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Executives

Hitesh Sheth - Chief Operating Officer

Michael Galvin - Interim Principal Financial Officer, Interim Principal Accounting Officer and Vice President of Finance

Dominic Orr - Chairman, Chief Executive Officer and President

Maria Riley - Director of Communications

Analysts

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

Mark Sue - RBC Capital Markets, LLC

John Marchetti - Morgan Stanley

Joanna Makris - Mizuho Securities USA Inc.

Ryan Hutchinson - Lazard Capital Markets LLC

Jeffrey Kvaal - Barclays Capital

William Choi - Janney Montgomery Scott LLC

Jack Monti - UBS Investment Bank

Jason Ader - William Blair & Company L.L.C.

Kent Schofield - Goldman Sachs Group Inc.

Stephen Patel - Gleacher & Company, Inc.

Aruba Networks (ARUN) Q3 2011 Earnings Call May 19, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Aruba Fiscal Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, May 19, 2011. I would now like to turn the conference over to Maria Riley of Investor Relations. Please go ahead.

Maria Riley

Good afternoon, and thank you for joining us on today's conference call to discuss Aruba's fiscal third quarter 2011 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Aruba Networks' website at www.arubanetworks.com.

With me on today's call are Dominic Orr, Aruba's President and Chief Executive Officer; Michael Galvin, Aruba's Interim 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 fiscal third quarter ended April 30, 2011. If you would like a copy of the release, you can access it online on the company's website or you can call The Blueshirt Group at (415) 217-7722, and we will fax you or e-mail you a copy.

We would like to remind you that during the course of this conference call, Aruba Networks' management will make forward-looking statements, including statements regarding the company's expectations regarding industry growth drivers related to the consumerization of IT, customer adoption of our MOVE architecture, MDAC Solution and AirMesh products and the company's future economic performance, pipeline, financial condition and results of operations. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-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. For a more detailed description of these risks and uncertainties, please refer to our report on Form 10-Q filed with the SEC on March 11, 2011, 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 changes. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investors Relations section of our website located at www.arubanetworks.com and in our earnings press release issued today.

Now I'd like to introduce to you 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 third quarter 2011 conference call. The rapid consumerization of IT has manifested in the proliferation of smartphones and tablets, a sharp increase in mobile collaboration and video applications and a steady march towards virtualization and utilization of cloud services. The impact on enterprise networks is dramatic as old paradigms for how the network edge is architected and how security is enabled are becoming obsolete. IT departments of all sizes must contend with the rising phenomenon of bring-your-own-device or BYOD demand for mobile applications and the imperative of security and control. And they must do this with relatively flat budget. With Aruba's mobility-centric architecture and industry-leading product innovations, we believe we are very well positioned to ensure our customers are in front of this mobility wave and the network investments are right-sized. Our results over the last couple of years have offered clear evidence of the differentiation of our technology and our unique position in our marketplace.

In the third quarter, we achieved a record performance across a number of major metrics. Revenue in Q3 grew to a record $105.8 million, a 53% year-over-year increase. We added over 1,200 customers, the highest in our history. We achieved non-GAAP operating margins of 18%, and we generated non-GAAP net income of $18.8 million or $0.16 per diluted share. Demand was broad-based across all of our major geographies, with no major concentration on a vertical basis. Over the last year, healthy demand from the general enterprise has been a significant growth driver, and that trend continued in Q3.

We believe the broader enterprise market now clearly grasp what many of our core vertical customers got years ago, that the legacy wire-centric approach to the network edge is outdated in an increasingly mobile world. At Aruba, our job is to solve this problem for IT organizations and deliver compelling business value by significantly improving the user experience. To achieve this growth, it is vital that we continue to innovate at a very rapid rate.

In the third quarter, we introduced our new mobile virtual enterprise or MOVE architecture, which has been very well received by analysts and the market at large. Aruba MOVE integrates wireless, wired and remote silos into one cohesive access solution enabled by cloud-based mobility services. Access privileges are context aware, meaning that they are based on user, device, application and location, and this dictates the type of network resources each person is entitled to access.

Key MOVE innovations announced in Q3 include the following: Mobility Access Switches that deliver true integration of wireless and wired networks into a single architecture with context-based access; Aruba Instant, which virtualize Aruba Mobility Controller capabilities and can be deployed in minutes; the new ArubaOS release that delivers digital fingerprinting to enforce device and application-specific network policies; and the latest release of Aruba, Amigopod, which provides zero-touch secure provisioning of Apple iOS mobile devices across multivendor networks.

Most recently, we continue to demonstrate our front leadership with the introduction of our Mobile Device Access Control Solution, which we call MDAC. Perhaps the most compelling part of MDAC is the simplicity and integration of our solution, which enables self-registration of mobile devices and automatic authorization of users.

