2Q Vendor Financial Index: Highest Number in Low-Risk Category

Strong revenue outlook, high operating margins and other factors put Adtran, Brocade, Cisco, Infinera, and Juniper into low-risk category

ACG Research has released its 2Q 2015 Vendor Financial Index report, which delivers independent information about the sustainability of a vendor or company to help providers assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations.

Low-risk vendors for the quarter are Adtran, Brocade, Cisco, Infinera and Juniper. Characteristics of low-risk vendors include strong revenue outlook, high operating margins because of sales, solid gross margin and expense discipline, low debt dependency, and high receivable efficiency ratio. Medium risk were Alcatel-Lucent, Ericsson and Fujitsu.

Adtran has the highest equity to debt ratio (2.32) in the industry and financing its assets with more shareholders’ equity than debt. The company’s financial performance is predicted to improve in the second half of 2015 as a result of higher carrier expenditure in U.S. However, weakness in Europe will continue to impact Adtran’s revenue. Brocade’s operating margin is 20.9 percent, one of the highest in the industry. However, the company’s operating income decreased by 18 percent QoQ. Brocade’s growing data center presence, positioning as storage networking experts and innovation in software-enabled networking, will be the focus in 3Q15 as well. Cisco’s a very high operating margins because of sales, solid gross margin, improved productivity and expense discipline led to its operating income increased 4.3 percent YoY. Application Centric Infrastructure and APIC are predicted to be the cornerstone of the Cisco’s next generation of networking architectures. Infinera's operating margin (8.0 percent) is high compared to industry average, driven by cost decline because of vertically integrated model and improved services profitability. Revenue for 3Q15 is estimated at $215 M, a 30 percent YoY growth and will be mainly driven by continued acceptance of DTN-X. Juniper’s revenue was up 14.5 percent QoQ, mainly driven by better demand from its cloud and cable service providers. The company’s services revenue increased 7.4 percent on YoY. Juniper’s partnership with VMware will enable highly automated cloud data center solutions for both service provider and mission-critical enterprise network.

The same as last quarter, Ciena, Cyan and ZTE remain in the high-risk category. ZTE, healthy but fluctuating net cash ratio, has had Difficulty establishing presence in North America markets. The company will focus on three key markets in the second half of 2015: carriers, government and corporate sectors and consumers. Cyan has the lowest operating margin in the industry. The company suffers from lack of customer diversification and revenue is concentration in one company, Windstream, which represented 52 percent of its revenue; two other companies accounted for more than 10 percent revenue each. Ciena has very low net cash ratio at $(6 M) and has substantial segment of revenue continues to come from sales to a small number of service providers. However, higher spending on optical upgrades and increased international orders will positively impact revenue.

“This is the highest number of vendors in the low-risk category we have seen since we started tracking vendor financial ratios and launched this report,” says Ray Mota, CEO, ACG Research. “Network vendors are taking operational efficiency and sustainability more seriously and the numbers show that they are running more efficient companies.”

For more information about ACG Research’s Vendor Financial Index service or other syndicated and consulting services, contact sales@acgcc.com.

Ray Mota

rmota@acgcc.com
www.acgcc.com

Two Major Vendors Shift Risk Categories: 1Q 2015 Vendor Financial Index Results

Ericsson Jumps into the Med-Risk Category and ALU Moves from Medium Risk to High Risk

ACG Research has released its 1Q 2015 Vendor Financial Index report, which delivers independent information about the sustainability of a vendor or company to help providers assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations.

Low-risk vendors for the quarter are Adtran, Brocade, Cisco, and Juniper. Characteristics of low-risk vendors include strong revenue outlook, high operating margins because of sales, solid gross margin and expense discipline, low debt dependency, and high receivable efficiency ratio.

