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  • Akamai is in the content distribution market, it specializes in providing customers’ data to users all around the world. This market can be broken down into four smaller categories: small object delivery, application acceleration, electronic software download, and media delivery. Although most firms only specialize in small object delivery or media delivery, Akamai offers all four services, giving it an edge over competitors who cannot satisfy the more sophisticated needs that customers such as Apple or the Department of Defense may have.Akamai has traditionally been the dominant firm of the CDN market, but in recent years, a large number of start-up firms have entered the market with hopes of directly competing with the CDN behemoth. Because of this, the CDN industry has gone from a monopoly in 1998, in which Akamai was the only firm, to an oligopoly, in which Akamai must now compete. Although Akamai has long been regarded as the most reliable and most secure CDN company, many rivals such as Level 3 and Limelight have taken advantage of Akamai’s premium pricing to gain market share. For example, Akamai has recently lost one of its most important customers, Netflix, to Limelight because of its pricing. Bringing in $15M a year to its CDN provider, Netflix is a customer that no CDN firm, not even Akamai, can disregard. Because of such competition, Akamai has seen its market share dwindle below 70% to the benefit of rivals such as Limelight, Level 3, and CDNetworks.
  • As a result of increased competition, Akamai has decided to aggressively change its corporate strategy from one of dominant firm to one of intense competitor. It has recently forgone it’s longstanding premium and has re-priced 75% of its contracts in order to retain its customers and attract new ones. This reflects how Akamai is now facing an oligopolistic market structure in which competitors are dependent on each other’s pricing decisions. Indeed, Akamai can longer enforce a price premium while also protecting its market share. Because oligopolists tend not to engage in price wars, their best option is to gain an edge over competitors by offering new products and increasing awareness. However, CDN firms rarely use conventional advertisement to promote brand awareness. As a result, Akamai must begin differentiating its products from those of competitors. This is perfectly exemplified in Akamai’s recent decision to launch new products, such as Electronic Software Delivery for Games, that competitors have yet to develop. This allows Akamai to still keep an edge over competitors while it figures out a way to protect and develop its market share as new rivals enter the market and offer close substitute products.
  • As a result of increased competition, Akamai has decided to aggressively change its corporate strategy from one of dominant firm to one of intense competitor. It has recently forgone it’s longstanding premium and has re-priced 75% of its contracts in order to retain its customers and attract new ones. This reflects how Akamai is now facing an oligopolistic market structure in which competitors are dependent on each other’s pricing decisions. Indeed, Akamai can longer enforce a price premium while also protecting its market share. Because oligopolists tend not to engage in price wars, their best option is to gain an edge over competitors by offering new products and increasing awareness. However, CDN firms rarely use advertisement to promote brand awareness. As a result, Akamai must begin differentiating its products from those of competitors. This is perfectly exemplified in Akamai’s recent decision to launch new products, such as Electronic Software Delivery for Games, that competitors have yet to develop. This allows Akamai to still keep an edge over competitors while it figures out a way to protect and develop its market share as new rivals enter the market and offer close substitute products.
  • Hi everyone, I’m Ross and I’m here to breakdown the financials of Akamai and tell you what they mean for the company. As you all should know, corporate finance is all about increasing shareholder value. On that note, I thought it would be appropriate to include the growth of their stock. This segment is from the lowest point of their stock, just under $10, since the tech bubble in the early 2000’s when they dropped to less than $1. After being hit by the financial crisis and the recession, you can see that the stock has rebounded in under a year. Keep that in mind as we delve deeper into the financials. COMPETITORS!
  • Here is our DuPont analysis for Akamai. We’ll address each of these factors in this presentation. To be brief, let me just point out that the profit margin has been decreasing, the equity multiplier has been decreasing, while the TAT marginally increased. This explains the decrease overall in ROE. First, we’re going to talk about profit margin.
  • Take a look at 2005, this is important for the end of the presentation. It seems like we did the graph incorrectly, but I assure you it’s correct. What happened in 2005 was that they has a revenue of 283.1 with an EBTaxes of 70mil. However, they exercised 257 million of NOL tax credits, resulting in a profit margin of 115%.What we’re seeing here in the graph is that revenue has had strong growth over the 5 year timeframe. Even in the midst of the financial crisis, from 2008-2009, revenue was able to grow by 8%. Akamai was able to manage this because of a huge market share, as Micro has already pointed out in their presentation, combined with strong financials, and a growth strategy that we’ll explain later. One problem area for Akamai in 2008-2009 was that their profit margin growth dropped from 18.35% to 16.97%. This is a pretty substantial one year drop, and by itself, looks dangerous. However, we’re going to dig a little deeper. The financial reason their PM dropped was because revenue increased by 8.7% where as pm growth was only .5%. This led to an overall lower PM for the year. After some analysis, we initially concluded that it was because of a lack of cost control. Once we did some more research and analysis, we found that it’s really because Akamai is increasing their investment in their 4 p’s to help combat some of the issues in the competitive environment. To put some weight behind this claim, let’s take a look at their SG&A expenses.
