Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aruba Networks, Inc. (NASDAQ:ARUN)

F2Q10 (Qtr End 01/31/10) Earnings Call Transcript

February 18, 2010 5:00 pm ET

Executives

Jill Isenstadt – IR

Dominic Orr – President and CEO

Steffan Tomlinson – CFO

Hitesh Sheth – COO

Analysts

Min Park – Goldman Sachs

Ryan Hutchinson – Lazard Capital Markets

Mark Sue – RBC Capital Markets

Sanjiv Wadhwani – Stifel Nicolaus

Greg Mesniaeff – Needham & Company

Erik Suppiger – Signal Hill

Lynn Um – Barclays Capital

Sanjit Singh – Wedbush Securities

Joanna Makris – Brigantine Advisors

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Aruba Networks second quarter 2010 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, February 18, 2010. I would now like to turn conference over to Jill Isenstadt. Please go ahead.

Jill Isenstadt

Good afternoon and thank you for joining us on today’s conference call to discuss Aruba Networks fiscal second quarter 2010 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Aruba Networks website at www.arubanetworks.com. With me on today’s call are Dominic Orr, Aruba’s President and Chief Executive Officer; Steffan Tomlinson, Chief Financial Officer; Keerti Melkote, Aruba’s Co-Founder and Chief Technology Officer; and Hitesh Sheth, Aruba’s Chief Operating Officer.

After the market closed today, Aruba Networks issued a press release announcing the results for its fiscal second quarter ended January 31, 2010. If you would like a copy of the release, you can access it online at the company’s website or you can call the Blueshirt Group at 415-217-7722 and we will fax or email you a copy.

We’d like to remind you that during the course of this conference call Aruba Networks’ management may make forward-looking statements, including statements regarding expected revenue, gross margins, operating expenses, non-GAAP EPS, and tax rate for the third quarter of fiscal 2010; the company’s belief that it will continue to gain market share and derive significant traction from its 802.11n products; anticipated macroeconomic improvements and resulting increases in IT spending; acceleration of the trend towards using 802.11n exclusively and expected customer demand for the company’s 802.11n products; the company’s belief that its pipeline for its network right-sizing and Virtual Branch Networking solutions is growing, which presents significant incremental growth potential; and other statements as to the company’s future economic performance, financial condition or results of operations.

These forward-looking statements are not historical facts, but rather are based on the company’s current expectations and beliefs. These statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially from those anticipated by these forward-looking statements. These forward-looking looking statements apply as of today and you should not rely on them as representing our views in the future. And we undertake no obligation to update these statements after this call.

Also please note that Aruba’s application of US Generally Accepted Accounting Principles or US GAAP requires disclosure that the availability of new products, planned features and upgrades discussed during this call are subject to change or cancellation. For a more detailed description of these risks and uncertainties that may affect our results, please refer to the risks and uncertainties described under the caption Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our quarterly report on Form 10-Q filed with the SEC on December 4, 2009 as well as our earnings release posted a few minutes ago on our website.

Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges, including non-cash stock-based expenses, amortization expenses of acquired intangible assets, and litigation reserves. We have provided reconciliations of these non-GAAP measures to GAAP financial measures in the Investor Relations section of our website located at www.arubanetworks.com and in our earnings press release.

Now, I’d like to introduce Dominic Orr, President and Chief Executive Officer of Aruba Networks. Dominic?

Dominic Orr

Thank you. Good afternoon, and thank you for taking the time to attend our fiscal second quarter 2010 conference call. I’m very pleased with our progress in the second quarter. We are clearly benefiting from a number of important fundamental trends in IT spending. And the market is aligning with our long-term vision.

During the quarter, revenues grew approximately 31% year-over-year and 9% sequentially to a record $62.7 million. Encouragingly, product revenues grew even faster than our overall revenues with 34% year-over-year and 10% sequential growth. Demand was strong across a wider range of verticals, with the domestic and international theaters both increasing 31% year-over-year.

