Michael Genovese, Managing Director (203) 340-5194 [email protected] Matt Bielawski, Research Associate (203) 340-5175 [email protected]

Industry Update

December 30, 2013

Technology: Communications Equipment Industry Implications of AT&T's Domain 2.0 Request for Information According to our research, AT&T (T, NR, $35.18) sent an RFI (request for information) to vendors last month that is likely to have significant long-term consequences for the Communication Equipment industry. The RFI requests responses on how each vendor plans to develop network functionality aligning with the AT&T Domain 2.0 vision, which looks to be a new virtualized network architecture in which white box hardware is managed by SDN controllers. In this note we look ahead and predict what could happen as AT&T transforms its Data Center and WAN (Wide Area Network) networks over the next 5+ years. We conclude that, within our coverage universe, the long-term implications are most negative for Cisco and most positive for Ciena, Finisar, and F5 Networks. Outside of our direct coverage the implications appear to be most positive for VMware (VMW, Neutral by Israel Hernandez, $88.96, $95 FV). Long-term impact of AT&T Domain 2.0 Technology Vision on companies under coverage Ticker Rating

Px

PT/FV Implication

CSCO Neutral $22.02 $20.00 Negative CIEN

Buy

$23.67 $28.00 Positive

FNSR Buy

$23.54 $30.00 Positive

FFIV

Buy

$89.22 $108.00 Positive

INFN

Buy

$9.79

JNPR

Buy

$22.22 $26.00 Mixed

ALU

Neutral $4.52

JDSU

Neutral $13.03 $13.00 Mixed

$14.00 Positive

$4.25

Mixed

ADTN Neutral $27.02 $24.00 Neutral RVBD Neutral $17.58 $16.50 Neutral

Source: MKM Partners

Impact Notes Cisco appears unlikely to win AT&T Data Center opportunity; High Trends in Service Provider routing may not work in its favor; Could need to acquire additional Optical assets Ciena is unaffected by nearer-term Data Center changes; AT&T says it is now introducing OTN into the network; High Leadership in 100G positions it as a potential target for CSCO or JNPR as Layer 0-3 converge in 2016+ High

Finisar benefits from white box Data Center switches since these tend to have more 10G/40G/100G content

F5 is a VMware NSX Ecosystem Partner; We expect AT&T will Medium likely use F5 products to increase performance, scalability and availability for applications that run on NSX Domain 2.0 could open up eventual opportunities at AT&T; Medium Leadership in 100G positions it as a potential target for CSCO or JNPR as Layer 0-3 converge in 2016+ Juniper could lose AT&T Network Security market share in 2015+; Likely to see AT&T edge and core Router demand High improve in 2014-2015; Likely to play a role in converged WAN transport long-term but may need Optical assets No exposure to Data Center; LTE opportunity largely unaffected; Has both the Data and Optical technology needed High for eventual converged Layer 0-3 solution but does not appeat to have leading AT&T mind share in either Dislocations in the test and mesaurement market are risks High and opportunities; Benefits from Datacom trends like FNSR but has much less exposure; Optical market appears solid Medium FTTC/VDSL/Vectoring opportunities are largely unaffected Low

Riverbed does not historically have a strong AT&T relationship; No strong stance to compete for VXLAN monitoring versus the large software companies and JDSU

Potential timeline of significant network changes. AT&T has asked each of the technology vendors receiving its questionnaire to respond with its ideas and potential architectures by December 31, 2013, according to our research. We expect AT&T will review the responses in 1H14 and issue a series of more specific equipment RFI/RFPs (request for proposal) in 2H14. Changes are likely to occur first in the carrier's Data Center domain, perhaps as early as 2015. We believe VMware's NSX platform has a strong chance of being selected as the Data Center virtualization platform, and foresee NSX-related Controllers and standardized high volume Ethernet switches being deployed starting in 2015. It would likely be at least another year beyond that or 2016 before a WAN SDN Controller is deployed and the process of true Optical and Router convergence begins to take hold in AT&T's network.

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Communications Equipment: Industry Implications of AT&T's Domain 2.0 Request for Information

AT&T Domain 2.0 envisions a new network based on Virtualization, Cloud and SDN/NFV

It appears AT&T intends to be aggressive with Domain 2.0 network transformation

AT&T introduced its Supplier Domain 2.0 strategy in September. The Domain 2.0 vision articulates the carrier’s future network direction in light of emerging technologies and business drivers. The Domain 2.0 program combines network technology evolution, operations best practices and vendor sourcing into one cohesive effort. Stated goals of the program include rapid innovation, new business models and increased choice of technology suppliers. Other key points include: 

Domain 2.0 is intended to transform AT&T’s networking businesses from their current Telecom-oriented mode to a future Cloud Services-oriented mode.



