Tomorrow, at 8:30 AM, we are presenting at the Flash Memory Summit 2017 and will share our views on the storage infrastructure market. We expecting growth in segments such as hyperconverged, All Flash Arrays, and SDS. We expect growth from customer groups such as Cloud Service Providers, as well as Telecom Service Providers, while traditional enterprises are expected to experience declines.
From a technology standpoint, we are bullish on NVMe technology as well as 3D Xpoint and expect that Hard Drive based systems will experience long, slow declines.
For those in attendance at Flash Memory Summit (#FMS2017), we will be presenting slides. If you are interested in learning more about our views on the storage infrastructure market, please contact us.
We attended the F5 analyst meeting, the first with new CEO, Francois Locoh-Donou. It is clear that the new CEO understands the impact the growth in the cloud has on F5, and VP Sales John DiLullo even went so far as to say that beginning about 18 months ago, his customers are embarrassed to admit they actually own a physical on-premises infrastructure (picture). Also relatively new to the F5 team is Ben Gibson, CMO, who joined about a year ago.
We break this write-up into a few different parts: a) the new technical strategy, b) the shift to subscriptions, and c) new products.
New Technical Strategy
The company’s message was similar to its recent earnings call, though with a lot of technical details, the focus being that the company is pursuing opportunities where its technology will be made:
Shift to Subscriptions
The company recently began offering its software versions of its products using a software subscription business model. This differs from its other contract methods it has used with customers in the past. The first subscriptions were made available since the new CEO has joined.
F5’s shift to subscriptions is not particularly unique in the marketplace. Many traditionally network hardware-focused companies have begun the transition, as well. Cisco is a good example, having very recently (June 2017) announced a software subscription model to pair up with its newly launched Campus Ethernet Switches, the Catalyst 9K series. Though this wasn’t discussed at the meeting, we expect that new accounting standards that come to the marketplace about a year from now may result in only a modest impact to revenues as a result of a shift to subscriptions.
Application Security Opportunity
The company’s big bet is on application security. We view this opportunity as quite significant, though providing application security is quite different from vast majority of the company’s offerings and revenue.
F5 offered some interesting data for us to chew on, the result of the fact that the company’s iHealth offering acquires data from its customers.
Over the past three years, the main features being used on between 6,000 to 8,000 customers on Big IP devices are as follows (in order of most common):
It is clear therefore that most Big IP use relates to front-ending customer-facing services, which supports our view that the company’s big bet on software will represent a large change for the company. However, the company also shared some other interesting market-sizing data that we found useful in assessing the company’s opportunity. Across its 6-8K of customers using Big IP in the past 3 years, there are:
We got thinking about what this means, in relation to the application security opportunity upon which the company is embarking. There are orders of magnitude more physical servers, and for that matter virtual servers, than those working in conjunction with Big IP systems. If the company can succeed in having its application security software working in conjunction with this larger opportunity, then the company may have some serious room to run.
The company is developing software products. Examples are:
Application Controller. It runs in the public cloud and connects to a Big IP in Co-lo or in a private cloud and extends what the Big IP can see into the public infrastructure. The products is in General Availability now.
Virtual Edition. The company views this software-only product capabilities as potentially running as fast as its hardware-based ADCs over time. VE is benchmarked at 40 Gbps in its F2Q17 release and the company sees this getting to 100 Gbps (timeframe not disclosed). Additionally, by 1H18, the company plans to offer VE to run in a container environment.
Container Connector (CC) and Application Services Proxy (ASP). Both were released in the Spring 2017. These are both ‘in the hands of multiple customers,’ according to the company. These are intended to be used with Container environments such as Kubernetes, Mesos and/or Docker.
Additionally, the company said it is working on “Incubation” technologies that are mostly cloud-focused and R&D budgets for such efforts are large (but this wasn’t quantified for us).
The GENBAND Perspectives 2017 conference in Los Angeles did a good job of highlighting the relatively smaller division at GENBAND - Kandy. Additionally, the company highlighted its advances towards an NFV World, its participation in so-called "Network Evolution" (upgrading old PSTN and VoIP systems to new VoIP and IMS systems).
Kandy. I asked CEO David Walsh to compare its business to publicly traded Twilio. He highlighted some differences between the two:
NFV. The company highlighted its VNF Manager, and we understand that it can perform some aspects of orchestration when operating specifically on GENBAND VNFs. Additionally, the company and its partner Wind River (Intel) explained that using WIND ABS (its software virtual switch) and the DPDK capability, for many VNFs, can see as much as a 40x improvement in performance compared to running in a virtualized environment not using these two technologies.
Network Modernization. About half of GENBAND revenues last year were related to services; and a meaningful percentage of total revenues are associated with network modernization. Several customers made presentations discussing their experience in moving to new VoIP systems, replacing PSTN and older VoIP systems. We learned a few interesting things relating to this modernization:
Today, Cisco announced the Catalyst 9000 family. The first new Catalyst line in many years focused on campus networking as a unified network involving security, WLAN, and switching. This is a very big announcement for Cisco as it’s a real step towards Unified Access and not thinking of WLAN as simply an overlay network. To keep the blog short, we will focus on just a few highlights here.
New hardware – the 9300 fixed switches are the next generation 3850s which were the revenue work horse for Cisco on the campus side. The 9400 is a modular access switch, currently more focused on user connectivity then campus aggregation and core. Finally, the 9500, a Fixed form factor aggregation and core box. The 9300 supports multigig with no fast Ethernet. We suspect a modular core is likely in the works as well and future generations will shift the uplinks from 10/40G to 25/100G.