All of our major product categories, software, access points and controllers increased both sequentially and year-over-year. New bookings and deployments were strong across our core verticals such as education, government and healthcare, but we also were very highly encouraged by the demand across the broader enterprise, which contributed significantly to our growth.

In summary, we are really pleased that no one product or one deal made the quarter and believe this points to some very positive trends. First, we think it is an early indicator of a broader increase in IT spending coming out of the downturn. Second, our customers start telling us that mobility is a strategic productivity driver for the business, expressly with the ratification of 11n.

Additionally, with the increased proliferation of remote locations, our customers are also telling us that enabling remote access rapidly and cost-effectively is a key priority. Both of these trends play well to our strength in enabling secure mobile access and seamless roaming for our customers. And the fact that we can address both of these needs with the same architecture and the same technology platform provides even greater cost-savings to our customers.

Our results show that we have the right products, the right vision, and the right organization to capitalize on this demand. Reinforcing our confidence in the market and our positioning in it is our strong rate of new customer acquisitions, which continued unabated throughout the downturn. The contribution from our installed base of accounts also remains very strong.

For example, the top 25 customers in Aruba’s history have generated 14 times the initial purchase in the quarters and years following the initial order. This clearly demonstrates the value of our installed base. Over the last 15 months, I’m also encouraged that we have steadily accelerated our rate of customers acquisition, adding over 3,100 customers in this period.

In Q2, we have added a record number of new customers, bringing our total to over 9,300. These customers represent a wide range of verticals and geographies. For example, our top 20 new customers in Q2 included a multi-billion dollar chemical corporation, a life insurance company based in the US, a large airport in the Middle East, a trucking company in the United States, multiple education institutions both domestic and international, and finally many hospitals in the United States and abroad.

One of the key factors contributing to our continued momentum is the growing adoption of 802.11n, which changes the networking landscape by introducing wireless solutions with performance comparable or superior to wired networks. Introduction of our value priced 105 Access Point and the continued success of our flagship 120 series access points have clearly contributed the momentum in 11n.

This quarter, we saw 11n access points increase to 48% of shipments from roughly 42% a quarter ago. Both the value line and premium access points continue to do well and both carry very healthy product margins. 802.11n offers a true alternative to Ethernet edge access and enables both our LAN right-sizing and vertical branch network, or VBN, initiatives.

Both of these initiatives make solid contributions to our growth in this quarter. And the pipeline on these programs are very encouraging. We expect both initiatives will ramp over time. Our family of VBN products effectively virtualize the network, providing a similar, more secure, better performing, and low-cost means of networking branch offices, stores and tele-workers.

Customers are finding innovative ways to use this technology to assist their needs. For example, during the quarter, we continued to roll out VBN for a popular restaurant chain. This customer was able to dramatically reduce wide area networking cost and meet straight PCI compliant security requirements using our VBN solution, saving them seven digits in annual operations cost.

In another case, a major chemical company deployed our remote access points in approximately 200 locations worldwide and reduced the number of times engineers have to be dispatched to remote offices to provision and troubleshoot remote IT networks. These are just a couple of examples of the way in which customers are implementing VBN through significantly reduced operating expenses while improving their remote networking capabilities.

With right-sizing VBN and our more than 30% product growth in Q2, we are well positioned to continue to grow in the future following a significant reversal in the economy. During the quarter, we also introduced AirWave 7, the major extension of our award-winning solutions that integrates the management of wireless LAN, wide infrastructure and client devices into a single interface.

AirWave now provides a single point of visibility and control for the entire network edge, including everything from handheld devices and wireless printers to edge switches from Cisco and HP. Our customers’ product innovation has been important to our ability to maintain our gross margins over the last year. Non-GAAP gross margins remained strong in Q2. And we have maintained them at at or above the high end of our target range in the highly competitive market in recent quarters.

We believe this points to the value proposition our products bring to our customers. While we continue to make strategic investments in the business, especially in the area of R&D and the expansion of geographic coverage, both of which we think will help drive future growth, we have also demonstrated continued operating leverage.

