being commoditized and it won't be surprising if telecom players (Qwest, Verizon and AT&T) start bundling these services. On the bright side, Akamai would be a nice pickup for one of these larger players. In the meantime, Akamai is moving upstream to offer more advanced traffic management services. On a conference call, Akamai CEO Paul Sagan noted the aggressive pricing:

I wouldn't want to put an adjective on anybody else's pricing. That's their own decision about their own business, and whether it makes sense and whether it's sustainable, and whether it actually builds a sustainable business and shareholder value, that's up to them. The discipline we have is that we believe we have the lowest cost structure, the ability to make money while continuing to drive the cost down for our customers, and so we continue to do that, continue to look for ways to do that with our client.

Akamai reported a third quarter profit of $33.4 million, or 18 cents a share, on revenue of $197.3 million, up 22 percent from a year ago (statement). Excluding items, Akamai reported earnings of 40 cents a share, a penny ahead of Wall Street estimates.

As for the outlook, Akamai projected fourth quarter revenue of $202 million to $210 million compared to Wall Street estimates of $212 million.

There were plenty of positives for Akamai. It added 83 new customers, lowered its churn rate to 3 percent and showed some momentum in advanced services, which are a defense in a price war. Analysts were divided on whether the Akamai's quarter was mixed or upbeat.

Here's the take from Oppenheimer analyst Srinivas Anantha:

As expected, management further lowered '08 outlook, as tougher volume/pricing trends persist in M&E (media and entertainment), less bursting is expected in 4Q08 (lower e-commerce upside), and currency is a headwind. We take our '08 estimates incrementally lower. With respect to '09, management held off issuing guidance, which we believe is appropriate, but highlights low visibility.

The elephant in the room is the economy. Akamai CFO J. Donald Sherman said:

Moving into the fourth quarter it is clear that online advertising and consumer spending trends are softening while the strengthening dollar also creates a headwind for our international growth. In this environment, we think it is prudent to be cautious over the short-term about our revenue growth and particularly expectations for holiday bursting in Q4 from our commerce sector.

We also expect to see the short-term pressure on our media delivery and download solutions continue in this environment, but we believe that the scale of our network and our software-based architecture give us both a performance and a cost advantage that positions us very well. At the same time, we expect to see continued traction for our newer solutions.

While Akamai's quarter could be viewed as a sigh of relief the real tale will emerge in the first and second quarters of 2009. If rivals continue to be aggressive on price amid a down economy Akamai is likely to take a hit.