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.

We expect that Wi-Fi 6E products to hit the market as soon as 3Q20 in the US and by 4Q20 in Europe.  The appeal of these new 802.11ax products is that they operate not just in 2.4 GHz and 5 GHz, as 802.11ac products have, but now add 6 GHz spectrum support.  The US products will likely support 1.2 GHz of spectrum, while European products may support about 0.5 GHz of spectrum. 

We expect that throughput of higher-end Wi-Fi 6E access points may exceed 5 Gbps under some operating conditions, which may drive the discussion towards 10 Gbps switching.  The higher throughput "backhaul" may mean that MultiGig Ethernet (that operates at 2.5 Gbps and/or 5 Gbps and takes advantage of older copper cabling installed primarily for 1 Gbps switches) could get another use-case compared to a scenario where 6 Ghz support never came to market.  There is also another potential that the market moves faster to 10 Gbps and/or fiber.

We will be publishing our forecasts for Wi-Fi 6 (802.11ax), MultiGig Ethernet and 10 Gbps Ethernet in a few weeks.  These forecasts will incorporate final 2019 numbers from vendors, as well as our updated views on 2020 macroeconomic scenarios, and the potential coronavirus impact (corvid-19).

On August 8, 2019, publicly-traded Cambium announced that it had completed the acquisition of the Xirrus products and cloud services from privately-held Riverbed Technology, Inc.  Xirrus has been a vendor in the Enterprise WLAN market for a while now and has been associated with its high-performance enterprise-class WLAN products as well as its cloud-managed services.  In our research, we find Xirrus has done well in the large venues, the education, government, and retail markets.

We interviewed the team at Cambium today and learned that the company is committed to using channels as a distribution strategy for the combined portfolio.  Additionally, the team told us it will be supporting both Cambium WLAN customers as well as Xirrus customers, and that, over time, the products and services will be converged.  We think it makes sense to rationalize the products, which will allow future customers to take advantage of developments made at each of the organizations.  The team explained that Cambium will be focusing primarily on medium and small-sized customers and that it will not be pursuing large enterprises associated with the Fortune 1000, instance.

The timing of Cambium’s acquisition makes sense on several counts.  First, it just completed its Initial Public Offering and is more well-capitalized than when it was a privately-held company. Second, during its IPO, Cambium identified that it expects its exposure to the enterprise market is key to its growth, so getting more exposure here will increase it further.  Third, several other companies have acquired enterprise WLAN vendors, and Cambium is part of this greater trend.  For instance, Arista Networks completed its acquisition of Mojo Networks in late 2018 and Juniper Networks closed its acquisition of Mist Systems at the end of 1Q19.
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Extreme Networks announced plans to acquire Aerohive, which has most of its revenues in Enterprise WLAN.  The deal was a surprise, as evidenced by the 40% price premium paid on on HIVE.  After this deal closes, Extreme's WLAN business will be the combination of three WLAN businesses - the traditional WLAN business from Enterasys (Ottawa based team), the Motorola Wireless WLAN business (acquired by Zebra, then sold to Extreme) and Aerohive.  Each of these three businesses had strengths, for instance, the Ottawa team had designed a product line that had high performance in crowded venues - Extreme has enjoyed a long relationship with the NFV; the Motorola team had designed systems that were effective in retail and logistics (as a consequence of Motorola's ownership of Symbol Tech, a bar code scanner company); and Aerohive, which was as of 1Q19 the #2 revenue player in cloud-managed WLAN services and with a strong presence in the US K-12 vertical.  While there is certainly some risk that Extreme does not integrate the Aerohive business effectively, there are some interesting aspects to this deal.
#1: Aerohive's cloud-managed WLAN services is a significant player in the market.  We expect many small and medium businesses will adopt cloud-managed WLAN, and Extreme had a less mature offering here.  We see this as the primary benefit of the Aerohive acquisition.
#2: Aerohive's vertical market exposure in US K-12 (education) market and the managed care part of the health care industry are a nice addition to Extreme.  These markets are additive.
#3: Aerohive had a SD-WAN product that while not a big revenue generator will be important for Extreme in selling to small and medium sized businesses.  We expect the SMEs and branch offices will be upgrading using a SD-Branch approach, where upgrades to WLAN, switching and SD-WAN will be done at once.  Extreme had a hole here and Aerohive fills it.
#4: Aerohive had a new product, A3, which we categorized as Enhanced Network Access Control.  The front end of this product is very modern.  Extreme also had its own NAC product.  Our hunch is the company will merge the two, taking the best of both.  We see larger enterprises as demanding this type of support.  HPE Aruba sells its Clearpass product in a wireless+wired+ENAC bundle to larger sized business, just as Cisco sells its ISE and wireless+wired bundle.  
#5: Aerohive has 802.11ax products.  We expect that increasingly, as customers adopt 802.11ax, with its expected throughput under high loads exceeding 1 Gb/sec, this will drive an upgrade cycle to switches with MultiGigabit support.  Extreme cited "cross selling" in its announcement of this deal, and we agree that customers in the 802.11ax world will be increasingly buying new switches when they adopt new wireless.

