Adtran: Desperately Seeking Software Status

Three years into its transformation into a software, integrator and services company, Adtran's making headway changing its image and sales strategy.

August 31, 2017

11 Min Read
Adtran: Desperately Seeking Software Status

Adtran CEO Tom Stanton would be the first to admit that transforming a company from its traditional role as a hardware manufacturer to a new position as a software and services company is not for those who lack persistence.

Three years into Adtran Inc. (Nasdaq: ADTN)'s transformation, Stanton says things are going well -- and cites a number of benchmarks to prove it -- but adds he's still doing small group internal meetings to keep the change process moving and succeeding. And he knows his company is still battling to change public perception -- especially among its customers. (See CenturyLink Testing Adtran Virtual 10G PON.)

"One of the biggest problems is that customers only see you the way you've been," he says in an interview earlier this month at Adtran Connect, the two-day event for media and analysts. "It takes you longer to convince them. We have been in the agile process for six years and we started moving toward software three years ago. But not everyone understands."

Figure 1: Adtran CEO Tom Stanton

Industry analysts attending the event, which provided in-depth exposure to where Adtran is now in this transformation process, generally give the company high marks for determined progress and share optimism for its future... with some "ifs" attached.

"I think their transformation has actually been quite fast," says Julie Kunstler, principle consultant of broadband access at Ovum Ltd. "They had a vision and they went for it. And partially because they had a lot of Tier 3 and Tier 4 telco customers, they had companies willing to move quickly with them."

Tim Doiron, principal analyst of Intelligent Networking, for ACG Research calls the process "a work in progress," but sees clear evidence it's working.

"The company has significantly grown its services revenue over the past several years [to more than] 15% of total revenue in the second quarter of 2017," he notes. "The Mosaic Software Suite has been successfully launched and Adtran announced that 10 Tier-1 global service providers have either selected Mosaic for deployment or are in field trials. Both data points are indications of progress in Adtran’s transformation." (See Adtran Reports Record Q2 Earnings.)

Mosaic is the cornerstone of Adtran's software-defined access strategy, as the scalable, microservices-based platform that enables configuration, deployment, activation, and orchestration of software functions, network elements and services. But the company is also banking on some of its more traditional capabilities -- such as those in access technologies -- and making a big bet on ultra-broadband as well, notably NG-PON II and Gfast. (See Adtran Pieces Together a Software-Defined Access Mosaic, Adtran Adds Control & Orchestration to Mosaic and Adtran Gfast Extends Gigabit Reach.)

The combination of those strengths has Adtran talking about winning much more business from Tier 1 global carriers and in new markets, notably the cable sector. The company's ability to score those bigger victories will be the real proof of its transformation success.

There are some signs of that success already such as its contracts with Deutsche Telekom AG (NYSE: DT) and CenturyLink, and inclusion in Verizon's early NG-PON II efforts. BroadbandTrends Principle Analyst Teresa Mastrangelo says it's too early to say whether the Huntsville, Alabama-based company will succeed, but that success could still be tied to old market realities.

"They are headed in the right direction, as proven by their current position at Verizon," she says. "Despite some key wins at DT and Verizon -- and they by all means are not the ONLY vendor in these accounts -- Adtran remains a small company against the bigger players such as Nokia, Huawei, etc. Calix has Ericsson on their side –- which has helped to some extent with some of the bigger accounts. Adtran may have to partner more in order to be a viable player at the bigger operators, but I think it will prove challenging as the operators place more responsibility on the vendors as their networks transform."

Next Page: What changed

What changed
Adtran was best known in the carrier space for strong access technologies -- by Stanton's admission, "HDSL kept the lights on," but it became apparent to company leadership that things were changing and the move away from purpose-built hardware was coming.

The software/services strategy was launched internally and generally embraced, the CEO says. "We are blessed with an incredibly strong engineering team -- it's hard to pivot when you don't have people to pivot with you," he says. "The biggest pushback we got was from people afraid to make that jump."

"That jump" was to software-defined access, where a lot of the value once delivered in integrated hardware-software models moved into the software itself, with the hardware becoming more of a commodity item. Layered on top of that was a services strategy, which put Adtran into the business of helping its customers actually execute a virtualization strategy in their access networks. More on that later.

Stanton and team sold the new strategy internally with a lot of what he calls grassroots communication, which continues today. He still personally meets with small groups of employees, 12 to 20 of them, three times a week, and counts on them to spread the word. And he says, he's been quick to address rumors that pop up and can undermine the process.

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Adtran has also become quicker to bring new products to market and to launch new approaches to the market. Just this week, it announced the Adtran Mosaic Open Network Alliance, a partnership with other players in an ecosystem for testing and proving open SDN and NFV solutions. (See Adtran Builds Alliance Around Mosaic.