This is a true zero-touch solution for IT departments. Due to market demand and specific customer request, we recently introduced MDAC for Cisco wireless networks. Cisco wireless LAN customers now can also enable BYOD simply and securely by using Aruba's MDAC solution.

Our innovation also extended to the outdoor wireless market, were we introduced AirMesh outdoor wireless solutions with Layer-3 routing capabilities. It is designed to be the most scalable and high-performance outdoor mesh portfolio available in the industry today. The Layer-3 routing capabilities of all AirMesh products and the quad-radio architecture of the new flagship MSR4000 clearly differentiated from other outdoor mesh solutions.

During the quarter, we added a record number of new customers, bringing our total to over 14,000. Key new customers included a large insurance and wealth management company, a major power provider in China, a worldwide property management group, a U.S. retailer with 1,700 stores and leading enterprises, hospitals and education institutions around the world.

We are also very pleased with the continued revenue contribution from our existing customers. We believe that our current customer base has the potential to drive significant revenue growth for many years to come as they migrate from a wired-centric to a mobility-centric network.

Now a word on the CFO search. We have been very pleased with the pipeline of qualified candidates applying for the job. We are going through a diligent process to make this important appointment. In the meantime, our colleague, Mike Galvin, who many of you have met in the last 2 months, has been doing an excellent job as our interim CFO.

A little later on the call, I'll be happy to answer any questions you may have and will now turn it to Mike to go over the financials in more detail.

Michael Galvin

Thank you, Dominic. In Q3 2011, total revenue of $105.8 million increased 13% sequentially and 53% year-over-year. Product revenue of $89.4 million increased 13% sequentially and 58% year-over-year. Professional services and support revenue of $16.2 million increased 11% sequentially and 33% year-over-year.

In Q3, approximately 94% of our revenue came from indirect channels, while 6% was direct. As a reminder, our indirect channels represent sales through our strategic OEM partners, borrowers and distributors. Growth was strong both domestically and internationally. U.S. sales grew approximately 55% year-over-year, representing approximately 59% of total revenue. International sales grew 52% year-over-year, representing 41% of total revenue, an increase from 36% of total revenue in Q2 '11.

In line with our expected range of 70% to 71%, total non-GAAP gross margin in Q3 was 70.3%, an increase of 50 basis points from Q3 2010, and a decrease of 290 basis points from Q2 '11. The sequential change in gross margin is primarily due to higher international sales and our normal variability in product mix. In the near term, we anticipate our total non-GAAP gross margin to continue to be in the 70% to 71% range. Our long-term target range remains unchanged at 65% to 68%.

Q3 non-GAAP product gross margin was 68.8%, an increase of 220 basis points from Q3 '10 and a 310 basis point decrease from Q2 '11. Q3 non-GAAP services gross margin was 78.4% compared with 80.3% in the prior quarter and 84.8% in the same period a year ago and reflects ongoing investments we are making to build out a first-rate services organization.

Moving on to operating expense. Non-GAAP research and development expense was $15.4 million, a modest increase from the prior quarter and down as a percentage of revenue from 16.2% in Q2 to 14.5% in Q3. Non-GAAP sales and marketing expense increased to $33.2 million from $30.1 million in the prior quarter. Sales and marketing decreased as a percentage of revenue to 31.4% in Q3 compared with 32.1% in Q2. Non-GAAP G&A expense was $6.7 million, a modest increase from Q2 '11 and a decrease of 60 basis points as a percentage of revenue to 6.3% from Q2 '11. Headcount at the end of Q3 was 1,009, an increase of 85 from the prior quarter.

In total, Q3 non-GAAP operating expenses were $55.3 million or 52.2% of revenue, which represents a 300 basis point improvement from the prior quarter. Our non-GAAP tax rate was 1.5% in Q3 compared to 2.6% in Q2. We expect our non-GAAP tax rate in Q4 to be between 5% and 10%.

I would like to make an additional comment on our fiscal 2012 non-GAAP tax rate. As we have previously discussed, our new offshore tax structure is scheduled to take effect in Q1 '12. We anticipate this new offshore tax structure will result in a tax rate in the range of 22% to 28% in fiscal year '12. We expect this rate to be in effect consistently over the fiscal year beginning in Q1.

Non-GAAP net income for the quarter was approximately $18.8 million or $0.16 per diluted share. This compares to $16.3 million or $0.14 per diluted share in Q2 '11 and $8.5 million or $0.08 per share in Q3 '10. Due primarily to the appreciation of Aruba's stock price throughout the quarter, Q3 '11 weighted average shares outstanding were 119.4 million shares on a diluted basis.