In Q2, we reported record non-GAAP operating margins of 10.1%, a 250 basis point improvement from our fiscal Q1. I’m pleased that our strong bottom line results were once again primarily a consequence of meaningful revenue growth.

In summary, we are increasing our penetration of our core verticals and seeing great adoption of our solution across the general enterprise. We believe that we are benefiting from an increasingly irreversible trend towards wireless replacing wired at the edge. And Aruba is a clear leader focused on enabling this transition.

Over the last year, we believe we have won significant market and mind share, a trend that was reinforced recently by our improved positioning as the leader in Gartner’s just released Magic Quadrant for the wireless LAN infrastructure. Additionally, several quarters ago, we introduced new initiatives, which are now contributing to our revenue growth and have vastly expanded our market opportunity, and that is more to come.

I would like to take this opportunity to welcome you to listening to our Analyst Day on March 17th when we will discuss our current opportunities and our vision for the future of Aruba. Details about the event were announced in a press release earlier today. A little later in the call I will be happy to answer any questions you may have. I will now turn it over to Steffan to go through the financials in more detail.

Steffan Tomlinson

Thanks, Dominic. In fiscal Q2 ’10, total revenue of $62.7 million increased 8.8% sequentially and 31.4% year-over-year. Product revenue of $52.1 million increased 10.3% sequentially and 34% year-over-year. Professional services and support revenue of $10.4 million increased 2.1% sequentially and 22.4% year-over-year. In Q2, approximately 91% of our revenue came from indirect channels, while 9% was direct.

As a reminder, our indirect channels represent sales through our VARs and distributors as well as our strategic OEM partner Alcatel Lucent. Approximately 62% of sales were generated in the US and 38% of our sales came from international theaters. Bookings were strong across all theaters and linearity followed our historical monthly patterns.

Total non-GAAP gross margins in Q2 were above our target range of 65% to 68%, at 69.4%, which represented a slight decrease of 30 basis points from Q1. Q2 non-GAAP product gross margin was 67%, flat with the prior quarter. Q2 non-GAAP services gross margin was 81.6% compared to 82.2% in the prior quarter.

Moving on to operating expenses, as expected, non-GAAP research and development expense was down approximately $0.2 million from the prior quarter and decreased as a percentage of revenue from 16.7% in Q1 to 15.1% in Q2. Non-GAAP sales and marketing expenses increased $1.5 million from the prior quarter.

This increase was driven primarily by sales commission expense from higher revenues and expenses related to marketing programs. As expected, sales and marketing decreased as a percentage of revenue from 37.1% in Q1 ’10 to 36.4% in Q2 ‘10. Non-GAAP G&A expense increased by $0.1 million and was down from Q1 ’10 as a percentage of revenue at 7.8%.

Headcount at the end of Q2 was 598, an increase of 38 from the prior quarter. In total, operating expenses were down from the prior quarter as a percentage of revenue at 59.3% of sales on a non-GAAP basis. Our non-GAAP tax rate was approximately 1% in Q2 compared to 8.3% in Q1. We expect our non-GAAP tax rate in Q3 to be in the range of 5% to 10%.

Non-GAAP net income for the quarter was approximately $6.3 million or $0.06 per share. This compares to non-GAAP net income of $4.1 million or $0.04 per share in Q1 ’10 and non-GAAP net income of $2.0 million or $0.02 per share in Q2 ’09. Due to the appreciation of Aruba’s stock throughout the quarter, Q2 ‘10 weighted average shares outstanding were 102 million shares on a diluted basis.

The GAAP net loss for the quarter was $4.4 million or $0.05 per share compared to a GAAP net loss of $24.7 million or $0.28 per share in Q1 ’10 and a GAAP net loss of $6.8 million or $0.08 per share in Q2 ’09. Our Q2 ‘10 GAAP results included $9 million of non-cash stock-based expenses, $1.2 million of amortization expense of acquired intangible assets, and $500,000 of litigation reserves.