New software – This is really about a security in networking and intent based policy. In other words, these switches take less human hours to administer, allowing more things to be connected to the network and the human to scale. Software Defined should allow these new switches to scale with the IOT device onslaught that many enterprises are about to go through.
New ASICs – As we all know, I’m a fan of ASICs, Cisco’s new in-house ASICs take many design ideas from Cisco’s DC ASIC family. They allow for some pretty cool security features that will allow Cisco to differentiate from the competition.
New Subscription Model – This does not come as a surprise, but a big component of the new offering is a subscription model. We see 3,5, and 7 year options listed on the website and believe this aligns well with Cisco’s push more towards recurring revenue. Given the availability of these switches, this is a 2018 event for the market.
New upgrade cycle – the combined hardware software approach will allow Cisco to touch its entire installed base to upgrade them. This is a big benefit to Cisco as over the past few years this installed base lacked a compelling reason to upgrade. This has caused the age of the installed base to creep up recently.
Today Nokia announced its new FP4 ASIC and 7750 SR Router. Playing the leapfrogging game on speeds, we saw 36 400 Gbs ports in a 2RU box that looks awfully similar to a spine switch and the further blurring of what a next gen router and switch really look like, especially in the Cloud.
We heard continued confusion over winning Cloud scale accounts. We note that a customer like Apple buys from multiple vendors and for multiple reasons. What Apple builds for their own consumption is not what they will deploy in a telco provider or peering location.
The debate between merchant silicon and custom ASICs continues to come up. While we are slightly in favor of merchant silicon, we note that the Cloud providers do not fear custom ASICs, they merely want to have standard APIs to control that equipment.
We note the Nokia ports are DDQSFP and not OSFP so we do not have a clear answer on form factor either. We now wait for the next product announcement with the only clear answer that we are in a phase of rapid innovation in order to keep up with the network traffic demands of the Cloud.
Today Broadcom announced Trident 3. The companies third major release of a chip that drove the merchant silicon revolution in the data center and started the white box movie in the Cloud. With Trident 3, all of Broadcom’s data center switching ASICs now support speeds of at least 3.2 Tbps per chip.
Trident 3 is impressive, but a few things about it really caught my eye. First, Trident 3 will offer five different skus, two of which are really focused on campus switching. One could see a 48-port 2.5 Gbps switch out of the X3 version of Trident 3 next year. We believe the Trident family moving into the campus will be significant for the industry once products begin to ship.
Second, native 25 Gbps ports. Trident is the most popular of Broadcom’s ASICs, especially in the enterprise, and with Trident 3, we expect the market to quickly move away from 10 Gbps/40 Gbps products and towards 25 Gbps/100 Gbps products. This product aligns well with our forecasts for this transition which we are excited to be publishing shortly. We still don’t see a bandwidth need in most enterprises for 25 Gbps, but the ability to future proof at the customer level and the ability to consolidate skus at a vendor level will make this compelling.
Third, we see a potential for both switch vendors and customers to benefit from one family of ASICs from the campus all the way to the data center. While it is too early to know the impact of this right after the announcement, we look forward to conducting interviews over the next few months to define this impact.
Today, we attended a presentation made by Huawei to discuss 5G. The company emphasized several interesting points:
Yesterday, Aerohive announced an expansion to its Connect Strategy that results in price cuts across its entire product line by virtue of its extension of its Connect cloud-services offering to all products. Given that Connect is a free version of cloud-managed services, it would accurate to say Aerohive is now pursuing a price-aggressor strategy in the WLAN marketplace. Price aggression has been effective in this market, with Ruckus (now part of Brocade) having pursued a price aggressor strategy over 5 years ago (this resulted in share gains, culminating in Ruckus achieving the #3 Enterprise-class market status for a while), and with Ubiquiti and Huawei currently pursuing price aggressor strategies (both are gaining share). So, it looks like Aerohive decided to join in on the price-aggression.
On Aerohive's latest earnings call for the period ending March 2017, which covers a portion of its operating results where Connect was announced, the company said its margins were largely unaffected as a result of Connect. This essentially means that most customers are still paying for the paid-for version of cloud-managed called Select. It is certainly possible that new customers in coming quarters will chose the free Connect version and not opt to pay up for Select. We will be watching margins!
Since 2014, the E-Rate program has slowed down spending in the once-largest vertical market for WLAN gear - the K-12 education market. Since the information about bidding and spending patterns for E-Rate is public, it is has been clear that the funding process - which adds almost a year more to the decision cycle for the typical municipality - has slowed down WLAN deployment instead of accelerating it, as the FCC had originally intended. Also, if you look at the total dollars disbursed to WLAN projects at schools and libraries, it has actually declined year on year, at least in part due to the failure of the of USAC to properly administer the program. In effect, the checks weren't be cut quick enough due to incomplete IT systems and other bureaucracies.
The new FCC Chairman, Ajit Pai, put pressure on the USAC CEO during 2017 (especially in April 2017) and the USAC CEO resigned on May 9 according to edscoop.com. In the April 2017 letter from Pai to USAC, Pai explained that "the E-Rate program is critical to the goals of universal service." This seems to address a concern as to whether Pai will support E-Rate going forward; it appears he will.
Our preliminary conclusion is that E-Rate might be improved in the future. It certainly could get worse - but not by much, because by our estimate the reduction in overall enterprise-class WLAN equipment spending versus the rates it had seen before the E-Rate program was revamped in 2014 may have cut out as much as 5 or more percentage points from growth in the overall WLAN industry.