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

Aruba Networks (NASDAQ:ARUN)

Q4 2011 Earnings Call

August 25, 2011 5:00 pm ET

Executives

Maria Riley - Director

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

Dominic Orr - Chairman, Chief Executive Officer and President

Analysts

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

Mark Sue - RBC Capital Markets, LLC

Ryan Hutchinson - Lazard Capital Markets LLC

William Choi - Janney Montgomery Scott LLC

Rohit Chopra - Wedbush Securities Inc.

Rajesh Ghai - ThinkEquity LLC

Jack Monti - UBS Investment Bank

Jonathan Ruykhaver - Morgan Keegan & Company, Inc.

Kent Schofield - Goldman Sachs Group Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Aruba Networks Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 25, 2011. And I would now like to turn the conference over to Maria Riley, Investor Relations. Please go ahead.

Maria Riley

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

With me on today's call are Dominic Orr, Aruba's President and Chief Executive Officer; Mike Galvin, Aruba's 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 of its fiscal fourth quarter and full year ended July 31, 2011. 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 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 our 4 core growth drivers; customer adoption of our MOVE architecture; and the company's future economic performance, pipeline, financial condition, tax rate and results of operation. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause the 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 quarterly report on Form 10-Q filed with the SEC on June 7, 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 charges. We have provided reconciliations of these non-GAAP financial 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

Good afternoon, and thank you for taking the time to attend our fiscal fourth quarter and full year 2011 conference call. The fourth quarter was a strong finish to a very robust year for Aruba Networks. I'm very proud of the team's hard work this year to achieve annual revenue of $396.5 million and 49% growth over fiscal year 2010. According to the Dell'Oro Group, the enterprise wireless LAN market has grown more than 70% over the last 8 reported calendar quarters. During this period, Aruba grew much faster than its competitors, gaining 5 percentage points of market share to 15.9%, including sales by our partners, while our main competitor, Cisco, lost slightly more than 4 points according to Dell'Oro's Group report. We achieved this while also in fiscal year 2011, delivering over 100% growth in both non-GAAP operating profit and net income and generating close to $58 million in cash from operations.

In the fourth quarter, we achieved a record performance across a number of major metrics. The revenue in Q4 grew to $113.8 million, an 8% sequential increase and 47% year-over-year increase. We added over 1,500 new customers, the highest quarterly increase in our company history. We generated non-GAAP net income of a record $20.2 million or $0.17 per diluted share, and we generated over $23 million in cash. Revenue in the United States grew by 23% sequentially, and we had strong year-over-year growth across all geographies.

The fourth quarter is typically a strong bookings quarter as well, and this quarter was no exception with broad-based geographic contribution. While we did not have major concentration in any one vertical, the general enterprise and education verticals were particularly strong in the fourth quarter. Our results offer clear evidence that our customers continue to migrate from a wide-centric to a mobility-centric network architecture. We continue to win new customers at a record rate last quarter, bringing our total customer count to over 15,500. A few key new customers included a large global telecommunications company, one of the world's largest family-oriented media conglomerates; a new ultramodern all-digital academic medical center in the Middle East; a full-service bank and wealth management firm based in the U.S.; a leading US-based financial services and insurance company; and major enterprises, hospitals, educational institutions around the world.

Across-the-board, we saw a number of competitor displacements as well as both Aruba installed base expansion and greenfield opportunities, as customers look to scale and secure their mobility networks. The core drivers of our business are very strong. I would like to cover 4 of these drivers, in particular, in more detail.

First is the bring-your-own-device or BYOD phenomenon. IT departments are at a crossroad. We believe their wired centric access networks are ill designed for handling all the wireless devices the employees are bringing to work. Aruba's unique user-centric architecture and industry-leading innovation, such as our Mobile Device Access Control Solution, ensure that our customers are in front of this mobility weight. Our Mobile Virtual Enterprise or MOVE architecture unifies wireless, remote and wired networks into one access solution that fits a variety of use.

The second driver of growth is to continue increase of multimedia application and video traffic. More and more enterprises are moving from wired IP phone or even TDM-based telephony to unified communications suite. This presents performance challenges for legacy Wi-Fi networks. Aruba has worked closely with leading unified communications vendors, such as Microsoft, to ensure that the suites run just as well over Wi-Fi as they do over wired networks. And this has translated to compelling market differentiation. Tests conducted earlier this year by Microsoft and Aruba showed that Aruba Wi-Fi provides up to 75% better performance for Lync Server 2010 when compared to equivalent Cisco Wi-Fi.

