By David Gross
Limelight reported revenue of $49 million, an increase of over 50% y/y including revenue from its Delve Networks acquisition. However, the company dropped the guidance midpoint for next quarter from $53.2 million to $52.5 million, or about 1.4%, and the stock fell nearly 7%, for an expectations multiple of 5.
While Wall Street overreacted to the news, this company is not that far from having some liquidity issues. It has $71 million in the bank, with no l-t debt besides a small amount of capital leases. However, it is burning about $10 million a quarter, and will need to break-even on an actual, not adjusted EBITDA, basis in order to keep funding its capital plan without borrowing. Moreover, its bandwidth costs remain over 30% of revenue, while rival Akamai's are just 16%. This is a serious cost disadvantage that the company has done little to address, and will be even more challenged to tackle if it has to cut capex to conserve cash.
While there has been some improvement in margins with growth, SG&As + R&D still add up to over 50% of revenue, compared to the low 40s for Akamai. This is a big problem when Gross Margins are still in the 40s, while Akamai's in the high 60s. While it's great to hear about all the exciting growth initiatives from mobile to enterprise storage, the company has a lot of boring expense reduction it still needs to complete in order to chip away at Akamai's cost advantage.
Showing posts with label CDNs. Show all posts
Showing posts with label CDNs. Show all posts
Monday, November 8, 2010
Monday, August 16, 2010
Akamai Insiders Have Bought Nearly 88,000 Shares This Month
I've made the point in a few recent articles that Wall Street and many industry observers are overestimating the threat that Level 3 and Limelight pose to Akamai (AKAM), just as they overestimated Cisco, AOL, and Inktomi's threats to the company then years ago.
CDNs require large support organizations dedicated to the service, which makes it challenging to simply bundle them with bandwidth. This is why after all these years, Verizon is still reselling Akamai, not competing against it, and why the top two providers of this now decade+ old service are not telcos. Moreover, in Akamai's case, its bandwidth costs are just 16% of revenue, compared to 33% for Limelight (LLNW), a figure that is not declining significantly.
Insiders at Akamai have endorsed this view, and bought over 87,950 shares since the post-earnings call sell-off. The biggest purchase came last Wednesday from Director Peter Kight, who bought 47,950 shares at $41.70, CEO Paul Sagan bought 15,000 shares a week ago Wednesday, and Director David Kenny bought 25,000 shares at $38.78 on August 4th.
While AKAM is not cheap, the market continues to overestimate its competitors' strength, and the insiders are buying on the dips.
CDNs require large support organizations dedicated to the service, which makes it challenging to simply bundle them with bandwidth. This is why after all these years, Verizon is still reselling Akamai, not competing against it, and why the top two providers of this now decade+ old service are not telcos. Moreover, in Akamai's case, its bandwidth costs are just 16% of revenue, compared to 33% for Limelight (LLNW), a figure that is not declining significantly.
Insiders at Akamai have endorsed this view, and bought over 87,950 shares since the post-earnings call sell-off. The biggest purchase came last Wednesday from Director Peter Kight, who bought 47,950 shares at $41.70, CEO Paul Sagan bought 15,000 shares a week ago Wednesday, and Director David Kenny bought 25,000 shares at $38.78 on August 4th.
While AKAM is not cheap, the market continues to overestimate its competitors' strength, and the insiders are buying on the dips.
Tuesday, July 6, 2010
Equinix, F5, and Akamai - Growing More by Doing Less
by David Gross
I wrote last week that data center revenue continues to grow in spite of the economy. In particular, three companies from different segments of the data center market, Equinix (EQIX), F5 (FFIV), and Akamai (AKAM), have increased their top line over the last 12 months. However, in years past, I remember hearing how they were going to go away.
Equinix has grown 24% year-over-year as its data centers continue to fill up, and its lease rates continue to rise. But I remember in 2000 hearing how Equinix was not going to stick around a long time, because hosting leaders like Exodus, in addition to the telcos, would put it out of business, and that its service line was too thin. Ten years later, Exodus and many of the ISPs who were supposed to put Equinix out of business are now out of business themselves.
The benefits of a tight product focus have extended to the network equipment market, where Cisco (CSCO) did not have a strong presence in layer 4-7 switching market until it bought Arrowpoint at the top of the market in 2000. And I remember in 2000, the load balancer everyone raved about was not Arrowpoint's, or even F5's BIG-IP , but Foundry's ServerIron. The challenge for the ServerIron was not performance, customer acceptance, or market share, but its parent company's focus on the much larger Ethernet switch market. Today, F5 has twice the market cap of the merged Brocade (BRCD) and Foundry company.
