Hewlett-Packard's Management Presents at Technology Briefing: Software Defined Networking Conference (Transcript)

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Hewlett-Packard Co. (NYSE:HPQ) Technology Briefing: Software Defined Networking Conference Call March 12, 2013 2:30 PM ET


Bethany Mayer - Senior Vice President and General Manager, Hewlett-Packard Networking

Nitesh Sharan - Director, Investor Relations


Brian Marshall - ISI Group


Good day and welcome to this joint ISI and HP conference call and webcast. (Operator Instructions) I would now like to turn the call over to Brian Marshall, Senior Managing Director and Head of Tech-Research at ISI.

Brian Marshall - ISI Group

Thanks everybody for joining us today. I'm very excited to have Bethany Mayer, Senior Vice President and General Manager of Hewlett-Packard Networking Group. Obviously, this group is one of the fastest growing business units with inside HP, doing roughly about $2.5 billion of annual sales, actually has grown year-over-year for 13 consecutive quarters. So obviously that's moving in the right direction.

And I'm really excited to discuss HP Networking today in a little bit more detail, especially with respect to some of the new trends that we're seeing out there. In particular, software-defined networking, the changes that's going to have in the industry and how HP is going to be leading that effort going forward.

Bethany has spent over 25 years in the networking space, although certainly wouldn't look like it. She spent a lot of time at HP as well as Blue Coat, where she was responsible for the Packeteer transaction, drove triple-digit growth there over a several-year environment. She spent some time at Mirapoint and JDSU, at Cisco, Ericsson and Apple, so very happy to have her join us today.

So with that, I think she's going to have probably about 15 slides or so, then we'll go directly into Q&A. We also have Nitesh Sharan from Hewlett-Packard's IR with us as well.

And so before we hand it over to Bethany's presentation, I'd just like to mention that this presentation may include some forward-looking statements that involves risk and uncertainties and assumptions. For a detailed disclosure, please refer to Slide 2 in the presentation deck.

With that, I'd like to turn it over to Bethany.

Bethany Mayer

Thank you, Brian, I appreciate the time and appreciate all of your time out there. As Brian mentioned, I head up the HP Networking business unit within HP Networking. And also as he mentioned, we're about a $2.5 billion revenue run rate at this time.

I wanted to go over a few things for you, just to start out, to give you a brief understanding overall of HP Networking, so that in case you don't have that, you will. First, I'd like to start with our customer value proposition.

Our value proposition is actually quite unique in the industry, but it's very, very compelling to CIOs, and that is really around simplification of their network. The network has been for many, many years, a very complex infrastructure, very fragile, very difficult to manage and change, and as a result, many CIOs have really struggled with making changes to respond to their business using the network.

And so our focus within HP Networking and everything we do is focused around simplification of that networking, architecture, the infrastructure, and the operating activities that go on with that network. So we have four key areas of focus for us in terms of that value proposition and I wanted to just briefly mention them.

The first is, open standards. We are an open standards-based organization and company as you may know from HP. But that is very, very key to us. It's a key philosophy for our organization and it also allows our customers a great deal of choice as a result of that open standards-based focus on our products.

We also have a very strong attention around convergence. And as you know, HP's Converged Infrastructure strategy is a very key part of our business overall within the enterprise group at HP. And it means a lot to our customers, because basically as these technologies converge together, they'll provide a lot more simplicity and automation for the customer base and that's what we want to do.

Virtualization is another aspect of our offering, that's very important to simplify the network. We already do and have done for several years a lot of virtualization techniques within the network to allow our customers to basically not have to type command lines into boxes, in order to make a change in that network. So we've done a lot of work in virtualization already and of course with SDN we're doing more.

And finally, automation. Everything we do with regard to thinking about operating expense for the CIO focuses on ensuring they can automate as much as possible within the network. And this is frankly very different paradigm from what they have faced in the past. They've had to solve that with human resources instead of just automating the technology itself, and we provide a lot of automation there.

And what it does for the customer in hard terms is it delivers a 66% lower TCO and an eight month return on investment for them. So it's a very, very strong value proposition, very compelling from a dollars and cents perspective as well.