Turning to the balance sheet, we finished January with cash and short-term investments of $1.27 per share or $129.1 million after the $19.75 million cash payment related to the settlement of the Motorola lawsuit, which was paid in November. Excluding the one-time payment, cash would have increased by about $13.2 million. Cash flow from operations was a loss of $6 million due to the one-time payment. We ended Q2 with $33.7 million of accounts receivable, up slightly from the prior quarter balance of $33 million.

Days sales outstanding were 48 days, down four days from Q1. We believe the quality of our receivables remains excellent. Moving down the balance sheet, short-term deferred revenue was at a record level of $41.3 million at quarter-end compared to $40.0 million at the end of Q1 ’10 and $28.0 million at the end of Q2 ’09. We are pleased with the increase in deferred revenues, given that typically we have a seen a decrease from Q1 to Q2.

It’s important to remember that we remain a book and ship business, and deferred revenues will fluctuate from time to time regardless of the health of our business and prospects of growth. Inventory totaled $12.8 million at the end of Q2, an increase of $3.6 million from the end of Q1, but less than we had in the same period a year ago on a larger revenue base.

Over the last couple of quarters, we have been actively preparing for and managing the demand for our 11n portfolio of products while supporting those customers who are completing rollouts of ABG-related projects. Inventory turns were healthy at 6.3, which was a decrease from 7.1 in Q1 and an increase from 3.6 in the same period a year ago.

Now let me turn to our fiscal third quarter guidance. We had a record quarter in Q2 and what is typically a seasonally tough quarter for us. Our pipeline of business remains robust and the initiatives we implemented are showing traction. We balanced that with caution on the overall market, even though we are definitely encouraged that IT spending has begun to show some signs of recovery.

Taking these factors into account, we expect revenues in our fiscal third quarter of 2010 to be up 40% to 44% year-over-year in the range of $64 to $66 million. We expect non-GAAP EPS of approximately $0.07 per share using 105 million shares on a diluted basis.

With that, let me turn the call back over to Dominic.

Dominic Orr

Thank you, Steffan. And right now, Steffan, Keerti, Hitesh and I would be happy to answer any questions you may have. Operator, you can now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Min Park with Goldman Sachs. Please go ahead.

Min Park – Goldman Sachs

Great. Thank you very much. If you look at the three – 700-plus new customers you acquired this quarter, do you think the total revenue opportunity with these customers on a blended basis is higher, lower or just consistent with your current installed base?

Dominic Orr

I think that there is no sign that the accessible market so to speak for a customer has decreased. In fact, with our increased portfolio, we believe with each customer we have more opportunity to get more revenue. However, having said that, we observe that some of the customers are getting more cautious in terms of dividing up the project interfaces so that for each project in the individual purchase order size actually might be a bit smaller.

Min Park – Goldman Sachs

Great, thank you. And then just a quick follow-up. Can you just help us better understand what’s happening out on the field on a competitive basis? It seems that the industry revenue seems quite lumpy, maybe partly due to your competitor – large competitor out there. But are there any changes in the competitive dynamics that you can talk to, that might be causing the lumpiness in the overall industry revenues?

Dominic Orr

I think in terms of on a deal-by-deal competitive basis, we continue to see the trend that we have seen for many, many quarters now. It is really becoming more of a two-horse race. We do compete with Cisco in almost every project. And in some vertical – in the very limited verticals like in retail, obviously the incumbent has been Motorola Symbol. Other than that, we have not seen any new change of scenery. And particularly the smaller competitors tend to – we see that actually more – less frequently.

Min Park – Goldman Sachs

Great. Thank you very much.

Dominic Orr

Welcome.

Operator

Thank you. Our next question comes from the line of Ryan Hutchinson with Lazard Capital Markets. Please go ahead.

Ryan Hutchinson – Lazard Capital Markets

Hey, good afternoon, guys.

Dominic Orr

Hi, Ryan.

Ryan Hutchinson – Lazard Capital Markets

Hi. Couple questions. First, Dominic, you talked about significant growth, I think was the quote, in the broader enterprise. I wanted to dig into that a little bit more. And specifically, how does that look as you look at sort of your core business? And then maybe talk to the network right-sizing and VBN initiative and the contribution in the quarter and the expectation moving forward. And then I have a follow-up for Steffan.

