The Search Is Over for Inktomi

SAN FRANCISCO -- From Inktomi's (INKT Quote) Foster City, Calif., headquarters there's an impressive, revealing sight.

Its two buildings sit on a spit of land alongside the San Mateo Bridge, facing north. It offers a unique view, where you can see both the east and west sides of the San Francisco Bay. But the strangest thing is the sight of airplanes landing just a few miles away at San Francisco International Airport. First the shadows appear over the water, alongside Inktomi's buildings, then the whole plane comes into view, at just about the height of CEO Dave Peterschmidt's corner office on the sixth floor. But he can't quite see what's going on inside those planes.

Is there a better metaphor for Wall Street's relationship with Inktomi? Wall Street can plainly see the company's surging business -- the most recent quarter was the 10th in a row in which quarter-over-quarter revenue growth rose better than 25%, and year-over-year growth exceeded 200%. And yet Wall Street seems to have no idea what's going on inside the company.

"Unfortunately, I think it's true what they say," says Peterschmidt. "Wall Street always understands what you were. But the rate of change is moving at a Herculean pace -- it's accelerating far faster than Wall Street can completely comprehend."

Wall Street's ignorance of Inktomi's business was never more clearly articulated than on June 26. On that day, Yahoo! (YHOO Quote) announced that it would drop Inktomi as its primary search engine in favor of start-up Google. Inktomi shares dropped 18% in a day and have yet to recover. (More on the reasons behind that later.)

"This Yahoo! thing has virtually no impact on their business," says Thomas Weisel Partners software analyst Katherine Egbert. "But for sure, investors don't seem to have a handle on Inktomi. Inktomi is no longer just a search company, but that's been very confusing."

An analysis of Inktomi's recent results, however, makes it pretty clear. Powering Internet search, once the mainstay of Inktomi's business, now makes up just 29.9% of the company's revenue. And while search revenue is still growing at a 136% annual pace, the rest of Inktomi's business, network applications, is 265% larger than a year ago and is growing at an accelerating clip. Peterschmidt says he expects that business to have a compound annual growth rate of 300% by year-end.

Inktomi's revenue continues to grow massively and rapidly

Source: Inktomi

Internet search has been a shrinking piece of revenue for Inktomi

Source: Inktomi

That growth is being fueled by the very growth of the Internet, and, in particular, the growth of new content networks that will be devoted to broadband. Inktomi's network software allows content networks to perform caching, creating a storehouse of Web pages and broadband content on thousands of nodes on the edges of the Internet. The content of Web pages can change, of course, so Inktomi's caching software continually checks and updates changing pages, providing them at network nodes closest to the user. That allows users to get the content wickedly fast, and, as such, it's essential to the realization of broadband Internet dreams. "Our products create pools of content that exist all over the Web," says Peterschmidt, "so where ever these networks are, our caches are."

The Search Is Over: Inktomi's hottest business is network software

Source: Inktomi

Here's the real secret in all this: There's a massive, multibillion build-out of private content distribution networks. It's a 21st century version of the space race, with about dozen companies racing to finish massive networks to pump out broadband Internet content. Inktomi's network software is being used as the building block for almost all of these networks, including those from Adero, AT&T (T Quote), Cable & Wireless (CWP Quote), Colt (COLT Quote), Digital Island (ISLD Quote), Genuity (GENU Quote), Enron (ENE Quote), Exodus (EXDS Quote), Mirror Image and Primus (PRTL Quote).

Analysts say that demand for such products is off the chart, and that Inktomi commands the dominant market share. "Put it this way, of the 11 content distribution networks being built in the world," says Peterschmidt, "Akamai (AKAM Quote) is being used by one -- we have the other 10."

The last 3 quarters revs. exceed the last 3 years combined revs.

Source: Inktomi

To analysts like Egbert, that means Inktomi is on its way to becoming the Cisco (CSCO Quote) of software -- ubiquitous on the network. "The Inktomi story is more than being No. 1 in search," says Egbert. "They have a strategic point of presence in the network, their caches are installed in areas that are closest to the end user. They're there today in a way that no other software company is."

As such, Egbert, whose firm hasn't done any underwriting for Inktomi, is banging the table on Inktomi with a strong buy rating, pointing out that Inktomi is trading at 165.2 times 2000 revenue, while its closest competitor, Akamai, is trading at more than twice that.

Meanwhile, there's possibly another story behind the Yahoo! announcement that caused Inktomi's recent stock drop. Two people with knowledge of the situation say Yahoo! dumped Inktomi because it made a venture investment in Google, which encouraged it to switch.

There are other ties between Yahoo! and Google. Star venture capitalist Michael Moritz of Sequoia Capital is an original Yahoo! backer, and, together with Kleiner Perkins Caufield & Byers, made a $25 million investment in Google last September. Moritz sits on the board of directors for each company.

"We haven't talked about the terms of that deal," says Yahoo! CEO Tim Koogle. Google won't say either. "Google, at this point, isn't releasing financial information regarding the agreement with Yahoo!" says spokeswoman Kimberly Vogel.

But the financial information Inktomi is releasing is quite telling, and seems to paint a scenic picture of many happy landings to come. Search may remain the cynosure of Wall Street's eye, but the growth of network software is the true story of the company. And while many Internet companies paint charts predicting growth that goes "up and to the right," Inktomi has managed to deliver them quarter after quarter.