Posted on behalf of author Scott Thompson:

The march by service providers and large enterprises toward more open, bare-metal, and virtualized networks seems to be taking another unexpected detour, this one more positive for vendors focused on L4-7 special-purpose hardware. Recent carrier checks indicate a reluctance to aggressively shift from SP hardware platforms to bare-metal   hardware as much of the existing infrastructure has not been fully depreciated. The virtualization of existing special-purpose hardware improves the usable life of the hardware and the overall relevancy of the associated vendors. While it is unlikely that the virtualization of special-purpose hardware will drive new and significant deployments for L4-7 vendors, it should provide a near-term stream of high-margin software and feature-set and module upgrades, as well as slow the transition away from special-purpose hardware. We expect the combination could improve an otherwise troubled outlook for many of these vendors.

    * F5 improves virtual and special-purpose hardware by adding Versafe functionality to platform. F5 has recently announced several solutions that reflect a shift to this type of model. F5’s acquisition of Traffix is likely to be a cornerstone of this strategy. Its recent marketing announcements around Virtual Clustered Multiprocessing and virtual edition solutions work to enable these solutions as well. We believe F5’s acquisition of Versafe (announced Sept 17) is another example of how F5 is improving its relevancy in both the security and hybrid NFV markets.

    * Versafe Ltd., a Tel Aviv-based software company, provides Web anti-fraud, anti-phishing, and anti-malware solutions under its WebSafe and MobileSafe product lines. We expect F5 to deploy Versafe’s solutions across the company’s existing modules as enhanced feature sets; therefore, it is not likely to have an immediate material impact on operating results. We continue to expect that a shift to more software-based revenue could eventually make F5’s revenue more steady and predictable.  However, we remain concerned about the earnings impact associated with transitioning from a transactional to a license-based revenue model.

    * Checks indicate special-purpose security vendors are gaining traction with hybrid models. We expect traditional firewall and security vendors are following a similar strategy to remain relevant to service provider, government, and enterprise accounts. Information generated from FBR’s BIG “switches:” little SERVERS Conference last week led us to believe that some of the most respected names in security are working to virtualize their hardware platforms in an attempt to create hybrid cloud and NFV solutions. We expect this shift to be much more defensive than offensive, and do not expect the architecture to remain relevant through the mass deployment of rack-scale architectures, which       should begin to gain significant momentum in 2014.

Written by Scott Thompson, FBR