The third driver for growth is to upgrade from 11abg to 11n. In fact, the majority of our largest customers have not yet fully upgraded their wireless networks to 11n. Moreover, we believe that upgrades to 11n are just the tip of the iceberg, as the enterprise market at large migrates from a primarily wired to primarily wireless networks.

The fourth driver of our growth is the fact that the march towards virtualization and cloud services presents new security challenges for IT managers. Aruba's MOVE architecture delivers a strong value proposition for a world where applications are increasingly delivered via private and public cloud models to a virtualized endpoint.

An ever-increasing number of customers and significant industry partners are recognizing that the wireless network must be ready for the new world of virtual desktop environment. Reliability, quality of services and security based on application, device and user are critical in this world, and Aruba's technology differentiation allows us to enjoy a strong leadership position to address this very critical, timely, IT inflection point.

In the fourth quarter, we further expanded our security leadership with the launch of Suite B cryptography. When Suite B is combined with Aruba's mobility controller, government and other high-security networks are able to accommodate a use of all major tablets and smartphones.

In summary, we are proud of our Q4 and fiscal year 2011 results. We believe our markets are robust; that the access network paradigm is shifting from a wired- to a mobility-centric architecture; and with our investments, our innovation, our go-to-market traction, we believe we are well-positioned to capitalize on this dynamic and gain further market share.

In our fiscal 2011, our core wireless LAN product drove our 49% year-over-year revenue growth, and we expect our MOVE architecture to help drive additional future growth by expanding our total accessible market. MOVE continues to gain endorsement of an increasing number of pilots within our install base as well as with new accounts. Our approach to what mobility enables our customers to right size their networks and reduce network operating costs by up to 70% per user of a legacy wired centric network. This is a huge differentiator that allows budgets to be freed up to spend on our solution even as enterprise IT continues to scrutinize expenditures.

I will now turn the call over to Mike to go over the fourth quarter and fiscal year financials in more detail.

Michael Galvin

Thanks, Dominic. In Q4 2011, total revenue of $113.8 million increased 8% sequentially and 47% year-over-year. Product revenue of $97.1 million increased 9% sequentially and 48% year-over-year. Professional services and support revenue of $16.5 million increased 2% sequentially and 41% year-over-year. In Q4, approximately 94% of our revenue came from indirect channels while 6% was direct. Revenue growth was strong, both domestically and internationally, with particular strength in the U.S., which grew 23% sequentially over Q3 '11. U.S. sales grew approximately 42% year-over-year, representing approximately 67% of total revenue for Q4. International sales grew 59% year-over-year, representing approximately 33% of total revenue for Q4.

Total non-GAAP gross margin in Q4 was 70.9%, an increase of 160 basis points from Q4 2010 and at the upper end of our guidance. Gross margin improved 60 basis points from Q3, as we saw a higher mix of U.S. business, partially offset by a Q4 higher mix of access points and continued lower margin sales in certain parts of the Asia-Pacific region. In Q1 '12, we anticipate our total non-GAAP gross margin to remain at the higher end of our near-term target range of 70% to 71%. Q4 non-GAAP product gross margin was 69.5%, an increase of 260 basis points from Q4 2010 and a 70-basis-point increase from Q3 '11. Q4 non-GAAP services gross margin was 78.8% compared with 78.4% in the prior quarter and 82.8% in the same period a year ago.

Moving on to operating expenses. Our non-GAAP research and development expense was $16.7 million, up approximately $1.3 million from the prior quarter and up modestly on a percentage of revenue basis. R&D expenses increased due to an investment in headcount and engineering programs spend related to the ongoing evolution of our product roadmap. Non-GAAP sales and marketing expense increased to $35.8 million from $33.2 million in the prior quarter. Sales and marketing expenses increased primarily due to a 21% increase in sales commissions related to year end accelerators and higher overall sales. Sales and marketing increased modestly as a percentage of revenue at 31.5% compared with 31.4% in Q3.

Non-GAAP G&A expense of $7.8 million increased approximately $1.1 million and increased 50 basis points as a percentage of revenue to 6.8% from Q3 '11. A significant portion of the increase in G&A was due to onetime expenses related to tax and professional service fees. We expect G&A to decrease as a percentage of sales in Q1 '12 and as a general trend moving forward.

