Akamai CEO Leighton Defends the Long Term Amidst ‘Bizarre’ 16% Sell-off
Akamai CEO Dr. Tom Leighton visits Barron’s offices to talk about the company’s Q1 report and trends in the industry, May 3rd, 2017. Illustration: Tiernan Ray for Barron’s
Dr. Tom Leighton. the chief executive of Internet bandwidth and security provider Akamai Technologies (AKAM ), stopped by Barron’s offices Wednesday morning to talk a bit about the company’s Q1 report last night. and his sense of the trends in the industry.
Akamai shares are down $10.04, or 16%, at $52.46, after the company yesterday reported Q1 revenue and profit that topped analysts’ expectations, but also missed with its outlook for this quarter, prompting at least three downgrades of the stock.
I noted that a word used by the sell-side is “visibility ”: there just doesn’t seem enough of it to give people confidence to wait through this rough patch in Akamai’s Media business.
For instance, one of those downgrading the stock, SunTrust’s Greg Miller. cut his rating from Buy to Hold, and slashed his price target to $54 from $82, writing that the big concern here is that the latest disappointment followed after a summit with investors just last month.
We cannot recall a time,” writes Miller, in the company’s history where one meaningful negative new report was followed so closely with another.
To Leighton, the talk of visibility is not entirely fair — or, at least, it’s relative:
Visibility depends on how you set that bar. We do have good visibility, and better than our customers, but it can swing by a few percent up or down in a quarter. When it swings by 1% or 2%, by an outlook to the quarter, we get an over-reaction in the stock price, which is bizarre. Now, of course, we’ve seen this operate in both ways, we’ve seen a reaction on the good side, and the bad side. We tend to be very volatile in that respect, but, at the end of the day, if I told you we could predict things within a couple percent of what it turns out to be, that’s pretty good.
Leighton, seemingly quite relaxed and beaming, told me We had a very good quarter,” highlighting some positives, such as the company’s security technology business now on course to make $450 million in annual revenue.
And what of the worries about the “media ” business? Media is Akamai’s ability to support streaming video. but also updates to video games. and downloads of applications for mobile devices, from its collection of data centers throughout the world. That business showed a suddenly weaker trend this quarter, which is largely because of the decline in how much video game companies relay on Akamai to support game downloads.
Leighton was inclined to look past the present moment — some of this is temporary. he suggested.
“Some of the gaming customers are doing more of the updates on their own, or they are going to competitors,” he noted, meaning the companies that make the video games and pay Akamai a fee.
“Part of that’s an effect of the fact that game updates can happen in the background in a way that they no longer require as much bandwidth on a regular basis.
“But, it’s still a really good business,” he added. I don’t think gaming goes away, I think there’s plenty of competition there, but it still will be a growth source for us in the longer term, I think it’s a fine business.
How, I asked, can it be a fine business when what he’s describing sound like long-term negative trends.
Leighton smiled and assured me “We’ve seen some of this in past: as traffic grows, people who have been trying to do it themselves at some point may find that it wasn’t as effective as they thought it would be, and then they come back to us. They may have thought it was a good idea [to go it alone], but it is very hard to keep up with the cost of doing this,” meaning, supporting massive flows of traffic.
Leighton was enthusiastic about other areas of growth. The build-out of streaming video, for one. is an area where the company is helping “all the major broadcast networks” and other types, “the Hulus of the world.” He is careful not to mention to many customer names explicitly, not to confirm or deny them. Akamai doesn’t provide streaming services for Netflix (NFLX ), but there are just one party in the overall rise in “over the top,” or “OTT” video.
He notes Akamai received awards and enthusiasm at the recent NAB convention in Las Vegas for the broadcast and cable industry. “We demonstrated our new capability for video that’s just as good as traditional broadcast-quality video, with no latency, and we now can stay up to the mark with what satellite can deliver,” he noted.
Another thing coming is augmented reality and virtual reality. for things like live streaming events and video games. The bulls on the Street believe it can rejuvenate the media business for Akamai because VR and AR content presumably has massive amounts of data that have to be downloaded constantly.
I pointed out to Leighton that the bullish reports talk about “when” VR happens, as if it’s a certainty. “IF and when,” he began, with a smile, “AR and VR would be very good for us.
“There are big checks being written,” meaning, investments by venture capitalists and media conglomerates and technology companies to make AR and VR work.
“They have some very high bandwidth needs there, and some localized computing needs.
I suggested many are still skeptical on VR and AR, given the products and services to date are poor. “But I’ve seen lots of cool things you can do!” he shot back. More seriously, he said, Some people will tell you it’s going to run out like the way 3-D video did, some people say it will change life as we know it — we are working to try and make it be the latter.
He noted that to deliver updated views inside a VR headset, say, would require a fairly rapid exchange of data down to you from the network with very low latency:
One of the big challenges with AR and VR is as the head turns, you need to be able to maintain with very low latency the illusion that the field of view is shifting, to make it workable. One solution to that is to transmit a video signal for all angles of view in 360 degrees, up front. But that is massive bandwidth. Another other option is you set a very good video view for the forward direction of view, now, and then you quickly update that by sending the other bits as the user is turning their head. Because the head turns fast, you have to be nearby, you have to have an ability to serve up the views closer to where the user is. Startups we are working with figuring out the algorithms for that, and we partner with them to actually do the delivery. Just like 4K. it’s very early days, but it’s live and it’s working already.
Other big changes in the Internet and data networking give him confidence in the long-term value of Akamai. For instance, the last decade has seen the rise of not only cloud computing, “hyperscale data centers, but also the rise of mobile devices as the default device, and the rise of “connected things,” the “Internet of Things.
That’s an area where he feels especially that Akamai can contribute with its security business.
He recalls a recent attack on a large “fashion retailer” — he wouldn’t name them — whose HVAC system was attacked; the intruders jumped from the HVAC to the other parts of the company’s network, in an attempt to steal sensitive customer and other data.
“Everything is connected!” says Leighton with a certain glee about the fact that event the humble air conditioner can be a launch pad for attacks. Akamai’s technology detected the attack so that the retailer could head it off.
We are seeing terabit-per-second attacks, and they will only get bigger,” says Leighton. Cisco Systems (CSCO ) is “a partner, a competitor, and a customer,” he says, when I ask how he feels about going up against their security business. Although Cisco’s security operation is bigger, $450 million in annual revenue, growing 37% per annum, is nothing to sneeze at, Leighton points out.
But he reserved his most intriguing critique for the other security vendors, firms such as Palo Alto Networks (PANW ) and FireEye (FEYE), remarks that perhaps sum up best how Akamai is unique.
“The security companies are coming from the world of selling you a box,” he said. “And the volume of attacks is such that, you just can’t keep up if you are selling a box.
“Yes, they have moved to the cloud, but their offerings are still a single -tenant system, its perhaps a virtual machine and a processor. We come at this with scale, with multi-tenancy.
“It is very hard to do multi-tenancy,” he repeated, for emphasis, it’s a monster to do it. Real multi-tenancy is a big project, to do it in thousands of places, to take our code into zillions of devices.
That level of complexity may be not well understood by most people, and is perhaps the most important strategic asset the company has in all its markets: the ability to handle complexity and turn it into value.