Akamai crashes after confirming tech giants shifting to in-house networks

Content delivery network operator Akamai (AKAM) plunged Wednesday after confirming in its second quarter report that its two largest customers, Apple (AAPL) and Facebook (FB), continue to build "do-it-yourself" alternatives to its network. BACKGROUND: Content delivery companies operate webs of Internet servers that help successfully and quickly deliver web content to users. As major Internet and tech companies grow in scale and capability, reports have surfaced of their choosing to move content delivery in-house, potentially threatening traditional CDNs. Companies in the space include Akamai, Limelight Networks (LLNW) and Level 3 Communications (LVLT). AKAMAI WARNS OF DIY: Tuesday evening, Akamai reported Q2 earnings per share of 64c on revenue of $572M, as compared to expectations for 64c on $574.86M. The company forecast Q3 EPS of 59c-62c on revenue of $566M-$578M, below estimates of 66c on $590.88M. Speaking during the company's conference call, CEO Frank Leighton stated: "As we discussed on past calls, our overall revenue growth rate is unusually low this year because of the do-it-yourself efforts of two of our largest customers... In Q2, these two customers accounted for a little over 5% of our total revenue, down from 12% in Q2 of last year." Seeking to address wider investor concern over the DIY threat, Leighton added: "Overall, I believe that our risk of future revenue loss from DIY is confined to a few of the Internet's largest infrastructure and platform companies. For example, companies like Amazon (AMZN), Apple, Facebook, Google (GOOG), Microsoft (MSFT) and Netflix (NFLX)... These six companies accounted for less than 11% of our total revenue in Q2, down from 18% in Q2 of last year. As you know, most of this reduction was from the two customers that we have talked about on past calls. To be clear, I'm not talking about these six companies now because I think they're going to go away. Quite the contrary -- We believe there are substantial opportunities for revenue growth in these companies over the longer term. And to the extent that there are further declines in revenues from these companies in the near term, we expect them to be more moderate than what we have experienced in the past year." PIPER STILL POSITIVE: Responding to Akamai's report, Piper Jaffray analyst Michael Olson reiterated his Overweight rating while lowering his price target to $64 from $69. Though Akamai's Media Delivery segment was weak for the quarter, the analyst highlighted strength in the Performance and Security Solutions unit, which he expects to continue. Olson also noted the counter-intuitive effect that, as Akamai's largest clients shift to DIY, their share of and impact to total revenue is becoming less material. PAC CREST DOWNGRADE: Pacific Crest analyst Michael Bowen downgraded Akamai to Sector Weight with a fair value estimate of $46 per share, arguing that competition in media delivery is increasing and margins are moving lower in the near term, while visibility on potential revenue driven by the shift to Over-the-op television remains unclear. PRICE ACTION: Shares of Akamai crashed 13.5% to $50.25 on Wednesday, while Level 3 and Limelight are down 6% and about 4%, respectively.