Aruba Networks Is Bouncing Back From 'Hurricane Cisco'

TheStreet.com

NEW YORK (TheStreet) -- After a disappointing 2013 that saw its stock drop 14%, mobile enterprise company Aruba Networks has gotten the new year started on the right foot.

There were doubts that the company could put the pieces back together after a couple of, well, tropical storms had an impact on revenue. The Street called it "Hurricane Cisco" . But as as I pointed out, too much was being made of a near-term hiccup. Aruba was suffering from revenue growth, yes. But it certainly didn't warrant the one-day 40% decline in the stock.

Last week, all of that was forgotten as Aruba beat both the top- and bottom-line estimates.

Revenue for the fiscal second quarter rose 14% year over year, and 10% sequentially. Product revenue, which comprises of 84% of Aruba's business, advanced roughly 8% year over year and 8% sequentially. As much as I like Aruba's business, this area has always been cause for some anxiety; 8% growth for product revenue is solid, but it still represents a deceleration of close to 66% from the year-ago quarter -- albeit still good enough for a 5% beat.

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Service revenue was slightly better, up 15% year over year and by an impressive 41% sequentially. But that's not a level I would expect Aruba to hit every quarter.

While I never believed Aruba was as bad as the numbers showed last year, I won't be quick to think that a 41% sequential surge in service revenue immediately sends an "all clear" signal. Let's not take one decent quarter out of context.

Let's also not forget that during the conference call management cited a contract worth $2 million to implement a public-facing application for an unnamed enterprise customer during the quarter. Let's not be quick to assume this is going to happen every quarter. If service revenue were to post a sequential decline in the May quarter, we should already know one of the reasons.

It's also encouraging that despite strong competition from Cisco and F5 Networks , Aruba continues to gain market share in the U.S. Revenue rose 21% year over year and 5% sequentially, making the U.S. 65% of the company's total revenue. This is the result of management tackling Aruba's competitive leverage more aggressively.

There were concerns that some of management's decisions regarding sales and marketing would take a toll on the company's advantage in price and performance. Management believed that these investments would create better product differentiation vs. the competition -- particularly Cisco. All told, there was no evidence of pricing pressure this quarter. Although margins were a bit mixed, this was more of the result of a 24% increase in sales and marketing spending.

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If there are any concerns going forward, it's that the tough IT spending environment still hasn't rebounded. There is also the constant fear that Cisco can disrupt Aruba's best-of-breed WiFi business. Cisco owns more than a 50% share of that industry. That isn't something that should be ignored. But there's no evidence that Aruba is under any sort of pricing pressure.

Besides, there will be a point when enterprise come to terms with their needs. These corporations can't continually under-invest in their infrastructure and expect to remain competitive. The Street has come to this realization, which is why Aruba's stock has begun to inch back up.

I'm not saying Aruba is a slam-dunk. As with most tech companies, there are still execution risks here. But I've studied this sector long enough to know how quickly sentiment can change. And as long as mobile devices continue their uptrend, Aruba's business should strengthen. On the basis of 10% to 12% free cash flow growth in the next six to 12 months, Aruba's stock should reach a price target of $25.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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