Dominic Orr

Okay. So if you look into the profile of our traditionally strong vertical, government, healthcare and education, they tend to be primarily single – a small number of campus sites. When you go into the large enterprises that they tend to be more – particularly the enterprises that are attracted to Aruba’s offering, they tend to be more of a distributor enterprise. So in terms of profile [ph] of products we sell, other than the core wireless LAN product, obviously the distributor enterprise fit even better into our – the secure mobile access story and an opportunity for us to sell the VBN solutions becoming even broader in this segment.

In addition, you mentioned about the right-sizing initiative. We are seeing that in both the large distributor enterprises as well as the single campus customers. And in terms of revenue contribution, it is hard – first of all, we don’t disclose product segment details, but it is – if you look into it, both the right-sizing and VBN are really initiatives to leverage of the same core platform with different form factor of access. And so it is hard to segment it, but I can tell you both initiatives had started to meaningfully affect the revenue.

Ryan Hutchinson – Lazard Capital Markets

Okay. I guess – so following up to that, I mean, I would be disappointed if that wasn’t, I don’t know, 10% or so, plus or minus, by the end of the fiscal year. Some parameters around that would be helpful. And then for Steffan, on the deferred revenue line, you’ve given some granularity in the past. It’s also in your filings, which I’m assuming you file your quarterly filing here shortly, but the product specifically was $16.4 million last – at the end of October, up I believe from around $11 million. So, is the increase in the current quarter, which is marginal primarily related to professional services, and any color around the impact it had to product and just the puts and takes in there in terms of how that flowed through the model? Thanks.

Steffan Tomlinson

I’ll answer the second question first. The primary increase was in the support line in the short-term deferred revenue. Product, on a sequential basis, was down slightly, but on a year-over-year basis it was up, call it a 110%. And how that flows through to our GAAP – our revenues, I should say, there is always flow-off off of the balance sheet on to the income statement, but we are very pleased that we were able to actually increase overall deferred revenues. As I mentioned in the prepared comments, there is going to be seasonality to our deferred revenues and that fact that we are actually able to grow deferreds in Q2 is something that we are pleased about. And what was the first question?

Ryan Hutchinson – Lazard Capital Markets

Just to – back to Dominic, and then I’ll jump back in the queue. Sorry, it’s just some parameters around expectations. I know you are not giving a hard number, but I think part of the story here and the growth drivers are, the expectations for some of these new initiatives, and maybe it’s an analyst day thing you’re going to outline, but is it 10% that we should think about in terms of total revenue by the end of the fiscal year?

Steffan Tomlinson

Ryan, so on the initiative front, both of those, as Dominic said, that we are extending our core technology platform to attack markets. What we’ve said in the past is both of those initiatives are – we anticipate will be strong contributors to our business in the second half of our fiscal year. We are actually pleased that they are contributing earlier than we’ve anticipated. And we don’t necessarily want to give a strict percentage on it. But if something is meaningful, it’s typically, call it, in the – at least in the mid-to-high single digits, if not greater.

Ryan Hutchinson – Lazard Capital Markets

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Mark Sue with RBC Capital Markets. Please go ahead.

Mark Sue – RBC Capital Markets

Thank you. Can you discuss your bookings on a month-to-month basis and maybe just touch on linearity overall? And second, if you could help us understand why product deferred revenues would be seasonal at this stage of the growth cycles. And separately, have you been able to rethink your long-term operating margin targets? Will you be adding headcount near-term? And do you feel that you can get additional productivity from your sales force?

Dominic Orr

So I’ll comment on the three questions here.

Steffan Tomlinson

Yes, the bookings –

Dominic Orr

Yes. So we did have a pretty good December at some geography that had benefited from the classical year budget slash, if that’s what you’re referring to, we’ve seen some of that. And your third question – so that helps the linearity obviously as we have a strong second month in the quarter. And then your third question is whether we would be able to leverage productivity in the sales force. Yes, we expect it to. But on the other hand, from a geographic coverage point of view, we don’t think we are complete yet. So you will see continued investment in extending geography in some developing country that we, for example, are seeing that it is definitely worth the return of investment. So you will see some –

Mark Sue – RBC Capital Markets

So Dominic, do you have a number of headcount additions in the current quarter?

