This is a guest post by Paolo Gorgò, who blogs over at Nortia Research [1]. Anyone else who might be interested in a guest post may contact the webmaster [2].
As Rob noticed in his previous article, “Another sequential decline at Akamai” [3], the company reported both revenues and EPS down from 1Q 2009, for the second time in a row:
[4]
(spreadsheets by Gridstone Research [5])
Quite a shock for one of the big growth stories in the industry for the last few years – the stock has suffered, consequently, losing about 20% after earning to rebound due to some strong management buy activity – see “Akamai Execs’ $4.3 Million Buy [6]”.
The CDN landscape has become more and competitive, with several new players, both Pure-play or Telco adding this offering to their portfolio, as Dan Rayburn summarized in this post. [7]
It would be interesting to try understand how much of Akamai’s performance is due to increased competition, or if the economic climate has been the main (negative) factor hurting the Company.
A closer look at a few, selected data. Margins (although very healthy) are declining, as if increased competition was forcing akam to sacrifice price to keep volume/customers:
[8]
Comments by lvlt, during their recent conference call (see Seeking Alpha transcripts [9]) might suggest that price competition is getting stronger in the sector:
- Jeff Storey – President and COO of Level 3
Pricing pressure for IP and CDN services also negatively affected the Content Markets group.
- Jim Crowe – CEO of Level 3
We have seen some additional pricing pressure, I think from fair play CDN providers who might be trying to hold on to market share. But we think in the longer term, what we have said repeatedly is what we’ll continue to say is going to become a large object, going to become a carrier business, going to become the bread and butter of providing IP and other forms of IP optical services to a broad range of the market
For what it might be worth, inap yesterday also reported gross margins declining from 66.1% (2Q 2008) to 47.7% for their CDN vertical.
DSO (Days sales outstanding) is higher, as you might expect in a difficult economic environment:
[10]
The Company has increased the number of servers deployed around the world, as well as the number of employees (headcount: 1,471 in 2Q 2008, 1,645 in 2Q 2009) – you can read this positively as the behavior a Company preparing to stand the needs of a rebounding market or negatively as a sector where you need to deploy more CAPEX to get the same numbers, due to price declines per unit:
[11]
Customers have also increased, which on the other hand means that ARPU is declining:
[12]
The Company is blaming churn (i.e. the economic environment, mainly) for most if its negative performance (see Akamai conference call transcripts at Seeking Alpha [13]):
- J.D. Sherman – CFO of Akamai
In addition, we again saw churn at above 5% in the quarter as compared to the 3% to 4% rates we saw in most of 2008. Churn continued to come primarily from smaller customers, and most losses were from clients who cut back our Internet initiatives or went out of business.
- Paul Sagan – CEO of Akamai
In some sense, we saw a higher churn in Q1, and it was a bit of a guess about how long that continued, and sometimes seeing it continue at that level in Q2 was even a bit of a surprise. We tend to have churn in the 3% to 4% range. So, seeing it above 5% for a couple of quarters is a bit higher than we would expect. You can never be precise in terms of how you analyze your churn, but based on our analysis, only a very small portion of it do we actually see customers finding an alternate supplier and usually that’s because of cost and usually that’s because of economic conditions as well. So I think what happens is that – and we’ve seen this in past cycles as well. You see a lot of churn because a lot of the economic pressure happens on the smaller customers that are either getting it consolidated going out of business or pulling back. And in terms of when – how that trend tends to moderate, a lot will depend on sort of the overall economic environment.
With Akamai’s main competitor, llnw, reporting tonight, we might get more information about the market, hoping to get further answers to our initial question: is Akamai just blaming the economy or losing ground to competition?