Akamai Serves Up a Surprise

The content-server colossus beat third-quarter expectations. Still, analysts remain dubious about its breakeven chances for 2002

Beleaguered Akamai Technologies (AKAM ) has finally handed the Street good news. For the third quarter, the content server company posted revenues of $42.8 million, a 57.4% increase over the same period in 2000, Akamai announced on Oct. 11. Excluding goodwill, amortization, and other expenses, the company's quarterly loss was $38.2 million, or 37 cents a share. That bettered analyst expectations of a loss of 40 cents to 49 cents per share.

The boost was due in part to September 11. Akamai benefited from a massive surge in Web traffic to big customers like MSNBC.com, CNN.com, and Yahoo.com after the terrorist attack. The company gets paid in proportion to traffic levels going to its worldwide network of content servers, which store chunks of Web sites closer to end users -- thus improving site performance. Akamai also made analysts happy by unveiling plans to cut 25% of its workforce, for a savings of $30 million annually.


  The strong report doesn't tell the whole story, however. The close-knit company lost its co-founder and chief technology officer, Daniel Lewin, who was on the American Airlines flight that hit the World Trade Center. Also, the market for content-distribution services is contracting as companies struggle to further cut costs, says Kevin Trosian, analyst with Banc of America Securities.

So while the third-quarter numbers were positive, Akamai might make less money in 2002 than this year, and profitability remains far away, says Trosian. The company expects fourth-quarter revenues of $34 million to $36 million. That's less than the $37.7 million to $44.1 million analysts had hoped for.

Akamai execs say the company will break even in the second quarter of 2002. But that's hard to believe, says Raimundo Archibold, analyst with J.P. Morgan Securities. Archibold and many other analysts expect Akamai to stop losing money in the first quarter of 2003. Some analysts are now wondering if it will need to seek a white knight or additional funding before it runs through its cash reserves.


  A one-time poster child for the dot-com infrastructure set, Akamai caught the market's eye with the idea of a galaxy of distributed servers powered by smart software that would bring content closer to users and dramatically improve site performance. With this idea, the company in October, 1999, raised $234 million in a rocket launch of an IPO that pushed shares up more than 400% in the first day of trading. Two years ago, its stock traded in the $50-a-share range, and it was still holding around $20 a share at the beginning of 2001. On the good news of Oct. 11, Akamai shares closed at $4.08, up 1.2%.

Today, Akamai has a network of 13,036 servers located in dozens of countries around the world. It's the largest content-caching network on the planet, boasting more than 1,333 customers over a wide range of businesses, including J.C. Penney and Apple.

That may not be enough, however. As of Sept. 30, Akamai had $239.6 million in cash and marketable securities on its books. If it spends $50 million a quarter -- a conservative estimate, assuming that Akamai slows down its network expansion -- the company could face a cash crunch in the coming year.


  Analysts say additional funding is unlikely, as the capital markets remain wary. And with its stock price down 92% from the 52-week high of $60.13, any type of share offering looks unlikely. Company President Paul Sagan says Akamai will break even in 2002 with no need for further capital.

Maybe so. But other companies such as Inktomi, CacheFlow, and Radiance Technologies are offering services similar to Akamai's, increasing the pressure. Meanwhile, new-customer acquisition in the sector has slowed to a crawl, says Ash Munshi, chairman and CEO at competitor Radiance Technologies.

Akamai faces another potential pitfall: Some clients might cut content-distribution from their budgets or ask for deep discounts, says Michael Hoch, analyst with tech consultancy Aberdeen Group. Unlike the big telcos that sell content-caching as part of a broader offering, "Akamai can't bundle [services]," says Seema Williams of tech consultancy Forrester Research.


  Akamai has bet its future on a new system that allows businesses to offer Web content without actually owning or renting any hardware or software. Dubbed EdgeSuite, the system lets companies generate and deliver multimedia content by constructing simple Web pages from component pieces. EdgeSuite customers account for 16.3% of the Akamai's quarterly revenues but bring in four times the revenues of customers using Akamai's older products, analysts say.

Still, some IT managers are reluctant to give up control of content distribution to Akamai, according to Archibold. As of Sept. 30, the company had 101 EdgeSuite customers, up from 75 in August. That's far less than the 50% of total sales Akamai would need from this offering in order to break even, according to Trosian.

Still, EdgeSuite has no rivals and provides considerable savings by eliminating hardware and personnel costs, says Adam Holiber of Wedbush Morgan Securities. Content distribution could prove a lucrative business with 30% profit margins. The sector will reach $5 billion in worldwide sales in 2005, up from $500 million this year, according to Cahners In-Stat. Besides, as military strikes in Afghanistan generate more news reports, that could bring more revenues to Akamai, analysts say.


  With its vast server network and comparatively depressed stock, Akamai could prove a tempting acquisition target for a company like AT&T. That, some analysts say, might actually shield the company from the markets and allow it to complete what, in the days before the dot-com boom, would have been a respectable five- to six-year trek to profitability.

At the moment, though, most analysts are keeping Akamai at arm's length. Says Brent Bracelin of Pacific Crest Securities: "Right now, I think we are...in a wait-and-see mode." That's not the optimum position for a hurry-up company like Akamai. But it might have to get used to that, at least for the next few quarters.

By Olga Kharif in New York

Edited by Alex Salkever

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