  • Since we’re taking a look at costs control, we wanted to go ahead and move past the COGS. Their COGS remained relatively constant and in 2009 gross margin as a percentage of revenue actually increased by almost 2 percentage points to 73.51%. With that said, we’ll be talking about expenses from here on out with gross margin as our starting point. In 2009, Gross margin grew by 64 mil in dollar amount. In the same year, SG&A increase 25 million. This alone decreases GM growth by 39%. T.hat’s a pretty substantial cost increase in that one item line of the income statement. We have an explanation for thisTAXESSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS
  • Since we’re taking a look at costs control, we wanted to go ahead and move past the COGS. Their COGS remained relatively constant and in 2009 gross margin as a percentage of revenue actually increased by almost 2 percentage points to 73.51%. With that said, we’ll be talking about expenses from here on out with gross margin as our starting point. In 2009, Gross margin grew by 64 mil in dollar amount. In the same year, SG&A increase 25 million. This alone decreases GM growth by 39%. T.hat’s a pretty substantial cost increase in that one item line of the income statement. We have an explanation for thisTAXESSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS. The reason.

Akamai -- Analysis and Recommendation Akamai -- Analysis and Recommendation Presentation Transcript

  • CONTENT DELIVERY: POWERING AN INDUSTRY AND THE WORLD WIDE WEBPresented by Team 2-7: Matt Muller, Austin Ros, Zi-Jay Chen, Josh Phitoussi, Ross Simons, and Doug M
  • Microeconomics Akamai and the Industry Landscape
  • Competitive EnvironmentThe Content Distribution Network Industry: Small Object Delivery Market Share of CDN Application Acceleration Electronic Software Download Media Delivery AkamaiMarket Structure Limelight Level 3 Akamai has lost market share in recent years Other firms From a monopoly to an oligopoly Akamai’s pricing premium has given it’s competitors an opportunity Direct competitors now threaten to develop market share
  • Porter’s Five Forces
  • Porter’s Five Forces
  • Porter’s Five Forces
  • Porter’s Five Forces % Market Share by % Market Share by Revenue 2008 Revenue 2009 1% Akamai Akamai revenue revenue 11% 9% Limelight Limelight 5% revenue 9% revenue6% Level 3 Level 3 5% revenue revenue11% Amazon AWS 4% Amazon AWS revenue 63% revenue 67% 10% Internap Internap revenue revenue Other Other
  • Strategy & Trends
  • Strategy & Trends Akamai has recognized its dependence on its competitors pricing decisions Aggressive re-pricing Product differentiation
  • Marketing Akamai and Their Expansion
  • Market Presence Market Segment Akamai’s Presence • Serves content for 5 of the top 6 online music sites, 29 of the top 30 Media & Entertainment media/entertainment companies • Leaders in information services like Thomson Reuters, and comScore Business Services rely on Akamai to provide customers with reliable access. • Protects and enables transactions for Charles Financial Services Schwab, E*TRADE, Easy-Forex and other top institutions. • Enables delivery of gaming content for next-generation consoles from Gaming Nintendo, and helps many other companies to meet gamers. • Handles online bookings for world’s largest hotel firm & big brands like Hotel & Travel Expedia, Marriott, & Travelocity. • Six of the top ten US insurance companies rely on Akamai. Insurance • Trusted by all of the top auto makers – Toyota, GM, Audi, BMW, andManufacturing & Automotive more. • Enables online operations for 10 of the world’s governments, all Public Sector branches of the US Military, and many other agencies • Enables $200 billion in annual e-commerce revenue; used by overRetail & Consumer Goods 90% of the top online retailers. • Used by all of the top 5 anti-virus companies to distribute software Software & Technology online.
  • Product Content Delivery Network  Geographically diverse network of servers.  Fast, secure, and reliable means of decreasing the user’s wait time for accessing content.  Scalable to still provide content even when suffering from burst traffic. Targeted Advertizing  Ability to move and capture 30% of all web traffic
  • Product Differentiation The market for our services is intensely competitive and characterized by rapidly changing technology, evolving industry standards and frequent new product and service installations. We expect competition for our services to increase both from existing competitors and new market entrants. We compete primarily on the basis of: • performance of our services; • return on investment in terms of cost savings and new revenue opportunities for our customers; • reduced infrastructure complexity; • sophistication and functionality of our offerings; • scalability; • ease of implementation and use of service; • customer support; and • price.
