Akamai Stumbles as Silicon Valley Giants Wean Themselves Off Network

Akamai Technologies Inc. warned its core profit could decline this quarter as its biggest Silicon Valley customers invest more in their own network infrastructure.

Shares dropped 11% to $51.70 in after-hours trading as the company warned its margins could also come under pressure as prices for some customers decline.

The Cambridge, Mass., company blamed a revenue pullback from its biggest technology customers like Apple Inc. and Facebook Inc. as they channel more data through their own systems rather than outsourcing the job.

Akamai's six biggest technology customers, which also include Amazon.com Inc., Alphabet Inc.'s Google, Microsoft Corp. and Netflix Inc., accounted for about 11% of its revenue in the second quarter, down from 18% for the same period last year.

"The worst of that is by and large behind us," Chief Executive Tom Leighton said in an interview. Even with the pullback, Mr. Leighton said, the company expects overall sales to pick up in 2017. "It's important for you to know that the core of our business is large and growing," he said on a conference call.

Most of Akamai's business comes from its network of more than 200,000 servers placed in data centers around the world. E-commerce companies, streaming video services and other corporate clients use the network to juice download speeds and keep their websites running smoothly.

Expenses swelled last year after the company, expecting a wave of new video traffic from its biggest media customers, quickened its network expansion. Instead, revenue from top clients Apple and Facebook declined as the two technology companies spent more on their own network capacity, according to people familiar with the matter.

In the second quarter, total costs rose 6.3% to $462 million. Akamai forecast that its third-quarter per-share earnings, excluding some one-time costs, would dip between 59 cents and 62 cents. Analysts polled by Thomson Reuters predicted a 66-cent per-share profit the quarter ending Sept. 30.

Akamai is still counting on traditional media companies to shore up its video business. Events like this year's Euro Cup tournament and the coming Olympic Games in Rio de Janeiro draw millions of online viewers who use massive amounts of bandwidth. The company's fledgling network security business has also grown quickly.

The company earned $73.6 million in the latest quarter compared with a profit of $67.2 million a year earlier. Revenue rose 5.8% to $572.1 million, below the midpoint of the company's previous sales prediction of $566 million to $582 million.

Write to Drew FitzGerald at [e-mail] and Josh Beckerman at [e-mail]

(END) Dow Jones Newswires

July 26, 2016 18:55 ET (22:55 GMT)

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