Outsmarting a Networking Giant
One thing about the David and Goliath story is that quick and adaptable is still an advantage in the 21st Century, notes Rob DeFrancesco of Tech Stock Prospector.
Last month, shares of Aruba Networks (ARUN) initially reacted negatively after Cisco Systems (CSCO) announced the $1.2-billion purchase of Meraki Networks, a privately held competitor in the enterprise wireless LAN market.
The deal takes Cisco out of the running as a potential Aruba buyer and also turns up the competitive heat in the mid-market segment.
Cisco is paying a hefty premium of roughly 17x Meraki's estimated 2012 revenue of $70 million. However, I do think the deal makes sense because it gives Cisco a presence in cloud-based management of enterprise WiFi networks.
With Meraki, a customer can centrally manage WiFi access across its entire network from the cloud. This is a compelling use case for customers with many branch offices, stores, or restaurants.
Aruba has a competing offering with Aruba Instant, which is geared more toward mid-market customers. And with Aruba's focus on the enterprise, all of its solutions can easily be upgraded to handle larger customer networks.
Aruba has been making inroads with its Instant offering (it's one of the fastest growing products in company history), which makes the Cisco purchase of Meraki look like it was a defensive move. Cisco would never admit that.
But the truth is Aruba forced Cisco's hand and the networking giant had to pay up for Meraki.
Aruba may initially benefit a bit from the Meraki purchase because the deal will move some channel partners to focus more on offerings from other vendors, as a good number of channel players don't particularly like dealing with Cisco. In addition, an acquisition of this size will make some potential customers wonder about Cisco's long-term commitment to Meraki solutions and lead them to consider other vendors. Cisco says it will allow Meraki to operate independently, but the company does not always have the best follow-through when it comes to acquisitions.
Morgan Stanley called the acquisition "largely a non-event for Aruba" because Aruba Instant primarily targets the enterprise branch office market, as opposed to the SMB and the K-12 segments.
Aruba shares have since recovered from the initial pullback and are now up 16% from the low set after the deal was announced. For fiscal Q1 (October), Aruba reported EPS of 18 cents, one cent above the consensus estimate, on revenue of $144.5 million (+21% year over, year) vs. the consensus of $142.5 million. Cash flow from operations totaled $36.9 million and the company ended the quarter with cash & investments of $377.5 million. Gross margin was solid at 73%.
Aruba saw a record number of new customer wins in the quarter. Linearity was better than average for a fiscal Q1. Bookings were strong all across geographies except Europe (not surprising).
The US market (64% of total revenue) saw revenue growth of 15%, consistent with growth in fiscal Q4. Management said the US was the key driver of fiscal Q1 growth.
For fiscal Q2, EPS guidance of 19 cents matched the consensus estimate, but more important, revenue guidance of $150 million to $153 million topped the consensus of $148.9 million.
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