The Clavister Brand Book 2016

Corporate GuidelinesBusiness UpdateClavisterTelecom segment2016

Introduction01 | Clavister Telecom segment 2016

The mobile telecommunications market continues to show dramatic growth rates, not only within individual segments, but in many parallel areas. Several factors result in a market situation that allows for good business opportunities as well as ones that involve major technology challenges for the telecommunications industry as a whole. The ability to meet both operators and end customers’ needs – while also delivering increased capacity at lower cost – will be crucial for success.

A disruptive window of opportunity is now opening, where agile vendors with innovative technologies are given the opportunity to take substantial market share and capitalize on the situation.

Clavister has a proven strong technology offering, one that has steadily attracted major players within the telecom segment as of late, with several contracts and a rapidly increasing amount of tenders with end customers. The company is therefore well posi-tioned to engage in substantial business cases within the short-term and to take market share in the very near future.

Market analysis02 | Clavister Telecom segment 2016

Although the number of mobile subscriptions is an interesting developement, it’s the growth of mobile data that’s primarily driving the market and technological development and is the great importance for Clavister’s business opportunities. The number of mobile broadband subscriptions is increasing by 20% annually, and the number of smartphone subscriptions will increase by about 10% annually, from the current level of about 3.2 billion to about 6.3 billion smartphones by 2021. The most important technology platform for mobile data is LTE (4G), but major investments are being made in the next generation mobile networks, 5G.

n S t r o n g g r o w t h o f s m a r t p h o n e u s e r s

The number of mobile subscriptions has seen continuous and stable growth in the order of 3% per year. Meanwhile, the amount of data traffic through mobile operators’ networks is expanded rapidly with a forecasted growth of between 45% and 60% until 2021. Increased traffic is attributed chiefly to smartphone proliferation and mobile broadband services where video streaming is increasingly consumed.

Figure 2: Growth of mobile broadband subscriptions. Source: Ericsson Mobility Report (June 2016)Figure 1: Growth of mobile subscriptions. Source: Ericsson Mobility Report (June 2016)

M o b i l e b r o a d b a n d s u b s c r i p t i o n s p e r r e g i o n ( b i l l i o n s )

The number of mobile subscriptions continues to increase with a stable growth of about 3% annually. In the first quarter of 2016 the number of mobile subscriptions amounted to more than 7.4 billion and is expected to grow to around 9 billion by 2021. Not surprisingly, the biggest growth is within the so called “emerging markets” with India, Myanmar, Indonesia and Pakistan at the top.

N u m b e r o f m o b i l e s u b s c r i p t i o n s ( b i l l i o n s )

Market Analysis03 | Clavister Telecom segment 2016

M o b i l e d a t a t r a f f i c p e r c a t e g o r y a n d m o n t h ( E x a b y t e s )

Figure 3: Mobile data per smartphone and month (GB). Source: Ericsson Mobility Report (June 2016)

Figure 4: Mobile data traffic per type of application and month (Exabytes). Source: Ericsson Mobility Report (June 2016)

As part of the rollout of smartphones, mobile broadband services and new mobile networks with greater capacity, the direct consequence is a greater supply of services requiring high bandwidth and with high traffic volumes as a result. Just between the first quarter of 2015 and the corresponding quarter of 2016 alone, data traffic volumes in mobile networks grew by 60%. The forecasted trajectory of mobile data traffic beyond 2016 indicates an annual growth of 45%.

n C h a n g e d u s e r b e h a v i o r – S i g n i f i c a n t i n c r e a s e o f m o b i l e d a t a

M o b i l e d a t a t r a f f i c p e r s m a r t p h o n e a n d m o n t h ( G B )

The by far largest application driving the growth of mobile data is video, which is estimated to account for 70% of all mobile data traffic by 2021.

New technology, new opportunities04 | Clavister Telecom segment 2016

Internet of Things (IoT) will create new conditions and opportunities for mobile operators, but also new challenges that must be addressed.

n A s t h e I n t e r n e t o f T h i n g s ( I o T ) g r o w , n e w c o n t o u r s a r e c r e a t e d

Traditional mobile devices (phones, tablets and mobile computers) still represent the largest category of connected devices. However, the industry expects that the amount of connected IoT devices (Internet of Things; automobiles, machinery, sensors and consumer electronics) will pass the traditional units in volume already by 2018. Already by 2021, forecasts indicate that there will be 16 billion connected IoT devices.

The large growth in volume of units, the total amount of data they represent and the nature of the traffic are major technical challenges for mobile operators. Completely new technologies and solutions will have to be introduced to handle the great complexity.

C o n n e c t e d d e v i c e s ( b i l l i o n s )

Figure 6: Increase of connected devices. Source: Ericsson Mobility Report (June 2016)

“During the first quarter of 2016, AT&T signed more new subscriptions related to connected cars than for mobile phones”

New technology, new opportunities05 | Clavister Telecom segment 2016

Telecom Cloud, Virtualization and SDN / NFV – the industry’s response to challenges related to IoT, increased number of devices and the rapidly increasing traffic volumes.

