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Fortinet had its Accelerate 2022 conference today. Its executive team presented its current strategy and expectations for the future and highlighted what it thinks are its key differentiators in the marketplace. The company explained: (a) the importance of its ASIC and its software code-base called FortiOS, (b) its services bundling strategy called "Fabric," and (c) its sales and marketing differentiation (the presentation was intended mainly for its selling partners as well as for financial analysts). We were reminded of the relative simplicity of Fortinet's messaging (Fabric, ASICs) and the solid financial results that illustrated its sales team and partners' success (it grew product revenue 54% Y/Y in the most recent quarter). ASICs and FortiOS. The company explained that it takes around four years to develop an ASIC. According to its ASIC roadmap, it has three types of ASICs: Network Processing, Content Inspection, and Entry-level Systems-on-Chip. CEO Ken Xie explained that the company uses 7nm process geometry semiconductors for its ASICs, which we assume means for its CP10 (content inspection) based on the timeframe shown in its ASIC Roadmap. The company's marketing strategy around its ASICs is that these systems allow its firewall platforms to perform better than competitors.  Fortinet Accelerate 2022 ASIC Roadmap The company's operating system software that runs on its firewall platforms has evolved to include many functions besides standard firewalling, including SD-WAN, Enterprise WLAN Controller, and SASE. What's interesting is that Fortinet is up till now has been taking an appliance-focused strategy and integrating many non-firewall services into its FortiOS. However, the company indicated that the OS will find itself in many environments in the future. Indeed, management highlighted that it sells FortiOS to four different environments today, including on appliances, as virtual software (that can operate in a data center, on a cloud hyperscaler infrastructure, or as cloud-native SaaS), as a container, or as cloud-delivered services. The company said that VM revenues are growing very fast, but expects its VM revenue stream to "go cloud-native." The company says it is "working on" a SaaS business and that its customers will consume these SaaS services through Fortinet's own cloud service. To summarize, management said that its R&D team is heavily investing in cloud designs and expects to make new cloud-related announcements soon.  Fortinet Accelerate 2022 FortiOS Everywhere Fabric. The company highlighted its sales strategy called "Fabric." CEO Ken Xie said that Fortinet charges less for its services, only around 20% of product prices and that when it uses bundling (which we interpret as synonymous with its "Fabric" strategy), it "discounts a lot." The company shared a slide highlighting "Broad Service with Half the Cost." The slide highlighted its FortiCare, FortiGuard, and FortiTrust services on this slide. On the company's earnings call earlier in May, it said it is "giving away" services in some cases. The company's Fabric offering includes services/functions/software such as "Access & Endpoint Security," FortiGuard Threat Intelligence," "Secure Networking," "Cloud Security," and "Network and Security Operations." If we were a competitor to Fortinet, we would find it frustrating to compete with Fortinet's discounting of these services – yet customers seem to embrace Fortinet's integrated product offerings.  Fortinet Accelerate 2022 Security Fabric Sales and Marketing. The company rapidly embraced SD-WAN a few years back, and now many of its firewall customers are using the same appliances to run SD-WAN networks. Likewise, Fortinet has embraced the SASE marketing moniker and has found large selling partners for this offering. Likewise, the company has adopted a selling strategy called "OT" that takes advantage of its ruggedized products (first introduced in 4Q20); it has experienced substantial growth in new vertical markets such as manufacturing and construction. The company's management has likewise embraced the industry trend of converging networking and security functions. It expects to sell using its positioning as a leader in "Secure Networking." Fortinet has experienced strong growth LTM product growth of 44% growth, which supports Fortinet's decisions to embrace SD-WAN, SASE, OT, and Secure Networking.
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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.  Alan Weckel: This week, HPE Aruba announced its planned acquisition of Silver Peak for $925 million with an expected close date during HPE's fiscal 2020, so we expect the deal to close in calendar 4Q20. SD-WAN is becoming a battleground for vendors as an increasing portion of enterprises want single-pane and cloud-managed solutions for their branch equipment. Our research indicates the average branch employee connects to over one dozen cloud services daily and the edge-to-cloud experience has never been more critical in the COVID and post-COVID world as businesses try to engage with customers across an increasing amount of physical and virtual locations. Enterprises will accelerate the retirement of MPLS links for more advanced WAN architectures with Cloud-first principles in their physical branches. Enterprise will also deploy a mix of hardware and software into employee's houses as Work-From-Home (WFH) changes every employee's residence into a new branch extension of the enterprise. We have conducted significant research into the Branch in 2020 and how it will transform across verticals and product categories (SD-WAN, legacy routing, WLAN, switching, and security) based on long-term structural changes to the market as well as the sudden changes forced on customers by COVID-19. We project SD-WAN as the fastest-growing component in the Branch over the next five years. Silver Peak's advanced SD-WAN portfolio (both hardware and software), completes HPE Aruba’s breadth of WAN offerings, strengthens Aruba ESP (Edge Service Platform) and complements Aruba's strong position in Ethernet Switching, and WLAN, especially Aruba's newer WiFi 6 APs and custom ASIC-based 6200/6300 Access switches. We expect that AI/ML will increasingly become part of the Branch market in each year of our forecast driven by further product integration by vendors and the need to control and monitor an increasing amount of user and device (IoT) traffic. As the AI engines learn, self directly networks will move towards self-driving as automation of tasks beyond simple device management become common across networks. The ability to use AI at this scale in networking today is limited to the largest hyperscalers, but will quickly make its way to campus and branch networks. We expect overall Branch spending to increase above its 2019 run rate during the forecast period (post-COVID) and single-pane management to nearly triple during that timeframe. HPE Aruba's acquisition of Silver Peak will help them address the fastest-growing part of SD-WAN and Branch networking. While there are dozens of SD-WAN, campus switching, WLAN, and security vendors vying for Branch spend, there are only 6 US-based vendors that have a holistic portfolio that customers want and need. Posted by Alan Weckel, founding technology analyst. 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. There were 3,100 attendees at the Atmosphere show in Las Vegas, most of which appeared in attendance at the keynote. Artificial Intelligence and Cloud were the main topics. Specifically new for the show: cloud-managed SD-WAN, NetInsight, ArubaEdge Partner program, Cape Networks acquisition. Cloud-managed SD-WAN – June/July ’18 availability (dynamic path selection, VPC direct to AWS or Azure). NetInsight is a data-collecting and cloud-analysis AI platform that finds anomalies and allows improvements to wireless LAN operation. Cape Networks acquisition to allow user-experience simulation for cloud-services connection quality measurement.
