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

1Q Worldwide Router and Switch Markets Affected by Lower Global Capex Spend

Global capital expenditure is expected to increase only two to three percent in 2015.

The Worldwide Carrier Routing & Switching markets decreased revenue in Q1 but was up slightly year over year. The Q1 Total Worldwide Carrier Routing and Switching market posted revenue of $2.8 billion. The core routing segment had revenues of $570 million, increasing 1.2 percent q-q and up 3.6 percent y-y. The edge/switching segment posted revenue of $2.2 billion, down 8.0 percent q-q but up marginally 0.2 percent y-y.

Worldwide Carrier Routing & Switching Markets 1Q15

U.S. capex was down 14 percent in 1Q and is projected to be down 10 percent in 2Q. The second half of 2015 is expected to be positive, with capex ranging from 2 to 6 percent, but overall for 2015, U.S. capex is projected to decline 4 percent. Europe is projected to increase approximately 5.8 percent, APAC will be up 6 percent and CALA, which was down 4 percent last year, will grow 2.2 percent.

Disruption continues to affect the router and switching market; social, mobile, analytics, and SDN/virtualization adoption has resulted in more data being transmitted and stored through mobile and computing devices. “Currently, carriers have infrastructure that is complex and is somewhat inflexible,” states Ray Mota, CEO of ACG. “This means they have to be very risk adverse. Carriers must start transitioning their architectures to so they just program the services, not rearchitect the network every time they have a new service. Service providers are looking for low-risk deployments while doing their network transformations and are looking at hybrid networks, a network that utilizes both the purpose-built Physical Network Function and Virtual Network Function, which are targeting almost all segments and functions of the network.”

TREND and DRIVER HIGHLIGHTS

Network innovations will facilitate bandwidth increases by expanding the capacity of the access network, reducing service providers’ costs, and creating new incentives for subscribers to stay on-net. For example, the benefits of LTE-Advanced include optimized heterogeneous networks with a mix of macro cells and small cells to improve coverage and reduce costs and use of multicarrier to support higher data rates.

LTE initiatives are also driving demand for mobile backhaul, evolved packet core, and edge routing solutions; however, there will be a decrease in the mobile backhaul business as LTE roll-outs end. In 1Q some vendors benefited from a second round of investments in LTE backhaul infrastructure to raise capacity for demand.

Wireline carriers remain focused on enhancing the fiber footprint, expanding its reach (FTTX) and capacity (100 gig) to facilitate improved broadband offerings, carrier Ethernet services, and cloud capabilities. Increasing traffic volumes at the network edge should drive demand for core upgrades, which may benefit sales of coherent transport products, OTN switches and core routers.

Data center interconnect positively impacts both the optical and packet domain. Currently, ACG sees six to eight percent of edge routers being dedicated to DCI. ACG sees three main areas that will be the foundation for DCI: Optical, Layer 2 and Layer 3.

For more information about ACG's router and switch services, contact sales@acgcc.com.

Ray Mota

rmota@acgcc.com

www.acgcc.com

Business Case for Open Data Center Architecture in Enterprise Private Cloud

Dr. Michael Kennedy analyzed the transition costs from state-of-the-art switching infrastructure to elastic and agile infrastructure that enables private enterprise cloud for a medium-sized enterprise data center. The Juniper Networks’ open data center infrastructure architecture was compared to a proprietary programmable architecture that requires simultaneous investment in a centralized controller and application-aware switch combination. The proprietary architecture requires parallel operation of the existing switching equipment and the new application-aware switches until all applications are moved to the new switches. This is a multiple-year effort for most enterprises. In contrast, the open architecture does not require any change in the existing infrastructure base. The study found that the open architecture provides full asset protection; the proprietary architecture destroys 88 percent of the value of the original switching investment in the first year of the transition period.

Click to download ACG’s Juniper Business Case for Open DC Architecture.

What is your best route to the cloud?