As with F5, economic conditions did not prevent Akamai from reporting year-over-year growth of 12% last quarter. But the last recession did not go too well for the content distribution network provider. It lost its founder in the 9/11 attacks. In 2002, its revenue declined, and it posted an operating margin of minus 141%, which led Wall Street to classify it as another low margin telecom transport provider. The consensus thinking was the CDN market was too small to be important, and if it ever got big, a large carrier would come in and take it over. Yet as it recovered in the mid-2000s, Akamai wisely avoided any temptation to over-diversify. Eight years since bottoming out, the company has grown its top line sixfold, and is on the verge of crossing $1 billion in sales. However, much of its financial strength is not reflected in its income statement, but its balance sheet, where unlike virtually every telco, it has very little long-term debt.
Akamai's primary telco competitor is Level 3 (LVLT), which got into the CDN market by buying Savvis' (SVVS) old business, which got into the CDN market itself by acquiring the American assets of my former employer, Cable & Wireless, which got into CDNs by acquiring Digital Island. Level 3 has had some big wins recently, including mlb.com, but in addition to having to support a wide range of telecom services, it is weighed down by a significant debt load.
It is very easy to cave in to Wall Street pressure to boost top line numbers by making questionable R&D choices, or by entering a market where there is little chance of ever being the number one or two supplier. This pressure is often greatest when multiples are high, and executives start scrambling to justify a growing market cap. But by refusing to go on wild revenue chases when times were good, these three companies have increased sales when times have been bad.
I wrote last week that data center revenue continues to grow in spite of the economy. In particular, three companies from different segments of the data center market, Equinix (EQIX), F5 (FFIV), and Akamai (AKAM), have increased their top line over the last 12 months. However, in years past, I remember hearing how they were going to go away.
Equinix has grown 24% year-over-year as its data centers continue to fill up, and its lease rates continue to rise. But I remember in 2000 hearing how Equinix was not going to stick around a long time, because hosting leaders like Exodus, in addition to the telcos, would put it out of business, and that its service line was too thin. Ten years later, Exodus and many of the ISPs who were supposed to put Equinix out of business are now out of business themselves.
The benefits of a tight product focus have extended to the network equipment market, where Cisco (CSCO) did not have a strong presence in layer 4-7 switching market until it bought Arrowpoint at the top of the market in 2000. And I remember in 2000, the load balancer everyone raved about was not Arrowpoint's, or even F5's BIG-IP , but Foundry's ServerIron. The challenge for the ServerIron was not performance, customer acceptance, or market share, but its parent company's focus on the much larger Ethernet switch market. Today, F5 has twice the market cap of the merged Brocade (BRCD) and Foundry company.
As with F5, economic conditions did not prevent Akamai from reporting year-over-year growth of 12% last quarter. But the last recession did not go too well for the content distribution network provider. It lost its founder in the 9/11 attacks. In 2002, its revenue declined, and it posted an operating margin of minus 141%, which led Wall Street to classify it as another low margin telecom transport provider. The consensus thinking was the CDN market was too small to be important, and if it ever got big, a large carrier would come in and take it over. Yet as it recovered in the mid-2000s, Akamai wisely avoided any temptation to over-diversify. Eight years since bottoming out, the company has grown its top line sixfold, and is on the verge of crossing $1 billion in sales. However, much of its financial strength is not reflected in its income statement, but its balance sheet, where unlike virtually every telco, it has very little long-term debt.
Akamai's primary telco competitor is Level 3 (LVLT), which got into the CDN market by buying Savvis' (SVVS) old business, which got into the CDN market itself by acquiring the American assets of my former employer, Cable & Wireless, which got into CDNs by acquiring Digital Island. Level 3 has had some big wins recently, including mlb.com, but in addition to having to support a wide range of telecom services, it is weighed down by a significant debt load.
It is very easy to cave in to Wall Street pressure to boost top line numbers by making questionable R&D choices, or by entering a market where there is little chance of ever being the number one or two supplier. This pressure is often greatest when multiples are high, and executives start scrambling to justify a growing market cap. But by refusing to go on wild revenue chases when times were good, these three companies have increased sales when times have been bad.
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