Steffan Tomlinson

We don’t disclose that, but I would like to say, as reflected in our guidance, we are guiding up sequentially on EPS, which you can infer that we’re going to have some operating margin expansion on that. So even though we are making some investments, we are doing with an eye towards improved operating leverage. On your second question, which was the product deferred revs and why they could be seasonal, remember we are a book and ship business primarily. And product deferred revenue, there will be some either seasonality or fluctuation, given acceptance criteria that we have with large customers. But we feel very confident that the position of our deferred revenues is strong.

Mark Sue – RBC Capital Markets

Okay. Thank you, gentlemen.

Steffan Tomlinson

Thank you.

Dominic Orr

Thank you.

Operator

Thank you. Our next question comes from the line of Sanjiv Wadhwani with Stifel Nicolaus. Please go ahead.

Sanjiv Wadhwani – Stifel Nicolaus

Thank you. Can you hear me?

Dominic Orr

Yes, we can.

Sanjiv Wadhwani – Stifel Nicolaus

Thanks. Couple of questions. On the value priced 11n products, can you just talk about any metrics of how they did during the quarter? And how are sort of customers deciding between the 120 series and the 105 series in terms of deployment? And the second question, for Steffan, it looks like international revenues were down about 2% sequentially. I just wanted to confirm that was the right number. And did the Australian deal continued contribution in the Jan quarter and is it sort of largely done now. Any color there would be helpful. Thanks.

Hitesh Sheth

Hi, Sanjiv, this is Hitesh. So on the first question of how the value priced access points did, we are very pleased with the overall traction of our 11n access points. And I think furthermore, we are very pleased that the value priced line, the AP-105s are achieving traction, not at the expense of our premium priced product lines. So overall, the whole transition to 11n is something that we are benefiting from. Secondly, your question around what are the decision criteria. It’s actually fairly straightforward. I think they were pretty much tied around scale and performance. And in terms of depending on the customers’ requirements, they will make a decision between (inaudible) premium line.

Sanjiv Wadhwani – Stifel Nicolaus

Got it. And Hitesh, any metrics on how did – I mean, is it a good chunk of your 11n deployments? Is it 10%, 20%, any color there?

Hitesh Sheth

We don’t break it out in that fashion. But again, what I can tell you is that the take-up is as we would have expected.

Sanjiv Wadhwani – Stifel Nicolaus

Got it, okay.

Dominic Orr

And we’d like to emphasize (inaudible) comment that both lines have very good margin. We’re very happy with the margins on both lines.

Steffan Tomlinson

And then, Sanjiv, on the international revs, international quarter-over-quarter was effectively flat. Year-over-year, it was up about 31.4%. One thing that we noted on the call – in the prior earnings call was that the US in fiscal Q1 was down. We actually saw a nice rebound in revs from the US in fiscal Q2. And we are very pleased with that. And then the other question you have on Australian deal and whether that contributed in the quarter, it did contribute revenue in the quarter. It wasn’t [ph] a 10% end customer. And we will continue – we are still in the midst of the rollout. So as we stated before, it was either in the March or April end of deployment. And so that’s still on track.

Sanjiv Wadhwani – Stifel Nicolaus

Got it. All right. Thanks so much, guys.

Steffan Tomlinson

Thank you.

Dominic Orr

Thank you.

Operator

Thank you. Our next question comes from the line of Greg Mesniaeff with Needham & Company. Please go ahead.

Greg Mesniaeff – Needham & Company

Yes, thank you. I was wondering if – with the slight sequential decrease in gross margins, I mean, recently you’ve had the transition to 2011 and as one of the drivers of gross margin expansion. And yet that expansion continues. So I’m wondering whether there were any other variables that kind of offset that continued shift in the mix in the quarter.