Total headcount at the end of Q4 was 1,057, an increase of 48 from the prior quarter. In total, Q4 non-GAAP operating expenses were $60.3 million or 53% of revenue, an increase of 80 basis points from the third quarter. While we continue to make investments in the business, we expect to grow revenue faster than expenses as a general trend and improve operating margin in future quarters.

Our non-GAAP tax rate was 1.5% in Q4, the same rate as in Q3. As we have previously discussed, our internal -- international operating entities have been established to optimize our long-term tax structure for the company. As such, we expect our non-GAAP tax rate in Q1 to be between 22% and 28% and expect this range to be in effect consistently over the fiscal year.

Non-GAAP net income for the quarter was approximately $20.2 million or $0.17 per diluted share. This compares to $18.8 million or $0.16 per diluted share in Q3 '11, an $11.1 million or $0.10 per share in Q4 '10. The weighted average shares outstanding were 119.6 million shares on a diluted basis.

On a GAAP basis, net income was $68.2 million or $0.57 per share compared with a Q3 '11 net income of $3.2 million or $0.03 per share and a Q4 '10 net income of $423,000 or breakeven on a per share basis. Q4 '11 GAAP net income includes a onetime tax benefit of $72.8 million or $0.61 per share related to the release of the company's valuation allowances on its deferred tax assets. A full reconciliation of GAAP and non-GAAP information is contained in our financial results press release issued this afternoon.

For the full fiscal year 2011, we achieved revenue of $396.5 million, up 49% from $266.5 million in 2010. Non-GAAP full year gross margin improved 210 basis points over 2010 to reach 71.6%. Full year non-GAAP operating margin grew to 17.8% from 11.5% in 2010, and GAAP -- and non-GAAP net income of $69.3 million was up 131% over the prior year's net income of $30 million.

Turning to the balance sheet. We finished Q4 with cash and short-term investments of $234 million, an increase of $23.2 million over the prior quarter. Cash flow from operations was also $23.2 million. We ended Q4 with $68.6 million of accounts receivable, up from the Q3 '11 balance of $67.5 million. Days sales outstanding were within our target range at 54 days, down from 57 days last quarter and up from 48 days in Q4 '10. As a reminder, our targeted range for DSO remains 50 to 55 days.

Moving down the balance sheet. Total deferred revenue of $68.5 million increased 26% year-over-year and 10% sequentially. Short-term deferred revenue of $54.5 million increased 25% year-over-year and 9% sequentially. Inventory totaled $29.9 million at the end of Q4, an increase of $9.2 million from the end of Q3. Inventory turns were 4.7, a decrease from 5.8 in the prior quarter. Inventory levels increased in response to strong order flow throughout Q4 to satisfy both quarter end demand and demand into FY '12.

Let me now turn to our first quarter of fiscal 2012 guidance. We had an excellent fourth quarter with record bookings globally and especially strong year-over-year bookings in Europe. We enter fiscal 2012 with a strong pipeline, and we believe wireless LAN and enterprise mobility remains a necessity despite economic factors and that we have the right technology to solve the challenges taxing today's access networks. Moving forward, we expect Q1 '12 revenue to increase 38% to 42% year-over-year in the range of $115 million to $118 million. Even with the impact of a higher non-GAAP tax rate, we expect non-GAAP EPS to increase on a year-over-year basis by 17% to 25% to $0.14 to $0.15 per share using 122 million shares on a diluted basis.

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

Dominic Orr

Thanks, Mike. Mike, Keerti, and Hitesh and I would now be happy to answer any questions that you may have. Operator, you can now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kent Schofield, Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc.

Can you give us a little bit more granularity on the international sales side, especially what you're seeing from EMEA?

Michael Galvin

Yes, I can. Our -- you can see that, sequentially, EMEA was down from Q3 on a revenue basis, but overall, our Europe demand in bookings, both in Q4 and the full fiscal year, were very, very strong. And we are very pleased with the way the year ended for Europe.

Kent Schofield - Goldman Sachs Group Inc.

And you mentioned on the access point side a little bit of an increase in terms of the product mix. How should we think about that going forward? Were you looking at it as more of a onetime in this last quarter? Or is that something that you expect going forward?

Michael Galvin

Yes, within any given quarter, we do have those fluctuations. A particular portion of our -- of the platform can move a few percentage points in a quarter. And so we view it as kind of the ebb and flow of the business on a quarterly basis, but the access points were definitely up this quarter.