On a GAAP basis, net income was $3.2 million or $0.03 per share compared with a Q2 '11 net loss of $2.8 million or $0.03 per share and a Q3 '10 net loss of $5.3 million or $0.06 per share. A reconciliation of GAAP and non-GAAP information is contained in our earnings press issued this afternoon.

Turning to the balance sheet, we finished April with cash and short-term investments of $210.8 million, an increase of $23 million over the prior quarter. Cash flow from operations was $9.3 million. We ended Q3 with $67.5 million of accounts receivable, up from the Q2 '11 balance of $54 million. Days sales outstanding were 57 days, up from 52 days last quarter and up from 41 days in Q3 '10, mainly due to linearity in the quarter and to the increase in our international percentage of revenue, which generally comes with longer payment cycles. Our target range remains 50 to 55 days, and we believe the quality of our receivables remains excellent.

Moving down the balance sheet, total deferred revenue of $62.2 million increased 25% year-over-year and 5% sequentially. Short-term revenue of $49.8 million increased 27% year-over-year and 5% sequentially. As a reminder, we remain a Book-and-Ship business. Inventory totaled $20.7 million at the end of Q3, an increase of $2.6 million from the end of Q2. Inventory turns were 5.8, an increase from 4.9 in the prior quarter.

Let me now turn to our fourth quarter guidance. We had a very solid third quarter, and we remain very confident about the future prospects of Aruba. Moving forward, we expect Q4 '11 revenue to increase 38% to 41% year-over-year in the range of $107 million to $109 million. We expect non-GAAP EPS to increase on a year-over-year basis by 60% to 70% to $0.16 to $0.17 per share using 123 million shares on a diluted basis.

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

Dominic Orr

Thanks, Mike, Keerti, Hitesh now would be very happy to answer any questions you might have. Operator, you can now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Ryan Hutchinson with Lazard Capital Markets.

Ryan Hutchinson - Lazard Capital Markets LLC

Just a couple of quick questions here. First on the gross margins, I mean clearly better than all of last year and within the range you targeted, but could you guys help us understand the dynamics there in terms of -- you'd highlighted in the prepared remarks, but just in quantifying the pieces there that drove the gross margins down 290 basis points?

Michael Galvin

Yes. Hi, Ryan. So like we said, it was in line with the range we've provided. The primary driver was the international sales, as we had previously discussed. And really what that comes down to is our international business does inherently come with lower gross margins. It varies by regions, but the primary driver there was that. And you can see it in the significant increase in the percentage of our international revenue this quarter that we took and the impact that -- that had on the numbers.

Ryan Hutchinson - Lazard Capital Markets LLC

Okay and I thought you said there was another component as well?

Michael Galvin

Yes, our standard product mix issues. That was very much, nothing out of the ordinary there, a secondary driver. The primary driver was definitely the international percentage of revenue.

Ryan Hutchinson - Lazard Capital Markets LLC

And then on the taxes, should we start to think about modeling that instead of the start of the year at 22% to 28%? Or is that for the full year? That's just a clarification and I have one final question.

Michael Galvin

Okay, yes, definitely start modeling it at the beginning of the year. The mechanics of setting up our international tax structure, the mechanics of that really go into effect immediately. And so Q1 through Q4, we'd want you in that 22% to 28% range.

Ryan Hutchinson - Lazard Capital Markets LLC

And then just a higher-level question. I mean clearly you guys have highlighted an uptick in the enterprise adoption and the impact that's had on your business. I was just wondering if maybe you could quantify the revenue contributions that it had during the quarter versus last or any other metrics that would help investors basically assess the success you are having in that enterprise vertical, perhaps new customer wins. Just things of that nature will be helpful.

Dominic Orr

Ryan, first of all, I'd like to report that traditionally, we have strong verticals such as the federal government, healthcare and education. We continue to see strength over that, and the observation in the last 2 quarters was that there was an uptick across enterprises stimulated by the iPad and its competitors and then on the smartphone. That trend pretty much continue and the mix of verticals and the increased number of verticals that are added into the mix is very consistent with Q2.

Operator

The next question is from the line of Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc.

One of the things that you mentioned was linearity in the quarter. Could you give us a little bit more granularity as to what you're referring to there?

Michael Galvin

Sure. So the linearity in the quarter obviously can cause a DSO increase. You can see from the revenue that we delivered, it was obviously a strong quarter across the board from a revenue standpoint, but we did see a higher percentage in month 3, which was April, and that higher percentage there did drive the DSO up some. The other contributor to it is our international sales, which, again, as I talked about before, with regards to gross margin, they do tend to have longer payment cycles. And so that significant jump in the international business also was a contributor. The primary contributor, linearity; the secondary, the international sales.

Kent Schofield - Goldman Sachs Group Inc.