Adtran’s performance is predicted to improve in 2015 as a result of higher carrier expenditure in U.S. and Europe. Tier 1 U.S. and Tier 2, Tier 3 carriers’ business is expected to grow. Broadband Access platforms will drive growth. Brocade’s SAN revenue is expected to be down by 8% to 11% QoQ. IP networking revenue is projected to be up by 3% to 11% QoQ. Global Services revenue is expected to grow 2%. Focus for new business is on large enterprises and cloud service providers. The firm is collaboratively working on Dell’s new open standard NFV platform. Cisco’s Vision is strong for Application Centric Infrastructure (ACI) and InterCloud. ACI and APIC are predicted to be the cornerstone of the next generation of networking architectures. The volatility in service provider and emerging markets will continue to be a concern. Order growth in SDN will add to revenue in 2Q15. Juniper’s strategy is focused on Cloud Ecosystems and High-IQ Networks segments. Partnership with Vmware will enable highly automated cloud datacenter solutions for both service provider and mission-critical enterprise network.

Alcatel-Lucent, which was a medium risk last quarter, Cyan, Ciena and ZTE are high risk, which is characterized by low inventory turnover ratio, revenue decreases and low value of equity to debt ratio. Alcatel-Lucent, soon to be called Nokia, saw a decrease in revenue in 1Q (21.5% sequentially) because of a decline in spending in the North America market and increase in cost of sales. The merger with Nokia will shift ALU’s priorities to include expanding Nokia-ALU’s optical networking portfolio with the introduction of high-capacity metro optical networking platforms and a scalable wavelength routing technology.

Ericsson, which moved from low risk to medium risk, is expected to see slow growth in its North American mobile broadband business. The company’s investment focus is in both core and new businesses in IP networks, cloud, OSS, BSS, TV and media to capture new markets.

For more information about ACG Research’s Vendor Financial Index service or other syndicated and consulting services, contact sales@acgcc.com.

Ray Mota

rmota@acgcc.com

www.acgcc.com

New Entrants into the DCI Small Form Factor Market

Two equipment titans Coriant and Alcatel-Lucent entered the Data Center Interconnect (DCI) small form factor market with targeted packet optical networking products. Coriant added to its 7100 family of products with the 7100 Pico™ Packet Optical Transport Platform and Alcatel-Lucent added to its 1830 Photonic Service Switch (PSS) family of cloud optimized metro products with its 1830 PSS-4, 8, 16 optical transport platforms. Both of these devices integrate cleanly into their respective portfolios and are Software Defined Network (SDN) enabled for dynamic service instantiation.

These products are significant because they validate the need for higher performance in this growing sector of the packet optical market. Bell Labs forecasts an increase of metro traffic by 560 percent by 2017. By 2019 there will be 60 percent more data centers in the world’s metro areas and DCI volumes will increase 400 percent. Why? With cloud-based services, the industry has recognized the need for data center interconnect (DCI). Initially, service providers offering XaaS solutions were connecting customers’ data centers to service providers’ data centers.  New requirements for DCI have grown out of the operators’ needs to deploy very high-capacity, high-speed, low-latency, efficient transport between their own data center sites. In addition, rich data types such as video, multimedia mobile backhaul, cloud and data center traffic are also forcing the need for more intelligent programmability and automation in management of these traffic patterns. However, because of the size and power constraints of the metro data centers to date, platforms need to fit strategically into smaller Point of Demarcation (POD) locations with low power and high cooling requirements. This is where the DCI small form factor market emerges.

Some key specifications and product comparisons for DCI Small FF at-a-glance:

DCI Small FF Requirements	Coriant 7100 Pico	ALU 1830 PSS –4, 8, 16
4 RU Chassis or less	2 RU	PSS-4=(2 RU), PSS-8(3 RU), 16(8 RU)
DWDM w/ Tb/s fiber capacity	88 DWDM @ 10 & 100G	8 CWDM, 32 DWDM (400G – 1.6 Tb/s)
Eth, OTN, SONET	Eth, OTN, SONET	Eth, OTN, SONET
SAN (FICON, etc.)	SAN interfaces	SAN interfaces
Video (DVB, SDI, etc.)	Video interfaces	Video interfaces
40 - 100G+ ntwk interface	40G	10G, 100G, 200G
10GE – 100GE modular I/O	1, 10 , 100 GE (176 GE max)	10 , 40, 100 GE (w/112SDX11 card)
Pwr (AC or DC)	AC/DC (110/220VAC / -48VDC)	AC/DC (110/220VAC / -48VDC)
Open API/SDN mgt	Transend	SDN Enabled