I just wanted to also briefly mention some of the innovations that we've had over the last several years. As you may know, HP has been in the networking business for quite a long time, and started out in the 90s with a very interesting innovation around redefining the campus economics. So what that meant was they created a lifetime warranty for their products. That is not just a business model activity. That requires innovation of the products themselves in order to offer that. And we still offer that today on many of our products.

So if you brought a switch from us in 1996 and it is now done, and it has had some sort of problem, you can come back to us and we will give you another one to replace it. We may not give you the 1996 version of that product, but we will give you another one that will replace one certain function.

Also as you look through the years, we have developed several other technologies that are very, very innovative are: first, virtualized blade server connectivity, which we call Virtual Connect, is a very, very strong piece of our networking portfolio and allows customers to utilize the networking connectivity in blade server itself with tremendous advantage.

We've also developed a virtualization technology we call, Intelligent Resilient Framework, or for short IRF, which allows you to virtualize several switches together, as if there is single switch, including the hop function of that network. So it's no multi-hop, it is actually a single virtualized switch. And that is a very huge advantage, especially in the data center, when you're aggregating lots and lots of server racks.

We in the 2009 timeframe also came out with our single pane-of-glass management, which is a very key aspect of our product offering today of our Intelligent Management Center, which manages not only all of our products, but several other peoples' products as well. And then in the 2011 timeframe, we developed our FlexNetwork architecture, which I will describe to you, as well as we began to develop our OpenFlow enabled software-defined networking controller.

As you may know, we have had OpenFlow enabled in our products since 2007, and we're continuing that tradition with now 29 OpenFlow enabled switching platforms going to the full completed portfolio of OpenFlow enabled switches by the end of 2013, so significant progress. And then finally, what we are doing today is, we're deploying SDN applications with customers even as I speak. So some wonderful activities in the innovation space for HP Networking and HP as a company.

In terms of who we are from a market momentum perspective, a few things, and Brian mentioned one of them, which is 13 consecutive quarters of growth. We are also number one in smart managed switches. We are the number one network vendor by a lot, at a 41% market share in China, and number two network vendor globally. And if you add it up, all of our other competitors, aside from Cisco, they would not equal our revenue. So we are number two by a lot. And of course, we have a large competitor in this space as we all know, but we have a significant market position today.

I just wanted to share with you a few of our customers, to give you a little sense of who we sell to. We sell to many Fortune 1,000 down to small-medium businesses. We have a really nice broad breadth of product offering and we cover many segments, earning new customers at roughly 40 a quarter, so very nice momentum.

As I mentioned, we developed something we call our FlexNetwork architecture. This is very important and it's more than a diagram. It is how we design products and it has a very strong value propositions with the customers. So it is really the first unified architecture that allows consistency across the data center, the campus and the branch of an enterprise. And we have consistent technologies across all of those areas of the network that allow a customer to roll out a very, very simple networking architecture that is open standards based, highly scalable, very secured, very agile, and as I mentioned, extremely consistent.

And consistency is very important. When you are making a change to a network around that automation discussion we had, if all of your boxes have different operating systems of them, are configured differently, have to be provisioned differently, you have a really hard time changing that network. And so consistency is really a key here. And then it's all managed by a single management platform, which again is unique in the industry, no one else does that, and that is our IMC.

We have a very strong breadth of products as well that range from the data center through the campus and into branch. So in the data center, we do core switching and routing as well as aggregation top-of-rack. In the campus, we have core switching and routing as well. We also have wired and wireless and we actually combine those into a unified wired wireless platform in the campus. And in the branch, we have routing, switching and also that wired wireless for the branch as well as flex management or Intelligent Management Center platform for management, so a broad breadth of products.

I want to focus on software-defined networking for you, because that's a very key part of our strategy and our product offering, and I want to help you understand it. So first I just want to talk a little bit about the drivers. So if I had mentioned that network for many, many years has been basically very difficult to change and slow to change.

You could change a lot of things in your infrastructure and you could setup a virtual machine in just a few minutes if you wish, but to change your network, it literally can take months, and lots and lots of planning and lots of people. And that's a problem, because the cloud is not going to wait around for months. And if an IT organization cannot deliver a service to their end-user, the end-user can often go to the cloud without them.

