Western Digital Corporation, also known as WDC, held its investor meeting yesterday.  We highlight four important disclosures: (a) it expects HDD to survive, despite flash's advantages, (b) WDC's plans to use RISC and launch a new memory interface, (c) an update on current business trends, and (d) the company's plans for its storage systems business.

First, since the company owns both Hard Disk Drive (HDD) and Flash divisions, it has an interest in keeping investors informed of the relative competitiveness between the two.  Two and a half years ago, WDC closed on its acquisition of flash pioneer Sandisk.  Around that time, the company was asserting that there is, and the company anticipates it will remain the case, that HDDs will retain at least a 10-times advantage versus flash on a cost per bit ($/GB) stored basis.  At the company's meeting yesterday the company reiterated its view that this 10x advantage will continue at least till the year 2022. 

The 10x $/GB differential is important because, if true, it means HDDs will not go away for many applications, especially for storage of big data at hyperscalers.  Consider this - storage systems vendors such as Pure Storage are announcing  software systems that allow premises-based flash storage to be seamlessly moved to the cloud for longer-term storage, which means that cloud hyperscalers like Amazon Web Services (AWS) are likely to be HDD customers for a very long time.  Nevertheless, flash will keep on taking share from HDD.  The company has been reducing its manufacturing capacity for HDD, with significant layoffs and factory shutdowns over the past several years.  In fact, it plans significant ongoing cost cutting in its HDD manufacturing, it the range of 15-25% Y/Y decline next year.

The company also announced an ambitious plan to transition from licensed CPU cores to RISC based cores, for which it expects to pay no licensing and/or royalty fees.  WDC says it ships over 1 billion CPU cores per year, so this is a significant shift.  Also, the company plans to introduce an open-sourced memory interface called OmniXtend memory fabric, which will pit it against Intel (using DDR4, etc.) who has historically launched its own interfaces.  WDC is now a very big player in storage, having built through organic growth and acquisitions.  It has more market might and these new initiatives have a better opportunity to launch than in the past.

Additionally, the company said that its near-term business trends are under pressure due to cyclical market fluctuations.  The memory semiconductor industry has historically endured a boom/bust cycle and now the company is explaining it has entered the bust part of that cycle.  Since its earnings call on October 25, 2018, it says conditions have deteriorated somewhat more​, partly the result of hyperscalers continuing to reduce inventories and partly due to mobile phone companies still reducing forecasts of demand.  The company expects 2019 will see flash demand below the historical range and that hyperscalers should see a return to growth in 2H19.

Lastly, the company's Data Center Solutions group, which employs a vertically integrated strategy to compete with traditional storage systems companies such as DELL-EMC, NetApp, HPE, Pure Storage and others, just experienced a record quarter on a revenue basis and is approaching break-even in its operations.  The company has the goal of becoming a top 5 player in data center solutions, which we take to mean, it is planning to take share from the current players.  The group has experienced 17x revenue growth from Q1FY19 compared to Q1FY16, according the presentation (of course, the group has made acquisitions that bolster this number), has shipped 3 Exabytes in the months in calendar 2018 (which isn't over yet) and has shipped 8,500 systems and platforms since inception.  The company plans to experience "double digit" revenue growth rates for this unit in the future.

On November 13, 2018, Cisco announced its new Catalyst 9800 Wireless Controller.  With this announcement, Cisco now enables large enterprises to manage their WLAN networks from the cloud. 

This announcement has several components to it that are interesting. 

• Available C4Q18
• The 9800 runs Cisco IOS XE
  
• The 9800 can be run:
  
  • 'on premise' (similar to how Cisco's existing Controllers like the 8540 or 5520 operate),
    
  • virtually embedded onto Catalyst 9000 switches (on premise)
    
  • on the 'public cloud' (such as AWS).  

What's new here is that Cisco customers can control their WLAN networks using public cloud - in particular Amazon Web Services. Up till now, the Cisco Aironet product set has been enabled to run on Controllers, as a virtual software instance on premise, or in "controller-less' capability, called Mobility Express. 

Why is this important?  Because Meraki (owned by Cisco) operates a very successful cloud-managed WLAN service, enabling management of Meraki Access Points.  The larger revenue contributor to Cisco's WLAN revenue is its Aironet product line, which hasn't been cloud-manageable until this 9800 announcement.  With the introduction of the 9800 cloud-managed offering, this enables large-enterprises to operate their wireless networks from the cloud.  So, Meraki isn't Cisco's only web-managed offering any longer.  We think over time, Cisco customers may see the distinction between cloud-managed and premise-located management as blurring.