  • Place/Price Two channel means of sales and distribution  Akamai Sales People  Outside Resellers  Act as competitors  Create a small area of monopolistic competition  I’ve long believed that you don’t want to entrust everything to resellers. Having a direct sales force helps you keep the game straight; it’s a back stop. What if a reseller abandons you? Sure, with dual channels you end up tripping over each other sometimes, and you have to figure out whether to double commission you in-house reps for sales made in their accounts by resellers. But it’s worth accepting the conflict that goes along with a dual channel structure. (Chairman Conrades)
  • Promotion 2010 EVP, Global Sales, and Marketing Compensation Mix 13% 13% Base Salary 28% Annual Cash 28% Incentive 59% 59% Long Term Equity Incentive General push is to boost product usage (CDN) Name recognition  Bestknown through reputation, and sheer size.  Tagged videos  Small Akamai Icon as content loads  Faster load time associated as Akamai’s reputation.
  • Performance Metrics Ratio is approximately a return in revenue against the invested dollars in marketing  Rising until market crash in 07/08  Revenues continue to rise, but at a slower pace due to less purchasing power of investments.
  • Competitors Limelight  Advertising CDNetworks  Private firm  Expanding quickly across the North Eastern Hemisphere Level 3 Communications  Primarily an ISP
  • SWOT Analysis
  • Relating Marketing & Finance Akamai’s increasing TAT indicates its efficiency in making key acquisitions High cash & liquidity allow potential flexibility in price competition Increasing R&D expenditures allows for expansion into growing markets
  • FINANCEAKAM A Quantitative Analysis
  • DuPont Analysis Dupont 2005 2006 2007 2008 2009 2010 Profit Margin 115.85% 13.39% 15.87% 18.35% 16.97% 16.73% TAT 0.32 0.34 0.38 0.42 0.41 0.44Equity Multiplier 1.43 1.31 1.22 1.20 1.20 1.08 ROE 52.55% 6.01% 7.43% 9.25% 8.39% 7.86%
  • Revenue and Profit 2009 Profit Margin Year over year Revenue Growth 1,100.0 1,023.6 1,000.0 2007->2008 24.28% 900.0 859.8 790.9 2008->2009 800.0 700.0 636.4 2009->2010 600.0 500.0 Year over Profit % of 428.7 400.0 year Growth Revenue 328.0 283.1 300.02007->2008 43.75% 18.35% 171.2 200.0 145.1 145.9 101.0 100.02008->2009 16.97% 57.4 0 2005 2006 2007 2008 2009 20102009->2010 16.73% Net Income Revenue
  • 2009 2010 SG&A Expenditures GM 2009 2010 400.0 Growth ($) $64 Mil $103 Mil 394.5 390.0 380.0 370.0 SG&A $25 Mil $69 Mil G&A Expenditures 360.0 Growth ($) 350.0 340.0 330.0 325.5SG&A Growth 320.0 39% 67% GM Growth 310.0 300.0 300.4 2008 2009 2010
  • “We expect increased R&Dexpenditures as we continue to hireadditional development personnel in order to make improvements in our core technology, develop new services, and make refinements to our other service offerings.” – 10k
  • 2009 2010 Year over year Revenue Growth GM 2009 2010 2007->2008 24.28% Growth ($) $64 Mil $103 Mil 2008->2009 2009->2010 SG&A $25 Mil $69 Mil Growth ($) Year over Profit % of year Growth Revenue 2007->2008 43.75% 18.35%SG&A Growth 39% 67% 2008->2009 16.97% GM Growth 2009->2010 16.73%
  • Future Issue “We expect to utilize “We expect to utilize substantially all of substantially all of our our tax credit tax credit carryforwards carryforwards in in 2011. Once we have 2011. Once we have done so, the amount of done so, the amount cash tax payments we of cash tax make will increase payments we make over those made in will increase over previous years.” those made in previous years.”
  • ASSETS AND DEBTMANAGEMENT
  • Acquisitions Netli. INC2010200920082007 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 -Growth of 571% -Acquired at 154.4 million on March 2007
  • Other Acquisitions % Growth in Net Income Netli. INC aCerno. INC % growthRed Swoosh. INCNine System. INC 0 100 200 300 400 500 600 700
  • Acquisition Summary Acquisitions can be risky without good management. Akamai does a very good job in managing it’s acquisitions and assets  This has resulted in a TAT increase
  • TAT ratio  Akamai’s revenue comes from efficient utilization of long term assets:  Servers, infrastructure  However, Akamai has grown cash and cash equivalents to roughly 10% of total assets in 2010.