Okay. Great. And on the gross margin side, can you talk a little bit about what sort of impact you're seeing from the higher software attach?

Dominic Orr

I think the product mix change is really more -- we're shipping, relatively speaking, a bit more access point. The network's getting bigger. The network, the software versus controller connect ratio, we did not see any significant deviation from the previous quarters.

Operator

The next question is from the line of Mark Sue of RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC

Mike, a question for you. I understand the international is more price-sensitive, but other companies don't seem to see the large fluctuations in margins despite the changes in regional mix. So is it more related to a particular country? Or is it carrier customer-related? Or is there some competitive response from Cisco which is resulting in your margins? And directionally, how should we see that over the next quarter, margins and also DSOs which are somewhat related to the international?

Dominic Orr

Mark, the one thing we can say is it's not competitively related. We always see competition, but we did not see any price-specific competition in Q3 that specific that we did not see in the previous quarter. In terms of geography, it is not tied to a single country. It is tied to a geography, and I think we know that our strength in the international sales actually across the board. So I would say, generally, what you see the trend is in North Asia, outside of Japan, you tend to have a bit more price competition. In the Middle East, you tend to have price competition. In Southern Europe, you tend to see more price competition. So if you want us to relate generally to the pricing pressure, to geography, I would probably say that Latin America is very price-competitive.

Mark Sue - RBC Capital Markets, LLC

So nothing out of the norm in terms of what you've seen in the past? You just saw higher concentration in these particular countries?

Dominic Orr

Yes. We had some large deals in those geographies that we want.

Michael Galvin

Yes. And that percentage mix, for us, is a significant jump-up in one quarter. Some of the bigger, more mature, that companies have already had a higher percentage of international revenue mix than we do at this stage. That'll be increasing over time, but that's a significant jump for us in one quarter.

Mark Sue - RBC Capital Markets, LLC

Okay. And Dom, it seems you're seeing acceleration in the number of new customers. What are you also seeing in terms of the deal sizes? And also are you starting to see a lot of the upgrades from the very early stages, for example, 3 or 4 years ago or is it more a continued expansion or both?

Dominic Orr

We've seen both upgrade and continuous expansion. Regarding deal size, I would say the average initial deployment size on the total average has probably slightly increased, but we for the larger deals -- the larger deals are actually getting larger is what we see.

Operator

The next question is from the line of Jeff Kvaal with Barclays Capital.

Jeffrey Kvaal - Barclays Capital

I was wondering if you could spend a little time talking about the trajectory of revenues a little bit. I think all of us are pleasantly surprised that there's upside that's issued to the quarter, bigger than what you have put up efficiently. So I'm wondering both on the one hand, what happened late in the quarter that drove that? It sounds like it was about April. And then secondarily, it seems as though your guidance really isn't up necessarily as strongly as what you've seen in traditional historic quarters. So what can we attribute that to?

Dominic Orr

Okay, so as to the April, the month of April, we do have some larger deals coming in towards the end of the quarter. That contributes to the back-end skewed linearity, and it has just statistically it happened that way. I cannot offer you any further insight as to if it's a trend. As to the Q4 guidance, it's still on the midpoint of the 40% year-over-year guidance, if you're looking at -- on a global macro situations around the world, we feel like that to set a more than a 40% year-over-year guidance, it was probably too aggressive. As regarding to the Q3 to Q4 traditional seasonality, as we mentioned that in the past, that seasonality was driven by 1 or 2 verticals. And as we are migrating to a broader-based business, our seasonality throughout the year, and including Q3 to Q4, is moderated quite significantly.

Jeffrey Kvaal - Barclays Capital

And then secondarily, I think you have in the past talked about hitting your operating margin target model at around this revenue level. You weren't there this particular quarter. You might be soon. But are there various factors that we should be thinking about that would change your target model? Azalea for example might be one of them.

Dominic Orr

I don't think our target model is changed, at least that is still what we're operating with. But quarter-to-quarter, do we act kind of more intuitively and responsibly to the market conditions? We definitely will, and I can tell you currently one of the largest competitors of ours is honestly quite distracted. And we feel like given the market growth and given that our large competitors being distracted on other fronts, it is our obligations to make sure that we continually invest and not miss out for future growth opportunity, and we will be probably using that as the guiding principle to make sure that as we keep on gross margin target, we judiciously decide how much will be applied for this cost versus to drop it to the bottom line.

Jeffrey Kvaal - Barclays Capital

And then finally, is Azalea a big variable for you on either the top -- the gross margin or operating margin line?

Dominic Orr

Azalea, is the question relating to Azalea?

Jeffrey Kvaal - Barclays Capital

Yes.