The carrier foresees today’s single function network equipment elements being replaced by Network Function Virtualization Infrastructure (NFVI) that can be directed to perform a variety of functions when directed with Software Defined Networking (SDN) protocols.



Potential benefits of NFVI include reduced equipment diversity, lower power consumption and the ability to enable new on-demand, end-user managed services.



As network services increasingly become cloud-centric workloads, new classes of Orchestration and Policy software will have to run in parallel with and scale in a similar manner to the NFVI/white box hardware.

According to our research, the Domain 2.0 RFI/questionnaire asks hardware systems vendors to respond to a series of questions similar to the ones below: 

What is your company’s SDN Controller solution? How does it control white box network elements?



How would the hardware devices your company makes respond to commands from an external SDN Controller?



What is your company’s roadmap for transforming your current hardware offerings into white box network elements?

For the purpose of this discussion, we believe “white box” hardware is defined as traffic forwarding network elements based on easily available hardware, whether merchant silicon or ASICs. White boxes are interchangeable and interoperable, and support SDN Control through open standards-based APIs (application programming interfaces.)

December 30, 2013

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MKM Partners LLC

Communications Equipment: Industry Implications of AT&T's Domain 2.0 Request for Information

Changes are likely to occur first in Data Centers, potentially starting in 2015

In the original Domain 2.0 announcement in September AT&T noted that the initiative should allow it to keep capex flat to down over the long-term. It also noted that capex will shift from traditional telecom domains to more cloud-oriented domains such as Data Centers. We expect to see the carrier’s Domain 2.0 vision begin to take hold first in its Data Centers since this is where SDN control, NFV-compliant servers and white box switches can first prove-in and impact customer-facing business models. AT&T is likely to review responses to the current RFI in 1H14 before issuing more specific RFPs in 2H14. We foresee new SDN Controllers and white box switches being deployed in AT&T Data Centers starting in 2015.

We think VMware NSX has a strong chance of selection as the key Data Center SDN Control platform

AT&T’s current Cloud Services offerings under the Synaptic brand name are based on VMware’s vSphere cloud computing operating system. VMware acquired SDN and OpenFlow-pioneer Nicira for more than $1bn in mid-2012, and subsequently launched the NSX network virtualization and security platform leveraging Nicira’s technology. We believe AT&T’s SDN-related vision aligns closely with VMware/Nicira’s vision and we foresee a relatively high likelihood that AT&T will select NSX as the master SDN control platform for its Data Center architecture. This could potentially leave room for other interoperable Controllers from SDN start-ups to also be used in AT&T Data Centers. Along with new SDN Controllers, we would expect AT&T to continue deploying commodity-like x86 servers and white box-like switches from VMware ecosystems partners. NSX ecosystem Switching partners include Arista Networks (private), Brocade Networks (BRCD), Dell (Dell) and HP (HPQ). Palo Alto Networks (PANW) is an NSX Network Security partner and F5 Networks, Citrix (CTXS, Buy, $61.67, $65 PT) and Silver Peak are Application Networking partners. We think most of the vendors listed have a good chance of selling equipment into AT&T Domain 2.0 Data Centers.

Cisco and Juniper seem unlikely to win AT&T Data Center opportunities …

Outside of some Network Security appliance sales, neither Cisco nor Juniper does much Data Center business with AT&T and this is unlikely to change. We view lack of traction in AT&T Data Centers as a bigger problem for Cisco than Juniper due to Cisco’s significantly higher Switching revenue exposure and market share. We do not think AT&T will be particularly receptive to Cisco’s recently announced Application Center Infrastructure (ACI) architecture, including Nexus 9000 switches, because it still seems too complex and proprietary compared to more white box-oriented architectures. AT&T appears to be especially concerned with competing with Cloud services offering from the likes of Google (GOOG) and Amazon (AMZN), and is likely to follow some of the virtual networking concepts established in these companies’ early SDN/white box deployments.

…but will probably sell edge and core Routers to AT&T for years to come

Cisco and Juniper likely will continue to sell edge and core Routers to AT&T for quite some time, including edge Routers that sit just outside of Data Center firewalls and connect Data Centers to the WAN/Internet. We expect AT&T Router spending to moderately increase in 2014-2015 even as the carrier evaluates potential future alternative WAN networking architectures. Further, we believe Juniper will be in a share gain mini-cycle relative to Cisco over this time frame due to its newer more NFV-compliant products such as MX-2020, T4000 and PTX being deployable now. On the other hand, some of Cisco’s newer products, such as NCS, were recently announced but are not yet generally available.