Steffan Tomlinson

We are very happy with the overall gross margin. It’s above our target range of 65% to 68%. It was down modestly, overall 30 basis points. When you look at the product gross margin, it was down I think 10 basis points. So we’re talking about really at the margin, no pun intended, that the gross margin came down. Overall dynamic in the marketplace, we were able to sell our platform or value proposition differentiated from the rest of the pack. And we are able to win on differentiation. So the overall solution is something that can give us the confidence of sticking with the 65% to 68% gross margin target range.

Greg Mesniaeff – Needham & Company

Got you. And just as a follow-up, Steffan, what percentage of your new wins were due in part to the interoperability or the ability of your OS to support a multi-vendor environment?

Dominic Orr

Actually our ability to support a multi-vendor environment has clearly increasingly become a differentiator for Aruba in larger accounts particularly, where in the current economic environment, people are making decision for the future deployment of Aruba, but they have constrain of the retirement schedule of the existing equipment. So the fact that AirWave can help them bridge the gap is increasingly becoming an important tool in our business.

Greg Mesniaeff – Needham & Company

Thank you.

Steffan Tomlinson

Thank you.

Operator

Thank you. Our next question comes from the line of Erik Suppiger with Signal Hill. Please go ahead.

Erik Suppiger – Signal Hill

Good afternoon.

Steffan Tomlinson

Good afternoon.

Erik Suppiger – Signal Hill

Couple of questions here. Just – first of all, did you break out the existing – or new customers versus existing customer revenue?

Steffan Tomlinson

We didn’t on the call. It effectively is right around the same level it was in the prior quarter, which is a little bit, I’d say, right around 70% from our installed base. And that is a – it's a metric that we will track, but it’s not potentially the best indicator of the business, which is why we are not highlighting as much anymore.

Erik Suppiger – Signal Hill

Okay, very good. And your guidance, are you assuming that your gross margins come back into your target range in the third quarter or is that implied in the guidance?

Steffan Tomlinson

Yes. Our guidance – we don’t typically provide next quarter guidance on gross margin, but we feel comfortable with the range 65% to 68%. Clearly we’ve been above the target range. And looking at patterns and everything, I would say that either at, I’d say, probably at the top end of our range makes sense.

Erik Suppiger – Signal Hill

Is there anything that would cause it to come back though into that range or even at the high end? I mean, any reason why it would come down next quarter?

Steffan Tomlinson

Nothing currently on my radar screen that would indicate that.

Erik Suppiger – Signal Hill

Okay. On the deferred revenue, did the Australian deal, was that part of the reason why that came down?

Steffan Tomlinson

We don’t comment specifically on individual customers. And as far as the overall deferred revenue, as I said, there is seasonality and there is also – as things roll out from acceptance, that sort of thing. So we don’t comment on an individual deal as it relates to deferred revenue.

Dominic Orr

It hasn’t come down.

Steffan Tomlinson

Yes. The product deferred revenue has come down slightly.

Erik Suppiger – Signal Hill

Okay. And then lastly, in light of some good growth on the 11n products, what do you think your share of the 11n market is at this point?

Dominic Orr

We have not received any updated data yet, I believe, the market share data.

Hitesh Sheth

Yes. The market share data for the latest quarter is imminent.

Steffan Tomlinson

And one follow-on point. The largest competitor of ours posted a mid-to-high single-digit year-on-year growth for their overall wireless LAN product set. And we’ve posted north of 30% growth. So we feel like we continue to gain market share from them.

Erik Suppiger – Signal Hill

Very good. Thank you very much.

Operator

Thank you. Our next question comes from the line of Lynn Um with Barclays Capital. Please go ahead.

Lynn Um – Barclays Capital

Hi, thanks for taking my question.

Dominic Orr

Hi.

Lynn Um – Barclays Capital

Hi. I think actually all my questions – most of them have been answered. But maybe just sort of a bigger picture question. Sounds like strength was pretty broad-based, but I was wondering if there are any geographies that still perhaps remain challenging for you. And maybe looking ahead to the remainder of this calendar year of all the variables that have been working in your favor, 802.11n, general IT recovery, if there is anything you feel incrementally more positive this quarter than perhaps to the last quarter.

