Ericsson has served the mobile service provider industry well over the years.  Most devices connected to its customers’ networks are mobile phones; this, however, is changing.  Internet of Things (IoT) devices are entering the fray and provide an avenue for growth, as is the enterprise market.  Additionally, Ericsson’s channels have mostly been to operators, at a time when enterprise growth is expected to provide additional cellular industry growth.  Ericsson’s portfolio, until the Cradlepoint acquisition, was not particularly well-positioned to benefit from IoT and enterprise growth vectors. 
 
IoT devices come in all shapes and sizes, and they use a number of different connectivity methods, from cellular to Wi-Fi to Bluetooth to LoRa and many others.  In 2020, we expect only 16% of IoT and wirelessly connected devices will connect to cellular systems; the rest connect to more popular (and mostly free) connectivity types.   We see cellular connections growing in the future, but as a percentage of all IoT and wirelessly connected devices, we expect it will drop to 13% of all such devices five years from now.  The reduction in the fraction of IoT and wireless devices connected to cellular is why the “cellular to other” gateway market (Cradlepoint’s main market) makes sense.  There are some use cases where cellular backhaul connections to connect Wi-Fi, Bluetooth, Zigbee and others are vital.
 
With US-based CBRS and European nations’ private enterprise spectrum opening up the opportunity that enterprises will build their own networks – without needing a mobile operator’s help with sub-leasing licensed spectrum – the folks at Ericsson had a choice to make.  The choice was to continue selling to and through mobile operators and hope that mobile operators keep their share of enterprise and IoT growth, or to acquire products and distribution channels to access enterprise growth. 
 
Ericsson’s competitors were partnering with Cradlepoint with some success.  Recently, Nokia’s enterprise revenues hit about 10% of revenues, in part because it was selling LTE gear to customers in verticals such as utilities, mining & exploration, and logistics & shipping.  Many of these customers were using devices such as Cradlepoint’s.  Ericsson is now invited to these ongoing dialogues as these networks expand and change.
 
We would be remiss if we didn’t mention 5G in relation to Cradlepoint.  Some enterprises seek a secondary wireless connection to supplement their primary wired broadband connection.  Gear such as Cradlepoint routers can serve this need well.  In this sense, we can see why Ericsson uses messages such as “Ericsson accelerates 5G for Enterprise with the Cradlepoint acquisition.” 
 
This acquisition is not without controversy, in our view.  The Swedes are acquiring a company located in Boise, Idaho, and as such, managing from afar may present challenges.  Cradlepoint sells its devices differently (mainly through channels) from how Ericsson sells its gear (mainly direct); these two distribution methods may conflict.  Ericsson sold its cell phone business many years ago because it conflicted with its mobile infrastructure business.  Similarly, Cradlepoint gear is focused mainly on enterprises, we see a similar conflict because Cradlepoint’s customer base liked its independence from cellular gear-makers.  If Ericsson can manage through these challenges, it may enjoy exposure to IoT, enterprise and 5G gateway growth opportunities.

We attended a well-organized and information-packed virtual conference hosted by Juniper Networks last week.  While there were many themes (400G, telco cloud, AI, Mist), the one that really came through was how much the Mist acquisition has reinvigorated the Juniper organization.  About a year ago, Juniper made its acquisition of the Wi-Fi startup. It is clear a year later that Juniper’s Enterprise strategy has been “Mistified.”  We will share some Mist statistics from conference and our thoughts, as well.
Juniper shared some milestones that now characterize the Juniper Enterprise group:

• 4 of the Fortune 10 are Mist Wi-Fi customers
• 3 of the Fortune 10 are AI customers for wired as well as wireless
• By 4Q20, Juniper will make its SD-WAN products assured by Mist AI, thereby completing the single-pane managed system that will include Wi-Fi, Ethernet Switches, Security and SD-WAN.  In slightly over a year, the AI operations system (AIops) from Mist will support the Enterprise products that Juniper had in house prior to the merger.
• Since January 2019  through last month, the Mist AI system has improved to the point where Marvis, the company’s Virtual Network Assistant, can resolve 80% of customer inquiries, compared to 20% in January 2019.

We asked the company what has worked well with the acquisition, including whether the deal structure may have contributed towards to its success.  Juniper executives explained that there was nothing special about how the acquisition was structured beyond the normal incentives for the acquired team.  What happened after the acquisition, though, is somewhat unique:  in effect, the Enterprise group at Juniper was subject to a reverse merger with Mist, whereby the Mist management team now leads the group.  Perhaps the fact that the Mist team is in charge of the show explains the rapid integration of the existing Juniper products into the Mist AI management system.  Perhaps, also, the integration went well was because the Juniper products (switches, SD-WAN and Security) were designed to collect and easily share telemetry data for use by the Mist AI system.