Click for more information about ACG’s business case analysis services or contact sales@acgcc.com.

Michael Kennedy

mkennedy@acgcc.com
www.acgcc.com

First Half Spending Boosts 2Q Router and Switching Market

Service providers are requiring more capacity because of an increase in mobility and agile cloud solutions, which are stimulating growth.

The Worldwide Carrier Routing & Switching markets increased revenue 7.0% in Q2 but remained flat 0.0% year over year. Global capex was up 5% q/q, and IT spending increased 6% q/q. In spite of this positive growth, ACG Research anticipates a challenging market in the second half of the year and lower service provider routing spend in Q3 with projects being pushed out to 2015. “AT&T and Verizon continue to surpass the industry average for operating margin. AT&T posted 17.2% operating margin while Verizon posted 24.4%. Many other SPs also saw solid margin gains, which had a positive impact for service provider equipment vendors in the first half of 2014,” states Ray Mota, CEO of ACG. “The router market outlook is uncertain because of architectural transitions, consolidations and larger then expected spending in the first half. The good news is that projects are not being cancelled but just pushed out.”

The rise in fixed broadband traffic and mobile broadband traffic on 3G/4G and LTE networks will continue to put pressure on providers’ networks. Streaming residential video is rapidly driving average household bandwidth requirements: 31% CAGR from 2.9 Mbps in 2014 to 7.3 Mbps by 2018. Smart phones, tablet, and next-generation devices as well as pressure on service providers to provide content-rich applications will force many service providers to upgrade their access, aggregation, and core networks, and mobile backhaul.

Q2 Total Worldwide Carrier Routing & Switching market posted revenue of $2.9 billion. Core Routing revenues were up 3.0% q/q but down 3.8% y/y. Edge Routing and Switching revenues increased 8.0% q/q and slightly up 1.0% y/y. 

Alcatel-Lucent reported routing and switching revenue of $603 million, increasing 17.3% q/q and 2.8% y/y. ALU’s solid quarter in routing is primarily attributed to the company’s gains in the IP Edge Routing segment, Multiservice edge routing and mobile backhaul. Cisco posted router and switching revenue of $1.46 billion, flat -0.05% q/q and -4.3% y-y. Cisco, which had a solid Q1, is transitioning from a hardware-based revenue to an annuity model, which impacted Q2. Juniper Networks has router revenue of $579.8 million, increasing 12.2% q/q and 12.5% y/y. Juniper continues to focus on launching new products and initiating cost reductions to drive growth. With software defined networking gaining traction as a solution for deployment, Juniper expects to capitalize on the anticipated increase of SDN and network function virtualization.

TREND and DRIVER HIGHLIGHTS

• Data center interconnect is a vital part of the service provider edge; 6% of the overall edge market is dedicated to data center interconnect. 

• Operators are more focused on the drivers in the edge of the network. The outlook for routers: the edge segment, which is projected to reach $12.2 B in 2018, is three times the size of the core router market, which will increase $3.3 billion in 2018.

• Service providers are struggling with both internal and external challenges: rapid technology adoption, ongoing support for legacy technologies, heterogeneity of technologies and multivendor networks. External challenges include loss of high-margin legacy services, over-the-top providers, low-cost providers, regulations, increasing traffic, and competition from their own suppliers.

For more information contact sales@acgreasearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Juniper’s Response to New Service Provider Economics

Today’s networks are all about optimizing performance and realizing maximum revenue. Service providers need products and services that decrease complexity and integrate services on one platform.  Juniper answers SPs’ request with its Network Optimization Services portfolio.

I’ve had the opportunity to meet with both providers and vendors during the past few months, and unanimously, they have told me that networks and monetizing them is their number one priority. This is no surprise, especially with core network traffic growing in excess of 50 percent per year and new services such as content-rich digital media, cloud and mobile placing new requirements on the network. Services and products, consequently, must scale rapidly and meet demanding network performance objectives with the lowest possible total cost of ownership and maximum ARPU.

