Aruba Networks Has a Strong Beat-and-Raise Quarter With Plans to Accelerate Leverage

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Aruba delivered the clean print and guide that the bulls expected for some time. And in a nod to shareholders, management announced plans to accelerate operating leverage. For the fourth quarter, revenue was above consensus by $8 million, gross margin improved by 100 basis points sequentially, operating margin hit management’s 20% target on the nose, and non-GAAP EPS were $0.01 ahead of the Street. First-quarter guidance was roughly $5 million ahead of consensus, and EPS were $0.01 to $0.02 better.

For the full year, management raised operating margin guidance from 19%-21% to 21%- 22%, based on a strong revenue growth outlook and an announced cost optimization plan that includes a 4% reduction in force and a relocation of 4% of the workforce to lower-cost geographies (i.e., India, Ireland, and Oregon). We believe this cost structure adjustment reflects a maturity in management’s beliefs regarding how to scale the business and a cultural shift at the board and management levels toward a deeper focus on profits and operating leverage. We project Aruba to exit the fiscal year at an operating margin of roughly 23%, which would be an all-time high for the company.

Slowly but surely, Aruba is addressing many investor concerns on the story, including potential Wi-Fi commoditization, risks around Cisco competition, lack of operating leverage (Aruba showed sharp expansion, as outlined above), and abnormally high stock compensation. We believe these factors are likely to create an inflection point in sentiment on the stock and rebuild management credibility, which should lead to an upward re-rating of the multiple.

Top-line strength during the fourth quarter was broad based with strong year-over-year growth across all geographies, especially North America, which was helped by strong enterprise momentum as well as a reacceleration in federal sales. From a product perspective, Aruba saw continued strength in the 11ac ramp-up, Aruba Instant, and ClearPass. Notably, Aruba also saw a record quarter in its core controller-based business, which speaks to the diversity and durability of its revenue base.

On the 11ac side, management noted that the new standard is accelerating the speed at which enterprises adopt the all-wireless workplace, in line with our field research. Management noted strong revenue visibility based on a robust enterprise pipeline (led by 11ac and ClearPass), an accelerating SME segment (driven by Instant), and growing opportunities with public-facing enterprises.

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