Akamai: Struggling with lumpy video traffic, competition

Akamai: Struggling with lumpy video traffic, competition

Summary: Akamai's first quarter results were strong, but the outlook was weaker than expected. At issue is Akamai's reliance on video streaming traffic, which is increasingly competitive as content delivery networks compete.

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Akamai's first quarter results were strong, but the outlook was weaker than expected. At issue is Akamai's reliance on video streaming traffic, which is increasingly competitive as content delivery networks compete.

The company reported first quarter earnings of $50.6 million, or 26 cents a share, on revenue of $276 million. Non-GAAP earnings were 38 cents a share. Wall Street was expecting earnings of 37 cents a share on revenue of $272 million.

For the second quarter, however, Akamai projected revenue between $270 million to $280 million, or 10 percent to 14 percent growth with non-GAAP earnings of 34 cents a share to 37 cents a share. Wall Street was looking for earnings of 38 cents a share on revenue of $280 million.

What's the problem? Analysts are worried about growth, pricing competition and the fact that 40 percent of Akamai's revenue depends on online video traffic. In other words, you get used to 20 percent or higher growth rates and the downshift to the mid-teens is a rough transition. Meanwhile, Akamai is seeing pricing pressure each quarter from the likes of Level 3, Limelight and others.

Shares got a 15 percent haircut Thursday.

Now Akamai is in a race to diversify its revenue stream with cloud security services, e-commerce and mobile applications. Akamai has also been forging enterprise partnerships with the likes of IBM.

Nevertheless, Akamai rides with media and entertainment video traffic, which is seasonal. JD Sherman, CFO of Akamai, said:

We are seeing a bit of a moderation in the rate of traffic growth, after very big growth numbers in 2010. And that is impacting the rate of growth of our volume business. And the verticals that are weighted towards those businesses -- media and entertainment and high-tech in particular -- we are seeing a bit slower growth now than we saw last year.

Part of that slower growth could be attributed to Netflix, which moved off Akamai to Level 3.

Paul Sagan, CEO of Akamai, said that the long-term trend for online video consumption is up, but that growth will be lumpy.

I think we are seeing normal growth, which still means there's more and more use of the Internet. We sort of see these cyclical accelerations for things that catalyze people to do more and businesses to do more. They are a little hard to predict, but we seem to be in this never-ending increase in the use of the Internet to deliver media content.

The amount of video over the Internet is becoming the majority of Internet traffic for a lot of carriers. I think the point that at least we've tried to make is that the majority -- the vast majority of video entertainment content in the home is still over traditional delivery method like cable or satellite. So we think that there is, at least from our perspective, a great deal of growth opportunity of IP video into the home, which today -- I haven't seen the latest numbers, but for a long time was just at that kind of even 1% number, almost trivial. And so we think there's a lot of opportunity for growth long term in that space.

Sagan added that online video is seasonal too. In other words, there will be growth, but it's going to be more of a stair step higher.

The Internet video business is pretty similar to, in many ways, television. You have lower audiences in the summer. You have new releases in libraries in the fall.

The advertising market is so driven by late Q3 and Q4, and that fuels a lot of the media because most of those businesses today still have an advertising or an exclusively advertising-driven component. That's the pattern that we've seen pretty much year-in, year-out, except when we got this huge inflection from really the recovery of the economy over a year ago.

Related: Netflix inks CDN deal with Level 3, confirms Akamai worries

Akamai loses appeal in Limelight patent scrum

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