Is Cisco Investing in C-RAN?

While most Cisco investors will be primarily focused on the company’s official launch of the Insieme Nexus 9000 data center product on November 6th and the company’s earnings report on November 13th, I wanted to share my opinion on what Cisco may be working on to disrupt the traditional wireless infrastructure market.  CEO John Chambers recently made some bold statements in an interview with Barron’s stating that Cisco has invested in a start-up as part of the company’s disruptive plan to enter the traditional wireless infrastructure market currently served by Alcatel-Lucent, Ericsson (ERIC), Huawei and Nokia Solutions and Networks (NOK).  My guess as to what Cisco is considering for this disruption is Cloud-Radio Access Network (C-RAN) technology.  In theory, C-RAN technology aims to centralize (“in the cloud”) the baseband processing done at each cell site base station in wireless networks resulting in a more optimized utilization of baseband resources.  In addition, C-RAN facilitates joint processing and scheduling between various cell sites allowing for reduced interference, increased throughput and improved performance of the network. C-RAN also supports less energy consumption, which would support Cisco’s sustainability efforts and a more environmentally friendly deployment of wireless networks.  C-RAN also fits the Software Defined Networking (SDN) and Network Function Virtualization (NFV) framework, which Cisco aims to exploit for new revenue streams.  Commercial deployment of C-RAN technology is probably at least a couple of years away, but given the traditional wireless infrastructure market which Cisco does not current play in is $40+ billion in size, and the company has already made $2 billion of wireless acquisitions in the last year in other segments of the wireless market, it would seem the logical path for Cisco to try to enter the wireless market.  Time will tell what Cisco actually is planning for entry into the wireless infrastructure market.

For more information on the topic of Cisco potentially investing in C-RAN technology and my current thoughts on Cisco’s stock, please visit my recent article on seekingalpha.com.

 

 

 

What Does Cisco Have Up Its Sleeve With Insieme?

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I recently wrote an article on Seeking Alpha discussing my view on the potential strategic objectives of Cisco’s Insieme spin-in. Cisco plans to formally announce the Insieme product on November 6th in NY.  A quick summary of the article on Seeking Alpha is as follows:

The three main strategic objectives of Insieme in my view are:

–       Attack Nicira/VMware’s (VMW) pure software approach to Network Virtualization via a converged hardware/software approach to be delivered by Insieme’s Application Centric Infrastructure solution.

–       Attack lower cost and “White Box” data center Ethernet switches potentially enabled by VMware and/or Software Defined Networking (SDN) as Insieme is likely to have significant improvement in price/port metrics for Ethernet switching.  Its interesting that John Chambers, the CEO of Cisco, highlighted the “White Box” switch as a major threat to Cisco just a week or so ago in a Barron’s interview, knowing that the Insieme launch is just a few weeks away.

–       Expand into non-traditional markets or markets with limited market share in the data center via virtual implementations of traditional security and Layer 4-7 appliances (and perhaps even some elements of flash storage given Cisco’s recent acquisition of privately held WHIPTAIL)

Over the past 18 months, Cisco has been aggressive in filling its product weaknesses via acquisitions (e.g. Sourcefire in security) and addressing the market’s concerns around network virtualization and SDN.  The Insieme launch, in conjunction with prior announcements around Cisco ONE and OpenDaylight, will likely be the last Big Bang effort by Cisco in 2013 to take on the threat of VMware/Nicira and convince the market that Cisco has the right data center architecture for the future of networking as well as diminishing the threat of the “White Box” network.

 

 

 

SDN And Silicon Photonics The Buzz at OFC

While the OFC exhibit floor opens today, I attended a few seminars and the OSA executive session the last couple of days.  The two topics that were more prevalent this year than last year in these sessions were SDN and Silicon Photonics.  My thesis on these two technologies is that the Telecom and IT capex cycle will trump both the longer-term impact of SDN and Silicon Photonics in 2013 in short term investing in 2013. Below are some the interesting takeaways I took from the past couple of days.

Optical Now A Bigger Cost Factor In The Core Than Routing: Major telecom operators like CenturyLink gave presentations that stated that today 80% of their core network cost is in optical equipment with 20% in routers, which is a complete flip of the relative cost structure several years ago.  This will certainly put more pressure on optical companies to seek further cost reduction in their equipment. The general consensus on how that will be achieved is further integration of optical modules (e.g. development of commercial merchant silicon DSPs for coherent optical functionality, silicon photonics or other methods).  It is interesting that the VC community continues to avoide funding optical companies to help solve this cost problem.  Perhaps companies like Broadcom or Intel will look into developing such commercial products in the future.

Fiber Leasing in Europe Should Help Optical Capex: European operator TeliaSonera presented and discussed while there is plenty of fiber capacity in Europe, operators now do not have all the fibers where they need them.  This is causing a increase in leasing dark fibers between carriers, leading to more dark fibers being lit.  This is generally a positive for optical equipment demand as it typically costs more in optical equipment capex to light a fiber than to just add wavelengths to existing fiber routes.  I think this will only help the optical spending cycle in 2013.