Dominic Orr

Kent, this is Dom. As far as the -- any trend relating to access point to controller ratios, I think that if there's one, the general EDU market entered [ph] a bit of a richer connect ratio of access point. And as we mentioned in the script, in Q4, we have a pretty robust EDU business, both in K-12 and higher education. But having said that, as a percentage of overall bookings and revenues, since now, we have a dozen or so verticals that we're active in now. The percentage of company operations tied to combine EDU's sector actually in Q4 has gone down from year-to-year.

Operator

And our next question comes from the line of Ryan Hutchinson with Lazard Capital Markets.

.

Ryan Hutchinson - Lazard Capital Markets LLC

I think we were all waiting for that guidance, so that's certainly good to see. And I guess that's my question is, maybe just talking about the visibility you have going in to Q1 by vertical would be ideal. And then as it relates to that, when I look at the inventory and in your prepared remarks, you touched on it, up 50% quarter-over-quarter. If you could talk through that coupled with the mechanics of deferred to help us kind of understand how comfortable we should think about the guidance you provided today.

Dominic Orr

Sure. Let me address that overall guidance and I'll let Mike handle the inventory part. So as regarding to the guidance, obviously, we all read the same newspaper and magazine, so we are not just gesturing that we are not immune to the macro environment. What the guidance was really based on is 3 parameters: One is the backlog we carry from Q4 into Q1; second is the booking momentum we have seen quarter-to-date, the 3-plus week into our current quarter; and third is through very, very careful scrutiny of the quality and the quantity of our pipeline for the remaining part of the quarter, moderated by all the business scenario factored in as the best we can judge on the macro environment and based on those 3 factors that we derived this guidance, which I feel very comfortable. As regarding, though, to verticals, I saw some writings about potentially some of the Q4 revenue is tied to EDU, as I mentioned earlier on in my answer to Kent. Actually, that's a proportion to our general business, EDU, even though it is still very robust portion of our business, contribution percentage-wise has been significantly less than year-over-year for the last 3 years. So it is still a general broad-based perspective that we look into the current quarter, and we continue to be encouraged by the activity, we think, in the general enterprise.

Michael Galvin

Ryan, with regards to the inventory question, so the increase at the end of July was absolutely driven by very strong demand we saw throughout Q4 and what we're seeing into the early part of FY '12. And so to supply customer bad OEM stocking needs, that is truly what drove that number. And we feel very good about the demand on that inventory going forward.

Ryan Hutchinson - Lazard Capital Markets LLC

Okay, and then...

Michael Galvin

Did you have -- you had a question on deferred revenue, sorry.

Ryan Hutchinson - Lazard Capital Markets LLC

Exactly, yes, yes.

Michael Galvin

And sorry, just could you -- how did it relate? Could you reask it?

Ryan Hutchinson - Lazard Capital Markets LLC

Sure. Just the components of the deferred, historically, you've given a breakout between product and service. I understand the majority of it is service, but there has been a product component. And I wanted to just understand if that has moved up or down sequentially just to help us set the framework here.

Michael Galvin

Yes. It's within our historical ranges, the mix between the service and product. It still is prominently service, but the mix is in the historical range.

Ryan Hutchinson - Lazard Capital Markets LLC

Okay. And then I have one other and I'll jump back in the queue. Maybe just for Dom. I mean, your R&D is certainly up significantly year-over-year and you touched on it in the prepared remarks talking about the roadmap. Maybe if you could provide any metrics that would offer evidence that you're gaining traction with the S3500 Mobility Access Switch and how we should think about investments in new products over the coming year.

Dominic Orr

For sure. I think as I mentioned in the scripted portion of the speech, the -- if you look at our $396 million of revenue for our last fiscal year, it is really wireless LAN predominantly with some VBN contribution. Now going forward, with the MOVE architecture, we are focusing on for the remaining part of this calendar year in winning design wins, where customers are not only selecting us for wireless LAN supplemented by some remote access but has -- but will select us as their next-generation access layer partner in which the remote access, the wireless access and the wired access become a unified architecture. And we are very encouraged by the number of pilot to be starting, as you can imagine, in the enterprise for consideration of this nature. It is definitely a multi-quarter, if not a multiyear initiative. Once they selected a new architecture, it's going to take a new facility, new projects to kick in before they start spending in the newest architecture. So I think for the next -- of the first -- our fiscal first half, our metrics internally is design wins for the new architecture and expecting nonmaterial impact to the top line in the second half of our fiscal year.

Operator

And our next question comes from the line of Jack Monti from UBS.