Dominic Orr

As you might be aware that actually, the Azalea integration is going on well and the whole AirMesh introduction is still due to integration to Azalea technology, so that integration is on track, and I'm very happy with that. And that product line is starting to make some meaningful contribution to top line. So in terms of all that funded, it is good. But it's our principle not to specifically break out front line details, and I hope I can just stop there.

Michael Galvin

And just a note on that, we obviously have incorporated all aspects of our Azalea business and all aspects of our entire business into our guidance, et cetera, what we're giving out to you guys. So that's fully factored in.

Operator

The next question is from the line of Stephen Patel with Gleacher & Company.

Stephen Patel - Gleacher & Company, Inc.

I want to follow up on your comment about greater price pressure in international markets relative to the U.S. How are competitive dynamics different in the U.S. that would give us comfort that margin levels in the U.S. won't eventually trend towards what you see internationally? Or conversely, is it possible that international margins trend up towards U.S. levels longer-term?

Michael Galvin

Yes, and just to be clear on the international piece there, we really didn't see anything unique in terms of international pricing pressure in the quarter. It was really about the mix of revenue. Now does our International business deliver a different set of pricing like most tech companies and a different gross margin profile? It does. It's a more complex place to sell. There's different street pricing dynamics, et cetera. So that all exists, which is why it has an impact. But in terms of explicit pricing pressures this quarter, there wasn't a difference there that we saw.

Stephen Patel - Gleacher & Company, Inc.

And then a follow-up, if I could. Can you talk a little bit about the ramp of your switching products? What kind of contribution have you factored in to the July quarter guidance? And what does the pipeline look like for the rest of this year?

Dominic Orr

So the product was introduced as part of the MOVE architecture offering, what we call the family of on-ramps in the middle and late March. We just started last week initial revenue shipment, and we have set expectation that our focus in the next 2 quarters is in design wins, and that like any new product line that we have introduced in the history of the company, we do not expect any meaningful contribution to top line until several quarters later. And that is on course.

Operator

The next question is from the line of Bill Choi with Janney Capital Markets.

William Choi - Janney Montgomery Scott LLC

Interesting comment. You've mentioned about seasonality. You obviously said you're broader now as opposed to being focused on the 1 or 2 verticals. I know you don't give too much information by vertical, but can you just talk about where we are in terms of the big verticals? And can you mention specifically if the Telecom Service Providers segment has really moved up as some of the opportunities that you had pointed to in China?

Dominic Orr

I think as a recollection, our traditional core vertical that we've tracked a year ago was government, healthcare, education and then high-tech enterprises. And then later on our new verticals that come in, financial, retail, transportation, energy and service providers are all growth verticals that we are very excited about. And so in that scheme, I think yes, we do see -- we are not in the service provider infrastructure business, but definitely there are intersection of service provider through the managed service offering, the resale offering and partially the 3G also offering in the retail and in public venue environment, which are overlapping with our core enterprise customers, the premises. So those are areas that we're seeing, particularly in the international scheme seemed rising.

William Choi - Janney Montgomery Scott LLC

Maybe I could ask you a little bit more direct way. So traditional 3 verticals, education, healthcare, high-tech it was anywhere combined up to like I think 40%, 50% of revenue in the past. Where is this now? And is telecom services close to being 10%?

Dominic Orr

First of all, if you recall, Bill, we never break out verticals either in aggregate or individually. What we have said before is that those core verticals range from 10% to 20%, and each one kind of peaked at its own seasonality. I can say that because now we have more than 10 industry we're participating in by nature, the contribution for each vertical, proportionally speaking, is less. Take EDU as an example, that we have, last quarter in the Q3, EDU as an industry has grown quarter-over-quarter, year-over-year, but it has less significant contribution to our overall business.

William Choi - Janney Montgomery Scott LLC

You made an interesting comment at the Analyst Day about it feels like a full market for the first time really, and the results today actually is a perfect example of that accelerating growth rate. Just wondering if you could comment about what you're seeing in terms of pipeline when you say it's a full market or anyway or the other, otherwise quantify what you mean by now it feels like a full market.

Dominic Orr

A bull market. I think the term that I probably used was that we are definitely seeing pain points created in enterprise networks because of the widespread bring-your-own-device phenomenon and with all this tablet and mobile phones, and we continue to see that. And if you look at our pipeline, definitely, we're seeing a lot of leads that are driven by customers' pain point and they want to solve -- I used the term that we are now delivering aspirin rather than vitamins for people's projects and that phenomenon has continued, definitely.

William Choi - Janney Montgomery Scott LLC

One last question. Mike, do you have the 10% customers?

Michael Galvin

In the quarter, we do not have any 10% end customers.

William Choi - Janney Montgomery Scott LLC

I meant like OEMs, distributors, Avnet, ScanSource, Alcatel-Lucent?