ACG sees a bifurcation of the DCI market between small and multislot form factor devices. The total high-speed DCI market was approximately $400 million in 2013 and is forecasted to grow to $4 billion by 2019. Growth for the DCI small form factor is predicted to be $3 billion by 2019, 97.3 percent CAGR 2014–2019. Growth for the DCI multislot is predicted to be $1 billion by 2019, 27.1 percent CAGR 2014–2019. This market segment is growing because of ADVA, BTI, Ciena, Cisco, Cyan, ECI Telecom, Ekinops, Fujitsu, Huawei, Infinera and ZTE. Who will command the market share? Time will tell but in the meantime ACG is tracking the progress of this exciting market in its new DCI Optical Networking Market Worldwide syndication.

Contact sales@acgcc.com to find out more information or schedule a meeting with Dennis Ward and Paul Parker-Johnson to discuss this research.

Dennis Ward

dward@acgcc.com

acgcc.com

4Q Vendor Financial Index Results: Ericsson Jumps into the Low-Risk Category

ACG Research has released its 4Q Vendor Financial Index report, which delivers independent information about the sustainability of a vendor or company to help providers assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations.

Low-risk vendors for the quarter are Adtran, Brocade, Cisco, Juniper and Ericsson. Characteristics of low-risk vendors include strong revenue outlook, high operating margins because of sales, solid gross margin and expense discipline, low debt dependency, and high receivable efficiency ratio. Adtran’s growth continues with new product launches, such as high- performance routers, momentum of TA 5000 and FTTN platforms, and new product wins in EMEA, which will contribute significantly to the company’s revenue in 2015. Brocade, which is focusing on efficiency, is targeting software networking investments, advanced fabric switches and datacenter markets. Cisco’s diversification strategy of relying less on specialized routers and switching devices and more on rolling SDN tools and security services will add to growth in 1H15. Juniper continues to pursue its restructuring plan, cost cutting initiatives and diversification of revenue with the goal of increasing efficiency in delivery of services and customer support. Ericsson’s sales in most regions are expected to increase sequentially in 1Q15 with rising demand for managed services, consulting and system integration.

Cyan, Ciena and ZTE are high risk, which is characterized by low inventory turnover ratio, revenue decreases and low value of equity to debt ratio. Cyan’s cautious ordering pattern by its customers will impact the revenue in 1Q15, which is estimated at $30.2 M. Ciena’s substantial segment of its revenue continues to come from sales to a small number of service providers. The firm is focusing on diversifying and broadening its customer base and increased spending on optical upgrades and higher number of international orders should positively impact its top line in 1H15. ZTE will continue to focus its efforts on major global carriers and government segments. Future growth will rely on flagship device range. 

For more information about ACG Research’s Vendor Financial Index service or other syndicated and consulting services, contact sales@acgcc.com.

Ray Mota

rmota@acgcc.com

www.acgcc.com

New SDN Apps Bring a More Open Lens to the Future of Network Operations

Some vendors are starting to leverage a truly open architecture for optimization of unified fabrics with extensible service control applications.

One of the great opportunities in software-defined networking is to amplify the efficiency of network and service operations teams by allowing them to leverage a powerful set of logically centralized and abstracted control functions for the infrastructures and services they manage.

While this model is simple to articulate it takes great vision and talent to realize in the world of real, deployed solutions that deliver the result.

The goal is only partially realized by the use of SDN controllers themselves. Controllers indeed do help simplify by normalizing and abstracting control plane functions for the given domain. In parallel, though, operators are driving to achieve additional optimizations, efficiencies, and innovations by leveraging what I call SDN Service Control applications that work in tandem with the centralized SDN controller code. Examples of focus for these include traffic analytics, service level monitoring and management, and custom traffic steering design for various operating goals (application performance, service availability, cost optimization, etc.).

The dynamics for how these goals can be pursued vary a bit between internal data center and adjacent wide area network infrastructures. I focus on data center implementations here.