Jack Monti - UBS Investment Bank

I guess, first, just to follow up, the strength in Europe is a different trend that many other networking companies have experienced. Is there certain countries in Europe that are driving that strength?

Dominic Orr

Actually, the strength in Europe is broad-based. We divide our Europe, Middle Eastern and Africa operation into 6 regions, and the growth come very, very evenly within a range, from all 6 region. I would highlight the areas that we're coming in from early investment is the Central Europe, which is primarily Germany and sub-Sahara Africa, which we involve of these regions that we are investments for one reason or another are behind. And so the growth is very nice but is from a relatively smaller base. And then for the other 4 regions, they're all growing very well on a substantial basis.

Jack Monti - UBS Investment Bank

And I guess just on the question now, I'm just trying to think about the sales cycle that you're seeing in terms of the guidance. I realize you put that extra scrutiny on the quantity and quality of the pipeline. Was there any adjustment on the sales cycle and close cycle with sales?

Dominic Orr

Not to any significant degree that I could mention. I think related to this, I would like to -- Jack, I want to relate it back to one of the drivers, right? The drivers of BYOD, drivers of unified communication, multimedia traffic, driver is 11n upgrade, our driver is this distributor security support for cloud services. And those drivers are still there and equally strong despite the overall economic environment. And in fact, because of the MOVE architecture, it's really a right-sized, optimized budget architecture. It does not derive any dependency on incremental budget. In fact, the tighter the budget, the more accentuated the differentiation to the extent that there is a budget.

Jack Monti - UBS Investment Bank

Okay. I appreciate the extra color. I guess maybe one more, if I could follow-up. There's been chatter about the weakening of the financials, and I was just curious, I know that it's a smaller vertical but growing quickly for you. If you could make any general comment on what you're seeing in that vertical, that'd be helpful.

Dominic Orr

So if you're referring to whether there's any of the pipelines in the banks are slowing down, we do not see a noticeable difference.

Operator

And our next question comes from the line of Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC

Dom, maybe some comments on where you believe wireless ranks within enterprise as in terms of overall IT spending priority. You're saying it's a necessity. Maybe some proof points from customers that it's not discretionary and, perhaps, how the rank order of wireless has changed from several years ago of relative ranking.

Dominic Orr

Sure. So as -- I think the market at large has noticed that laptop and PC makers are under some non-trivial pressure from -- in the enterprise spending perspective on the -- basically the onslaught of the usage of mobile and mobile devices in terms of tablets and smartphones. To the extent that this is an established phenomenon, the connectivity of these new devices has only one choice; it is wireless. And so the major difference between in the current difficult economic environment compared to the one that was 3 years ago, for example, is that, that is the key driver is to the extent that the enterprise actually find that it is more cost effective to let employees and visitors bring in their own mobile devices. They have to create an infrastructure to support it. And at the same time, they also noticed that the old devices that have the Ethernet connections, those devices are being used less. And, therefore, the refresh of those connectivity doesn't need to be as up tuned as before and it has to be right-sized. So basically, the ratio of the budget being spent on providing some connectivity to wireless-only devices to wired and wireless connectivity to the devices that can support both, that rationalization is giving the relief to budgets that support the procurement for our whole market. And if you will be looking at the faces of all our -- my competitors that's on this call, they probably will be knocking their head off at this time. It's just that Aruba has been more effective in grabbing market shares than all those ladies and gentlemen out there.

Mark Sue - RBC Capital Markets, LLC

Okay, got it, got it. That's helpful. And then maybe separately, Dom, what happens to the Alcatel-Lucent relationship as that business is sold? Will there be any changes for you? And if so, how do you risk manage that? And then one for you, Mike. How should we think about maybe the -- is there a new operating margin target now that you're CFO?

Dominic Orr

So 3 points. So one is Alcatel-Lucent business, both in the area of the enterprise and also in the areas of service provider in China through ASP, on both fronts are strong and normal. And second is, I cannot comment on other companies' strategic initiative. And thirdly, is, the guidance we have given you for Q1 have baked in all the business scenarios and moderated by what our assessment of the global macro factors. And so the -- what you're referring to here is the bake in into our guidance.

Mark Sue - RBC Capital Markets, LLC

Got it. Mike, operating margins?