Michael Galvin

Okay, yes. We did have 3 greater-than-10% partners.

William Choi - Janney Montgomery Scott LLC

Are you willing to give those percentages out?

Michael Galvin

They were all in the mid-teens. And yes, they were in the mid-teens.

William Choi - Janney Montgomery Scott LLC

And Dell and Shanghai Bell still not in the 10%?

Dominic Orr

Well, normally, we don't map things.

Michael Galvin

Yes. And Alcatel Shanghai Bell is part of our corporate OEM arrangement with Alcatel-Lucent, and so that's all part of that number.

Operator

The next question is from the line of John Marchetti with Cowen and Company.

John Marchetti - Morgan Stanley

You talked a little bit about the increase that you had this quarter in international sales. Curious as to where you see that split sort of falling out over the next 3 or 4 quarters as you continue to focus some of your resources there. And if that comes up say, were you at a 50-50 kind of split, is that kind of how you get back to that sort of corporate target gross margin in the high 60s range?

Michael Galvin

Yes. We don't give explicit future guidance on the way the theaters will split, but we definitely will say that over time, our plan and our objective is that the international piece grows as a percentage to be closer along the lines to what you'd see with bigger tech companies. And that is one of the factors that we have stated in the past about why our target gross margin remains in the 65% to 68% range. That's one of the factors that would gradually pull that back into the range along with OEM sales, two-tier distributors.

John Marchetti - Morgan Stanley

Okay. And then Dominic, you mentioned obviously taking advantage of a larger competitor who's a little bit distracted right now. Have you seen them, in any way, I guess get a little bit more desperate on the pricing front? I know we haven't seen anything really change from them on the product side, but have you seen them sort of get desperate yet, if you will, on the pricing front?

Dominic Orr

Well I think from day one, we actually have seen pretty extreme form of pricing -- probably the most extreme is you buy the wired infrastructure, you get the wireless free. How much more aggressive can you get on pricing? But specifically, do we see any more desperate discount on the average? I cannot say we've seen that. But do we see more bundling approach? Yes, we've seen it.

John Marchetti - Morgan Stanley

And then lastly, I may have missed it. Did you give out the split of 802.11n APs in the quarter?

Dominic Orr

So actually, we did not because internally in our business, we stopped tracking it because now it has far exceeded 90% level. We only sell abg on an exceptional basis now for backward customer compatibility. So it's over 90% in terms of units shipped. But again, we internally have not tracked this. We're assuming that is the ordinary net of business now.

Operator

The next question is from the line of Joanna Makris with Mizuho Securities.

Joanna Makris - Mizuho Securities USA Inc.

I'm wondering if you can talk about tablet adoption by vertical and particularly in the financial vertical, what are you seeing in terms of security concerns and the impact on broader-based tablet adoption and the enterprise. And then I'm wondering if you have customers actively using the portal base self-provisioning described in MOVE architecture, if that's being implemented live by customers right now?

Dominic Orr

So the financial vertical is taking up very nicely for us, but it is actually very typical of a lot of general enterprises. It is really driven by tablet. And particularly, we're seeing a lot of iPad applications that are driving the needs of deployment of wireless infrastructure in this vertical, in addition to the traditional CapEx that's in intrusion detection. That's really the key movement.

Hitesh Sheth

If I may, Dom. So this Hitesh, and think just to add to what Dom just said, the security aspect of what you just ask with respect to iPad adoption is also a big reason why our MDAC Solution is resonating in the marketplace. And so we have pretty good early traction with that. And as we also announced in the release, we would have enough demand for that such that we will also announced it for Cisco's product line infrastructure. This customer is broad-based and we're deploying, [indiscernible] are looking for solutions to ease deployment of iPads.

Dominic Orr

And to your question of whether they're actually live deployments, yes they're live deployments.

Operator

The next question is from the line of Jack Monti with UBS.

Jack Monti - UBS Investment Bank

Just curious if you could comment and expand upon -- the 40% guidance is very strong, but you did mention there were some impact macro headwinds out there and other larger tech peers have seen those headwinds. Can you maybe comment on some of the dialogue that you're having in the public sector with some of your customers?

Dominic Orr

Yes, the public sector, if you're referring to domestic public sector, I want to just restate that most of our public sector work is done with the federal government. And a reasonable portion of that is with the defense sector, and also within that, most of our projects are embedded in the multi-year program. So we tend to have less sensitivity to the upswing and downswing of quarterly budget. So we don't have as strong as the [indiscernible]. But on the flipside, is that we don't have a lot of ups and downs as far as those programs, particularly the defense program are funded. And they normally are funded across multiple years. As regarding the state and local, our most active state and local-funded project are probably in the K-12 space, and we are seeing pretty brisk activity in the deployment of wireless LAN in the K-12 space as well.

