650 Group Blog
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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.
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Juniper held its industry analyst day last week to present its strategy update to the market; the company wants to change networking for the cloud era. The company reiterated its commitment to three customer types: cloud provider, service provider, and enterprise. The company is making investments to take advantage of multiple technologies: 400 Gbps, 5G, Multi-cloud, segment routing across its portfolio for multiple IPv4 and IPv6 use cases; artificial intelligence (AI); and security. An underlying theme for Juniper’s enterprise strategy is its AI-focus that comes with its Mist acquisition, a WLAN company; the company is transferring this AI technology to its wireline products in the coming quarters. We cannot emphasize enough how big the opportunity is for Juniper in the enterprise market. The company has taken on a big task by extending the Mist AI engine to other parts of the portfolio, starting with the campus and branch switching and routing products, but we expect customers will see the value of automation and intelligence throughout the enterprise product line.  The company highlighted several key points of differentiation:
• A cloud-optimized, Linux based version of Junos is available for certain data center use cases
Enterprise. To emphasize its re-invigorated focus on enterprise, the company highlighted its recently closed acquisition of Mist Systems, an AI and WLAN vendor, which bolsters its enterprise product breadth. Now Juniper has a wide product portfolio: WLAN, switching, SD-WAN, routing, and security. Service Provider. The company is showing good growth in its cloud-delivered SD-WAN offering. The company supports segment routing across its portfolio for multiple IPv4 and IPv6 use caseswhich it believes will allow it to serve 5G needs of operators. Contrail system Networking has been deployed widely to control and manage virtualized infrastructure EPC, IMS, and combined control plane systems at operators. Juniper continues to invest in high performance routing as evidenced by its strong position in the emerging 400Gbps market. Cloud. Juniper expects that in the 400 Gbps era, it can take market share in Tier 1 hyperscaler switching because it has addressed some deficiencies it had not delivered in the 100 Gbps era. This includes support for SONIC, P4, Stratum, and other private APIs. It expects to ship the PTX 10008/16, with 14.4 Tbps per slot, by year-end 2019. Juniper is also disaggregating Junos to meet cloud operators’ flexible consumption models and cloud-optimized architectures. Business Model. The company expects that by the year 2021, it will get 16% of its revenues from software. It revealed that recently, it was at 10%. We attended the Comcast Business analyst event in Philadelphia. We find the Business Services part of Comcast is interesting, and so do customers, because it is growing rapidly. It installs a “new Ethernet every four minutes,” and has “40-45K installs per month.” The company shared with the audience that it is expanding the breadth of its services to grow its potential revenue it can get from each customer, and in many cases is either acquiring or developing this technology itself. We see these development efforts as moving up the technology stack. To understand Comcast Business, you have to know that it has unique approaches to its different customer segments. The organization addresses customers of different sizes, and it does not use the same terminology as some others do: SMB (<20 employees), Mid-market (20+ employees), Enterprise (Fortune 1000). We think it is more common that small is considered 100 employees and smaller, which would include SMB and Comcast’s Mid-Market, and that mid would be 101 employees or greater. Here are the Comcast Business market views:  Comcast Business Customer Segments and Market Opportunity, September 2019 More details about customer segments. In addition to attacking three customer size groups with distinct approaches, it also serves two verticals (carriers and government) segments with different strategies and recently acquired Deep Blue (May 2019) that serves WiFi to venues and hospitality verticals. Each served customer type uses different combinations of third-party developed technology and Comcast in-house developed technology. The company has 4,000 people developing in-house technology. As a mix of total systems sold to customers, today, Comcast Business uses a higher mix of in-house developed technology when serving its small and mid-market customers than it does when serving large enterprises. The group that serves Enterprise Solutions serves large enterprises using mostly using third-party technology from vendors like Cisco, Fortinet, and HPE.