Michael Galvin

Yes, Mark. So first off, the model has definitely not changed. We're keeping the model exactly as it has been. We absolutely believe strongly in the operating leverage of our model and the company to drive better operating leverage in future quarters and operating margin. Like we've talked about quite a bit, I think, in the last 90 days is the opportunity that we see in front of us in the next couple of years is very significant, and we are going to invest to grab that opportunity. In any given quarter, that investment in those strategic investments can affect the ramp of the op margin and the operating leverage, but we are very confident that the model will continue to prove out and we will drive improvements in both of those areas going forward.

Operator

And our next question comes from the line of Sanjiv Wadhwani from Stifel, Nicolaus.

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

Mike, just to follow up to that operating margin question, I'm wondering, I think the Street is currently modeling, perhaps, slightly north of 20% for calendar 2012. I mean, does that seem like a reasonable goal for sort of the next 18 months? I just wanted to get color on that.

Michael Galvin

Yes, Sanjiv. So we're not giving explicit guidance on the operating margin, but, like I said, we absolutely believe that we will drive the improvements in that line over its current levels in the recent quarters of 18%. And so our -- we've guided out to the next quarter with our revenue and EPS guidance and gross margin guidance. And so from that, obviously, operating margin falls out, and we feel good about the way that's going to map in the near future.

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

Okay. Dom, can you talk about how the government sector did and sort of what the outlook is for the October quarter for government spending?

Dominic Orr

Sure. As a reminder that we, our participation, in the government sectors were primarily in 2 area; one is program related spending in the federal government and then K-12 projects funded by state and local. And in those 2 categories, we have been tracking pretty historical trends. And going forward, we are not seeing -- we're not doing any particular -- in contingency planning in those area because our scrutiny of pipelines indicated that they are still healthy at the level that we have seen them and the level we need them to operate.

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

Got it. And 2 other questions. One is, any color on the contribution from Alcatel-Lucent in terms of sequentially were they up or down? How close they are still to 10%? And then secondly, just on cash usage, given what's happened to the stock in terms of where it's trended over the last few months, any thoughts of a buyback?

Michael Galvin

Yes, Sanjiv. So with regards to Alcatel and its kind of progress quarter-on-quarter, and just to let everybody know out there, we had 3 10% partners in the quarter: Alcatel-Lucent, which, remember, does include the Alcatel Shanghai Bell and Alcatel-Lucent relationships; Catalyst and Avnet, which are our 2 large U.S. distributors. For Alcatel-Lucent, in the quarter, it -- there was a slight sequential decline in the percentage mix of its revenue. It was down about 1.5 quarter-on-quarter. That was mixed about equally between ASB and Alcatel-Lucent.

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

Got it. And on the buyback?

Michael Galvin

Yes. With regards to the buyback, we absolutely, in conjunction with our Board of Directors, keep a finger and a pulse on that at all times. And so it's something we're always evaluating. No explicit action yet, but it's something we're always looking at.

Operator

[Operator Instructions] And our next question comes from the line of Jonathan Ruykhaver from Morgan Keegan.

Jonathan Ruykhaver - Morgan Keegan & Company, Inc.

How should we think of the gross margin's dynamic around expansion of access points within a given customer as that customer looks to support mobility in the software modules, on the controller, to support QOS and security? Does one offset the other? Or does the growth in APs over time lower the gross margin profile with any given customer?

Dominic Orr

I think the way that we look at the business is that on the average coverage of our customers' enterprises over a certain period -- in I'm sorry, over a certain square footage, and those average number of devices, they are supported by an access point and in an eventually mature configuration, so many access points gets supported by so much controller power and on the controller, on average, a certain connect ratio of a number of software packages. And then we all model it out. And to be honest, it generally, within a geography, within an industry, that is relatively homogenous calculations. It's just that they are, like I mentioned earlier on to some -- the industry, industry-specific idiosyncrasy, like in large university campuses, they tend to have a lot more access point coverage right off the bat. And whereas in general enterprises, they might load up the controller first, and then as they expand the building, they add more access points. So it is just a matter of progression and a little bit of the quarterly seasonality type of verticals. But the way that we look at it is really the average support growth of the device on per square footage.

Jonathan Ruykhaver - Morgan Keegan & Company, Inc.

Okay, okay. Good enough. One quick final follow-on question. Last year, you introduced the VBN product line, and you talked about it as being a Trojan horse into the enterprise. Can you talk about how successful that has been in terms of traction with that product line and also in terms of follow-on activity to drive greater enterprise penetrations?