Jack Monti - UBS Investment Bank

And I was curious if you could maybe expand on what you're seeing on the competitive front. Cisco recently announced a new mobile controller. Have you seen any changes there?

Dominic Orr

I would say by and large that the competitive landscape has not changed, really for general large enterprise projects. The Gartner Magic Quadrant has pretty defined it very well that it is which 2 vendors get into the shortlist, so it is then 2 vendor. If it is a traditional retail logistic warehouse kind of deal there will be a third one, which is the incumbent which is Motorola. So that remains the competitive scene. We have not seen HP anything more than what we've seen in the last year, which is the bid in K-12 and a bid in the hospitality space. And Trapeze, we have not seen any increase of the traction with Trapeze as part of the Juniper local.

Michael Galvin

And the other thing we should add here is that we should not mix up stumbling on the part of competitors with evidence. Those are 2 very different things.

Jack Monti - UBS Investment Bank

I guess just to dig a little more deeply, so have you seen any difference in the negotiations with customers as a result of this new Cisco mobile Controller?

Dominic Orr

Not that I'm aware of at all..

Jack Monti - UBS Investment Bank

And I guess -- it's helpful. And one more question. I guess I was curious if you could help us understand maybe how large the OEM revenues were this quarter, and how Dell is tracking.

Dominic Orr

I think as far as OEM revenue is concerned, we normally don't break it out, but it would be embedded in those large -- the over 10% partners. For the Dell, our expectation is going to be a multi-quarter ramp. And so far, the ramp in terms of pipeline and current activities are very satisfactory. I'm actually quite pleased with the progress.

Operator

The next question is from the line of Sanjiv Wadhwani with Stifel, Nicolaus.

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

A couple of questions in terms of the guidance, I'm guessing you're expecting sort of normal seasonality for the education vertical, which tends to sort of spike a little bit in the July quarter. Are you expecting that to come in sort of below normal seasonality?

Dominic Orr

No. I think we expect still a strong quarter -- it's just a component is less significant. It moves the needle less for me now than I have spent the business over 10 verticals.

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

Got it. So similar to sort of one of your competitors, you're sort of not seeing that level of weakness that they have exhibited at least in the last 3 months or so?

Dominic Orr

Or the EDU market in general?

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

Yes.

Dominic Orr

Okay. So let me the reiterate that the point that our EDU business in Q3 was stronger than our Q2 and also stronger than Q3 last year. So from both quarter-to-quarter and year-to-year measure, EDU is growing market for us. And also one advantage of living in the Silicon Valley is that you can compete with people in your day job, and you can still go to breakfast and dinner with them and have social activity in the evening. And I can tell you that I have talked to my counterparts in many competitive firms, and I think everybody agree that EDU is still a very strong market. In fact, K-12 is a market that all the private wireless LAN company are all deriving a lot of their revenue from. So this is actually still a very booming market. So the fact that I mentioned that EDU is a little bit less significant contributor to our revenue is just a reflection of the growth of the other verticals. EDU is still a very important market for us, a growing market, the market we are winning.

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

Got it. That's helpful. And not to sort of beat the dead horse on gross margins, I'm just trying to parse out the international situation. I'm just curious whether the sort of the gross margin impact because of the spike in international revenues. I think they were up like 28% sequentially. Is that a component of just being stronger in international markets? Or are your international customers taking in more abg versus end products, which tend to have sort of stronger growth margins?

Dominic Orr

Okay, Sanjay, let us revisit a comment I made. We are already shipping well over 90%.

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

I'm just trying to get the international versus domestic mix on that, Dom. I don't know whether it's...

Dominic Orr

First of all, international customers just because they're willing to pay a little less is absolutely not willing to take lesser technologies. So they're actually very sensitive to getting the latest technology. Let us not forget the 70.3% gross margin, if you take the last 2 quarter away, it's actually an all-time high, almost. It was better than any of the quarters for the last fiscal year, for example.

Michael Galvin

Anything better than FY '10.

Dominic Orr

So we had a pretty strong mix, product mix for the last 2 quarters and some strong geography that has good margin came in the last 2 quarters. And we saw that there will be some normalcy returning this quarter in a way that both OEM and particularly the international markets. So we kind of helped paint to explain in the last call to make sure that we have explicit range. So I think you have to give us credit that we call that, we executed...

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

No, absolutely. I was just trying to get a little more granular. But that's helpful.

Dominic Orr

It's not giving me up at night worrying about this thing is heading in the wrong direction. That is not my worry point. There are a whole bunch of things that obviously I need to worry about to run the quarter, but that's not one of them.

Operator

The next question is from the line of Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C.