On the other hand, the company serves smaller-sized customers using fully or partially in-house developed technology. Comcast Business’s SVP Product Management, Bob Victor, summed up its approach to working with third-party vendors by saying, “We want to totally commoditize hardware.” We assume he means this is a long-term goal because, during the event, the company told us of new hardware and software relationships announced with new vendors. For small and mid businesses, the company has developed several in-house technology systems that compete with vendor-supplied technology. One such example is its WiFi Pro service, which combines internet connection and WiFi service. In WiFi Pro, which was introduced a couple of years ago to small businesses and is available at up to four Access Points, the company sources WLAN access points from a non-branded access point. Based on our discussions at this conference, we would not rule out that at least some of the in-house developed technology may be supplanted by vendor-supplied technology if there is a compelling reason. However, on multiple occasions, we learned that the direction the Comcast Business is going is to develop in-house technologies and bring these directly to customers, first with smaller customers, and perhaps very long term to large enterprises. Managed Services. The company delivers both transport/network services and transport bundled with other services; there is a case to be made that Comcast Business’ bundled services could be called Managed Services. However, even Comcast says there is some confusion about using the terminology “Managed Services,” because of customer expectations; some customers see it as a very high level of services, where customers do nothing, while others see it as Comcast Business is “working with” the customer to deliver the service. Playing to Strengths. On an overall basis, Bill Stemper, who runs Comcast Business, says the company’s strategy is to focus on serving the wireline needs of businesses in the US. He says, “this is where we invest. We expect to focus this way for decades.” Small Business details. Stemper said that the company would bring “mobile to small business.” It will bring mobile to this segment when “all the systems are squared away, and when sales reps are capable of selling this additional service without slowing down customer purchasing decisions on the existing suite of services.” It is currently offering mobile in selected markets to learn more about selling this new service. We expect mobile to small business to be offered sometime in 2020. Growth Avenues in Mid-Market. The company made it clear that it believes the mid-market is an enormous growth opportunity. And, starting in 2020 and beyond, the company says, it is putting more investment into it to improve coverage, its focus, and its reach. Today, the company has 800 reps targeting the in mid-market and plays to strengths in certain verticals such as government, education, and healthcare. Large Enterprise Opportunities. Approaching the Fortune 1000, the company has its most meaningful exposure in finance, healthcare, restaurants, retail, hospitality verticals. The company is finding customers who, according to Comcast, are replacing MPLS service with broadband and getting a 50% cost reduction and an order of magnitude speed improvement. Comcast introduced a leader from a large finance company to the audience, and though we cannot name the customer, the company shared that it had moved initially to use Comcast transport, and is currently doing a proof of concept for voice and Comcast’s ActiveCore SD-WAN service. Comcast reiterated its plans to use Cisco, Fortinet, and HPE at large enterprise (Fortune 1000), though implied it is entering another phase that it internally calls Enterprise 2.0 for its Enterprise Solutions group. In Enterprise 2.0, the company hinted it might develop more in-house technology and further implied its ActiveCore (SD-WAN is one service it offers in ActiveCore) might find a home in some large enterprises. Comcast’s customer endorsed the idea of using white box universal CPE loaded with “best of breed services” instead of buying vendor-supplied routers so it will not have to replace 15,000 routers when it comes to upgrading time or transitioning. Carrier opportunity. Bill Stemper, who leads Comcast Business explained that, since 2009, it has served carrier Ethernet to the mobile industry and it will pursue 5G opportunistically. Elaborating further, Stemper said it would decide whether we can get leverage on new builds to serve 5G simultaneously with other customer types. So, it sounds like building new plant to serve only 5G backhaul is not in the cards. Deep Blue WLAN. In May 2019, the company acquired a Troy, NY-based WiFi services company. We understand from the presentations that Deep Blue was growing at least 30%/year for several years before the acquisition and that its revenues may have hit around $40M. The company designs/installs third-party WLAN and associated systems, then operates the networks for a recurring fee mainly in verticals such hospitality and large venues. The wholly-owned subsidiary has developed advanced software and services capabilities that could easily be leveraged across the other parts of Comcast Business, but from what we learned, there has been no cross-fertilization as of yet. Products. The company is expanding the number of services it can deliver to customers, thereby increasing its possible revenues to each customer. It began offering SD-WAN services three years ago. It plans to expand beyond SD-WAN. In its