So really, the IT organization needs to change its paradigm and needs to have the network be agile and responsive to business, as all other aspects of the infrastructure are today in not use, what we call human middleware or lots and lots of folks typing lots and lots of things into lots and lots of boxes. That doesn't help them and it won't get them to the cloud.

Also there are many, many devices that we all know are being bought into the enterprise today, and even if an IT organization decides, well, that we're just not going to allow it. The reality is it happens anyways without them. So they need to have a mechanism to allow their users to come in with devices and have them be safe and use them appropriately.

And then finally from a market growth perspective, the SDN market is going to be very large. And the reason why is because this paradigm, where you can control your network from a single mechanism is a profound change in the networking industry. And I'll talk about that.

So we are a founding member of the Open Networking Foundation. And if you look at the explanation or definition of SDN, let me just point a few things out for you, this is what the definition says. The control and data planes are decoupled. Okay, that's key. That's different than what you do today.

Today, the control and data plane are in a single box, the switch. And you have to change the switch, switch by switch, in order to make a change. So the control and data planes are decoupled. The network intelligence and state are logically centralized, so that means they're not in switch by switch by switch, and the network infrastructure is abstracted from the applications, and how you want to deploy things in the network. This is, as I said, a very significant and different paradigm from what exists in networking today and we are a big part of this, which I am excited about.

So just to give you an example, when you're building a cloud, here is what it takes today to basically bring up 50 users. It takes a lot of folks, a lot of provisioning, a lot of commands for 50,000 users in the cloud. So if you want to deploy a bunch of users in the cloud, it takes you over 3,000 man hours of effort and over 420 network admins. So I mean that's just not scalable. It just isn't and it's not suited for the cloud, and that's the point of SDN.

So if you look at the way the network is architected today, it can't provide agility and it can't provide several things, starting with, the network doesn't know what applications are running over it. In a way that's a beautiful thing, but in another way that's a bad thing, because applications are often times sensitive to network changes and network performance. And if the network doesn't know that it's running an application that requires that, there is a problem with the application.

The network is very rigid, physically. So it's not meant for multi-tenant environments or different kinds of user types or location, it lacks programmability. And then finally, it is manually managed in many cases. You can't manage it from another point in the network. So those are the issues with the network as it exist.

And what SDN provides you is huge agility, and it allows you to have a network that's responsive to business needs. And looking at it, if you start from the bottom, the infrastructure layer, what SDN first brings is an open standards-based programmatic access to the infrastructure. So this is where OpenFlow comes in, okay. That's the open standards-based programmatic access to the infrastructure.

It also provides a control layer that abstracts the control from the device, and it does that in a centralized manner. And then finally, it offers APIs that are programmable that build orchestration or network services, or even other applications on that network. So that is what an SDN architecture should look like.

And if you look at it from a physical perspective, you'll see the network devices at the infrastructure layer with using OpenFlow as a programmable interface, the SDN controller itself, which has the south-facing OpenFlow programmable capabilities and north-facing APIs that are open as well and programmable to a lot of different things, including cloud orchestration using OpenStack is a good example or SDN applications, which I'll describe one for you or even business applications. So that's what it looks like.

So what HP is doing, is we're following that architecture you can see. And what you can see from what we've done is, first, we've implemented OpenFlow in now 29 of our switching platforms. So that's 29 as compared to one with one other competitor that we know about. A lot of OpenFlow enablement in those products and has been enabled since 2007.

As well, we have our SDN controller. We show it in a server, but it's software basically, and can be put in a server, can be put on a server anywhere in that network you wish, because it's the single point of control. We have built that, that's in data today with several customers, including the ones that I show you in this slide for different SDN applications.

And then, we built applications, one is virtualization for our HP cloud, so we can virtualize the network using our SDN controller. We also have built a security application, we call Sentinel, and we did that for our customer HBO, who was having problems with people bringing devices into their network.

And I'll explain that security application in some detail. What it means is we've taken our DDLab's cloud that delivers signatures to our TippingPoint appliance normally and instead of it delivering the signatures to the TippingPoint appliance; it delivers the signatures to the SDN Controller, which then pushes those signatures out to all of the switching ports in the fabric.