This deal was a surprise because Extreme already has WLAN in its portfolio, but if Extreme executes on this business transaction effectively, it can solidify its position in the mid-market by offering cloud services and SD-WAN (through a SD-Branch bundle) and potentially move both up market (with ENAC) and if it choses, downmarket by maintaining a business practice that Aerohive rolled out well over a year ago that can be described as a "freemium" model for its cloud-managed WLAN services.

Juniper Networks announced plans to acquire Mist Systems for approximately $405M in cash.  We think this deal makes sense for Juniper, who can now sell a key technology - WLAN - into its customer base of large and medium enterprises.  Valuation of the deal probably fell a bit short of the expectations of some, but the vendor landscape has already seen significant consolidation between Ethernet Switch and Enterprise-class WLAN vendors, with now just a few potential buyers and sellers.

The companies just had a call to discuss the announcement and share the following messages:

• Slightly dilutive to non gaap F19, accretive F20. 
• Verticals discussed on the call: h/c, retail, mfg and distribution segments
• Key wins discussed:  Large healthcare organization, Verizon Mgd SP, Walt Disney Orlando, Dartmouth College
• Business model will remain as current (60% hardware; 40% services at time of acquisition)
• No revenue numbers share
• $405M in cash; closes F2Q for JNPR
• Avoided saying who Mist competes with, other than to say Mist sees “the usual suspects”
• Mist should continue to grow because its channels will expand when Juniper acquires it
• Juniper will expand the “AI for IT” technology from Mist across the Juniper portfolio of campus switch, security and SD-WAN
• Will imminently begin 802.11ax pilots
• Last time new technology was developed for WLAN industry was over a decade ago; Mist is microservices / container based; all new
• Juniper has seen its campus switch business grow in recent times
• Will share more numbers in the future

H3C and Qualcomm announced the planned availability of the WA6628 802.11ax Wireless LAN Access Point; it is slated for September 2018 shipments.  This new Access Point uses the Qualcomm IPQ8078 part number - we checked the Qualcomm website and we cannot find this part on the website.  So, we assume that this is a future product.  

While the H3C press release is not the first 802.11ax Access Point get announced (Huawei, for instance, announced its own .11ax product in early 2017), this is important because this press announcement has a specific shipment date - September 2018.

Additionally, it is generally expected that another set of announcements are imminent from vendors using Broadcom chips.  Looks like Qualcomm and H3C wanted to get ahead of those announcements.

We attended the Wi-Fi NOW conference in Redwood City, CA this week and attended some interesting presentations.  We are writing about our observations and notes from the Google, Quantenna, Mist Systems and Mojo Networks presentations.  

Google Station presentation.  "GOOGLE STATION: PUBLIC WI-FI TO CONNECT THE NEXT BILLION INTERNET USERS."  Monica Garde and Erika Wool made an interesting presentation.  The jist of the presentation, from our viewpoint, is that Google is partnering with service providers and enabling these service providers to monetize the Wi-Fi network through a revenue sharing system that is based primarily upon advertising.  The company shared some statistics, which we have in the accompanying slide.