​Our big takeaway from its recent global analyst meeting was that Nokia is formalizing its enterprise business.  Of course, the company’s primary business, which focuses on telecom service providers, is undergoing major product updates, including towards 5G, Fixed Wireless Access and towards network slicing.  We have published about these topics in other posts relating to Nokia in the past several months, having attended other Nokia events, so we focus on topics we haven’t discussed recently.

The company acknowledges that telco capex is expected to be unexciting and is redoubling efforts to gather enterprise customers.  In 3Q18, Enterprise represented 5% of revenues.  The company expects 8% CAGR for Enterprise Networking.  Of course, the company covered many topics beyond enterprise, including its view on megatrends, the importance of spectrum instead of differentiation between 4G and 5G, residential WiFi and Fixed Wireless Access, its recent wins at major telcos, the impact of the recent re-organization, the impact of the trade war and other topics. 

Enterprise market, Private cellular and WiFi.  The company’s view is that private LTE will challenge WiFi for certain applications in its “strategic” enterprise markets, including for verticals such as logistics and transportation.  Considering the Nokia view, we expect private LTE and WiFi will co-exist in the future.  We think that Nokia can succeed with its private LTE strategy, because this is mostly a “greenfield” opportunity.  Many of the cases Nokia explains it is seeing success are outdoor, not indoor, where WiFi is so popular.  A number of industries are likely to adopt private LTE (mining, logistics are good examples), and later 5G, but we expect most every industry will maintain their reliance on WiFi.  We keep in mind that in light of the fact that 802.11ax (which began shipping 3Q18) incorporates many more cellular-like capabilities, WiFi will have a seat at the table for some time to come even in these critical industries.  Interestingly, by leveraging service provider channels, the company has plans to enter the “branch” enterprise network market, using SD-WAN as its “Trojan horse” to enter.

Megatrends.  From a strategy standpoint, Nokia sees megatrends: Ubiquitous connectivity, multi-cloud, deep analytics, industrial IoT and regulatory.
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Spectrum takes on new importance.  On mobile radio, the company focuses on spectrum differences as much as the difference between 4G and 5G.  The company’s view is all macro basestations should have mmWave.  Describing its 5G ramp, Nokia’s factory capacity related to 5G infrastructure has quadrupled this most recent quarter; and the company “went to volume shipments” on its new, in-house Reefshark chips in 3Q18. 

Residential WiFi and Fixed Wireless Access.  The company’s new mesh WiFi will be made available at its first service provider customer’s stores in the month of November.  This mesh technology is from the recent acquisition of Unium. The company’s first Fixed Wireless Access (FWA) customers have begun deployments, for both 4G cellular and WiGig (60 Ghz 802.11ad).  We understand that the 4G cellular projects are largely at mobile service providers working to leverage existing investments in their mobile infrastructure, while WiGig is in demand at enterprises and traditionally fixed-line service providers. The company expects 5G FWA infrastructure will be ready to ship in 2019.

Recent wins at service providers.  New wins announced €2B around this event include “frame wins” at major Chinese service providers

• China Mobile: radio access, core, passive optical networks, IP routing and optical transport, SDN, network management and professional services.
• China Telecom to improve country-wide 4G LTE coverage and hot spot capacity. Nokia will provide its end-to-end portfolio and solutions for China Telecom including FDD-LTE radio access, home CPE solutions, core routers, multi-service edge routers and optics as well as its services expertise.
• China Unicom deploy technologies across the country including Nokia FDD-LTE radio access, Multi-access Edge Computing, virtualized IMS, SDN, IP routing and optical transport, and fixed network equipment.

The company also emphasized its multi-billion dollar deal recently signed with T-Mobile US.  Neville Ray, CTO of T-Mobile US presented at the event.  Additionally, AT&T’s Chris Penrose, SVP IoT, discussed its relationship with Nokia using the WING service; this is a global IoT service that uses revenue co-sharing between AT&T, Nokia and the many regional service providers in non-AT&T locations.  AT&T made the point that IoT is a business service.  Telia, headquartered in Nokia rival’s Ericsson’s home country, Sweden, made a compelling presentation at the meeting, as well.