Keerti Melkote, President of Aruba, discussed financials: FY17 was up 15% Y/Y, reaching $2.5B, split 49% to wired and 51% to wireless. (650 note: for C17, we measure WLAN + non Data Center Switch + Enhanced NAC product revenues at $2,260M). A key message of the presentation was that as enterprises embrace cloud-services applications like dropbox, Salesforce and Office 365, this means enterprises become more focused on edge access than ever. Citing statistics like that 80% of advanced attacks use valid credentials, 8 weeks average gestation period of typical attacks, and 84% of those who’ve deployed IoT have been breached, the company said that securing the edge is more important than ever and discussed the Aruba 360 Secure Fabric. Aruba had customers on stage to endorse various products, including Accenture, Ohio State University, and CBRE. Other customers mentioned on slides included Lufthansa Technik, Purdue University, Rajasthan, Disney, Time Warner, University of Minnesota, University of New Hampshire, University at Buffalo, Northwestern University, University of Washington, Bucks, Virginia Tech, University of Iowa, Illinois, and Lenovo. Yesterday, Comcast announced its ActiveCore SDN platform. We are attending Comcast’s analyst day and learned quite a bit on day one, but wanted to focus this blog on Routing.
To date, there has been an argument of SD-WAN and it ability to replace expensive telco MPLS solutions. If a customer continues using MPLS, it is likely they will keep their old router or buy a new router. But what happens when a startup uses ActiveCore without a legacy infrastructure or builds a new branch(greenfield)? In many cases, the CPE box provided by Comcast and 1 Gbps bandwidth is more than enough, especially for a mobile Cloud based workforce(many new companies fall into this category). We continue to believe MPLS will live on and have a very long tail, but are seeing capable platforms threaten traditional vendors and the branch/access router market. It will be interesting to see what other SPs around the world do for SD-WAN as well as how traditional vendors and startups address this changing dynamic in businesses of a mobile workforce that uses Cloud platforms and a VPN tunnel is enough to connect back to headquarters without MPLS and/or without the need for a traditional router. SD-WAN vendor Riverbed announced plans to acquire Wireless LAN vendor Xirrus today. Riverbed emphasizes its product line and portfolio strategy in the Software Defined Wide Area Network (SD-WAN) market. Xirrus has emphasized its product portfolio as being a cloud-enabled Wireless LAN (WLAN) market vendor. Two main themes come to mind with this acquisition:
As background, it is quite interesting to see the journey both Riverbed and Xirrus have followed over the years that makes this deal work. Both today are active participants in the cloud and software defined markets. Both Riverbed and Xirrus have participated successfully in their respective marketplaces to have undergone transformations as their markets have evolved.
Our view is that SD-WAN is more than WAN optimization. It is more than just security and services. And it is more than branch routers. SD-WAN is a full branch play. Every vendor will approach SD-WAN differently depending on their strengths. With the Xirrus acquisition, Riverbed just differentiated from its SD-WAN competitors by doubling down on enterprise relationships. We are excited about the SD-WAN opportunity. Many vendors are repositioning their product lines to address SD-WAN, and Riverbed is both strengthening and differentiating its product line to more fully address enterprise needs by adding LAN and WLAN capabilities to its portfolio. WLAN industry consolidation has been a major theme in the past several years. Most recently, we've seen:
Consider that the early consolidation deals for WLAN companies were mainly to allow Ethernet Campus switch companies to sell WLAN/Campus Switch products to their customers. HPE's May 2015 acquisition of Aruba was a good example of this kind of acquisition. And the acquisition was done in large part to respond to Cisco's acquisition of Meraki a couple years before the HPE/Aruba deal. And, in a corporate M&A twist-of-fate, in mid 2016, switch vendor Brocade announced plans to acquire WLAN vendor Ruckus. But, before it could complete the deal, semiconductor vendor Broadcom announced its own plans to acquire Brocade and spin off all Brocade assets but its Fibre Channel assets, putting in motion the Arris for Ruckus and Brocade ICX switch products deal. So, the first several deals were switch/WLAN related, and like we said, more recently, WLAN acquisitions are related to broader themes than just campus switch consolidation of WLAN, including broadband equipment vendor Arris for Ruckus and SD-WAN company Riverbed for Xirrus. This leaves very few pureplay Enterprise-class WLAN vendors in the marketplace these days, Aerohive being the largest among the pureplays. Interesting indeed. |
CHRIS DePUY
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