Quantenna presentation.  James Chen, VP Product Line Management presented "GREAT INNOVATIONS PART ONE: MASSIVE MIMO & DUAL-BAND 802.11AX".  Chen made the the case that 8x8 WiFi (that Quantenna calls Massive MIMO) outperforms 4x4 systems.  For instance, in its tests, at 85 RSSI and through a wall, performance was 1.6x greater using 8x8 compared to 4x4.  The company also made the case that Massive MIMO has greater throughput compared to non Massive MIMO, as well; the company has demonstrated >1 Gbps throughput in a typical home.  The company showed that Massive MIMO alleviates the "Sticky Client" using a 1x1 Samsung Galaxy Tab Active2 device.  The company did not talk about 802.11ax, unfortunately, other than to say that 8x8 is relevant for 802.11ax, as well.

Mojo Networks presentation.  Mojo CEO Rick Wilmer made the point that simply enabling Cloud-managed Wi-Fi has been done already, implying this is cloud 1.0, and that this message is boring.  The company explained that its cloud architecture is cloud 2.0 because it takes advantage of the capabilities in the cloud and enables - Cognitive Wi-Fi.  Cognitive Wi-Fi, as far as Mojo is concerned, has to do with big data (store key client parameters and run ML algorithms) and smart edge APs.  The company didn't go into deep science of ML/AI, but explained the ML workflow: 1-data collection, 2-training the classifier model, 3-trained model in action, 4-result.  

Mojo explained that it has lots of data to perform Machine Learning on.  It has 1/2M APs deployed.  The company shared that using 1 week of data of a subset across only 4 verticals (enterprise, education, mfg, retail & hospitality): 237K clients, 31M associations, 400+ applications.  Separately, the company said it has obtains 50M associations per week (in a press release).  A significant amount of the data that is delivered to the cloud has been pre-processed in the Mojo APs; the APs cache 2 days of data.  The point of these statistics, according to Mojo, is that it has more data than other Wi-Fi vendors to train its Machine Learning system on.  

According to Mojo, using inference engine, automatically fixes everything possible.  Wilmer says that this makes interacting with the User Interface less necessary because it takes care of problems automatically.  Was Mojo serious or joking when it said, "the UI may disappear as we know it."  Time will tell.

The company shared some other information that was interesting:

• 130K APs deployed at a single customers - a very large customer.  Very scalable.
• Many Mojo customers are decomissioning their EThernet infrastructure (including cables) in lieu of using Wi-Fi from Mojo. 
• Mojo deploys 'a lot' of 3 radio APs.  With third radio, a listening radio, it watches RF environment and does wireless intrusion scanning.  Every 5 seconds, it feeds critical information to the ML environment.  So, if users physically move, the AI system can make adjustments to the system so there are fewer performance issues.  The third radio can also be used as a client, to simulate performance.  This client capability can run the specific application that will used in an environment and simulate whether the Wi-Fi will perform adequately before an event (like a test at a university, for instance).
• Open Standards.  Believe all APs from all vendors should interoperate like light bulbs.  That would accelerate the Wi-Fi market.  Wilmer highlighted that the OCP event, earlier this year, Mojo 'lit up' the entire trade show floor with non Mojo APs using the Mojo system.
• Mojo will announce AP providers soon that are not Mojo APs that you can plug.  No margin stack from an OEM, purchased directly from an Asian ODM.  

Mist Systems.  Bob Friday, of Mist made a presentation on May 17, 2018.  In addition to the content from his presentation, I interviewed other at Mist personnel at the show.  The company claims it is focusing and having success in selling to large enterprises.  We learned that Mist uses Broadcom WiFi chips and has a custom-designed Bluetooth antennae array (shown at the show).  The company highlights its location services as a unique capability, and it draws upon its Bluetooth capabilities to deliver location.  However, the company's main message is its AI capabilities; in some ways, it has become the poster-child for AI amongst startups in the networking industry.  Mist's presentation at the show reiterated the same point - that it is an AI company.  

Stepping back, Mist has been shipping commercially for a year now.  In our observation and research, the company's efforts to take share from competitors has landed it on the map - over the past two quarters, its larger competitors have taken notice of Mist and see it competing at large enterprise accounts.  