  • Cash vs. Total Assets 94% Cash TA 6% 2006 90% 10% 2010
  • Debt Management Started to 450 Long term debt decrease debt 400 350 starting 2003 300 250 Paid off all long 200 Long term debt term debt in 150 100 2009 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
  • *Improvement*Liquidity*Opportunity*Nimbleness
  • GlobalExpansio n
  • Action Plan1. Enter mobile marketing / SMS delivery “Mobile advertisements are 30 times more effective than internet ads.” MobileMarketer• Globally, mobile ownership andusage far exceeds the ownershipof PCs with Internet access.• Unlike other mobilemarketers, Akamai already hasthe servers and businesspartnerships necessary todominate this market.• Akamai can help firmseffectively gather and analyze amore specified range ofinformation about theircustomers.
  • Action Plan2. Targeted Marketing • Akamai collects large amounts of data about web users and their behavior. • To increase a firm’s profitability, Akamai can create profiles about users to more effectively place advertisements on the firm’s webpage. • This model has worked for firms such as Facebook, Pandora, and Amazon.
  • Action Plan3. Target firms that cover major events in other countries March Madness Super Bowl FIFA World Cup Cricket World Cup
  • References AccuStream iMedia Research. (2009, August). CDN 2010: Revenue, R&D, Cap Ex and Operational Analytics - Market Research Reports - Research and Markets. Research and Markets - Market Research Reports - Welcome. Retrieved April 03, 2011, from http://www.researchandmarkets.com/reportinfo.asp?report_id=1057699&t=d&cat_id AKAM Competitors | Akamai Technologies, Inc. Stock - Yahoo! Finance. (n.d.). Yahoo! Finance - Business Finance, Stock Market, Quotes, News. Retrieved April 03, 2011, from http://finance.yahoo.com/q/co?s=AKAM Akamai: The Leader in Web Application Acceleration and Performance Management, Streaming Media Services and Content Delivery. (2011, March). Retrieved April 03, 2011, from http://www.akamai.com/index.html Edelman, B., Eisenmann, T., & Van Den Steen, E. (2004). Akamai Technologies - Harvard Business Review. Harvard Business Review Case Studies, Articles, Books. Retrieved April 03, 2011, from http://hbr.org/product/akamai-technologies/an/804158-PDF-ENG Form 10-K. (2010, December 31). U.S. Securities and Exchange Commission (Home Page). Retrieved April 03, 2011, from http://www.sec.gov/Archives/edgar/data/1086222/000119312511051569/d10k.htm Gale. (2011). Application Service Providers. Encyclopedia of Emerging Industries. Retrieved April 3, 2011, from http://galenet.galegroup.com.ezproxy.babson.edu/servlet/BCRC Marketing Weekly News, A. (2011, March 12). Internet Software and Service Companies; Akamais Advertising Decision Solutions Help Retailers Drive Transactions and Improve Return on Ad Spend. Internet Software and Service Companies; Akamais Advertising Decision Solutions Help Retailers Drive Transactions and Improve Return on Ad Spend. Retrieved April 3, 2011, from http://proquest.umi.com.ezproxy.babson.edu/pqdweb?did=2281756971&sid=6&Fmt=3&clientId=5013&RQT=309&VName=PQD Mostash. (2011, March 28). From Horseback To Bullet Train: The History Of Internet Usage And Speeds | Official WebHostingBuzz Company Blog. Web Hosting, Cheap Reseller Hosting by WebHostingBuzz, Cheap Web Host. Retrieved April 03, 2011, from http://www.webhostingbuzz.com/blog/2011/03/28/history-of-internet-usage Phillips, M. (2011, March 14). Akamai Shares: March Madness to End Slump? - MarketBeat - WSJ. WSJ Blogs - WSJ. Retrieved April 03, 2011, from http://blogs.wsj.com/marketbeat/2011/03/14/ncaa-tournament-the-antidote-to-akamais-slump/ Rayburn, D. (2009, August 17). CDN Market Still Due For A Shakeout. Business Insider. Retrieved April 03, 2011, from http://www.businessinsider.com/the-future-of-cdn-2009-8 Rayburn, D. (2010, January 19). Akamai Gaining Market Share With Their Lower CDN Video Pricing. The Business Of Online Video. Retrieved April 03, 2011, from http://blog.streamingmedia.com/the_business_of_online_vi/2010/01/akamai-gaining-market-share-with-their-lower-cdn-video- pricing.html Rouse, R. (2007, July 11). Akamai Technologies Still in the Limelight. Stock Options Trading Strategies Options Trading Course Options Mentoring. Retrieved April 03, 2011, from http://www.optionsmentoring.com/stockoptions/Akamai_Technologies_Still_in_the_Limelight.shtml Rusli, E. M. (2007, September 20). New Competitors For Akamai Online - Forbes.com. Information for the Worlds Business Leaders - Forbes.com. Retrieved April 03, 2011, from http://www.forbes.com/2007/09/20/akamai-technology-entertainment-markets-equity-cx_er_09020markets22.html