Stanton sees Adtran as being able to be a software integrator of multiple pieces, and thus able to do what perhaps many companies would expect a larger vendor to tackle. He admits larger vendors who might have "the wherewithal to muster a team to do software development will move quicker," but adds that they have more ground to cover, because of their legacy products.

Adtran is in a position to tackle network complexity -- including integration at a time when software is changing so rapidly -- that can cement its value to customers, if they can accept the company's new role. In some ways, that's what makes newer markets -- such as cable MSOs -- more attractive, because it's fresh turf for Adtran. That means new revenues in what is 60% of the broadband footprint in the US, and less of a need to reinvent an existing image. (See Adtran Seeks Cable Stardom With EPON Deal.)

"If you think about what is going on right now in cable -- their whole infrastructure business is shifting at a faster rate than what is going on in the carrier space," Stanton noted. "They are embracing virtual CCAPs at an accelerated pace. Some of their traditional vendors are flat-footed, which is creating an entry point that didn't exist before. And even if we win a small part of a market that is so big, it will be significant new revenues for us."

Throughout its Adtran Connect event -- which included Comcast's Rob Horwald as a speaker -- company representatives kept teasing the notion that a big Adtran win in this field is looming, without naming the company. Horvald spoke in general terms, but his presence was clearly an endorsement of some kind.

Where Adtran's software integration skills will also quickly translate is in the smaller telco market, which is where the company is making its bigger services play, with more than three dozen active projects in the US. As Kevin Barnes, vice president of Adtran's Services & Solutions Integration Portfolio, told the Adtran Connect audience, the vendor sees services as a win-win proposition, in the sense that it is not only new revenue but also an opportunity to accelerate the pace at which smaller network operators deploy new networks by doing a lot of the heavy lifting for them.

Figure 2: Adtran's Services Strategy

"We can do everything from site identification to actually turning up the service for the customer," Barnes said. And that includes integrating new things such as a Residential Central Office Re-architected as a Data Center (R-CORD) approach that brings small telcos into the distributed data world and gets them in position to launch new services more quickly.

As Barnes admitted, this isn't a cookie-cutter approach to doing things, but Adtran is developing common practices and processes around the different stages or "buckets" of work: engineering or pre-construction, installation/turn up/ construction and provisioning/post construction.

Next Page: Can services drive profits?

Can services drive profits?
Industry analysts aren't questioning Adtran's ability to sell services and deliver on the promises they are making to customers, but there is some concern as to whether this becomes a profitable business.

"That will definitely be a metric to watch going forward, but I expect they will face the same challenges that have plagued other vendors as they shift their strategy," Mastrangelo says. "It will take some time for them to find the right equilibrium."

What it comes down to, says Ovum's Kunstler, is knowing your customers well enough and structuring contracts appropriately to benefit both sides.

"If you have done a really good analysis of what they need and how to structure the services contract, there should be a decent margin here," she says.

This transition from a hardware-centric world to one that puts more value on software and services is one the entire industry is making, Doiron comments.

"With the migration to software and disaggregated solutions like CORD, it is important that Adtran demonstrate and quantify the value of its software independent from the hardware," he says. "This is about value migration. The value was always there, but now it is being exposed and sold separately. That’s a change for both Adtran and its customers."

Bigger, faster, better
Doiron also believes Adtran will continue to have a hardware play for some time to come. "Hardware prices may get squeezed, but by expanding its total addressable market to include copper, fiber, wireless and MSO/cable, Adtran can increase its total volume of shipments," he says.

Adtran is targeting the global Tier 1 market -- at least in the US and EMEA -- more than ever before. It has a marquee customer in DT, a foot-in-the-door with NG-PON II at Verizon and position of growing strength at CenturyLink, whose CTO, Aamir Hussain, delivered a keynote address at Adtran Connect. (See CenturyLink Touting New MVP.)

"I've been working with Adtran for the last many, many years and I've seen this company progress," Hussain said in his presentation. "I've seen this company progress from being a hardware provider all the way to their Mosaic software architecture that's one of the best in the industry."

Kunstler notes that Adtran has made a big commitment to helping operationalize NG-PON 2 deployment, particularly with Verizon. And while it wasn't unique in doing that -- competitor Calix has as well -- that commitment positions the company much more favorably for the larger Tier 1 play, she says.

"What it really shows to me, with Adtran is that they made a huge commitment to support Tier 1 carriers is their effort with NG-PON 2," she says. "Even if there is a standard, it doesn't specify everything in a way that makes it operational. And they have worked very hard on a lot of stuff to operationalize."

For many of the same reasons, Doiron says he's optimistic about Adtran's Tier 1 prospects. He points to the growth in its service organization and revenue as an encouraging factor for larger operators that demand service and support.

"The way vendors interact with service providers is also changing and becoming more collaborative," he says."Adtran has been using agile software development methodologies for many years and is evolving to support a dev-ops model. That’s definitely in alignment with where service providers want to go to create a more dynamic and flexible services deployment model."

— Carol Wilson, Editor-at-Large, Light Reading

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