During the Q&A part of the presentation by Bob Friday, Mist CTO and founder was asked something that we found very interesting; the question was what kinds of algorithms does Mist use in its system, and do they all need to learn?  The answer was to the effect that many different types of algorithms are used, linear optimization, decision tree analytics, neural networks, etc.  Friday made the case that there are just certain things you just know about how a WiFi network will and should work, so why go an have a machine learn about it when you already know it.  This begs the question - how necessary is AI in the first place, especially if the vendor and its IT workers or VARs have gobs of experience and can design and implement a Wi-Fi network right in the first place.  Looking at the problem differently, what this means is that some vendors may have had different backgrounds than competitors and can design Wi-Fi systems that know how to work under a variety of working conditions.  Friday was also asked another question - given that Mist is focusing so much on AI, does this mean that far fewer IT workers will become employed?  Bob's answer was diplomatic, but probably true - he said that no, we'll need the same number of workers in the near-term, and that AI Wi-Fi will simply allow the same number of IT workers to make better decisions.  Still, the question makes it clear - the audience is concerned about job loss as AI works its way into the IT industry.

Arris held its annual investor day late last week on March 28, 2018.  It was interesting: the company said "Everything is going wireless," which is an interesting admission for a company that, until about a year ago, was essentially a pureplay on wired broadband.  To be sure, the company has diversified into wireless with its acquisition of Ruckus and has benefitted from the inclusion of Wi-Fi capabilities to its broadband CPE.  The company sees this wireless future - and is pivoting towards it.

Arris management highlighted that it expect its future to include the following growth avenues:

• Cloud Wi-Fi
• DELL OEM
• CBRS 3.5 GHz LTE Small Cell
• IoT (Residential and Industrial)
• FTTx (10Gb EPON / NGPON-2)
• Consumer Mesh Wi-Fi
• Campus Ethernet Switching

Additionally, the company discussed its expectations for each division, which using its 2017 mix and various projections, calculates to a 4.7% CAGR from '17 to '21.

Enterprise Networking (Ruckus).  Overall, the company's Enterprise Networking division, also known as Ruckus Networking, includes its Enterprise WLAN business (formerly Ruckus Wireless), the Brocade ICX Ethernet Switch product line (referred to by the company as Campus Switching), and other revenue streams such as CBRS 3.5 Ghz LTE Small Cells, as well as IoT radio modules that plug into the Ruckus Access Points like Bluetooth, LoRa and Zigbee.  The company is targeting 20%+ growth for the Ruckus Networking group, which is far above the industry growth rates we expect for Enterprise plus Outdoor WLAN and Campus switching. This aggressive growth rate either implies share-taking, or growth in other products such as CBRS, Bluetooth, LoRa and Zigbee, or the the non-WLAN parts of what used to be Ruckus Wireless, such as Cloud-managed Wireless LAN services (that, for instance compete with Cisco's Meraki, Aerohive services and Mojo Networks).  The company cited an expected Enterprise WLAN revenue growth projection slightly above our projection for the period '17 to '21, even if cloud-managed WiFi services were included.

​Network and Cloud Segment.  The company said this market is growing 5% annually, and described the market generally as the Cable Modem Infrastructure, optical nodes and cable video networks market.  The company generally expects to take share, compared to this market viewpoint, projecting a 4-7% long-term annual growth expectation for this business segment.  It was interesting that the company said that the "mobile device explosion [is] driving offload demand," because it has been several years since "Wi-Fi offload" was a growth driver, but dissecting the comment a bit more, the company is pointing to cable operators as being "well positioned to handle [the] offload."  We think Arris' strong supplier position with the major Cable MSOs in the US, especially, may indicate that there should be a strong build up of WiFi and cable infrastructure coming in the future.  And, this corroborates with our own research and statements from MSOs such as Comcast.  In fact, the company showed a "future" network diagram that indicates it expects its MSO customers will be delivering 5G radio, Remote OLTs (PON) and Fixed Wireless Access instead the of cable modem (DOCSIS) equipment that was indicated in the "now" chart.  This implied shift from DOCSIS to PON/5G/FWA would be a dramatic shift in the company's product portfolio.  Very interesting, indeed.