Up to now, mobile networks and traditional computer networks have been sharing a common design. The foundation has been built upon hardware-based components, so-called “appliances” which are tailor-made for specific functions within the network. This way of building mobile networks, however, creates an undesirable lock-in effect for the operators and is far more costly. But above all it lacks the scalability and flexibility required to meet the huge growth of subscribers, data traffic and connected devices.

The industry’s response to these challenges is mainly related to cloud solutions and specific concepts such as SDN (Software Defined Network) and NFV (Network Function Virtualization). These new trends are based on two fundamental principles, namely to separate the software from specific hardware (so called virtualization) and to separate function from the location.

With these principles, operators can deliver services when and where they’re needed without the need for heavy CAPEX investment in specific hardware equipment. As all network functions are executed as pure software on standard hardware platforms, direct investments drop significantly, and new business models are giving operators the opportunity to carry the costs as business and revenue increases.

Gartner states as an example that some operators will be able to reduce CAPEX by up to 40% and its OPEX by 60% for certain services.

According to reports from Market Research Reports and SNS Research more than 70% of all operators will have launched projects to virtualize their networks by 2018, and by 2020, 80% of all investments in mobile networks will be based on virtual infrastructure and virtualized technologies.

n A b o u t T e l e c o m C l o u d , V i r t u a l i z a t i o n a n d S D N / N F V

Figure 6: Transition from legacy and hardware based networks to software based solutions. Source: ETSI.

“Network virtualization has the potential to reduce CAPEX with 40% and OPEX with 60%”, Gartner

Security in the new generation mobile neworks06 | Clavister Telecom segment 2016

As with traditional enterprise networks, there’s an accelerating need for security functions in mobile networks. The main difference to a corporate network, however, is that the amount of users potentially affected by an attack of a mobile network is dramatically larger, and thus the underlying value that needs protection significantly higher. In other words, there’s a great incentive for mobile operators to invest in security technology.

Overall you can group network security attacks into two main categories: attacks against the mobile users (or devices when it comes to IoT) and attacks against the mobile operator’s infrastructure. The attacks targeting users include for example, interception of mobile phone calls or data traffic, or infection of smartphones and other mobile devices with viruses, trojans and other malware.

Attacks against the mobile operator’s infrastructure can for instance result in that mobile services to be disabled (calls are not connected, Internet traffic is stopped), users being over-billed or customer information stolen.

It’s clear that security issues – regardless of the type of attacks – can have far-reaching consequences and costs for a mobile network operator.

Increased traffic, explosive growth of IoT devices combined with increased use of virtualization and software-based infrastructure creates new demands on security solutions.

n S e c u r i t y i n m o b i l e n e t w o r k s“Network Functions Virtualization (NFV) and Software-Defined Networks (SDN) create a need for new and highly integrated security solutions.”

Clavister’s security solutions for mobile networks07 | Clavister Telecom segment 2016

Robust and Swedish technology, purpose-built to protect Mobile Network Operators and their subscribers against eavesdropping and cyber threats.

Based on an innovative software that can be executed both in a virtualized environment and in a traditional appliance-based environment, Clavister provides mobile operators with a solution to address a wide variety of security issues.

The image below shows an illustrative mobile network, with six areas where Clavister delivers security features.

n C l a v i s t e r ’ s s o l u t i o n s f o r m o b i l e n e t w o r k o p e r a t o r s

LTE Backhaul Security protects the backhaul communication between radio base stations and the mobile core network against eavesdropping and attacks.

Core Security (Gi/SGi Firewalling) protects the mobile network against attacks and threats originating from the Internet.

Roaming Security protects the mobile network against attacks initiated from other mobile operator networks.

Domain Security creates a separation of different functions within a mobile network, and protects these functions against attacks.

Virtual CPE allows a mobile network operator to offer security services to individual subscribers without having to supply physical equipment to the users. WiFi Access Gateway enables a WiFi service provider to manage security, quality of experience and service differentiation.

The market for Clavister08 | Clavister Telecom segment 2016

The picture below shows the expected market size for LTE Backhaul Security and Core Security (Gi/SGi firewalling). An important aspect of the development is the rate at which mobile operators are adopting new virtualization technologies. At the end of the period, virtualized security is clearly expected to be the dominant technology.

The market for other security solutions is also expected to be substantial and follow the same trend regarding virtualization.

n V i r t u a l i z e d s e c u r i t y d o m i n a t e s t h e m a r k e t

LTE Backhaul Security and Core Security (Gi/SGi firewalling) are examples of areas which grow proportionally with in-creased data traffic. These two solutions alone are estimated to have a turnover of more than USD one billion in 2018, with further growth reaching more than USD two billion by 2021, with an aggregated turnover of more than 5.7 billion USD.

Figure 8: Addressable market for security in mobile networks. Source: Clavister 2016.

“We are proud of our products and solu-tions, but it is by listening to our custom-ers and the market that enables us to stay in the forefront of technology.”

Clavister in the forefront of technology09 | Clavister Telecom segment 2016

Through long-standing and close cooperation with leading players in the telecommunications industry, Clavister has been able to design products and solutions that are meeting the high demands on security, performance and flexibility.