The end game we’re looking at is one where the logically centralized and streamlined controls for the network being managed dynamically serve the needs of the applications and users relying on it for their services. In many data centers this will include a sizable overlay virtual network running in parallel with a high-performance physical underlay network. It will include a blend of control plane and value-adding service control apps to make it all work automatically and with maximum performance, efficiency, security, and stakeholder satisfaction (phew!).

A challenge in getting to this end game is achieving these results in a streamlined, integrated manner for both underlay and overlay networks. As implementing SDN in data center environments has gotten started, we’ve largely had operationally separate deployments of underlay and overlay networks. Services such as VXLAN and virtualized router modules are operating in their own logical scopes, and a sometimes heterogeneous fabric of underlying physical network nodes is implementing its own L2 and L3 functions in parallel. Each piece can do its part on its own, but it doesn’t create an especially streamlined operational model.

Some amount of overlay and underlay integration has occurred. From the open networking point of view, a number of OpenFlow controllers have started to bring a degree of integration of underlay switches with a range of centralized control plane functions. And in a proprietary context, Cisco’s ACI framework and APIC service control system have brought a range of application policy controls to both overlay and underlay network infrastructures—the only glitch from an optimization point of view is it’s not being implemented on a fully open platform.

Neither of these early stage developments has brought a design that unlocks the potential of the open network control environment of SDN with the power of value-add that can be obtained from service control applications running in parallel with the SDN controller that have the ability to optimize both the virtual and the physical network environments according to the operator’s service delivery requirements. Most SDN controllers delivered to date open up control of either a virtual overlay or a physical underlay but not both. And while the APIC is logically elegant within its own technological silo, it’s not opening up the opportunity for streamlining to the same extent—across a heterogeneous SDN infrastructure—as a solution leveraging, say, and Open Daylight-based set of network control plane functions could.

A glimpse into a more open framework for streamlining whole data center networking fabrics has started to appear in a set of recently introduced SDN service control applications from Big Switch and Brocade. Each has the attribute of bringing a distinct set of added value to managing a data center’s SDN deployment, while leveraging the abstraction of the SDN controller as a means of streamlining the deployment of the application’s work. In this manner they have the potential of leveraging the versatility and openness of the SDN control plane for implementation of the service controls they are generating in either a virtual or a physical deployment or both.

Simplifying analytics, traffic engineering, and application policy controls in this way brings an order of magnitude increase in the level of efficiency that an operations and service management team can achieve toward the services they are managing.

Big Switch’s Fabric Analytics module and Brocade’s Volumetric Traffic Management and Path Explorer applications are each pursuing this path. Examples of implementations approaching this design have been developed in wide-area or transport SDN solutions such as Cisco’s WAE and NCS solutions and Ciena’s recently introduced Agility software suite. But in the data center the Big Switch and Brocade applications are early entrants in the market that are starting to leverage a truly open architecture for optimization of unified fabrics with extensible service control applications. Whether additional similar applications arrive in the market using a similar model in the near future will be interesting to see. But in the meantime, kudos to both suppliers for advancing the state of the art in managing open data center fabrics with the versatility and extensibility of their designs.

For more information about ACG's SDN services, contact sales@acgcc.com.

Paul Parker-Johnson

pparkerjohnson@acgresearch.net 

ACGcc.com 

4Q Vendor Financial Index Announcement

ACG Research has released its 4Q Vendor Financial Index report, which delivers independent information about the sustainability of a vendor or company to help providers assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations.

Low-risk vendors for the quarter are Adtran, Brocade, Cisco, and Juniper. Characteristics of low-risk vendors include strong revenue outlook, high operating margins because of sales, solid gross margin and expense discipline, low debt dependency, and high receivable efficiency ratio. Adtran’s growth with the Deutsche Telekom and AT&T opportunities and improved spending by carriers is projected to accelerate the company’s revenue 10% in 2014. Brocade, which was in the medium-risk category in 3Q, is now in the low-risk category because of solid operating margin, high receivable efficiency ratio, good inventory management practices and healthy equity to debt ratio. Although Cisco’s revenue is projected to decline in the fiscal calendar year, the company is aggressively pursuing major technology developments, including Internet of Everything and SDN. The question is how long will the transition take? Juniper has posted its sixth consecutive quarter of YoY growth and is focusing on improving operational execution and managing costs. 