Customer Premises Equipment (CPE) Segment.  The company claims a #1 Set Top Box (STB) market share, and #2 Broadband CPE market share, with a mix of 60% video CPE and 40% broadband revenues in 2017.  The company expects to grow broadband CPE to a mix of 50%+ by the year 2021, consistent with the market growth rates it cites - 4% CAGR for broadband and -.8% for video.  Generally, the company is projecting long term sales trend of -5% to +1%, indicating that it lacks the direct to market exposure that would get it to a growth expectation in this segment.  The company confirmed it is using NBASE-T (Multi-Gigabit Ethernet) interfaces on its home networking devices and it is planning to release 802.11ax capabilities on its portfolio, as well.  Arris CPE will also include Extenders / Adapters to, at least partially, address the growth now occurring in the Consumer Mesh market.

cWe attended the upbeat Alcatel-Lucent Enterprise (ALE) Connex18 conference, where the company said its strategy is focused on three pillars: verticals, cloud and services.  In its networks business, most significantly, the company announced: its Omnivista Cirrus cloud-managed network services offering, the WLAN indoor Location Based Services system and its plans for its Network On Demand offering.  Finally, the company has retained the use of the Alcatel-Lucent Enterprise brand name for the next few decades, shutting down speculation of a rebranding.

Verticals.  Company has organized its development and selling efforts around five vertical markets: transportation, government, healthcare, education and hospitality.  Last year, the company achieved over 100% growth in its transportation vertical, benefiting from Internet of Things (IoT) trends.  Our view is the transportation vertical and, more generally, industrial, has the opportunity to grow faster than other verticals due to the growing number of IoT use cases emerging.

Cirrus.  The company will soon offer a cloud-managed network services capability to customers that use its WLAN and switch products.  In this respect, ALE is taking on Cisco's Meraki and Aerohive, among others.  Customers can choose from its free offering or its premium offering, depending on what features are needed.  We expect that the company will be aggressive about moving customers to this service.  Pricing was not announced, though we expect the company will set prices generally at a modest discount to those of Meraki, both on product and services.

WLAN & Location Based Services (LBS).  The update focused mainly on the in-house developed Stellar WLAN product line.  Its capabilities have improved over the past year, its management capabilities have improved and will soon include cloud based management (called Cirrus), and the devices are being offered using new business models (including NOD).  The wireless product line is being specialized to support the new verticals discussed earlier.  Generally, Stellar is moving up market.  The Stellar WLAN product line is much broader than it was last year and has increased capabilities, including far greater scalability - Stellar will support 4,000 APs per campus will soon be possible.  ALE exepects Stellar WLAN to support 802.11ax by 4Q18.

The company made a big deal about Location Based Services.  Today, Bluetooth (specifically BLE) is the wireless technology being used.  BLE is incorporated into high end APs and is available using USB ports on the rest of the WLAN Access Points, or BLE beacons are available, too.  The company will offer WiFi LBS later in '18.  Examples of capabilities enabled by LBS include geopositioning and wayfinding, geofencing notifications, people tracking/flow, analytics (geofencing based).  For instance, for healthcare, the company demonstrated a 'Way Finder' capability that runs on patient smartphones that uses WiFi and Bluetooth capabilities from its WLAN APs to allow patients to navigate themselves through the healthcare facility.  Another example is for the transportation industry, where the company's ruggedized switches are finding a home, the Outdoor ruggedized APs are matched well.  

Network On Demand (NOD).  The company has signed up about 40 customers to use its NOD offering, which allows customers to use ALE switches and wireless products while paying a monthly fee instead of purchasing the equipment up front.  NOD was introduced in 4Q17 and is currently available for in-house developed products like OmniSwitch and Stellar WLAN.  NOD may be offered for third party devices, such as those from HPE Aruba, but are currently not available.  We understand that the network architecture is designed by ALE.  The company gave a few examples of customer types, mainly surrounding the idea that a quick decision had to be made on upgrading the network but there was a lengthy approval process for capital spending but a short one for operational spending, or that there was insufficient budget for the capital spending.