Dominic Orr

Actually, absolutely. It is a very, very successful program since the 2 years of being introduced to the extent that we don't think that this is any Trojan Horse any more. This is a real horse that's going through the main door because that is part of our MOVE architecture, as part of the access, the unified access method. So in most of our large projects now, VBN is actually designed in, not as a separate product line, but as they -- as another access method that is controlled by the same architecture. And that is really particularly true for enterprises that is getting a virtual workplace. So what it is saying is basically the connectivity an employee is connecting into work. He's not restricted to the headquarter office or the branch office but is extending to the home office in a very, very remote edge as well. So a lot of our large customer actually have absorbed VBN as part of the wireless LAN, extended wireless LAN architecture. So in that sense, it is very satisfactory introduction.

Operator

And our next question comes from the line of Rajesh Ghai from ThinkEquity.

Rajesh Ghai - ThinkEquity LLC

A couple of questions on the gross margin. This maps back to the key basis points with the mix shift into the U.S. But it's still about 200 key points below what you had 2 quarters back, and I understand you said it's a greater mix of access points and continuing lower margin business in China. Do you attribute the 200 key basis points comparison with 2 quarters back potentially to those factors? Or has there been some pricing degradation in North America also?

Dominic Orr

Okay. So let us get to the root of this question. If you are asking whether we think this comp pressure or price pressure in the U.S. domestic market to the extent that it -- that the increase in the U.S. business does not overcompensate for the International business, the answer is a resounding no. We do not see any discount pressure. We don't see any increase of discount in Q4 relative to Q3. For that matter, I'd like to also clarify in -- I saw that in some of your writings, you, gentlemen, have picked up the -- some data points that, towards the end of our quarter, our discount increase or our reseller activity increased, it's with -- we absolutely do not see that from our perspective. In fact, the Q4 that we just finished is one of the mostly linear quarter of my tenure as the CEO of Aruba, both from a booking and the delivery and a shipment perspective. So very linear quarter, no quarter end rush, no quarter end discount, no discount pressure more than any of the previous quarter. It just sticks out to be what it is. It is not due to competitive pressure on discounts.

Rajesh Ghai - ThinkEquity LLC

That's really helpful. And one last question. As you talked about some economic impact, but it doesn't show up in your results, but I just wanted to understand where exactly are you seeing any economic weakness and how it's impacting you in anyway, whether it's leveling of sales cycles or having any other impact in any other form.

Dominic Orr

We actually did not say that we're seeing economic weakness that is tied to our business, okay? What we're saying is -- let me repeat what we said because this is important. Our growth, which we are very proud and happy with, is driven by 4 drivers, the driver I delineated as BYOD, multimedia traffic, 11n upgrade and entrance security supporting the cloud services. Those 4 drivers continue to drive purchase and growth. And our MOVE architecture give us the optimized cost structure, so that we do not relied on an incremental budget and in fact when the customer's budget is tight, our value get accentuated. So -- and our quarter guidance is based on the 3 factors of backlog, visibility for the remaining part of the quarter and booking momentum on -- of the quarter today. And based on all of that, we gave you the guidance that we feel very confident about despite the economic factor. We do not see any direct impact of the kind of accesses to our specific business at this point in time.

Operator

And our next question comes from the line of Bill Choi from Janney Capital Markets.

William Choi - Janney Montgomery Scott LLC

Get a little more color about book-to-bill ratios and how's backlog might compare on a year-over-year basis, and just wanted to understand this OpEx here. You guys compensate your sales force also on the bookings, right? So is there a little more margin pressure in Q4, mainly because you compensated them on a higher level of bookings, and as a result, that goes down quite significantly next quarter? And lastly, on the OpEx here, can you just quantify the size of the onetime expense in G&A?

Dominic Orr

The color is yellow, and we do not -- your understanding of how we compensate our sales force is incorrect. And we do not see any pressure in our end of quarter either bookings, shipment or anything. Like I said, it's very, very linear.

William Choi - Janney Montgomery Scott LLC

No, I think you misunderstood my question. I said, so your operating margins were down sequentially. I'm trying to understand the OpEx here. Is it because there were -- I guess you're saying that the salespeople aren't compensated on bookings from revenue in the quarter? I'm trying to understand why there's decreasing leverage.

Dominic Orr

First of all, it is not our practice to publicly state our compensation policy of our sales force. I'm just saying that your premise is not correct.

William Choi - Janney Montgomery Scott LLC

Okay. So can you address then just -- what I was trying to aim at is trying to understand the decreasing leverage for each incremental dollars of sales here in Q4 despite better gross margins and why did we see that incremental percentage go down. There's a...

