Aruba Networks (ARUN) has taken a beating since I initiated my coverage of them some months ago. At that time, the stock was trading at its then 52 week high of $31.65 and had just released great earnings. Since then, Aruba has been introduced to the other side of the earnings card, falling after their last call on soft Q4 guidance. Regardless, they remain one of the leading providers of wireless infrastructure solutions. Their security features are embraced by IT departments, and they can integrate with other vendors of traditional networks.
After their earnings beat revenue and had in-line EPS Thursday, Aruba could be positioned for a rebound from current price levels around $17. Seeking Alpha has helped facilitate an exclusive interview with Aruba Networks CEO Dominic Orr Thursday to coincide with this earnings release. I’m excited to offer my readers exclusive insight into Aruba’s strategic initiatives, straight from the top. I’m happy to welcome Mr. Dominic Orr.
CR: Good afternoon Mr. Orr, it is very nice to have you. This will be a basic Q&A to offer readers some insight into Aruba’s future directly from the top. Are you ready to get started?
DO: Absolutely, let’s get started!
CR: Wireless has arrived, and very few can deny that it is the present and future of computing. With security being such a hot topic of late, how can Aruba convince customers that they will be secure using a wireless network?
DO: At the highest level, the way we convince customers is that we show them that all US Air Force bases are secured using Aruba networks. [Laughs] It is simple but true, when Army Command, Navy Exchanges and military in the field use Aruba solutions it makes the security discussion go much more smoothly with our customers, from a high level.
At the technical level, Aruba has a very unique centralized encryption system that allows you to keep all of your information encrypted until it hits your server. That is central to a lot of institutions financial intermediaries, banks, large corporations, etc. When they ask their information technology personnel how they’d like their system to be designed ideally, IT departments are usually wanting it to be implemented this way. Since we are currently the only ones that create it this way, it is compelling argument in our favor.
Also, think of the changing security structure. Typically you have to secure both endpoints, but now everyone from Generals to Privates want to bring their iPhone, iPad to work, and still maintain the government level network security. With Aruba Networks solutions, we can do that without disrupting day to day operations or having too much hands-on IT involvement. The rest of the industry is trying to catch up.
CR: You mentioned in previous earnings calls the “proliferation of mobile devices” on a personal and enterprise level. How do you feel that is progressing? With some calling for the market for tablets to quadruple by 2015, what is Aruba Networks doing to take advantage of this revolution?
DO: It is going more quickly than even I anticipated! [Laughs] As witnessed by the major vendors in the laptop and PC industry having significant thoughts about even being in that business because of issues with margin and growth. That is impacted by the unprecedented growth from mobile users in smart phones and tablets.
I think there is also another thing happening with this mobile movement. Initially, people thought that these devices would be purchased by people for personal use with discretionary spending. Now, so many of these devices are being used by businesses, that it is eating into the budget for traditional enterprise solutions. This means more budget going towards mobile solutions and less money for those other devices.
This does a couple of things for the debate about wired or wireless. If you think about it, laptops and desktops have wired and wireless access, whereas the new mobile solutions offer Wi-Fi or 3G/4G without capabilities for ethernet connections. Also consider our recent release of Suite-B support for Windows 7 devices and Android, which enable integration of these mobile devices on high security enterprise networks. If you are investing considerable capital into mobile solutions, the debate over wired or wireless suddenly becomes easier. You want the solution that matches your hardware.
As an example for someone at a smaller-medium sized company like Aruba, I increasingly use my tablet more and more for everyday purposes than my desktop. In terms of communication with my staff, I use Apple’s (AAPL) Facetime more than the other traditional methods of communication. To do that, you need excellent signal, and the two of the hallmarks of Aruba are security and high density multi-media support. For example, a few months ago Microsoft (MSFT) and Aruba did a test on Wi-Fi and Microsoft linked server; the Aruba network was 75% faster than Cisco (CSCO). I don’t usually brag about things like that, but when it is 75% faster I don’t have much of a choice! [Laughs]
CR: With larger competitors like Cisco now giving in to the pressures of real competitive pricing, how do you feel Aruba can compete? How do you maintain your margins in this environment?
DO: So, obviously we’ve been competing with them for nine years, and from day one we have been competing on value as well as on price. From day one, when they offered a complete bundle of services, the wireless element could sometimes end up being free. This is because they could capture so much value from a packaged suite of services and the support that came with it. So, when customers looked at this, they needed to ask is this free to maintain? Does it include all of the features that are necessary to keep this network running?
Interestingly enough, with the current pressure on Cisco, you notice they have five billion or so of wired business. Their wireless is at $400 million, and growing very quickly. Their router business is under pressure from Juniper (JNPR) and Alcatel Lucent (ALU) and their switch business is being assaulted from Dell (DELL), HP (HPQ) and now Juniper. There is very little room now for them to offer complementary services at severe discounts. They rely on that wireless business to grow and support decreasing margins from other divisions. As a result, the ground that we compete with Cisco on is much more even now than it was in the past. The rise of Juniper, Alcatel Lucent, Dell and HP in routing and switching has ended up helping Aruba compete with their larger rival.
CR: What steps are you taking to ensure that the Aruba Mobile Edge Architecture remains the industry leading solution that it is today? Will your technological leadership be fostered more organically or through acquisition?
DO: From a technology perspective, our core architecture in Aruba OS with all the built in features must be organically grown. Historically, we have positioned ourselves through other value additive acquisitions in network systems. For example Airwave allows our customers to mix and match vendors, and has been very successful and popular with our customers.
CR: What are your thoughts on weak federal and corporate spending? Do you feel the impact and will it have a material impact on your strategy moving forward?
DO: Three years ago we had pretty grim outlook for leading up to and during the financial crisis, and people compare that to the current situation. There is a crucial difference in the current environment between then and now. At that point, there were very few tablets and smart phones. Wireless in that crisis was like an herbal remedy or medicine, without real tangible impact. Now, it is more like an aspirin. While people may avoid herbal remedies by lowering their discretionary spending, people will take an aspirin when it is necessary. We feel that wireless networks are now crucial to the business needs of enterprises and will only continue to grow in importance.
Additionally, Aruba solutions can actually reduce overall costs. If you compare a wired/wireless combination, the network built on a primarily wireless foundation can offer lower costs than those installed with a wired foundation. In an era of tight budgets the wireless solutions now offer a surprisingly high value proposition.
Well, there you have it. This is some really great information for investors on where Mr. Dominic Orr, CEO of Aruba Networks, feels the wireless movement is going . I will have more in depth analysis of the financial results and earnings call in additional articles. I want to thank Aruba Networks, Dominic and Seeking Alpha for helping organize this interview. If your company would like to be involved in a similar earnings related conversation, please contact me through email or message.
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.