Juniper also featured a customer – whose name we cannot share – that is a major fast food chain across the US.  It currently has 10,000 Wi-Fi Access Points with another vendor and recently made the decision to replace them with Mist Wi-Fi 6 APs by the end of 2022.  We found it interesting how important support is for IoT and the increased importance of outdoor Wi-Fi during the pandemic.  The company is deploying four indoor APs and three outdoor APs per restaurant.  The customer spokesperson shared that Mist does AI-based, dynamic radio resource management (RRM) very well and he shared numerous screenshots showing power levels that were kept around 11-13 dBm instead of values he recalls seeing closer to 20 on the existing infrastructure.  At this point, the customer has installed Mist APs in over 50 restaurants and he says he has not had a single Wi-Fi-related trouble ticket from these locations.  He is also looking to implement location services in the future with the company’s vBLE technology.

The company’s cloud-based location analytics capability is designed to serve as a contact tracing and crowd management system to allow Juniper WLAN customers to reduce risks as employees and visitors go to the campus environment.  The company introduced this contact tracing capability in May 2020.  The company said its cloud-based contact tracing service is something that can operate on top of Juniper infrastructure, as well as its competitors.  The company shared details about a large elite US university that is using the service and decided to upgrade to Juniper WLAN infrastructure as well.
​
Our view is that Juniper is well-positioned in the Enterprise market because by year-end it will have an AI-driven, single-pane operations system that covers Wi-Fi, Ethernet Switching, Security and SD-WAN.  This is an enviable position because increasingly customers are making purchasing decisions for various equipment at the same time, and they are looking to reduce ongoing operational costs.  By managing a system with a single-pane, customers can correlate customer experience, application responses and network issues in an integrated system, and pinpoint corrective action.  This is not to say that Juniper has an exclusive on single-pane managed systems covering all these network systems – Cisco, Fortinet and others lay claim in the same.  Juniper is in good company. ​

Alex Choi, SVP, Head of Strategy and Technology Innovation at Deutsche Telekom, presented at Day 2 joint keynote broadcast for ONF's Spotlight event on 5G and open source. He shared several comments about DT’s strategy that we thought were interesting and showed that the German telco is looking to break away from old ways of doing business.

• Open RAN is being used to accomplish two major goals
  • Get smaller vendors into the DT network bids
  • Enable multiple vendors to interoperate, for instance between RRU, CU and DU
  • Break the “monopoly” and “Vendor lock-in” that the larger RAN players have at DT
• Wi-Fi 6 is excellent technology and may compete with cellular, depending on the situation
• Unlicensed and private licenses.  The use of cellular systems on these newly available spectrums is important to DT, and the telco is working closely with German industrial players like Siemens, Bosch, for instance.

These three major trends synchronize with our researching findings and forecasts, as well. 

• For instance, we also presented at the ONF 5G event on the topic of Open Source and Open RAN, and we shared that we expect Open RAN to represent 10-20% of RAN spending in a handful of years.  We shared the results of the August and September 2020 surveys we did of telcos about topics like open source, Open RAN and capex spending plans.  One of the key findings we shared was that telcos who participated in our survey are more bullish about using Open RAN than they were just one year ago, and that, surprisingly, these same telcos are open to using open-source software in their RAN systems in as early as a couple of years from now. 
• In our WLAN-related studies, we expect by next year, over half of enterprise WLAN revenues will be 802.11ax-based. 
• Unlicensed spectrum has been popular mainly for use in communications technology such as Wi-Fi, Bluetooth and other short-range communications systems.  However, like DT, we expect enterprises to use cellular technology at enterprises on new unlicensed, shared and private licensed spectrum.  While DT didn’t spell it out in the presentation, our view is that enterprise cellular has the potential to be deployed in a manner similar to the way Wi-Fi is deployed today, and that could mean telcos may not participate fully in the enterprise opportunity so often cited as a driver to 5G-related growth.
  

 Activity surrounding Open RAN is hitting a fever pitch.  We have been seeing accelerating operator and vendor announcements supporting Open RAN, and now the Open Networking Foundation has announced that it is launching SD-RAN to complement Open RAN.  The plan for SD RAN is to open up critical portions of the RAN architecture, allowing both open source and vendor based microservices, called xApps, software connect to the SD RAN architecture’s Radio Ixxx Controller (RIC).
 