Of note in 4Q:

• Adtran claims the highest Altman Z-Score in the industry: 7.3
• Brocade had the highest receivable efficiency ratio: 2.59
• Cisco posted the highest R&D potential: 28.7%
• Juniper has a high receivable efficiency ratio: 2.20, compared to industry average

Cyan, Ciena and ZTE are high risk, which is characterized by low inventory turnover ratio, revenue decreases and low value of equity to debt ratio. Cyan, with one of the lowest operating margin in the industry, is dependent on a few customers (Windstream contributed 39% revenue). A substantial segment of Ciena’s revenue continues to come from sales to a small number of service providers. ZTE has the lowest receivable efficiency ratio in the industry, indicating significant risks associated with the credit policy and finances. 

For more information about ACG Research's Vendor Financial Index service or other syndicated and consulting services, contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Ciena Financial Analysts' Conference

Eve Griliches was in NYC last week for Ciena's financial analyst conference. Click here to listen.

For more information about Eve Griliches, click here. For more information about ACG Research's optical service click here or contact sales@acgresearch.net.

Eve Griliches

egriliches@acgresearch.net 
www.acgresearch 

Ciena WaveLogic 3 Technology: “Moving the Goal Posts”

Ciena has announced it will be delivering the WaveLogic 3 chip set that not only scales to 400G, but delivers on software programmable coherent technology. The general idea behind this technology enhancement is increased capacity and extended economic reach across metro, regional, long haul and submarine networks.

Enhancements to operate with additional capacity over existing submarine cable are also key economic advantages of this new technology. This chip set is more of a technology launch rather than a specific product launch; the WaveLogic 3 chip set will be used across multiple platforms in Ciena and will be available in the second half of 2012.

Read why we agree with Ciena’s statement that it is "moving the goal posts."

Eve Griliches
egriliches@acgresearch.net

www.acgresearch

Cisco Captures #1 Spot in Packet Optical Transport Segment for Q1/11: ACG Research Optical Networking Market Share Report

The Worldwide Packet Optical Transport Market has seen typical 1Q seasonality, declining 16.1% sequentially but growing 21.0% year over year, according to ACG Research. The total Worldwide Optical Networking market declined 18.1% sequentially but grew 3.7% year over year in Q1 2011.

Cisco has regained the number one position with 19.9% of total market share in Packet Optical Transport, bumping Alcatel-Lucent down to the #2 spot. In an interesting market shift, Fujitsu has jumped to the third spot, because of strong North American shipments. The optical market continues to recover from the recession; however we expect delays in 100G deployments as vendors struggle to bring product to market. This bodes well for Ciena, which already has 100G product shipping, and Cisco as most operators are looking for a second source, and the options for those positions are still wide open.

ACG is optimistic about the future outlook of the Packet Transport market. We see service providers and content providers spending on their backbone networks as well as making significant architectural plans to change their metropolitan networks. Vendors that execute on their packet transport strategy stand to gain significant market share in this segment.

Top Vendors- Worldwide Packet Optical Transport Systems (POTS) Market
Vendor	1Q11
	Rank	Q-Q Revenue Growth	Y-Y Revenue Growth
Cisco	1	-8.8%	21.6%
Alcatel-Lucent	2	-47.3%	92.5%
Fujitsu	3	48.9%	65.0%
Tellabs	4	-15.5%	-15.3%
Ciena	5	1.6%	314.5%
Total		-16.7%	21.0%

QUARTERLY TREND and DRIVER HIGHLIGHTS

• The packet transport market is wide open to router vendors with optical platforms if they can deliver on 100G and ROADM technologies.
• OTN architecture is clearly resonating with operators, but adoption of OTN standalone platforms within major carriers involves a long selling and new certification cycle.
• MPLS-TP, a source of contention in the standards bodies, is seeing slow adoption outside of specific networks in China and Europe. The rapid deployment of Ethernet technologies may, in fact, eclipse or delay MPLS-TP solutions.

For more information contact Karen Grenier, kgrenier@acgresearch.net.