Through long-standing and close collaboration with leading industrial players, such as Nokia, Ericsson, Intel, and others, Clavister has been able to gain a deep understanding of the telecom industry’s challenges and opportunities. Combined with the experience from the enterprise segment, and with significant investments in software technology, Clavister has developed a software-based security solution that not only addresses the telecoms market needs, but also does it in a way which means great competitive advantages for Clavister and their clients.

In short, the Clavister software is the first security product on the market that has the capacity to both replace, and even perform significantly better than, traditional hardware-based products.

n C l a v i s t e r ’ s c o m p e t i t i v e a d v a n t a g e s

Among other things, Clavister software delivers:• The highest security performance on the market in virtualized environments• Full integration with SDN / NFV-MANO systems• Support for many solutions based on the same software, including LTE Backhaul Security, Core Security (Gi / SGi firewalling), Roaming Security, Virtual CPE Security and Domain Security.

Given the massive growth of mobile data traffic, it’s obvious that the capacity to transfer large amounts of data (performance) is the most critical success factor to scale mobile networks to the level needed to meet customer requirements. Comparative graphic below shows the performance levels in Clavister’s software versus the main competitor’s virtualized offering.

Figure 9: Performance and capacity comparisson between Clavister and another established vendor. Source: Clavister 2016.Notes: VNF - Virtualized Network Function. Performance figures for VPN is based on 512 bytes packet size.

Business model and typical volume estimates10 | Clavister Telecom segmentet 2016

The business model Clavister applies for the telecom segment is based on an indirect sales model, in which a system integrator assumes the full responsibility towards the end customer, i.e. the mobile operator. Clavister has currently contracted a handful of systems integrators, where players such as Nokia, Ericsson, NEC and Mirait are the most renowned.

Nokia, one of the market leaders regarding LTE infrastructure, for example, has chosen to license and sell Clavister software under its own brand, Nokia NetGuard Virtual Firewall. The solution has – by leveraging on Nokia’s extensive sales organization – the potential to reach out globally to all mobile operators.

Mirait, as another example, is a major supplier to some of the largest companies in Japan, including the major mobile operators.

The typical delivery from Clavister to the system vendors consists of security software, related software for administration, required licenses and technical support and upgrades. The software is primarily licensed per data traffic amount, which means that Clavister’s revenue increases as the volume of data increases in the operators’ networks. Technical support and upgrades are provided at an annual support charge, which is a percentage of the license cost.

n B u s i n e s s M o d e l

A typical business case has a purchasing process that normally ranges from six to twelve months, depending on the size and complexity. Thereafter, the operator often validates functionality, performance and stability through a smaller pilot installation, also called “Proof of Concept”. The validation normally takes two to three months, after which the solution is rolled out on a larger scale. The large-scale rollout may of course be highly variable in both scope (volume) and time, depending on both the type of solution, the operator’s size and rollout strategy.

In any event, it’s relevant to look at the aggregate business volumes over a period of at least five years. This is because the rollout itself may extend over several years, after which a growth phase takes place during which the mobile operator continues to make investments to meet the

increased volume.

The chart below provides guidance on the estimated size of a “typical business case” within two solution areas, LTE Backhaul Security and Core Security. For an operator with 20 million subscribers, a rollout of an LTE Backhaul Security solution corresponds to an aggregate revenue of approximately USD 3-5 million over five years. The corresponding figure for an operator with about 100 million subscribers is approximately fifteen to USD 25 million over five years. A typical business case does not mean a single large order, but is made up of one or more smaller initial orders followed by continuous orders as the rollout continues.

n E s t i m a t e d b u s i n e s s v o l u m e

Figure 10: Estimated deal sizes based on size of mobile network operator..Source: Clavister 2016.

E s t i m a t e d d e a l s i z e b a s e d o n s i z e o f m o b i l e n e t w o r k o p e r a t o r

Business status and outlook11 | Clavister Telecom segment 2016

The telecom market is in a growth phase where new technology represents a paradigm shift for mobile operators.Clavister has extensively to develop technologies, products and solutions based on these needs and is now in a very exciting period of growth, both commercially and organizational.

n B u s i n e s s s t a t u s w i t h i n t h e t e l e c o m s e g m e n t

“A strong growth of commercial presence and ongoing tenders, combined with an estimated first deployment in the first quarter of 2017 confirms our belief in that we are on the right market at the right time.”

Figure 11: Development of number of ongoing tenders through contracted telecom manufacturers. during the period Q1-Q3 of 2016. Source: Clavister 2016.

Between the first quarter of 2016 and the third quarter of 2016, the number of tenders through leading system integrators and telecom equippment manufacturers has increased from three to some twenty. The tenders are of varying sizes and in different solution areas.

Clavister AB, Sjögatan 6 J, SE-891 60 Örnsköldsvik, Sweden◼ Phone: +46 (0)660 29 92 00 ◼ Fax: +46 (0)660 122 50 ◼ Web: www.clavister.com

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