Vendors have been responding to meet market requirements and during the last few months have announced a number of new products and services that meet SPs’ performance requirements. The most recent comes from Juniper. With its Network Optimization Services offering, Juniper has consolidated services on the MX Series 3D Universal Edge Router and one operating system, Junos®.  This consolidation supports service providers’ business goals by significantly lowering the cost to implement and operate the network and by improving return on network and service investments (to download Dr. Michael Kennedy's TCO, click http://www.juniper.net/us/en/dm/acg-optimizing-wp/). 

I had the opportunity to put Mike Marcellin, SVP, Juniper, in the HotSeat and talk about the MX 2020, the most recent addition to the MX family, and Juniper’s Network Optimization Services.  The following gives you a quick view of the financial benefits of Juniper’s Network Optimization Services:

According to Mike, the MX “not only produces positive economics, it also offers investment protection.”  To find out how and why, listen to Ray Mota and Mike Marcellin discuss how service providers can use their networks to drive revenue. Click here for the HotSeat.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Second Half of 2012 Poised for CapEx Spend

Although there is instability in global economies, demand fundamentals remain intact and network traffic continues to rapidly increase, adding more performance pressure on service providers’ networks. The outlook for the second half of the year is for SPs to spend, invest, and upgrade networks and launch new projects.

The European debt crisis as well as a reduction in service providers’ CapEx spend continues to affect the global router and switching markets. Vendors cited the turbulence in Greece, Spain, and Portugal and decreased demand from service providers as factors that contributed to their weak revenues in Q2. ACG Research still anticipates growth in the Worldwide Carrier Routing and Switching markets by the end of 2012. One factor that will affect growth is the surplus of CapEx, with some operators reporting having spent less than 50 percent of their CapEx thus far. “Growth in network traffic continues to rapidly expand and add more stress on SPs’ networks. Service providers have to make the investments and upgrades in their networks to meet capacity requirements; it’s that simple,” states Ray Mota, managing partner. “In the long term, this bodes well for vendors, and if SPs remain true to being flat or slightly up then the spend in the second half of the year should be positive.”

Q1 Total Worldwide Carrier Routing & Switching market posted revenue of $2.8B. The global market increased 2.7% q/q but decreased 5.1% y/y. Core Routing revenues were down 0.6% q/q and down 11.4% y/y. Edge Routing and Switching revenues were up 3.6% q/q but down 3.3% y/y.

Cisco posted a total worldwide decline of 2.1% q/q but an increase of 2.3 y/y. Cisco reports macroeconomic conditions contributed to the decrease in its Q2 revenues. Brocade posted a significant decrease, 23% q/q but a solid increase of 1.8% y/y. Juniper increased worldwide routing revenue 4.6% q/q but decreased 20.2% y/y; the company stated cautious purchasing prioritization by service providers, which is 64% of Juniper’s revenue, and some large enterprises as factors influencing their quarterly results. Alcatel-Lucent, which continues to institute more cost cutting measures, staff reductions and management restructuring, increased 6.6% q/q but decreased 2.2% y/y. 

Vendor	Rank	Market Share ($)	Q-Q MS Point +/-
Cisco	1	54.7%	-2.6
ALU	2	18.4%	0.7
Juniper	3	16.7%	0.3
Tellabs	4	2.5%	0.5
Huawei	5	1.9%	0.2

QUARTERLY TRENDS and DRIVERS HIGHLIGHTS

• Service providers and enterprises are looking at networks that are flatter, that reduce complexity and OpEx, while delivering greater performance and scale.

• Core network traffic is growing in excess of 50% per year, and new services such as content-rich digital media, cloud and mobile broadband place new requirements on the network for optimal distribution and delivery. Core routers, consequently, must scale rapidly and meet demanding network performance objectives with the lowest possible total cost of ownership.

• A key driver contributing to service provider router and switching market growth is the increasing demand for mobile broadband and providers investing in wireless networks to meet that demand.

