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Oppenheimer And Craig-Hallum Initiate Coverage Of Ruckus Wireless At ‘Buy' – Note Core Advantages In Small Cells

|Includes: Cisco Systems, Inc. (CSCO), ERIC, RKUS

According to a just-released report from Craig-Hallum Capital Group, initiating coverage on Ruckus Wireless, Inc., with a 'Buy' rating, and $22 Price Target, the "rapid proliferation of increasingly sophisticated mobile devices and growing richness of content being delivered to apps running on these devices is spawning an almost insatiable demand for wireless data across all mobile users." In an effort to ameliorate this crisis, "[c]arrier-grade Wi- Fi/Small Cells are emerging as compelling solutions to this network capacity problem in part because they cost as little as 10% compared to conventional cellular infrastructure," and "Ruckus is aiming squarely at this Carrier Wi-Fi/Small cell market with solidly differentiated technology, a focused product strategy and a significant first-mover advantage, and has, in our view, navigated itself into a position to participate disproportionately in the market's secular growth trend."

Moreover, the report continues, "we believe that Ruckus is at the cusp of a significant growth trend which we believe is likely to be accompanied with significant margin expansion and increases in earning power, which could potentially render our current base-scenario estimates very conservative."

Among the growth drivers cited by Craig-Hallum, is the authors' belief that "[c]apex-constrained Mobile Service Providers are looking for alternative ways beyond their traditional macro-cellular infrastructure to cost-effectively service this growing data network capacity gap while maintaining quality of service levels," which, in turn, is key to "addressing the gap in denser urban locales and during peak usage times. " Further highlighting the need for new small-cell solutions, the report cites data indicating that "[m]obile data traffic in the United States alone is expected to grow between 53x and 153x from 2010 to 2020….[and] U.S. cellular network capacity will grow by only approximately 25x over the same time period. There will therefore be a significant gap between the expected traffic volume and the expected capacity of conventional cellular infrastructure in the United States."

The Craig-Hallum report continues, that, because "the demand for data is significantly higher in certain densely populated urban areas and at certain times of the day, which makes designing finite capacity based macro-cell infrastructure highly ineffective and more importantly, uneconomical." Therefore, the report concludes, "[w]e believe service providers have no choice but to consider small-cell based approaches across multiple spectrum bands to address these problems."

Among the advantages of small cell networks cited by Craig-Hallum are the ability of operators to "save on cost and complexity, share site-leasing agreements and, importantly, backhaul to both additional capacity and offload traffic." Further, the report notes, "according to the small cell forum, the advantages of integrating 3G or 4G small-cells with Wi-Fi are as follows: 1. Helps address all device types and connections for the customer - 3G/4G only, Wi-Fi only and Wi-Fi+3G/4G. 2. Simplify installation/connection for the customer: only one box, one power supply, no extra cables, etc. 3. Extend service continuity on 3G UMTS voice and data applications to Wi-Fi. 4. Drive scale of economics of integrated Pico/Femto and Wi-Fi devices and services. 5. Lower cost of installation and ease of deployments for mobile operators to have single installation process and savings of installation materials. 6. Set the foundation for traffic load management over multiple air interface technologies per 3GPP standard functions."

Because "Ruckus saw the Carrier Wi-Fi trend early and focused its product strategy from the beginning to appeal to this segment of the Wireless market. The company's products are architected to address the top three concerns of a service provider - radio interference, integration with cellular systems and scale - which we believe provides Ruckus with compelling sources of differentiation and competitive advantage."

One of the products mentioned in the report was the SmartCell 8800 AP. This product, the report notes,
"integrates 3G/4G, Wi-Fi and backhaul into a single, lightweight, small-form factor. It features a Ruckus Wi-Fi access point, a USB slot which can be used to deploy a 3G/4G small cell access point (Femtocell, picocell etc.) and a 5GHz wireless" backhaul. This is in essence a field upgradable Wi-Fi and small cell AP which means that a carrier can deploy a 3G small cell to start with and then upgrade it to integrate LTE without mounting or backhaul changes. This integration enables Wi-Fi and the small cell to share site, power and backhaul. The SmartCell 8800 is centrally provisioned and managed by the Ruckus SmartCell 200 gateway."

Ruckus's product strength is further emphasized in the report issued by Oppenheimer and Co., which noted that Ruckus offers "a carrier-class WiFi solution that directly integrates its Smart WiFi access points into a carrier.s 3G/4G network. A single Ruckus controller can support 100,000 users and offers the same types of services a carrier offers through its cellular network. Ruckus also offers the option to co-locate its APs with third-party 4G-LTE and 3G-HSPA/EVDO femto-cells (for example, with an Alcatel-Lucent or Nokia Siemens Networks solution) through a specifically designed modular form factor." These capabilities are particularly significant, the Oppenheimer authors note, as "wireless users are increasingly accustomed to having pervasive wireless access….WiFi is ideal for this type of coverage, [and] with Ruckus.s adaptive antenna technology and interference management ideal for adjusting to where the coverage need is most acute."

Further, with respect to Ruckus's strength in the small cell arena, the Craig-Hallum report emphasizes, that the company intends to "augment the SmartCell 8800 with pico or femto cells in the future….[and we] see this deployment strategy as very significant as it reflects on the strength of Ruckus's product vision and its ability to benefit disproportionately from the small cell trend in the future." Moreover, the Craig-Hallum report continues, "[c]onsidering that most service provider sales cycles are typically between 1 and 3 years long, we believe the first-mover advantage could prove to be very significant as most service providers are likely to make significant progress in their small cell strategies over the next couple of years. We also note that compared to the Enterprise market, the Service provider market has a fairly benign competitive environment." The only two players that show up as competition for Ruckus in this segment include Cisco and Ericsson (Belair acquisition)." Notwithstanding, its authors continue, "Ruckus by our checks is considered more nimble than the giants in terms of being responsive to needs, is considered more technically advanced at this point of time and remains the pure play vendor with significant mind share in this fast-growing market."