December 30, 2013

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MKM Partners LLC

Communications Equipment: Industry Implications of AT&T's Domain 2.0 Request for Information

It will likely be years before a WAN SDN Controller is deployable; 2016 may be an aggressive target

While Data Center SDN Controllers are deployable sooner rather than later, it could be years before a WAN SDN Controller is ready for prime time. In addition, it is unclear whether a software vendor like VMware will be able to easily expand from Data Center SDN Controller to WAN SDN Controller or if an existing WAN Networking vendor such as Cisco, Juniper or Ciena will introduce an open standards, converged Layer 0-3 (Optical + Data) SDN Controller that ends up to AT&T’s liking. As we understand it, AT&T’s current packet or data networks are based on Routers with traditional Layer 3 BGP (border gateway protocol) and Layer 2 MPLS (multi-protocol label switching) functionality. The Optical network (Layers 0-1) is composed of various DWDM and ROADM transport elements and AT&T is now introducing OTN into the network, which is positive for Ciena. We believe AT&T’s long-term vision is to evolve its WAN networks to a converged Layer 0-3 network where white box-like hardware devices forward data plane traffic via SDN control.

AT&T’s vision is likely to drive the eventual converge of Routers, core MPLS Switches and Optical transport platforms

AT&T will continue to buy Routers from Cisco, Juniper and Alcatel-Lucent and Optical transport equipment from Ciena in 2014-2016, and likely well beyond. However, there will probably be full convergence of Layers 0-3 eventually as NFVI-compliant Data and Optical products merge into virtualized WAN traffic forwarding devices. We expect that Juniper and Cisco will continue to sell WAN packet networking equipment to AT&T well into the future, but they may need to add ultra-high capacity coherent Optical transport to their product capabilities. For this reason, we view best-of-breed Optical transport vendors like Ciena and Infinera as potential acquisition targets for the larger Router vendors over the next several years. Long-term impact of AT&T Domain 2.0 Technology Vision on companies under coverage Ticker Rating

Px

PT/FV Implication Impact Notes Cisco appears unlikely to win AT&T Data Center opportunity; CSCO Neutral $22.02 $20.00 Negative High Trends in Service Provider routing may not work in its favor; Could need to acquire additional Optical assets Ciena is unaffected by nearer-term Data Center changes; AT&T says it is now introducing OTN into the network; CIEN Buy $23.67 $28.00 Positive High Leadership in 100G positions it as a potential target for CSCO or JNPR as Layer 0-3 converge in 2016+ FNSR Buy

$23.54 $30.00 Positive

FFIV

Buy

$89.22 $108.00 Positive

INFN

Buy

$9.79

JNPR

Buy

$22.22 $26.00 Mixed

ALU

Neutral $4.52

JDSU

Neutral $13.03 $13.00 Mixed

High

Finisar benefits from white box Data Center switches since these tend to have more 10G/40G/100G content

F5 is a VMware NSX Ecosystem Partner; We expect AT&T will Medium likely use F5 products to increase performance, scalability and availability for applications that run on NSX Domain 2.0 could open up eventual opportunities at AT&T; Medium Leadership in 100G positions it as a potential target for CSCO or JNPR as Layer 0-3 converge in 2016+ Juniper could lose AT&T Network Security market share in 2015+; Likely to see AT&T edge and core Router demand High improve in 2014-2015; Likely to play a role in converged WAN transport long-term but may need Optical assets No exposure to Data Center; LTE opportunity largely unaffected; Has both the Data and Optical technology needed High for eventual converged Layer 0-3 solution but does not appeat to have leading AT&T mind share in either Dislocations in the test and mesaurement market are risks High and opportunities; Benefits from Datacom trends like FNSR but has much less exposure; Optical market appears solid

$14.00 Positive

$4.25 Mixed

ADTN Neutral $27.02 $24.00 Neutral

Medium FTTC/VDSL/Vectoring opportunities are largely unaffected

RVBD Neutral $17.58 $16.50 Neutral

Low

Riverbed does not historically have a strong AT&T relationship; No strong stance to compete for VXLAN monitoring versus the large software companies and JDSU

