650 Group Blog
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Extreme Networks announced its intention to acquire the Ipanema SD-WAN operations of Infovista. The company expects the deal to close in October 2021 and that in Extreme's Fiscal 2022, the revenue contribution will be "material." We think Extreme's entry to the SD-WAN market gives the company exposure to a critical part of the networking industry, the wide area network market. In the past couple years, we've seen enterprise customers are demanding a wider range of networking products that will be managed using a "single pane of glass" management system, and with the addition of SD-WAN to Extreme's portfolio that includes Ethernet Switches and Wireless LAN, Extreme's customer appeal will grow.
Ipanema is based in France and after the acquisition, almost a quarter of Extreme's workforce will be Europe based. Ipanema currently has reseller agreements in place with British Telecom and Orange Business Services and half of its revenues are from the UK and France. The other half of revenues are from other European countries. As part of the SD-WAN operations, Ipanema has a relationship with firewall leader, Check Point Software, that allows Ipanema to offer Firewall as a Service (FWaaS). Over time, Extreme says it plans to address the SASE market, which according to our research is a very high growth opportunity. Extreme has been acquisitive in the past several years and has been focusing its efforts on offering cloud-managed services as the "glue" that binds its hardware products together. The plans for Ipanema is that it'll be integrated into Extreme's cloud-managed services system as soon as 6-9 months after its acquisition closes. Extreme also said it will continue to offer SD-WAN as a standalone offering.
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Today's big news from the FCC is that it will open up 6 GHz to Wi-Fi and other unlicensed uses. The FCC authorizes "1,200 megahertz of spectrum in the 6 GHz band (5.925–7.125 GHz) available for unlicensed use," and further explains that it authorizes "standard-power devices in 850 megahertz in the 6 GHz band. An automated frequency coordination system will prevent standard power access points from operating where they could cause interference to incumbent services." We see that this vote is very beneficial to Wi-Fi chip and systems companies that serve both consumer and enterprise markets. We also expect that outdoor systems that take advantage of this new spectrum may benefit wireless ISPs (WISPs) and their equipment suppliers. And, also, the FCC's statement that an automated frequency coordination (AFC) system will be used to prevent interference from existing microwave transmission systems. With that background, we have compiled a list of companies that will benefit from the FCC's vote.
WLAN Semiconductor companies Broadcom, Qualcomm, ON Semi, Celeno, and Intel. In our research of the WLAN Infrastructure semiconductor market, these are the vendors we expect to sell Wi-Fi radio chips to devices such as Access Points, Broadband Customer Premises Equipment (CPE) with WLAN, and Consumer Routers. A new class of Wi-Fi that takes advantage of 6 GHz is now called Wi-Fi 6E. Broadcom and Qualcomm have already made statements about Wi-Fi 6E in the past month or two, and others somewhat more recently. Historically, Broadcom and Qualcomm have enjoyed significant market shares of the enterprise WLAN Access Point market, while players in the consumer AP/router/CPE have included a wider list of players including Broadcom, Qualcomm, ON Semi (formerly Quantenna), Celeno, Intel, Realtek, Mediatek and others. Enterprise WLAN companies Cisco, HPE Aruba, Commscope, Extreme Networks and Juniper. While each of these companies has launched Wi-Fi 6 products over the past couple of years that operate in 2.4 GHz and 5 GHz, we expect this group of companies to release Wi-Fi 6E products that connect over 6 GHz over the next year. We expect initially that 6E enterprise products will sit at the high end of product portfolios, selling at higher prices than 5 GHz and lower products. The FCC commented in today's press release that "The notice also seeks comment on increasing the power at which low-power indoor access points may operate," which means that there is still some work to do in figuring out whether these Wi-Fi 6E devices can operate at powers levels more common in enterprises without needing to connect to an AFC. We are sure there is more to come on this topic. Consumer WLAN Infrastructure companies NETGEAR, Commscope, Technicolor, Amazon and Google. We expect NETGEAR to be an aggressive player in Wi-Fi 6E, just as it released super high-end Wi-Fi 6 products in its Nighthawk product line. We expect Broadband CPE vendors such as Commscope (through its Arris brand), Technicolor and others to benefit as they seek to capitalize on the new spectrum, which should allow the delivery of Wi-Fi at higher speeds and to more devices in the home. We wouldn't be surprised to see consumer mesh vendors such as Amazon (through its eero acquisition) and Google to offer Wi-Fi 6E products, but these probably come a bit later than traditional router and Broadband CPE devices. Wireless ISPs such as Etheric Networks and Common Networks (both located near the 650 area code that we used to name our company, 650 Group) will likely benefit as they will be able to offer new WISP services over the new 6 GHz spectrum. Since the spectrum is new, essentially unused and there's lots of it, we expect that these, and other WISPs in the US market, can benefit by expanding beyond the current unlicensed spectrums commonly used today, such as 60 GHz, 5 GHz, 2.4 GHz and 900 MHz spectrums. We think it might take a year or two before the WISPs can capitalize on these spectrums, but we see it as a windfall. WISP suppliers such as Ubiquiti Networks, Cambium Networks, Airspan, and others will be likely beneficiaries. These suppliers sell to WISPs and other operators to enable "last mile" services that compete with fixed-line broadband services such as cable modem, DSL and PON. As we alluded to above, the 5 GHz spectrum is quite crowded, and thus, as 6 GHz becomes available for outdoor use, we expect that a new class of equipment will take advantage of this ample spectrum to deliver broadband to a more significant number of business and consumers. The FCC