To date, we’ve seen vendors like Parallel Wireless, Mavenir, Altiostar, Samsung and Nokia throw their weight behind Open RAN.  Japanese operator Rakuten has been very vocal about its successful commercial launch in April 2020 that uses Open RAN and a virtual computing system to support various RAN functions such as baseband.  ONF’s SD RAN project takes things another step, though, by allowing operators and vendors to to leverage open source in the RAN environment.
 
Getting there presents a challenge.  With its announcement, the ONF will support a nRT-RIC and xApps, this is the intelligence that needs to be opened up, according to Timon Sloane, VP for ecosystems and marketing for the ONF based in Menlo Park. He says that functionality from a powerful RIC and xApps can finally deliver the integration and benefits needed for an open approach to work.
 
Adding some muscle, the open RAN development community, and associated carriers globally, have shown their support for this latest project, a software defined RAN that will put a focus on open systems for 5G and the deeper integration.

 
The ONF’s SD-RAN project specifically is backed by a coterie of industry players: The O-RAN Alliance, Telecom Infrastructure Project (TIP), and Facebook. Also, global carriers and cloud providers like AT&T, Google, China Mobile, China Unicom, DT and NTT. Lastly, system/chip companies like Intel, Sercomm and Radisys.
 
The ONF’s proposed µONOS-RIC, is a microservices SDN controller based on ONF’s ONOS platform.  650 Group is bullish on this effort as previous attempts have not come to fruition and the ONF has already had lots of success with its CORD/cloud edge data centers and broadband access with the likes of AT&T DT and Comcast.

Like many companies that sell campus networking gear, Ubiquiti Networks saw a slowdown in 2Q20.  Its Enterprise-related revenues grew only 4% Y/Y and were down 16% Q/Q.  We reviewed the public material from its disclosures this morning, plus as we do during each of the quarters, we are making checks along the way because we assess Ubiquiti’s market share in many of its markets like Ethernet Switching, Enterprise WLAN, Consumer WLAN, routing and security.  

The company experienced production delays in the quarter, primarily as a result of its main manufacturing site being located in southern China.  It has established subcontract manufacturing relationships recently where parts are made in Vietnam and Taiwan.  The company has been penalized with tariffs because many of its products are made in China, so it has an incentive to get out of the PRC.  Its facility lease in China ends in a year, and we expect that Ubiquiti will begin using subcontract manufacturing outside of China increasingly.  

Inventory and purchase obligations are at a record high.  At the end of 1Q20, inventories had dropped, probably because of shutdowns in China, but inventories grew nearly 40% Q/Q in 2Q20.  We believe that the company is expecting revenue growth in the future, based on its high inventory and purchase obligations.   

The company attributes its growth to the expansion of distribution channels and expansion of its product line.  Since the pandemic shutdowns hit, it appears that the company has not grown its distributor count appreciably.  In previous quarters, it had grown its reseller and distributor counts, fueling growth.  Coincident with the company’s supply chain difficulties, we have noticed that the company is having trouble getting important new products to volume.  For instance, its Amplifi Alien 802.11ax product, while introduced months ago, is unavailable for purchase.  We have evidence that some volume was available during 2Q20, though.  We see this type of difficulty getting products to volume as related to the sequential growth challenges the company experienced.  But, the company has record purchase obligations, so we think it is just a matter of time before it has 802.11ax consumer – and enterprise-class – WLAN products in the market.  Our hunch is that by 2H20, the company will have 802.11ax enterprise WLAN products in the market.

Speaking of WLAN, since Ubiquiti is selling primarily 802.11ac products at a time when the market is moving towards the newer generation 802.11ax, this is effectively shrinking Ubiquiti’s addressable market as about 1/3rd of enterprise Access Point revenue is related to 802.11ax.  Additionally, the company has significant exposure to smaller customers, which are being hurt more during the shutdowns than larger ones.

Ubiquiti has been a share-taker in the enterprise WLAN market for many years.  But, with the short-term challenges it is experiencing (supply chain, distribution, older product portfolio, customer exposure), its share-taking ended in 2Q20.  It looks like the company is taking steps to address the supply chain and product refreshes.  However, its exposure to smaller customers and its challenges in expanding distribution are more difficult to fix during the pandemic.

AWS (Amazon Web Services) grew nearly 30% Y/Y, remarkable results for a $10B a quarter business. 650 Group enterprise interviews indicate that IaaS is the preferred platform for new application development in the new-normal COVID-19 world. 