Click here for more information about ACG Research's router and switching service.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Core or Edge, Which Is It?

What defines a core router?  An edge router?  The trend has been to make the edge router "smart" and the core router "dumb and fast."  Does this trend still hold true today?  How are service providers using routers? Ray Mota of ACG Research and Sanjeev Mervana of Cisco Systems, discuss what defines core routers from edge routers, the architecture requirements of core, drivers for these requirements, forwarding and control planes, service substantiation and what makes both Cisco's and Juniper's products true core routers.

For additional insight, read "Alcatel-Lucent's New Core Router: Contender or Pretender?"

Click here to view the video.

Click here for more information about ACG Research's router and switching service.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Juniper Recovers #2 Spot from Alcatel-Lucent in Q1/11 Service Provider Routing & Switching Market Share Report: ACG Research

The Worldwide Carrier Routing & Switching markets have seen typical 1Q seasonality, declining 14.2% sequentially but growing 9.0% year over year, according to ACG Research. The Total Worldwide Carrier Routing & Switching market grew revenue $2.7B in Q1/11. Core Routing revenues were down 11.2% q/q and up 9.5% y/y. Edge Routing & Switching revenues down 15.1% q/q and up 8.9% y/y.

Cisco continues to hold the number one position with 50.3% of total market share. In a dramatic market shift, Juniper reclaimed its number two spot, bumping Alcatel-Lucent to number three. According to Ray Mota, managing partner, “this seasonal decline was expected, especially after the strong growth posted in Q4.” ACG is cautiously optimistic about the future outlook of the market. “We see service providers spending on cloud computing and video services and managed services will help drive growth in the remainder of 2011. Vendors that execute on their strategy stand to gain good market share of CapEx spend associated with those services.”

Top Vendors: Worldwide Carrier Routing & Switching
Vendor	1Q11
	Rank	Q-Q MS Point +/-
Cisco	1	1.9
Juniper	2	(2.3)
Alcatel-Lucent	3	(4.0)
Tellabs	4	0.3
Ericsson	5	(0.1)

QUARTERLY TREND and DRIVER HIGHLIGHTS

• Carriers are reducing their CapEx this quarter but still spending in mobility and new services creation opportunities.
• Many providers have exhausted or will soon exhaust their IP addresses. Service providers have to decide about IPV6 now and gradually increase their costs or continue to employ band aid solutions to NAP and risk their business continuity.
• Security is the number one concern of enterprises as they continue to move toward virtualization and cloud offerings.
• Carriers are looking to Carrier Ethernet, QoS, CDN, IPV6, and end-to-end technologies to address their pain points associated with the increasing amount of video traffic.

ACG focuses on providing market analysis and consulting to help service providers and vendors monetize their existing infrastructures and increase operational efficiency and profitability. ACG is uniquely qualified to develop the TCO analysis and white paper. ACG applies multi-disciplinary expertise and multidimensional solutions to complex business and technology issues, delivering greater strategic value than a one-dimensional firm. Each consulting engagement is uniquely structured — no forced methodologies or canned reports are employed. Our consultants’ collective experience is derived from leading firms across a broad spectrum of professional disciplines including management consulting, engineering, marketing, financial analysis, and IT management and operations. We combine advanced academic degrees with practical business experience.

ACG has extensive experience assisting vendors and service providers define and execute their marketing programs from determining their value proposition, positioning and messaging; to prioritizing marketing programs; to supporting execution by designing seminar series and developing and delivering compelling content such as keynote presentations, sales and analyst presentations, white papers, videos and articles.

Our strong relationships with vendor market leaders and innovative start-ups, enables ACG to offer extensive knowledge of product portfolios and strategies as well as emerging architectural shifts. We have a strong track record of predicting market trends and separating hype from practical reality.

Karen Grenier, Marketing and Communications
kgrenier@acgresearch.net
Desk: +1 408-200-0967