Cisco Shows Off The Fruits Of Its Lightwire Acquisition: Cisco showed its new optical module used in its routers and optical systems that was developed from its Lightwire acquisition.  Visually, the new module was impressive as it was about 1/3 of the current size of merchant modules in the market from optical component suppliers.  While there was a lot of debate at this presentation whether optical component suppliers would soon catch up to smaller footprint and lower power modules like Cisco was showing, Cisco has clearly raised the bar for the industry in the race for better optical integration.  I suspect Cisco will use this technology in its new core router, which is likely in my view to hit the market in 2H13.

SDN Is The Panacea: SDN commanded several of the seminars.  As an example, the CTO from Ciena called SDN as the single most important technology in the industry for the next 5-10 years.  Google and Facebook talked about how they have already implemented SDN within their networks.  Google, however, has some unique attributes vs. traditional telecom operators, which has allowed them to implement SDN well before the rest of the industry.  Namely, the vast majority of their traffic is machine to machine and Google is already a software company, which allows them to write their own “SDN-like” applications that can be used within an SDN framework in their network.  Traditional telecom operators all expressed a strong desire to move towards an SDN architecture for both speed and flexibility of new service creation and to better maximize capacity utilization in their networks.

Disclosure:  I currently own shares of JDSU in the optical industry. NT Advisors LLC may currently or in the future solicit any company mentioned in this report for consulting services.

SDN: Open, Fragmented Chaos

I wanted to follow up on a prior blog post after attending a recent SDN conference where I also moderated an investment panel.  In summary, I walked away from this conference and reading other recent SDN news thinking that 2013 will be a year of increased entropy for the SDN market.  VCs will continue to fund new start-ups, incumbent large IT companies will announce SDN plans/roadmaps, users will demand open standards to avoid vendor lock-in and the press release and marketing onslaught will be intense.  From an investment perspective, I still think it is too early to make any definitive conclusions given all this disorder and timing of SDN revenues being significant still being a couple of years away, but I believe that existing merchant silicon suppliers like Broadcom can only benefit from the deployment SDN with little threats from start-ups, while Layer 4-7 based appliance companies like F5 are most at risk given the ultimate SDN architecture and significant VC start-up funding in this area. 

Users Want Open Standards: Not surprising, both enterprise and service provider end users are weary of being locked-in to single vendor or vendor coalitions. After all, one of the main goals of SDN is to unlock monolithic data center hardware and appliances to allow for more innovative and faster feature development.  What I think will be challenging here is any standards efforts typically involves multiple constituents with different agendas.  This tends to slow down the standards process and results in compromises in the ultimate standards that limit functionality and flexibility.  A very relevant example in the recent past was the standardization process for IP Multi-media Subsystem (IMS) in the telecommunications industry.   When I asked a senior technical executive from the telecom industry at the SDN conference on whether there were any lessons learned or best practices from the IMS standardization process that could be applied to SDN, the answer was not encouraging. Specifically, the executive mentioned how the standards process around IMS was tedious, took longer than expected, and resulted in compromises that ultimately left the standard somewhat inflexible for some future unforeseen requirements (e.g. certain aspects of machine to machine communications over 3G/4G wireless networks).   Although not yet formally announced, the new open-source Daylight controller consortium from traditional networking and IT vendors Cisco, Citrix, HP, IBM and NEC will be interesting to watch.  Is this is a true open-source initiative, or a coalition effort from those that benefit from the current processes in data center design, implementation and hardware sales that just want to keep the status quo as we transition to SDN over the next few years.

Fragmentation and Chaos: To me, the SDN market right now is both fragmented in terms of company functionality and chaotic in terms of vendor positioning and marketing.  I say fragmented as most start-ups (and public companies for that matter) I see are offering one or a few pieces of the overall SDN solution, but not one is all that encompassing. That make sense given how broad SDN is both in terms of architecture and functionality.  It is likely we will see continued funding of start-ups to fill in functions within the SDN functional grid as well as acquisitions as existing public companies and mature SDN start-ups seek to fill out their SDN offerings.  The F5 acquisition of LineRate was a recent example of this as an existing appliance based Application Delivery Controller company F5, acquired an SDN start-up focused on Application Delivery Control.  Thus, the fragmentation of the SDN market is likely to remain and supportive of continued VC funding, which will continue to fuel consolidation as mature start-ups, traditional networking, hardware and software companies seek to fill in the gaps of their SDN solution.  I continue to believe such a cycle and the ultimate timing of significant SDN revenues being 3 years away will make it highly unlikely any true SDN start-up goes public in the next two years.

I also characterize the SDN market as chaotic right now given the marketing onslaught of large technology companies in 2013.  In the past several days alone, we have seen initial indications of the open-source Daylight controller (e.g. expected to be supported by Cisco, Citrix, HP, IBM and NEC), SDN announcements from traditional vendors Ericsson and Huawei and ONUG releasing its top five recommendations to enable Open Networking.   While 2012 was the year start-ups garnered virtually all the attention in the SDN market, 2013 seems to be the year that technology incumbents are scrambling for mind share through coalitions, product launches/roadmaps and acquisitions.  On top of these developments, venture capitalists on the panel I moderated at the SDN conference indicated they expect further investments in 2013 for new SDN start-ups.   Seems like the SDN crescendo will only intensify throughout the year.