Dominic Orr

So from a geographic point of view, all geography seems to be growing again. But relatively speaking, Europe is a little bit behind Asia-Pacific and Americas. So that would be one distinct trend. And then from a competitive strength perspective, as mentioned a little earlier, our not only multi-vendor network management capability but our introduction of AirWave 7, which integrated management of the wireless LAN and wire infrastructure together in addition to mobile devices is helping us significantly in providing major relative [ph] customers who now are straining towards moving some of the projects for wireless as the overlay into – at least appear to be if not the main infrastructure for the local network.

And the fact that we have AirWave 7 is clearly a big differentiation. That would be one major comment. And the other one is, increasing number of our projects, particularly ones in the general enterprise, would include the VBN component in addition to the campus wire LAN components in a single architecture. And that strengthened our strategic position in this account. So those I think are the trends that would make us more competitive, and we work towards that to gain market share.

Lynn Um – Barclays Capital

Thank you very much.

Dominic Orr

You’re welcome.

Steffan Tomlinson

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Rohit Chopra with Wedbush Securities. Please go ahead.

Sanjit Singh – Wedbush Securities

Hi, guys. This is Sanjit Singh for Rohit Chopra. Couple of questions. Last quarter we mentioned – you guys mentioned Westcon, Avnet, I think Alcatel and Tel telecom [ph], all were about 10% customers. How did they contribute to this quarter’s results?

Steffan Tomlinson

To this quarter, basically Alcatel-Lucent, Catalyst, and Avnet were each 10% partners. And going forward, we’re not necessarily going to be breaking those out. But for this quarter, we are. And so those three were 10% partners.

Sanjit Singh – Wedbush Securities

Got it. And then looking forward a bit, in terms of your hiring plans, what areas do you – is management looking to invest, and is it going to be in support sales or more in the channel?

Steffan Tomlinson

I think – one of our objective is to leverage our installed base of 9,300 customers having more products to sell to them. So the one major focus has been engineering in expanding the front line. And the other focus I mentioned early on is there are still geographies that are growing around the world that we have not adequately or have not at all covered. So those will be areas of investment.

Sanjit Singh – Wedbush Securities

Got it. And one quick follow-up. How is your partners in India and China? Is there increasing adoption in the Asian markets?

Dominic Orr

Both India and China are very active markets, and we are actively investing to capture the opportunities.

Sanjit Singh – Wedbush Securities

Thank you.

Dominic Orr

Welcome.

Operator

Thank you. Our next question comes from the line of Joanna Makris with Brigantine Advisors. Please go ahead.

Joanna Makris – Brigantine Advisors

Hi, good afternoon. I’m wondering based on your earlier comments, it sounds like you’re on the inflection point of enterprise spending and proliferation of remote locations. How does the company think about its channel strategy as it relates to what could be a meaningful pickup in the enterprise? Do you need to align yourselves more with some of the edge switching vendors? I mean, talk to us a little bit about how you’re going to approach the channel.

Dominic Orr

So the – I think one of the major expansion, as I mentioned, is the general enterprise and the distributed channel enterprise. I think clearly this is an area we would like to have global alliances. And to a certain extent, service providers that will allow the footprint and capability of end-to-end managed services. So those are the areas that we’re paying attention to foster relationships to complete the deployment stories and capability.

Operator

Thank you. (Operator instructions) And I’m not showing any further questions at this time. I would now like to turn it back over to Dominic Orr. Please go ahead.

Dominic Orr

Well, thank you. And again, I’d like to thank you for being on the call today. I’d like to take a moment to thank our employees, our customers, and our partners. And they have been giving us support during this difficult market condition, and I’m very pleased with our second quarter results and optimistic about our outlook for Q3. Thank you for listening, and we look forward to updating you on our progress in the coming months. And please, do not forget about our Analyst Day is on March 17. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aruba Networks, Inc. F2Q10 (Qtr End 01/31/10) Earnings Call Transcript
This Transcript
All Transcripts