Content Delivery heavyweight Akamai reports Q3 earnings today after the market close. The CDN market has been quite an interesting place this year, with literally dozens of upstarts raising money and building out competing products, lawsuits clouding the skies, P2P going in and out of fashion, and a half dozen network operators jockeying for pole position. Through it all, the only company that really matters from a revenue standpoint is Akamai which should ring the bell at over $750M in revenue from all its various CDN-related services this year. As much noise as we might hear from all those newer CDNs, or even from Limelight or Level 3, it is Akamai's report that will tell us the most about how the CDN business has fared through this ugly spell in the financial markets.
First, here's a quick table to summarize their numbers thus far and a basic estimate of what Q3 might look like:
So what should we look for? Some thoughts:
- Revenue trends: There can be no doubt that the industry is pushing more bits each month. But is Akamai getting the lion's share of the new ones? More competition surely means that Akamai's awesome revenue growth over the past few years will not continue, but that doesn't mean Akamai will stop growing. The question is, at what rate will they grow in this new, more dangerous environment?
- Margin stability: Pricing pressure is returning to the CDN space, in the short term perhaps driven by Limelight but it is really inevitable given the steady drumbeat of IP transit pricing declines. Akamai seems sure to stay at the high end of the market, using its brand and its top of the line services to bring top dollar. The question is, will top dollar also come down? Has it already? Akamai has enjoyed truly awesome margins for many years, the market expects them to fall but it isn't clear when that will happen. Probably not this quarter.
- Effects of the financial crisis: Does Akamai see any pullback in spending from credit-dependent content providers? Level 3 mentioned some in its Q3 report, but said it was balanced by increases from larger content providers. Anything Akamai tells us about the mood of their customers will be critical to watch.
What strikes me the most in poking around Akamai's numbers is its valuation. Anyone who follows this blog knows I have been obsessively watching fiber-based telecom valuations collapse, but I hadn't been watching Akamai's as closely. Is this company really trading at $13.89? That's not a misprint? Their 'normalized' EPS for 2008 should be something like $1.60, isn't that a P/E of under 9? Wow, nothing like a 75% haircut for the crime of possibly, one day long from now, seeing competition that might make a dent.
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