Investment Thoughts:  My investment thesis around SDN continues to evolve as I continue to digest new information.  I provide some takeaways from the investment panel I moderated at the SDN conference below, which are of-course subject to change in the future as new information becomes available.   

  1. Little Competition for Merchant Silicon Companies: Everyone agrees that there will be strong demand for merchant silicon for new hardware platforms as the SDN market develops.  On the other hand, it appears VCs do not want to fund merchant silicon start-ups given the high R&D and other costs associated with semiconductor companies vs. software companies.  Thus, my conclusion is that Broadcom and maybe Marvel (if they can get some traction with their merchant silicon products) could be companies to benefit from the growth of SDN, although it will take a few years for SDN to truly drive merchant silicon sales. Intel would be another beneficiary, but merchant silicon would likely be too small of a business for such a large semiconductor company.
  2. Layer 4-7 Companies More At Risk Than Cisco: While all incumbent data center equipment suppliers are potentially at risk from the future of SDN, I think special purpose appliance based Layer 4-7 companies like F5 are more vulnerable than Cisco.   I say this because the ultimate SDN architecture will still require physical switching fabrics in the data center. Perhaps these fabrics will be merchant silicon based and Cisco will suffer share loss or margin pressure, but perhaps not.  On the other hand, the stand alone Layer 4-7 appliance is not present in the future SDN based data center, but rather replaced by a pure software solution in the application layer.  While its possible companies like F5 can pivot and transition their business models to be the suppliers of such software, the VC community seems intent on funding talented start-ups to attack this technology discontinuity while at the same time they are not funding merchant silicon companies at all and seem to be rarely funding data center fabric companies. 

Disclosure: I currently own shares of Cisco, HP, Marvel and Ericsson mentioned in this report. I may currently or in the future solicit any company mentioned in this report for consulting services for NT Advisors LLC.

Juniper Stock Seems Stuck

After reviewing Juniper’s 3Q earnings release and listening to their earnings call tonight, I came away continuing to think that Juniper’s stock is stuck in many ways.  In particular, the company seems to be bound to single digit revenue growth at slightly over $1 billion in quarterly revenues and a peak quarterly run rate of $0.20-$0.25 in pro-forma earnings per share.   In the world of technology stocks, former darling growth companies that seem stuck in terms of revenue growth and peaking earnings power suffer the ongoing melting away of their valuation multiple. Clearly Juniper has seen their valuation compress over the past several quarters, but hopes of an expanding multiple do not seem likely for now.   With earnings bound  between $0.80 and $1.00 on an annualized run rate, the stock is not likely to get over $20/share in my view anytime soon.

The key for Juniper’s valuation expansion will be acceleration of its revenue growth and margin preservation. While new products like the PTX in MPLS Core Switching and Q-Fabric in Data Center Fabrics have provided hope to the Juniper bulls on the stock over the past year or so, these products continue to ramp very slowly.  There also continues to be doubt on how successful the Q-Fabric product will be given its lack of significant revenue traction in the past few quarters, increasing competition in this segment of the market and the potential overhang that the open standards Software Defined Networking (SDN) architecture poses to the originally closed Q-Fabric offering.  Juniper mentioned on their call that SDN is a key area of focus for the company, and it is likely the company will focus its efforts in the future to make the Q-Fabric more open and less reliant on the originally planned closed Juniper Q-Fabric controller.

There also continues to be a lack of excitement in the future growth prospects of the traditional Router and Security businesses.  Both Routing and Security products have shown year over year declines for the nine-month period through the end of 3Q12.  One could argue somewhat convincingly that routers are suffering a cyclical decline and are poised to recover at some point, but even so, the future growth is likely to remain sub 10% in the future.  Security is not suffering any cyclical decline, but rather a case of niche specialized competitors gaining share (e.g. Palo Alto Networks, Fortinet etc…) as Juniper has lost competitive advantage in this market.  \ It is unlikely this business will return to a consistent growth story in the future.  The company continues to do well in the traditional enterprise Ethernet Switch market growing 20% year to date vs. last year, although this business tends to be lower in margin profile than both routing and security, thus, not likely to help the long term business model.   Even so, this is the one share gainer Juniper has going for it right now.

What Should Juniper Do?

Juniper is in a multi-front war in Service Provider Routing, Enterprise/Data Center Switching and Next Generation Security Firewalls all of which will also be challenged in some unknown way by the emergence and deployment of SDN in the next 3 years.  The status quo of investing in all of the above seems like a high risk proposition for Juniper as it will have to continue to fend off much larger companies like Cisco and Huawei and smaller product specialists like Arista Networks, Palo Alto Networks etc…  My sense is Juniper will need to focus more, get back to its roots in the Service Provider market and seek larger committed partners that can help it succeed in the Enterprise market.  Breaking up the company while likely very difficult could also be a favorable outcome for shareholders as different buyers would emerge for the Service Providing Router business and the Enterprise business.