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Divergent technologies - February 7, 2008

Interesting contrast in the quarterly earnings results reported yesterday by content delivery network operator Akamai and network-equipment maker Cisco Systems. In a nutshell: Akamai reported a strong Q4 and was bullish on 2008 based on unexpectedly strong demand for media and entertainment content delivery in the fourth quarter. Cisco, on the other hand, reported an okay quarter (its fiscal Q2) but cut its guidance for upcoming quarters based on slowing demand for its routers and switches in the U.S. and Europe. Not surprisingly, Akamai shares rose on the report while Cisco shares dropped, taking a good chunk of the technology sector with them.

Given the complementarities of their respective businesses, you might expect the general trend lines to be at least similar. What does it mean that they're not? Dunno exactly. But it suggests that the general economic slowdown Cisco was responding to could become a wild-card in the build out of the network infrastructure that Akamai and its media clients are counting on to accelerate the migration of entertainment content to the Internet.

Some highlights from the earnings calls:

• Akamai CEO Paul Sagan: I think one of the things you saw in the fourth quarter was the strength in e-commerce that we expected but continuing or unexpected strength in media and entertainment, which as you know is our biggest vertical. As more and more entertainment content and games are going online, it drove really tremendous results for us. And we saw it across many other verticals as well, but the two most important were e-commerce, as expected, and the media and entertainment even beyond expectations.
• Cisco CEO John Chambers: While we were pleased with our revenue growth slightly above 16% in Q2, our product order growth in Q2 was in the low 10s. The second quarter was unusual by month in terms of these order growth rates. December was strong with year-over-year growth in terms of orders in the high teens. But January’s growth was less than we expected with order growth rates of approximately 10%. We are all seeing the challenges that global stock markets and the U.S. stock markets had including a very challenging January as well as a steady stream of challenging economic and confidence data over the last month. These and other events, along with our own order growth in January, combined with the economic business and consumer confidence changes make forecasting next quarter’s business momentum extremely challenging.
• Sagan: I think that we are seeing a steady growth of entertainment content moving to an IP world. I don’t think there is a single event that is going to transform that world. It’s a number of things. It has content and rights having to be available. End users have to have fat enough pipes and the people have to have compelling business models and applications. [snip] As you know, we launched a high-def initiative last year to demonstrate that you actually can go all the way to HD in certain homes with tremendous results over the Internet. I think that got a number of our customers very excited. But the truth is, most end users still can’t consume it at that bit rate so I think that you are going to see steady growth over the next three to five years.
• Chambers: We did see the slowdown occur pretty rapidly between December and January in terms of our orders and one of the few times we’ve actually missed our forecast -- if I remember right Rick – in January in a very long time. Having said that, no, I would not assume by anything we said that we expect it to deteriorate further. [snip] So again, on things we can control or influence we feel pretty good but we felt the right thing to do given the challenges that we saw in the U.S. and with both the U.S. and Europe being under forecast in January was to extrapolate that out and we’ve always be transparent and conservative with in terms of our positioning.

Full transcripts of the conference calls can be found here (AKAM), (CSCO).
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