First question, just on the International business. Guys, can you talk a little bit about the breakdown between EMEA and Asia Pacific and Latin America?

Michael Galvin

Yes. On a go-forward basis, we don't break that out. And for this quarter, we just break it into international and Americas. We definitely can say that both theaters in EMEA and Asia Pacific were really strong across all the regions. It was really a pretty consistent performance. I believe you said Latin America also. Latin America is still a young theater and region for us that we're really still in the process of developing it. We like the progress there, but it's not on the scale of where it materially moves the needle right now.

Jason Ader - William Blair & Company L.L.C.

It would be really helpful if next fiscal year, you guys provided a breakout that most companies of your size do. So there might be something.

Michael Galvin

A breakout in terms of?

Jason Ader - William Blair & Company L.L.C.

EMEA, Asia Pacific as well as the Americas. Rather than just doing U.S. versus international. A little bit more detail would be helpful, but that's your call. I'd just throw it out there.

Michael Galvin

Yes. Maybe I misspoke a little bit. We do in our 10-Qs, we do disclose for the prior quarter, the breakdown of those theaters.

Jason Ader - William Blair & Company L.L.C.

Okay, you just don't do it on the call. And specifically on China, I know Azalea was a China-based company. Is there any impact from I guess a ramp in Chinese business on the strong momentum that you have internationally?

Dominic Orr

Yes. Definitely, the Azalea was very strong in the mining and the energy sector and in some of the public safety-related type of network, and that's definitely -- their pipeline definitely has accelerated our sales momentum in China. We're very pleased about that.

Jason Ader - William Blair & Company L.L.C.

And is it safe to say that China is one of the regions where there's more price sensitivity?

Dominic Orr

I would say China is one of those countries, but I would say probably if you look at it, there's probably like a dozen countries internationally that the price is sensitive. But China, I would list China into one.

Jason Ader - William Blair & Company L.L.C.

And then on the U.S. business, Americas business, it was flat sequentially, if I had the numbers right there. And I guess could you comment at all on the dynamics in your U.S. business? I think I guess April is probably a seasonally slower quarter in the enterprise market. But any comment there on the U.S. business?

Michael Galvin

Yes, sure. So it was a little better than flat. It was up slightly. And really, the way we look at it is that in any given quarter, our theaters may be kind of like our verticals can ebb and flow a bit in terms of the strength of the growth in any given quarter. We can say that we're happy with the bookings and order performance of the Americas. We're happy with the outlook for Q4. We've incorporated that into our guidance. And so overall, we look at it as you're just going to have certain theaters based on timing and revenue recognition and other things that are going to have stronger quarters than others.

Jason Ader - William Blair & Company L.L.C.

And just do you have the exact numbers for the U.S. for January and April? Because I guess I have it flat. But I have the percentages. I don't know if it's a rounding thing? Do you have those numbers handy?

Michael Galvin

Yes. Let me, maybe I can come back in a second. I do have them. I just got to get them.

Jason Ader - William Blair & Company L.L.C.

Okay, and one last thing. Dom, on the education market, you sound pretty pleased with what's happening there. Have you seen any impact from state-funded higher education? I know there's a lot of pressure on state budgets. There's a lot of new governors. Have you seen that higher education market, obviously, the public side impacted at all?

Dominic Orr

Yes, definitely. We have seen state-funded projects, both high education and K-12 projects has a longer signature cycle, but that is not something that happened in the last 90 days. That actually happened in the last -- it started like 3 quarters ago. So we have adjusted our forecast and our close rate. And so, and it is built into our business methodology, I would say. So you just have to make it up to make sure that you plan for the longest sales cycle, but there are still -- projects still happening and it is competitive, like I mentioned there's a lot of private companies operating in that space. But the project that we are involved in tend to be larger campuses and larger school districts and our win rate's still very, very high. And we have fully adjusted to the longer sales cycle in some of those state-funded project in our forecasting methodology. But I repeat this is something that was very clear about 9, 10 months ago and it has been at least from our perspective, has not gotten worse in the last 90 days.

Michael Galvin

And hey, Jason, just to follow up on that and for everybody on the call, so the U.S. growth quarter-on-quarter was 3%. The European growth was 18%, and the Asia growth was 42%.

Jason Ader - William Blair & Company L.L.C.

Very helpful.

Operator

Ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Dominic Orr for any closing remarks.

Dominic Orr

Thank you. So again, we thank you for being on the call today, and I'd like to take a moment to thank our valued employees, customers and partners for a very strong third quarter for 2011. We're pleased with our performance in the first 9 months of our fiscal 2011 and very excited about the opportunity for the futures. Thank you for listening, and we look forward to updating you on our progress in the coming months. Have a good evening and afternoon.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.

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