Content Delivery Network (CDN) service provider Akamai announced Q2 2016 financial results. Akamai does more than $2 billion in annual revenue with operations across multiple industry verticals and several technology segments. In its financial disclosures Akamai breaks out its revenue for Media Delivery Solutions (product category reporting) and for its Media Division (customer type reporting).
Media Delivery Solutions encompasses a broader use case than traditional media operations. Revenues associated with gaming, social media, software downloads, and other activities are reported in the Media Delivery Solutions category along with revenues related to the streaming of movies, television shows, and live events. In a similar way, the Media Division includes revenues separate from the streaming of movies and television, such as technology solutions for security or website acceleration.
To address investor concerns on exposure to “do-it-yourself” initiatives from large customers, Akamai has started disclosing the revenue contribution of six large internet platform customers – Amazon, Apple, Facebook, Google, Microsoft, and Netflix. In aggregate these six customers represented less than 11% of Akamai’s total revenue in Q2 2016, down from 18% in Q2 2015. During the quarter’s earnings call, Akamai’s CFO’s Jim Benson indicated the six customers are predominantly classified as media customers. Because of this, the revenue declines associated with “do-it-yourself” initiatives from these six internet platform customers has negatively impacted Akamai’s results in both Media reporting segments.
Media Delivery Solutions Category
Akamai’s Media Delivery Solutions category generated $197 million in revenue, a 9% year-over-year decline against Q2 2015 and a decline of 4% against the previous quarter, Q1 2016. On a constant currency basis, the Media Delivery Solutions category was down 10% when compared to last year’s second quarter.
Management attributed the revenue declines to lower traffic from one of its largest customers. Outside of Akamai’s business with the six large internet platforms, Media Delivery Solutions revenue grew 11% in the quarter versus the year prior.
As a percentage of Akamai’s total revenue, Media Delivery Solutions represented 34% during the quarter. This compares to 45% of total revenue in Q2 2015.
The Media Division had $288 million of revenue in the quarter, a decrease of 2% versus Q2 2015 and a decline of 1.2% against the preceding quarter. Again, the decline was attributable to lower revenue from the six large internet platform customers. Excluding activity from these six customers, Akamai’s Media Division grew 14% year-over-year.
During the quarter, the Media Division accounted for 50.4% of Akamai’s total revenue. For the year-earlier quarter, the Media Division contributed 54.5% of Akamai’s sales.
In his prepared remarks on the Company’s earnings call, Akamai’s CEO Dr. Tom Leighton highlighted the strength of Akamai’s OTT business within the media division. “…our OTT business has continued to grow at a rapid rate, following the record breaking results of the Super Bowl and March Madness in Q1, Akamai delivered a very successful EURO 2016. In addition to providing very high video quality in countries throughout Europe and North America, we set a new record for internet traffic for a single sporting event, during the final round match between Portugal and France” said Dr. Leighton.
Commentary on Media Vertical Results
The negative growth rates for its Media Delivery Solutions and Media Division were anticipated by Akamai’s management team. Akamai experienced a moderating of growth in its Media Division segment during 2015 because of “do-it-yourself” initiatives, in particular at two of Akamai’s largest media customers (included in the six large internet platforms). These two large customers accounted for 5% of Akamai’s total revenue in Q2 2016, down from 12% of the Company’s revenue in Q2 2015. This continues a broader trend of Akamai’s Media Division (customer category) experiencing a declining growth rate in each of the last 10 quarters.
In responding to a question from Ganjit Sing of Morgan Stanley on growth rates related to over-the-top video (OTT) distribution, Mr. Benson offered commentary on OTT’s relative revenue contribution to Akamai’s Media Division.
“…it’s not a huge contributor to revenue in the near term. It just isn’t. What we’re seeing is steady growth in that customer base in the traffic. Steady growth in revenue. You have not seen a step function move to viewing content via those platforms. They are growing steadily. They’re growing nicely, but there has not been a catalyst yet to see a huge movement of people cutting the cord and moving online. So I think they will be a steady grower, but today the larger contributors to revenue and the media business are still software download customers, gaming, and social media.”
Later in the call, Dr. Leighton added further context on the video business when responding to a question about the nature of tasks insourced by large media customers. Dr. Leighton stated, “…The insourcing of traffic is mostly around files where quality matters less and it’s easier to do…On the other side of the house, as we talked about, our OTT business is growing very well, much faster than the media business as a whole. And that’s because it’s more difficult to do with a high quality level, especially live and linear. And people are often paying to watch it, and so you really want to have a good experience there”
Successful Litigation Resolution
Separate to the earnings announcement, Akamai benefited from a final judgement in a long-standing legal case. The day after the second quarter ended, July 1, 2016, Akamai received a $51 million judgement in its favor regarding a decade old patent dispute with Limelight. The U.S. District Court in Massachusetts entered the final judgement after a series of appeals stemming from original damages awarded to Akamai in a 2008 jury ruling against Limelight. The appeals process even reached the U.S. Supreme court in 2014.
Press Release: Q2 2016 Earnings Results
Press Release: $50 million dollar judgement in Akamai’s favor
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