Dominic Orr

Because we -- because to run our business, we invest in our future, and our historical records show, as I mentioned in the -- early on in the scripted part of this -- the presentation, that for the last 8 quarter, we have been gaining market share. So as the executive running the company, I am committed to the extent that I see that if I invest now, I continue to gain market share and still converge the operating model, I will do so.

Michael Galvin

And, Bill, just an element on the commissions, as I said in my statements at the beginning, it was a strong quarter across the board. We are at the end of our fiscal year, and there are accelerator aspects to the commission base that happened. And our overall revenue was also higher, so both of those combined drive that number bigger in Q4.

William Choi - Janney Montgomery Scott LLC

Right. And the Q1 guidance, which assumes Op margin going up is largely related to just G&A and sales and marketing leverage? What...

Michael Galvin

Yes, those are -- I'd say those are the primary drivers. Like I said, there were -- in the G&A line, we had some tax and professional services fees. So a substantive portion of that increase were onetime in nature. As you guys know, we set up our international operating entity this past quarter in Ireland. There are some fees associated with that. In addition to some year-end compliance fees around Sarbanes-Oxley, et cetera, that occurred. So we plan to absolutely get leverage out of that line go forward.

Operator

And our next question comes from the line of Rohit Chopra from Wedbush Securities.

Rohit Chopra - Wedbush Securities Inc.

I had a question related to competition. The -- I don't know if it's rhetoric, but there's been a lot more talk about competition controller-less access points, virtual access points or virtual controllers. Can you talk a little bit about the competition, how they reacted, what maybe clients are looking at in that area? Are they still -- what's going on essentially? And the other...

Dominic Orr

Okay, so that's a fair question, Rohit. Our competition day in, day out remains Cisco. I think you can say that with this accentuated environment, you can see the role of competition level between Cisco and us is more explicit. For the mainstream vendors, the XP, the Juniper, the Motorola, we do continue not to see them in -- as a -- in all our major projects by and large. That -- as I commented one quarter ago, because of partially Aruba's success, that there has been a new round of these [ph] money going into the smaller private company, so there was some increased level of activity, particularly relates to the EDU and K-12 area that we've seen more activities for smaller private companies. As regarding to controller-less virtual this virtual that, you mentioned exactly the right word, it's rhetoric. There's a lot of rhetorics out there. The fundamental issue still is no matter where you put the control function, whether the network is reliable, whether it can support a high density of mobile devices, whether it can carry -- we have the quality of service to carry multi-multimedia traffic and whether the networks can be managed in a centralized manner and whether it has the end-to-end security. We remain to see the customers' recurring requirements at their level. Most customer actually don't really have big bias towards one architecture to other, so we really were focusing a lot of our winning situations because we provide better services and features in those categories I mentioned above.

Rohit Chopra - Wedbush Securities Inc.

Okay. And, Dom, just I wanted to ask you on Dell -- we've already asked the Alcatel question. But Dell wasn't mentioned today, and I wanted to get a sense of where they are in the ramp, and they're not 10%. Can they -- I mean, is it a goal to get them there? And can they offset some potential challenges or whatever change of control is going to happen?

Dominic Orr

Absolutely, when you sign up a big partner like Dell, you want them to be a significant contributor to your revenue stream. And we have such expectation, but we also have mentioned many times, to ramp up a big partner like that is a multi-quarter across fiscal year affair. Relative to our internal metrics, I am happy of where the progress with Dell is.

Operator

And at this time, there are no further questions in my queue. I'd like to turn the conference back over to management for closing comments.

Dominic Orr

So this is an extraordinary time, and I know everybody is edgy and nervous, and we have come out with a report and a guidance that is probably not 100% congruent with some of what our colleagues see in the market. And we explained several time in this call, they were based on the drivers that we receive through a business. They continue to be the driver. And then the guidance, the architecture that we propose feed well in a difficult budget environment. And lastly, the guidance that we deliver is based on our backlog, our visibility and judgment into our pipeline and on booking momentum into the quarter as of now. And I want to just highlight that to make sure that you understand where we come from. So as I conclude this call, like in previous quarter, I would like to thank our valued, hard-working and loyal employees and customers and partners for a very strong fiscal year, a year that we all are very proud of. And thank you a lot for your support as well. We look forward to updating you in the next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so at anytime by dialing 1 (800) 406-7325 or (303) 590-3030 and entering the access code of 4463275#. We thank you for your participation and 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' CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts