Tuesday, August 15, 2006

Calls of Note Part 2

- ThinkEquity notes recent contacts with multiple industry experts revealed insights into the bull/bear debate on Akamai (NASDAQ:AKAM). While the company faces pertinent challenges that they will continue to monitor, they are positive on Akamai's growth prospects for the foreseeable future. Firm had an opportunity to discuss new technology with Akamai's Chief Scientist, Tom Leighton, and they believe that Akamai's new offers will address the changing internet infrastructure. Checks confirm a solid pipeline at Akamai. Maintainw Accumulate and $42 price target.

Why a CDN vs. DIY? Akamai's management and customers agree that performance is a main driver for CDNs. Nevertheless, our sources indicate three main drivers for CDNs: disaster recover (security), streaming media (expensive set-up costs), and bursting. Large organizations-at times a mix of DIY, dual-source CDN. Some large organizations use a combination DIY model and 2 CDN sources. Profitable economics for digital media. According to Akamai management, distribution of digital media (video) may hurt a percentage point in gross margin, but the business is profitable and operating margins should benefit.

Akamai's Dynamic Content Accelerator-meeting the needs of AJAX, encrypted traffic. Some traffic types, like AJAX and encrypted traffic, are difficult to cache. Akamai has an important offer for the performance and security of AJAX and encrypted sites.

P2P-lots of promise, lots of issues. The firm has found a lot of optimism among industry participants around peer-to-peer (P2P) networking; however, they have found an equal number of security products that are intent on blocking it. They do not see an imminent threat from P2P.

Web 2.0-likely to be a softer bust than the .com bust or a non-event for Akamai. A number of industry participants believe that there will be a rationalization of new Internet companies (e.g., social networking) and worry that Akamai's growth may slow. Firm believes that Akamai's customer base has longer staying power and that any rationalization is likely to be far less significant than the .com bust. Finding Akamai customers is fairly easy to do with a name server look-up. The method is accurate approximately 75%-80% of the time according to Akamai.

Firm reiterates their view that Akamai is the best way to play the managed service growth in application networking. They see little risk to Akamai's growth in the near term. Sources indicate a full pipeline for Akamai. Firm is maintaining their Accumulate rating as the current valuation seems to have priced the near-term upside.

Notablecalls: Not actionable but good to know category. AKAM has been a smart bet over the past year. Berko has gotten is quite right.

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