mid-market customer focus, the company will soon offer security (Advanced Firewall and UTM, for instance), routing, and a bit later on, voice gateway (SBC) and WiFi. For premises-based VNFs, these are run on a universal CPE (uCPE) that today costs about $1,000 to Comcast and it will be launching a $500 uCPE with similar capabilities soon. The company is updating the cable plant that serves business users, where 4 M businesses are passed, towards a “mid split” architecture that allows for greater upstream speeds so that initially 50 Mbps up and down will be possible, and then over time 100/100, 300/300 and longer-term 1 Gbps up and down. The company also uses EPON for more demanding needs and places like multiple dwelling units; it won’t be moving to XG PON (10 Gbps) for the foreseeable future. The company has a multi-vendor approach with these VNFs. This week, it announced Fortinet UTM/security. We expect the company could announce other security, routing and perhaps longer-term, other SD-WAN vendor options. We think the company will stick with a single WiFi cloud controller for at least the next year or so, but indicated it could introduce at least one more vendor’s technology afterward. The $500 uCPE device is capable of 1 Gbps SD-WAN throughput, as well as advanced firewall at 1 Gbps and has UTM at 600 Mbps. These are impressive throughput numbers, we think, especially because similar throughput capabilities are available on proprietary boxes from vendors that cost much more. Additionally, the product called CBR2, a new version of its Comcast business router, will be coming soon. Both the original CBR and CBR2 have WLAN as a built-in feature. But, neither the CBR nor the CBR2 has sufficient WLAN coverage capabilities to satisfy a mid-sized business, so Comcast thinks its soon-to-be-launched WLAN plans to mid-sized businesses allow it to serve more customers. One such new target from these added WLAN capabilities will be the E-Rate program, which is a partial funding mechanism for K-12 schools overseen by the US FCC, is one such target. Comcast emphasized that it has spent significant time and resources developing software capabilities that allow it to orchestrate VNFs, to remotely administer customer networks, and to allow multiple VNFs from different vendors, or to allow VNFs that are developedin-house by its customers. 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. 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:
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. Earlier this year, Aerohive issued a press release about its A3 software system. A3 is what we categorize as an Enhanced Network Access Control (ENAC) system; we calculate market share statistics on this market in our Security report series. The company is now getting ready to bring the product to market and is blitzing the media, so to speak. We were briefed and learned more about the product. To summarize, it checks the boxes necessary for us to include it in our ENAC report and we like that it has a common user interface to allow customers to perform device profiling, authentication / registration, compliance / remediation, device management, billing integration and network access control.
Our outlook for ENAC is positive and, today, three main vendors consist of the majority of share: Cisco (with ICE), Aruba (with Clearpass) and ForeScout. We learned that company has more aggressive pricing than these market leaders. If you look at why a product like A3 is important to Aerohive, recall that back when Aruba introduced Clearpass back in 2012/2013, it used it as a selling tool to get into its competitors' accounts (it also got high margin sales from Clearpass, too). Aerohive's A3 is positioned similarly - it operates with its competitors' equipment (including those from Cisco, Ruckus, Extreme and others). So, Aerohive has developed another means of selling to customers, by offering A3 to customers using non-Aerohive equipment. Tomorrow, 650 Group's Alan Weckel will be a featured speaker on the NBASE-T hosted webinar, entitled "Growth of NBASE-T, Market Trends and Forecast." In this webinar, we will review Ethernet trends that related not only to Campus Switch ports, but also WLAN, computing and other devices. The NBASE-T ecosystem continues to expand, including most recently with broadband modem devices. We are excited about this market and hope you will attend.
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. Alcatel-Lucent Enterprise Broadens its In-House Developed enterprise-class WLAN Product Line9/22/2017 Back on 5/9/17, we discussed how Alcatel-Lucent Enterprise (ALE) had announced its in-house developed enterprise-class WLAN products. A couple days ago (on 9/20/17), ALE announced further developments to its WLAN product line and now has a broadening product line of Stellar WLAN products. Initially, ALE announced a lower end Stellar product. Now, with this 9/20/17 announcement, in Stellar products have moved up-market and include the AP1220, AP1230 and AP1251. ALE continues to offer the HPE Aruba products to customers, but it is clear, in looking at the amount of space on the WLAN products page at ALE's website, that it is increasingly promoting its in-house Stellar brand - and why not?
It is encouraging to see a new set of products enter the enterprise-class WLAN market with ALE's announcement. We will be tracking ALE's progress in the coming quarters, but initial results of the Stellar product line have shown it is growing strongly as a proportion of total WLAN revenues. |
CHRIS DePUY
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