The impact of the recent re-organization.  On the day of its recent earnings call, the company announced a planned re-organization, along with some reductions in force, to reduce spending so the company can hit its year 2020 financial targets.  The importance of this re-org, from our standpoint, is that the Software division of the company will be in charge of managing several products that used to be part of the Mobile division beginning Jan 1, 2019.  Products moving from Mobile to Software include IMS CSCF and TAS.  We have verified that Packet Core (including EPC/4G and 5G Core) will remain in the ION (IP and Optical Networks) division, where it has been for years.
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Trade war.  According to Rajeev Suri, CEO of Nokia, Australia, UK, Korea, Japan, possibly Canada all may ban Chinese telecom gear.  Suri expects that Nokia’s “working assumptions” are that: (a) around 20-25% Chinese market share is available for foreign vendors, and (b) potentially, ZTE will take more share in China, and that (c) foreigners (like Nokia) will still be able to play. Suri explained that Nokia hasn’t seen Chinese vendors get more aggressive in Middle East and Africa (MEA).

​At Mavenir’s analyst meeting in Dallas today, the company stated that it expects to grow its revenues about 10% Y/Y in 2018.  In arriving at this revenue, it is pursuing a price-aggressor strategy to some extent and has a surprisingly broad portfolio of telecom-focused products.  Its product line is software-oriented, though the company does still have hardware development on an ongoing basis.  Using 5G as its ‘insertion point,’ the company is working on a strategy to get 10-15 large, Tier 1 mobile network operators at the tens-of-millions per year level.  The company’s portfolio encompasses voice core, messaging core, mobile packet core and radio access networks.  What is really interesting is that Mavenir expects to expand past its traditional revenue stream (telecom core and messaging) into the radio market, with revenues coming in 2019.

In its traditional telecom core market, the company suggested that some of its customer wins are with Tier 1 mobile network operators across its product portfolio, including IMS/VoLTE, EPC/5GCore, Security and advertising messaging.  To illustrate its success in selling a differentiated Telecom Core portfolio, it shared subscriber statistics that its operator customers who use Mavenir core system such as IMS TAS, CSCF and RCS application servers (mostly supporting VoLTE, and secondarily RCS):

• North America >70M active subscribers, 62% VoLTE share
• EMEA >25M active subscribers, 50% VoLTE share UK/Fr/Germany
• APAC >45M subs; 67% RCS share Central/S.Asia

​In its new market, RAN, this is exciting – Mavenir is a new entrant to the RAN market, and it is US-based.  The company expects that it will have Radio Access Network (RAN) revenue in 2019 after successful completion of trials now underway.  For reference, the company’s RAN systems generally follow open standards such as xRAN and can be considered “cloud RAN.”

Mid-band spectrum shortages in the US was the main thrust of the 5G Americas sponsors. The idea is that the rest of the world has lots of mid-band spectrum available and service providers in countries that could be considered economic leaders (Japan, Korea, China, Western European countries) have plenty of available mid-band spectrum that is ideal for 5G, while the US does not.  This group at 5G Americas, which includes service providers, vendors and standards bodies, is saying that US leadership in cellular infrastructure and the entire app economy that relies upon it may be at risk as 5G get deployed.

Other topics discussed:  AT&T is currently out for bid on its 5GC infrastructure, and this caused some interesting posturing by the vendor attendees (like Ericsson, Nokia, Cisco, Mavenir) at this conference, with each trying to identifying their strengths.  It seems the consensus is that all mobile operators in the US market are using Option 3X, an EPC anchoring system.  And, the consensus seems to be that US operators will need to move to 5GC once most traffic is coming over 5G Radio (“New Radio”).  Vendor selection appears an open field, once again, as 5GC has 13 different microservices, each which could theoretically be parsed out to different vendors.  Operators are saying, though, that while this multi-vendor selection may lead to savings on purchasing, it will increase integration spending, so these two have to be balanced out. 

Mobile Edge Computing:  The consensus is that a 50 mile radius (or others are saying 100 km) is considered the ‘edge,’ or the ‘low latency’ zone.  We expect, however, that the data forwarding plane (‘user plane’) will be distributed to, say, 100 locations within a territory like the US market, while the control plane will be much more centralized (perhaps as centralized as it is currently, where it might be considered to be like 1/4th the number of locations). 
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CBRS.  The consensus is that testing will be done by mid November 2018 and Initial Commercial Deployment by 1Q19, potentially spilling into 2Q19.  PAL auctions are expected by attendees to be a 2019 event, with 2020 traffic running on PAL spectrum. Commscope represented the views from a SAS standpoint for this discussion.There were discussions about the C-Band (6 Ghz) potentially using the same type of Automatic Frequency Coordination system, but the consensus is that it is too early to declare that the path forward.

We attended Mobile World Congress Americas (MWCa) in Los Angeles, CA this week, as well as the AT&T Spark event in San Francisco.  Since 5G is launching first the US, these two events became the public events where significant 5G-related announcements happened.

• Verizon.  Will launch 5G Fixed Wireless Access (FWA) on October 1 in four markets: Houston, Indianapolis, Los Angeles and Sacramento.
• AT&T.  The company reiterated its own 5G plans (mobile 5G by year-end 2018 in cities such as Atlanta, Charlotte, Dallas, Indianapolis, Oklahoma City, Raleigh, Waco, Houston, Jacksonville, Lousville, New Orleans and San Antonia), plus it made some announcements like that it is beginning 5G-ready CBRS equipment testing (using Samsung CBRS equipment and CommScope as SAS provider).  Also, at the Spark event on Monday, the company announced three strategic telecom equipment suppliers, Ericsson, Nokia and Samsung. 
• T-Mobile.  Announced that it had completed a Cisco vEPC system (upgradeable to 5G Core) carrying traffic for 70M users that was from Cisco.  It also announced that it signed a $3.5B 5G agreement with Ericsson.  This is in addition to the July 30 announcement made earlier with Nokia for $3.5B, as well.  Generally, the company has set expectations as recently as September 10 that it will provide nationwide 5G by the year 2020.
• Sprint.  Announced that it had demonstrated a 5G NR connection of Massive MIMO with Nokia equipment.

Additionally, discussions about spectrum in the US market were very active discussions.  Some points we picked up on:

• No new mid-band auctions will occur in the US market for another 2-3 years, so this means that new capacity is going to come from LAA (just announced on the iPhone Xs this week, as well) and from CBRS (discussed above).
• The "who has the fastest 5G throughput" battle will be won at the millimeter wave.  In other words, using millimeter was, speeds as high as 10 Gbps are possible, but with mid-band (1-6 Ghz), where LTE is currently deployed, cannot go much over 2 Gbps.  So, to beat the Ookla Speed Test, the mobile operators who deploy mmWave early will get a leg up.  However, in order to deploy mmWave, these have to be small-cells that are within 100 meters of users.  Since it is so difficult to get real-estate rights and backhaul for small cells, this is going to be a big challenge.  Nevertheless, this is how the battle will be won.
• T-Mobile's 600 Mhz rollout is now in 1,250 cities.  The company will eventually enable 600 Mhz 5G.  600 Mhz should dramatically improve T-Mobile coverage because it is low-band spectrum.

Yesterday, Ericsson and Juniper announced plans to partner to tackle 5G transport challenges together.  Additionally, Ericsson announced a partnership with optical transport company, ECI.  The companies said that Ericsson's Router 6000 product family will focus on fronthaul and backhaul and edge compute and will be complemented by Juniper MX, PTX and SRX Series portfolios providing edge, core and security capabilities.  Additionally, in today's presentation to analysts, Ericsson showed that the overall transport capability from Ericsson will also include Optical Transport from both ECI Telecom and Ciena.  The Ericsson Network Manager will be capable of managing not only Ericsson products, but also the three families of products from Juniper.

ECI will be used for Metro, and will be completely integrated with the Ericsson OSS platform.  The company conceded that it is de-emphasizing its in-house metro optical product line and focusing on ECI.  Ciena will be used for long-haul transport predominantly, mainly the Ciena 6500 product.  Ericsson concedes that both ECI and Ciena products can move to other domains.

To enable automation for 5G, Ericsson can only guarantee that networks working with Ericsson and its partners can successfully be automated.  This automation / partnership topic illustrates just how complex it will be to make 5G networks work properly.

Recall that Ericsson and Juniper had a close partnership that goes back many years.  In fact, the Juniper router predecessor to the MX was used as the underlying hardware for Ericsson's very important GGSN/SGSN and later EPC capabilities. Ericsson eventually replaced the Juniper product for EPC with its own Router 6000.  Subsequently, Ericsson announced a partnership with Cisco, which was more general in nature.  That relationship did not result in much tangible progress, from what we have learned; and the relationship was done under previous management teams for both Cisco and Ericsson.  Ericsson explained today in its analyst briefing that Cisco and Ericsson compete in several areas.  So, this new Juniper relationship is important in that it re-kindles an old relationship and plays to both companies' strengths.

We attended the Nokia Fixed Broadband group analyst meeting in Tokyo last week and found that the company’s portfolio is expanding rapidly.  The company’s view is that capital spending at its customers will be flat in future, and therefore the company is taking the approach to grow its portfolio beyond its core DSL and Optical core to potentially allow it grow revenues.  It has expanded its product line to include cable (from Gainspeed acquisition), more recently home WiFi (augmented through acquisitions) and is rolling out Fixed Wireless Access (FWA).  The company is also predicting that the Indian subcontinent and fixed network wholesaling will become significant opportunities for the Nokia Fixed Network group.

• Cable.  Admits that it took a year longer for DAA to develop.  In deployment phase at WOW! And we get the sense that there are some significant wins that Nokia could announce in the future.  It claims to be the only vendor with DAA available today.
• Fixed Wireless Access (FWA).  The company is offering two versions of FWA: The company is offering two versions of FWA: (a) 3GPP radio access network based and (d) unlicensed WiGig (60 Ghz WiFi-based).  The company expects 5G-based solutions to hit the market in 2019.  The company’s first FWA customer is an enterprise, using WiGig.  But, the main focus is on large Service Providers.  The company is not focusing on Wireless ISPs (WISPs).    
• WiFi.  Nokia is making a push to enhance its Broadband CPE portfolio to include more advanced WiFi capabilities.  It is launching a “mesh” capability that will become popular across its broadband CPE product line.  Mesh is a very popular router category that has been propelling growth for vendors such as eero and Google.

Additionally, Nokia emphasized an enabling technology to allow fixed network wholesaling - slicing.  The company has begun discussing Altiplano, an SDAN (Software Defined Access Network) system.  This allows multiple service providers to share the same fiber and equipment installed base.  The company’s view is that just like mobile network tower sharing happened to reduce capital spending, the same will happen with Fixed Broadband networks – but this requires a virtualization technology such as SDAN.

F5 kicked off its #F5Agility18 conference with over 1,300 attendees.  The company’s themes was “Any app, anywhere,” and words repeated included “Automation” and “as a service.”  The company is moving towards selling security as a standalone offering.  Accompanying the show, there was a press release announcing Gi LAN traffic management and Gi Firewall VNFs generally available September 2018 focused on mobile operators, available on capacity-based consumption model.  A striking difference between this year’s conference in Boston and last year’s conference in Chicago was that a significant portion of the management team is different: new CIO, CFO, regional VP, Chief Strategy Officer, two new SVP/GMs of business units, EVP HR, EVP Services.

Generally, the company is planning on delivering new capabilities:

• automation & orchestration,
• cloud-native applications service platforms (Packaged software and as a service for native cloud consumption experience (in next 12 months)
• new application security services.

Here are the three eras of market development for F5:

• 1996-2004.  Load balancer.
• 2005-2015- ADC market.
• 2016+    Multi-cloud application services

The company is putting significant investment into SP, software, automation.  “Any app, anywhere” vision.

​Growth strategy:

1. Drive share gain in physical ADC market.  F5 expects physical ADC down mid single digits Y/Y (5%).  Think ours will decline less fast b/c we have exposure to largest customers, have SP exposure who demand hardware (ViPRION) and because we innovate on hardware faster than competitors
2. Capturing growing demand for virtual ADCs and ADC-as-a-service.  Been growing vADC 20%/yr past few years; could accelerate.  Just now releasing purpose-built software (BigIP) and cloud-native software in early 2019. 
3. Expanding security with new multi-cloud solutions.  WAF enhancements. 
4. Creating long-term value through services. 
5. Driving margin expansion and earnings power.  Through scale.  40% software by 2022. 

Development timeline:

• F2018: Just announced orchestration / automation a few months ago for BigIP (BigIP Cloud edition).  Per app use-cases are enabled through this innovation.
• F2019: cloud-native app services.  Container-based, Kubernetes, cloud-native distributed ADC system.  Beta end this year, release 1H19.
• >F2019: ADC-as-a-service. 

Security strategy:

• F15-17: ADC-attached security
• F18-19: Standalone security offerings
• F20-22E: Multi-cloud application security

Fast-growing Ethernet Switch vendor Arista Networks announced plans to acquire Mojo Networks, an Enterprise-class WLAN vendor today.  The deal is expected to close in C3Q18.  This deal douses hopes that Arista may buy other WLAN vendors, in our view.  Mojo Networks is unique in the WLAN industry: (a) it has a different business model from competitors, and (b) as of Aug 2018, it manages more Enterprise-class Access Points using Artificial Intelligence than other vendors.  Arista says that it plans to use Mojo AI in its Cognitive Cloud Networking for Campus initiative.  

Mojo Networks has taken revenue for cloud-managed services and has not taken revenue from the sale of Access Points.  The Access Points are sold by distributors who make a small margin and drop ship them to Mojo Networks customers.  The Mojo Networks revenue from cloud-managed services is significant when compared to other vendors in the Enterprise-class WLAN market.  Additionally, because Mojo's Access Point selling partners charge only a small premium for the hardware, Mojo customers benefit with a lower total cost for the Access Points, than, say, Cisco or HPE Aruba Access Points.

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