Source: MKM Partners

December 30, 2013

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MKM Partners LLC

Communications Equipment: Industry Implications of AT&T's Domain 2.0 Request for Information Distribution of Ratings MKM Partners, Equity Research Investment Banking Serv./Past 12 Mos. Rating BUY [BUY] HOLD [NEUTRAL] SELL [SELL]

Count

Percent

Count

Percent

78

56.52

0

0

57

41.30

0

0

3

2.17

0

0

Explanation of MKM Partners Rating System “Buy” Security is expected to appreciate 15% or more on an absolute basis in the next 12 months. “Neutral” Security is not expected to significantly appreciate or depreciate in value in the next 12 months. “Sell” Security is expected to depreciate 15% or more on an absolute basis in the next 12 months. Investment Risks: Risks associated with the achievement of revenue and earnings projections and price targets include, but are not limited to, unforeseen macroeconomic and/or industry events that weaken demand for the subject company’s products or services, product obsolescence, changes in investor sentiment regarding the company or industry, the company’s ability to retain or recruit competent personnel and market conditions. For a complete discussion of risk factors that could affect the market price of the securities, refer to the most recent 10-Q or 10-K filed with the SEC. Analyst Certification I, Michael Genovese and Matt Bielawski, certify that the views expressed in this research report about securities and issuers accurately reflect my personal views. I further certify that there has not been, is not, and will not be direct or indirect compensation from MKM Partners LLC or the subject company(ies) related to the specific recommendations or views in this report. Compendium report: Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research. Please go to https://research.mkmpartners.com/to access our Research Repository. Important Disclosures Michael Genovese (including his/her/their household) does not have a financial interest in the securities of the subject company(ies). The Firm has not engaged in transactions with issuers identified in the report. MKM Partners LLC does not make a market in the subject company(ies). The subject company(ies) is(are) not currently, nor for the past 12 months was(were), a client(s) of the Firm. The research analyst does not serve as an officer, director or advisory board member of the company(ies) and receives no compensation from it(them). This report has been prepared by MKM Partners LLC. It does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained in this report may not be suitable for all investors. Although the information contained herein has been obtained from recognized services, issuer reports or communications, or other services and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. This report may contain links to third-party websites, and MKM Partners LLC is not responsible for their content or any linked content contained therein. Such content is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or affiliation with MKM Partners LLC; access to these links is at your own risk. Any opinions, estimates or projections expressed herein may assume some economic, industry and political considerations and constitute current opinions, at the time of issuance, that are subject to change. Any quoted price is as of the last trading session unless otherwise noted. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in such securities and instruments, including ADRs, effectively assume currency risk. This information is being furnished to you for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Investors must make their own determination of the appropriateness of an investment in any securities referred to herein based on the applicable legal, tax and accounting considerations and their own investment strategies. By virtue of this publication,

December 30, 2013

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MKM Partners LLC

Communications Equipment: Industry Implications of AT&T's Domain 2.0 Request for Information neither the Firm nor any of its employees shall be responsible for any investment decision. This information is intended for institutional clients only. This communication may involve technical and/or event-driven analysis. Technical analysis solely examines the past trading history of a security to arrive at anticipated market fluctuations. Technical and event-driven analyses do not consider the fundamentals of an underlying security and therefore offer an incomplete picture of the value or potential value of a security. Customers should not rely on technical or event-driven analysis alone in making an investment decision, but should review all publicly available information regarding the security(ies), including, but not limited to, the fundamentals of the underlying security(ies) and other information provided in any filings with the Securities Exchange Commission (SEC). MKM Partners LLC has multiple analysts, and their views may differ from time to time. We encourage readers to call with any questions. This report may contain a short-term trading idea or recommendation that highlights a specific near-term catalyst or event that is anticipated to have a short-term effect on the equity securities of the subject company(ies). Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects a longer-term total return expectation. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating. Any discussions of legal proceedings or issues are not and do not express any, legal conclusion, opinion or advice; investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. Regarding the use of instant messages (IMs) and e-mail, you consent to the following: IMs or e-mail sent from or received by MKM Partners LLC employees are presumed to contain confidential or proprietary information and are intended only for the designated recipient(s). If you are not the designated recipient, please inform the sender that you received this e-mail or IM in error and do not use, copy or disseminate its contents. MKM Partners LLC and its analysts may from time to time make informal technical, fundamental and economic comments on IM and e-mail. Additional information on all of our research calls is available upon request. MKM Partners LLC is a U.S. registered broker-dealer and a member of FINRA and SIPC.

December 30, 2013

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MKM Partners LLC