has a "goal of making broadband connectivity available to all Americans, especially those in rural and underserved areas," according to its 6 GHz press release today, and we see WISPs as one of the main constituents of serving this goal. Mobile network operators AT&T, Verizon, T-Mobile, and US Cellular. Similar to WISPs, we expect that mobile operators will eventually leverage 6 GHz to deliver Fixed Wireless Access (FWA) services (and potentially mobile services) to consumers and businesses. In suburban and rural areas, we have already seen some operators, notably Verizon, deploy FWA in licensed mmWave spectrum (in 20 GHz and 40 GHz ranges) - we have seen operators pare back on plans to deliver services, though they haven't stopped deployments or anything. But, we see 6 GHz could puff some new life into FWA plans because this is a lot of new frequency and since it is lower frequency than mmWave, does not suffer as much from immovable obstacles such as tree leaves, windows and precipitation. Additionally, we see mobile services could benefit as well, as we have already seen operators such as AT&T leverage 5 GHz unlicensed spectrum in delivering mobile service on its small cells in locations such as New York City, so we would expect mobile operators to eventually take advantage of 6 GHz in a similar fashion. But, incumbent services (point to point microwave systems) are more likely to interfere with mobile operators' plans in urban areas, where paradoxically, there is more need for this extra bandwidth, so we think operators will take some time to sort this interference out. AFC services operators such as Federated Wireless. Given that the FCC announced a specific need for AFC services in its media blitz today (see above), we point out that Federated Wireless has already announced an AFC service. Just as Federated has competition in its CBRS SAS service from players such as Commscope, we would not be surprised to see new competition in AFC services. Big themes at the show were WiFi-6, 6 GHz, and 802.11ah. We share some comments about the following organizations: WiFi Alliance, Commscope, Newracomm, Celeno, Cambium, Juniper Networks, On Semiconductor, Extreme Networks, Webb Search, Facebook, UK's Ofcom, Huawei, and 650 Group. The WiFi Alliance and a handful of other speakers commented that WiFi-6 has lower latency than 5G, but the Alliance conceded that cellular had better mobility. We think the WiFi community is not doing enough to promote WiFi-6’s low latency capabilities Commscope expects 6 GHz 802.11ax products to be shown at the CES show in January 2020 and that FEM and filters are not available today but will be by year-end or early 2020. Newracomm is an 802.11ah (900 MHz WiFi) chip company that had won an award at the show. It claims to be an early leader in the market and based on comments made during presentations, we expect by 2H20, we will see systems and IoT services based on these types of chips. Celeno, a stand-alone WiFi chip company, demonstrated radar on WiFi chip capability - the company won multiple award at the show. The company expects that a year from now, its Doppler on WiFi will emerge in products from SPs such as BT, Orange, and Comcast. The Doppler service only consumes about 3-5% of throughput capability when using Doppler and enables some very interesting capabilities such as fall detection, proximity detection, people counting and arm gestures. ON Semiconductor's Quantenna group won an award at the show. Cambium, in a presentation, explained that it is looking at an expansion to CBRS, 5G FWA backhaul, and 60 GHz. Juniper Networks has been hiring in Europe as it expands its enterprise sales capabilities. It’s recently hired team made a positive impression on the audience. We tweeted about how great and fun the presentation by recent hire Jussi Nivikiemi’s presentation. Extreme Networks presented its view that Artificial Intelligence won’t replace IT workers - it will just make them better. A spectrum consultant - Webb Search - said that DFS is not working in the UK in 5 GHz and wastes a lot of bandwidth - most WiFi products don’t bother trying to operate one the spectrum covered by DFS. He advocated for using a database in the sky approach similar to what is being proposed for 6 GHz. UK's Ofcom representative, Christina Data, explained that it is researching both 5 GHz and 6 GHz as a comprehensive solution. Ms. Data acknowledged that DFS may have some challenges and was diplomatic in response to questions about how 6 GHz will emerge. Huawei advocated for an unpopular viewpoint (at a WiFi show) that 6 GHz device makers should register for IMT designation. In a panel that included German WiFi equipment vendor Lancom and Commscope, the other two vendors made counterpoints, including that this move to IMT will delay the rollout of 6 GHz by at least four years. Facebook is advocating a non-AFC approach to low power 6 GHz in the US market. We have learned through multiple sources that it has recently a demonstrated a prototype of an AFC, however. 650 Group. The Chris DePuy presentation hit on three topics: unlicensed and shared spectrum impact on WiFi, WiFi and WiFi-6 shipments, and WiFi semiconductors. 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. Today I attended the Extreme Analyst day at the NASDAQ in New York. Extreme’s 4Q18 switch revenue grew over 10% and in our preliminary view of 4Q18, it took share. The company highlighted over 30,000 customers and over 6,000 partners in a one-Extreme approach that has integrated the acquisitions of Avaya and Brocade. The company also highlighted that in 4Q18 it saw nearly 20 deals over $1M which is indicative of a rebound in its' business from large enterprises. We believe the company is maintaining a good portion of its' Extreme and Avaya installed based. Extreme emphasized software as a driver for higher margin sales. We agree, software is the general direction of where campus switching is going with vendors looking to get incremental revenue from software instead of hardware. We have maintained for over two years now that campus switching would be a positive growth market led by software to help manage a more converged (Unified Access) market. We also see IoT and the inclusion of securing and monitoring IoT traffic as an additional growth drive for the campus market.  |
CHRIS DePUY
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