So that when you bring up device in that was known good, say, yesterday because it was clean by all the networking standards using the IPS, you trot on home and your kid plays with it and then you bring it back in again, the network can sense that there is malware on the device and block it. So that's the key there. And it can do that at every single port in the network instead of dragging all that traffic through the network to a single device. It's a very impressive profound capability where you literally have dissolved IPS into the switching fabric itself.

And we also developed an application with CERN, which, of course, moves terabytes of data everyday, which load balances that data movement across the network using the network itself instead of appliances. So this is, as I said, very profound and the applications are fascinating because they can be very different.

So just in terms of what has kind of sprung out in terms of SDN is, I thought I'll kind of give you a sense of myths that are out there and explain a little bit about why they aren't real. So the first myth is that the only network function in software on a virtual machine or creating an overlay network is SDN. Okay, that's not true.

That's a network application. Virtualization of the network is an application of SDN. SDN as the definition mentions has programmable access to the devices that are the infrastructure. And if you just use an overlay that does not understand what devices are beneath it, that overlay, and the quality of service of that overlay is in jeopardy. So that is not SDN.

Also it is not SDN to have an offering that uses a proprietary programming capability to program a device. Okay, that's almost the opposite of SDN because you're going device-by-device to reprogram it and you have all these devices that are now inconsistent and you're doing that on a device-by-device basis. You are not separating the control plane from that device. You are actually just controlling that device even more granularly.

And then finally it's not the end of hardware innovation. There are lot of things you can do in silicon that will support and enhance network performance and that doesn't get supported in a white box. It gets supported by real innovation in silicon itself. So those are the key things that are not SDN.

And what I'd like to also share with you is we've developed an ecosystem of software-defined networks as well. So not only it will re-support our own products, but we will support other people's products as well, so third-party virtual switches and infrastructure, we all work with third-party controllers as well because of our open-standard capability.

We will work with other companies around the application layer. We'll develop our own application. And essentially have an application ecosystem with our partners and other companies. The idea here is to provide back-to-back customer choice, their choice and how they construct their SDN-enabled network.

And they can construct it one piece at a time. This is not a rip and replace. And in fact, what I will share with you is here's our version of how the customers will adopt SDN. So first, they'll lay the foundation with OpenFlow-enabled switches. Then they will create a lab to participate in an SDN Controller applications and data applications. They'll move from that to actually deploying applications on their network and then from there perhaps developing their own applications and then finally deploying that enterprise-wide.

So this is going to take time. And it will be a migration. It will not be a rip and replace. And what's interesting is if you think about it, you can even use your SDN Controller to migrate your network from where it is today to SDN because essentially using that controller you can virtualize parts of your network or you can automate parts of your network while still managing the network that you have that is there today. So in any case, that's the adoption and that's what I have today to talk to you about SDN. Thank you.

Question-and-Answer Session

Brian Marshall - ISI Group

Great. Now, we'll switch into the question-and-answer session of the discussion. But Bethany, I think one of the interesting areas, if you go back to the most recent earnings call that Meg and Cathy kind of singled-out is that HP is one of the areas that they have confidence in. HP Networking is one of the areas that they have confidence and most confidence in going forward. Can you talk a little bit about the sources of the confidence internally, I mean, is it with respect to the pipeline, the channel, the products et cetera?

Bethany Mayer

Well, I think that first the momentum has been very positive. We have continued to grow in economic uncertainty and all sorts of different areas, but the growth has been very good and positive. Also, the innovation has been very strong. HP has very strong organic innovation and it is so exciting to be part of it. And that innovation is evidenced in many, many things we do including the SDN capabilities that we have put in place for our customers.

So I think they're referring to the momentum we've had. We've put in place a great go-to market team. We have leveraged our channels very heavily. We're at 96% channel leverage. So that's very different than our competitors. And we have a very strong relationship with our channel partners. And all of those things together combined I think give them strong confidence in our business unit.

Brian Marshall - ISI Group

If you think about HPs market share historically in networking, our perspective is that it's been much stronger in the campus and the branch side of the post to the data center. I guess if you could clarify some of that. And maybe talk about what some of the ambitions are and the visions for developing a stronger presence on the data center switching side.

Bethany Mayer

So HP started in networking by building ProCurve, which many of you may know about, ProCurve, was a campus and branch offering only and actually very successful, very fast growing business for HP, very innovative technologies, with its own ASICs. We still have our own ASICs within our business unit. And a strong player in the campus, really kind of crept up there very quickly in market share in the campus environments.

We now as a result of having acquired 3Com in 2009 and then finalized that acquisition in 2010 have a very broad breadth of product that runs from data center through campus and branch. And we've done a lot of work within HPN to build our data center portfolio, which is now actually very healthy with products that include the core switch capabilities, our core routing functionality as well as our top of racks and then software capabilities around virtualization.

So we know today that according to Infonetics because they do segmentation in the network, I think we're at 10.5% share in data center, but we're growing fast there historically from what I've seen in market share numbers. And so we have a long way to go, no question, but I feel very good about the innovation we have to offer to customers and I do feel good that clearly from our momentum more people are buying our products.

Brian Marshall - ISI Group

If you talk to the investment community, I think there is some already predetermined believes about the impact that SDNs going to have on the profitability of infrastructure equipment going forward. I think many things by definition literally removing some intelligence, some controls and intelligence from a switch and putting it into a low margin server then you would have some profit migration from that switch into the server.

Bethany Mayer

What do I think about that?

Brian Marshall - ISI Group

Yes, if you can comment on that?

Bethany Mayer

So, both are interesting to me. So couple of things, one is back to the ASIC thing; it actually matters a lot for a network performance, just FYI. But even if you were to say all the intelligence goes into the control plane, well, actually we're okay with that. Because, frankly that value we bring to the network is around the intelligence in the network in the automation and in the virtualization of the network. So that intelligence is of value to the customer and to standard price.

And so we believe that will actually be a very strong profit pull for us. And interestingly enough, if you look at VMware, I mean, they don't have any hardware, but their profit pull share is great. And it's that controlled mechanism that matters to people, that management capability, the automation that you bring to bear, that's your value. And I would say the other piece is, your ASIC can help you and can provide a lot of capabilities as well.

Brian Marshall - ISI Group

If you take that line of thinking one step further, I mean, obviously you guys are the number two player in this space. You've got a pretty big juggernaut with maybe 70% of the market as incumbent, but can you talk about the price elasticity of the market, especially with respect to some of these new trends that are coming down the pipe. I mean, is there an ability to potentially drive share gains by changing a little bit of where the profits lie in the equation?

Bethany Mayer

Yes, absolutely. I mean, our converged infrastructure capabilities actually add to that because frankly if there is a switching port that fits in the server or if it fits in a storage device, I am okay with that. I mean, if the customer wants to converge those technologies and have a fabric that goes across them that has a fewer boxes, that's not a bad thing for us.

We believe strongly that converged infrastructure is the way that the market will go. And we've seen that with our competitors because they've also basically imitated us. And frankly that capability is unique to HP because we own the servers, the storage and the networking. And it's not a packaging exercise. There is the big difference between partnering for packaging versus actually doing R&D organically in your own company around these three technologies. So HP is very comfortable with these shifts in the industry and in the networking space. And I feel that were in a position to take very strong advantage of that.

Brian Marshall - ISI Group

If you think about it I think one of the benefits of that HP Networking has is early adoption, obviously very early with respect to the trends of SDN, supporting it back in 2007, 2008. I think over 15 million OpenFlow-enabled ports out there in the market today. But you talk a lot about the importance of ASICs, obviously Cisco, as well as Juniper and others, have pretty strong ASIC development groups, in addition to what you guys offer. Can you talk a little bit about maybe some of the differentiating characteristics of HP's SDN strategy relative to some of the other guys, I mean, is it basically being early-to-market, ASICs et cetera.

Bethany Mayer

Well, early-to-market is important. But frankly, we think we can marry intelligence both in the device itself with tremendous capabilities and powerful control capabilities in software. And we don't have a predilection between where we put that, right. We're happy with it being intelligence in a single location and not necessarily intelligence across all boxes, right.

So from my perspective, I think our differentiation will be partly around convergence, because that converged capability that we are absolutely working on within HP is an advantage that we have that none of our competitor in the networking space can match today, that's very key.

And our SDN capability, if you think about it, could be extended greatly across a lot of different devices and technology in the architecture of the infrastructure. It could also fit into other orchestration capabilities that HP offers. So we have a really, really strong differentiation with the enterprise group and our software group. And even if you think about it, it could go all the way down to our devices list and end-to-end concept with our ElitePad as an example are using SDN for network security in a BYOD solution. There is a lot of capabilities here that I think differentiate us very strongly.

Brian Marshall - ISI Group

And you mentioned earlier in your slide presentation that the deployment of SDN should be enterprise-wide by 2015, is that kind of the timeframe in which you would expect a lot of disconverged infrastructure take on a ramp-up as well. I mean, is this all going to happen at once or can you layer in different pieces to the puzzle? And then, as we're ready to go with SDN, we can just flip the switch and turn it on or can we future-proof, if you will?

Bethany Mayer

I do think it's a migration. I think that people will utilize SDN in different parts of their network for different purposes, for a period of time. I think they will use SDN to migrate to SDN, believe it or not, because it's a control mechanism, right. So you can control certain parts of your network with it and you can actually transition other parts of your network using it as a control plane.

So I do think it's going to be a transition. The enterprise, rightfully so wants to ensure that whatever solution they put in the infrastructure will work and will not cause them downtime, I completely respect that. And so we're going to offer them different kinds of capabilities that they can take advantage of SDN without feeling like they're concerned about their overall infrastructure. That's our plan.

Brian Marshall - ISI Group

I think it ultimately, I mean, what we see, being adopted by the market is, how can we save costs? How can we lower CapEx and OpEx?

Bethany Mayer

It will.

Brian Marshall - ISI Group

And I think when you look at the applications; many people talk about SDN as basically enabling the creation of thousands of applications. But when I talk to people in the industry, what I hear is that that probably four or five network virtualization, network tapping, security, 4 through 7 services in management. Do you think that the lion share of the market; we estimate this could be a $3 billion market by 2016, I think your slide said $2 billion by 2015. I think will these four or five main applications represent the lion share of that market?

Bethany Mayer

Maybe, but also I kind of have to say I don't know, because customers will be able to utilize APIs to do what they want with it, if they choose too. And so I think we'll be surprised by people who create different applications for the network that we haven't thought of today. And I think there are many possibilities. And I think around the layer 4 through 7, there is some interesting things that you can do that we actually don't do even today, right.

We do a lot with our business applications that are known, but there is a lot of new applications that people are crating in the mobility space that might have an impact on that too. So I guess my position is I think there will be some standard ones that all of us want to focus on and I get it. But I think there will be also others that we just don't know about yet today.

Brian Marshall - ISI Group

Can you talk through a little bit about the pieces of VAN, the virtual application networks strategy? Can VAN ultimately integrate with other cloud and virtualization platforms going forward?

Bethany Mayer

Virtual Application Networks is our management concept for services in the network. So it works together with SDN and the SDN controller to basically provide. So the SDN controller focuses on services in the infrastructure. The VAN application focuses on management of the infrastructure. And you can marry those two beautifully, and so we utilize virtual application network technologies within our Intelligent Management Center to do a lot of the automation that we do today even without SDN.

So you can use it to literally cable up a switch, play it into an Ethernet port and the Intelligent Management Center using virtual application networks, will go in, will find that device, will configure that device and basically have you be able to utilize it as a pool of resources in your network itself. So it's an automation tool even today. And it's used very effectively to manage the networking environment and then we'll couple it with our SDN capabilities, which will manage the services.

Brian Marshall - ISI Group

Are there any questions from the dial-in queue? While you're pulling that maybe I'll just continue. If you think about you mentioned how you're going to kind of combine the VAN and the SDN network software application opportunities going forward. Can you talk a little bit more? I mean, can you start to offer more kind 4 through 7 services longer term? And if so how do you think about the use of appliances in that kind of market? I mean do you think ultimately that most of the 4 through 7 implementations going forward will actually be from the software perspective or do you think those appliances will be required?