We do expect at some point enterprises will move some of these workloads back to the premise, but don’t expect a headwind. Still, more of normalization as this premises-based move in 2021 will be occurring right as AI workloads add a new leg of growth to IaaS providers.

AWS Custom ASIC and semi-custom ASIC development include many projects beyond Annapurna’s Smart NIC and Amazon’s investment into satellite connectivity with a $10B investment in project Kuiper for low earth satellites in direct competition with SpaceX’s Starlink will make the company's Cloud platform even more popular. Also, if satellite connectivity is just for media, which we see as unlikely, the way consumers connect their devices over the next decade is going to go through a significant transformation, and this is just the best-case will have a minimal impact.  

Apple’s Cloud business remains locked between business models.  Apple monetizes the Cloud portion via hardware sales with little direct revenue coming from Cloud services. 

While Apple announced a significant networking advancement with Nokia’s new data center switches, a substantial step in the right direction, we have yet to see a significant increase in organic data center spend. 


Instead, Apple utilized other large IaaS providers for a lot of Apple’s features, which, to a certain extent, we see a conflicted to Apple’s vertical integration of the company's portfolio.  We expect Apple’s organic data center spending to increase significantly over the next few years as the company further vertically integrates and competes directly with Google/Facebook on features and capabilities even though the three companies monetize them differently.   For example, computing is just as critical in Augmented Reality and Virtual Reality as the handset itself.

The only negative in Microsoft’s earnings in 2Q20 was Bing, expected based on consumer behavior trends.  Azure continues to grow robustly as the company experiences supply constraints, just like everyone else in 2Q20.  Over the next 4-6 quarters, we expect Project Jedi, the DoD’s Cloud project awarded in 2019 to Microsoft, to ramp up, which will be a significant positive to demand during the quarters in which it recognizes revenue. 

Microsoft is not only benefiting from enterprises using Azure for application development but also in collaboration with Teams and Office 365.  Almost all WFH scenarios help Microsoft, except for higher unemployment (less total office workers).

Microsoft remains the dominant #2 IaaS provider and is increasing its influence in the supply chain on future projects and deployments. In 3Q20, we expect LinkedIn revenue to moderate based on fewer companies hiring.  We also expect the new XBox, Series X, to be a key driver for Microsoft’s Cloud services.

Facebook revenue grew robustly in 2Q20, and its CAPEX guidance remained consistent for 2020 compared to previous revisions in the last two quarterly results.

Facebook’s results were counter trend to our expectations that many advertisers would pull back spending do to COVID-19 based on lack of supply (no need to advertise consumer staples) or from consumer spending put on pause (cars that people don’t need while sheltering at home).  We believe Facebook benefited from more time on the platform and from the targeting of specific adds on areas of discretionary spending that did grow like sports equipment (good luck finding a bike, kayak, or other social distancing sports gear) and WFH (consumers shifting patterns of spending more for their residents while WFH or just making the home more comfortable due to extended hours in it).

Facebook, like Google, is under government scrutiny for its scale and size.  We are closely monitoring the trends of government oversight from the US government and well as other countries like Australia which is forcing Facebook to pay for news as well as Microsoft’s potential purchase of Tik Tok (as of writing this over the weekend, they were still pursuing them).  It seems like the duopoly here is not preferred by most governments at this stage and expect election results to polarize the losing party against social media companies into 2021.

Google, the largest US Hyperscaler by revenue, reported Search and Social results that declined Y/Y for the first time while IaaS revenue grew nearly $1B Y/Y.  We were a little surprised at Facebook’s robust growth compared to Google’s. Google’s results were in line with our overall expectations for Search and Social decline in 2020 as consumers and advertisers resetting to the new normal.  We expect more targeted ads throughout 2020 as consumers live and work from home, and many students live and study from home during the fall semester.

Google has made big bets and investments in IaaS, and we continue to see AI as an area where they will attack AWS and Azure.  It is unclear if IaaS is compatible with the culture withing Google, which could put an upper limit on the verticals and companies Google can sell to.  During 1H20, Google was surpassed by Amazon in our supply chain interviews as the company with the most influence on the technological direction of industry-wide future products. 

We see a passing of the guard as AWS CAPEX is now much higher than Google’s, and the supply chain sees Amazon as more significant revenue potential.  We expect this change to reverberate throughout the supply chain, primarily based on how each Cloud provider uses custom or semi-custom semiconductors in their data center infrastructure.  This is something we are happy to talk about as we prepare our 2Q20 results and our fall readouts.
-- Alan Weckel, Founding Analyst, 650 Group