Bethany Mayer

Well, I think again back to the migration and it will take time. I think that folks will migrate to different implementations of 4 through 7 services. So in some cases, they will utilize the network and SDN and in another cases they may use devices themselves. Because back to that there are certain kinds of network performances that be enhanced, you might be able to use a device in certain instances. But as an example, you can deploy Microsoft Lync across an entire infrastructure using SDN.

You can deploy different kinds of business applications that are very sensitive to network performance slight exchange as an example using SDN. And you could also utilize those layer 4 through 7 capabilities that you basically build into the controller, so that the network knows, okay, this is an exchange packet that's going across, a MAPI packet that requires certain services of the network, therefore the network will change to be able to support MAPI, It is very chatty.

So I think that there will be a lot of different kinds of techniques to support different applications on the network. And in some cases that will be basically dissolved into the fabric itself using SDN and in some cases you may choose an appliance as well for that purpose.

Brian Marshall - ISI Group

Operator, are there any questions from the dial-in.


Currently we have no questions.

Brian Marshall - ISI Group

Okay, I'll take one from the webcast type-in. Bethany, given that you debunk the end of hardware innovations myth in the presentation. What are your views on switching margins in the SDN paradigm?

Bethany Mayer

The margins are based on value. They are not based on like how much a connector costs. And even if you look at appliances today and I'll give you a good example of Blue Coat was an appliance. We used basically an industry-based motherboard. I mean, there wasn't as a lot of technology in the motherboard, but we sold the appliance at wonderful gross margin. So I think margins are related to value.

And if you build strong value in the device itself that provides enhancement to the network performance, I think you will still see good margin opportunity in devices. And also back to that concept of implementing OpenFlow into a device, there are lot of things you can do in an ASIC to enhance OpenFlow and OpenFlow understandings. So this goes back to that intelligent equals' margin. And my opinion is that the intelligent can still benefit the devices themselves as well as the control plane software that you are utilizing.

Brian Marshall - ISI Group

I think we have time for one more question. We're coming up on 45 minutes here, but I think it comes back to, are there any potential cannibalistic effects going forward? I mean, if you think about the Sentinel Security Application, I think you mentioned it actually TippingPoint, and there is going to be some other security tie-ins, as that I think HP obviously offers with respect to ArcSight and others, but at the end of the, is this going to be additive to the HP Networking opportunity or will it be some sort of substitution for something else in the portfolio. Can you talk a little bit sort of puts and takes there?

Bethany Mayer

Well, I think that our security organization is becoming more and more software oriented, I mean, that's been there stance Arc don't want to talk about. And dissolving technologies into the switching fabric itself, whether its security or whether it's another application actually is very valuable and you can still gain back to the value equals margin, you can still gain a lot of revenue from the software application itself, right. And the fact that it happens to end up living in the switching fabric, first, brings benefit to the customer, but also makes the network much more simple.

So there will be capabilities that will end up being embedded in the switching fabric using software-defined networking. And I think that the combination of software capabilities and intelligence in that SDN controller combined with the fabric and what you can do to affect the fabric using it, will be of value to customers.

So it will affect to some degree, some hardware in the network that are appliance-based, I think. But I think that's also to the benefit of the customer, and actually don't think it will harm the vendor, because again if the vendor is bringing intelligence as their value, if it happens to be in software, that's perfectly fine.

Brian Marshall - ISI Group

Maybe one last question from the webcast, it's an interesting one. How does the applicability of SDN change based on the size of the customer?

Bethany Mayer

So I guess the question is could it be applicable to smaller businesses, this is what I think the point is there. I think that initially it has bigger value for the larger enterprise, because the enterprise has much more complexity. But you could also actually, if you thought about it you could maybe use SDN as a service provider, providing services to a small-medium business perhaps, because you could help them manage their network performance for different applications like cloud applications they are deploying. That's very possible. But I do think initially and maybe over a reasonable amount of time, the larger enterprise, it will provide them more advantage than a small-medium business.

Brian Marshall - ISI Group

With that I'd like to thank you very much for taking the time today. It was great chat with Bethany Mayer, the Senior Vice President and General Manager of HP Networking, and Nitesh Sharan from HP, IR. Thanks guys. And as always, it's back to work.

Bethany Mayer

Thank you.


Thank you. This concludes your conference. You may now disconnect.

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