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

Executives

Hitesh Sheth - Chief Operating Officer

Maria Riley - Director

Dominic P. Orr - Chairman, Chief Executive Officer and President

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

Keerti Melkote - Co-Founder, Chief Technology Officer, Secretary and Director

Analysts

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Edward Parker - Lazard Capital Markets LLC, Research Division

Rajesh Ghai - ThinkEquity LLC, Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Jack Monti - UBS Investment Bank, Research Division

Lynn Um - Barclays Capital

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

William H. Choi - Janney Montgomery Scott LLC, Research Division

Jonathan B. Ruykhaver - Morgan Keegan & Company, Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Aruba Networks (ARUN) Q1 2012 Earnings Call November 17, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Aruba Networks Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, November 17, 2011. At this time, I'd like to turn the conference over to Maria Riley, Investor Relations. Please go ahead, ma'am.

Maria Riley

Good afternoon and thank you for joining us on today's conference call to discuss Aruba Networks' fiscal first quarter 2012 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of our Aruba Networks website 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 Strategy 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 first quarter ended October 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 team will make forward-looking statements, including statements regarding the company's expectations regarding the continued proliferation of mobile devices and the evolution of our MOVE architecture; the company's beliefs regarding the financial plans, intentions and strategies of relating to its proposed acquisition of Avenda; and the company's future economic performance, pipeline, financial conditions, tax rate 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 annual report on Form 10-K filed with the SEC on September 27, 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 you to Dominic Orr, President and Chief Executive Officer of Aruba Networks. Dominic?

Dominic P. Orr

Thank you. Good afternoon and thank you for taking the time to attend our fiscal first quarter 2012 conference call. On this call, I will provide you with a brief overview of our Q1 performance and market trends. I will then turn the call over to Keerti, who will discuss today's technology acquisition, in the context of our mobile virtual enterprise, or MOVE strategy. Mike will then follow with a detailed look at Q1 financials and our outlook for Q2.

The first quarter was a strong start to the 2012 fiscal year. We achieved our 10th consecutive quarter of record revenue and reported the highest non-GAAP operating profit in the company's history. Q1 revenue increased 44% year-over-year and 5% sequentially, to $119.4 million. We achieved strong gross margin of 71.6%, reflecting the strength of our competitive position and our value proposition. We delivered strong operating results, with operating margins at 19.5%.

Our results offer evidence that the market for our solutions remains robust. Demand was solid across all geographies, as well as across all major verticals. And we continue to grow more rapidly than our biggest competitor. Our customers are telling us that wireless LAN is a priority for them. In Q1, we added over 1,500 new customers, one of our strongest quarters ever of new customer acquisitions, bringing our total to over 17,000 customers. Key new customers included one of the world's largest mobile communications companies, a large utility in Korea, one of the largest airplane manufacturers in the world, a state highway patrol organization and major enterprises, healthcare and educational institutions around the world.

We believe that the rapid proliferation of mobile devices remain a key driver of our customer growth and we believe this trend will continue. Mobile device price points are declining, while functionality is increasing. Companies are shifting to BYOD, or bring-your-own-device. This trend, which we think is still in its early stages, was confirmed by a recent information week survey, in which 26% of enterprises surveyed allow employees to use their own devices at work, up from a much smaller number in 2010. The proliferation of mobile devices and the BYOD phenomena are forcing enterprises to rapidly change how they approach the edge of the network. The rise of mobile apps, adoption of video and Unified Communications, requires organizations to re-architect the edge. And they need to do so while not increasing the IT budget.

These are the issues that Aruba addresses with our MOVE architecture. With MOVE, I am more confident than ever that Aruba is well-positioned to keep our customers ahead of these dynamic shifts. MOVE enables context-aware networking for the mobile device era, by applying user-device applications and location intelligence to determine access policy, access performance and access control. We plan to continue to broaden and strengthen our strategy around our MOVE architecture, both through internal development and technology acquisitions. In this vein, we announced today that we entered into a definitive agreement to acquire privately-held Avenda Systems, a leading developer of network security solutions designed to connect users and their mobile devices to business networks. Keerti will discuss this pending acquisition in more detail later in the call.

To support our continued growth and execution of the MOVE architecture, we have made changes to our organization and strengthened our leadership team. I'm pleased to announce that Keerti has taken on the role of Chief Strategy Officer. In this capacity, Keerti will be responsible for broadening our MOVE strategy and direction. Given his history since the inception of Aruba, Keerti is ideally suited to help us solidify our position as the vendor of choice for enterprise mobility solutions.

Ankur Singla, formerly our Vice President of Engineering, is replacing Keerti, as our Chief Technology Officer. Ankur has led the Aruba engineering team since late 2009 and has overseen the initial delivery of the MOVE architecture and significant expansion of the engineering organization. Lastly, I'm very pleased to announce that G. Pandian has joined us as our new Vice President of Engineering. Pandian joined Aruba after a long tenure of various senior management positions at Cisco. Pandian most recently was Vice President of Engineering for Cisco's Wireless LAN business unit and prior to that was the Vice President of Engineering for the Desktop Switching business. Over the past several quarters with our MOVE strategy, we have made substantial progress executing our plan to transition the company to an access network solution provider to address an increasingly mobile world. With our strong performance in the first quarter, rapid addition of new customers and expansion of expected bandwidth, we believe we are on a solid path to take the company to the next level. I will now turn the call over to Keerti who will discuss our pending acquisition in context of the MOVE architecture.

Keerti Melkote

Thank you, Dom. The key problems we aim to solve with our MOVE architecture include: one, allowing end-users to simply and securely access the corporate network using any device of their choice; two, assuring the security of the corporate network; and three, ensuring a reliable user experience across wireless, wired and remote access metrics. The core components of our MOVE architecture include the access infrastructure, such as access points, mobility controllers and access switches; and network services, such as Layer [ph] policy enforcement, wireless intrusion protection, guest access and wireless network management. Most recently, we introduced the mobile device access control service, or MDAC, to automatically detect personal devices when they connect to the enterprise and enable a simple self-provisioning portal to enroll Apple IOS devices to the corporate network. Avenda's access management solution will augment the security capabilities of our MOVE architecture, by adding support for Android-based smartphones and tablets, as well as self-provisioning and health-checking for personal laptops running Windows, Mac OS and Linux operating systems. In addition, Avenda's solution can extend context-awareness net-booking policies on Cisco, HP, Juniper and other third-party network solutions, enabling a multi-vendor BYOD solution spanning wireless, wired and remote access. Taken together, we believe these capabilities will enable enterprises to truly embrace BYOD across any device, any network, anywhere, without requiring disruptive changes to their network architecture. We are excited about expanding our MOVE architecture with Avenda's additional capabilities and leading the industry towards a new access paradigm that fully embraces mobility at the front and center of the enterprise network. I will now turn the call over to Mike to discuss the details of our first quarter financials.

Michael Galvin

Thanks, Keerti. In Q1 2012, total revenue of $119.4 million increased 5% sequentially and 44% year-over-year. Product revenue of $100.1 million, increased 4% sequentially and 46% year-over-year. Professional services and support revenue of $18.1 million, increased 10% sequentially and 31% year-over-year. As Dom mentioned, demand was solid across all geographies and major verticals. U.S. revenue grew approximately 56% year-over-year, representing approximately 68% of total Q1 revenue. International revenue grew 22% year-over-year, representing approximately 32% of total revenue for Q1.

Total non-GAAP gross margin in Q1 was 71.6%, an increase of 70 basis points from the prior quarter. The sequential improvement in gross margin was primarily driven by favorable geographic mix, and as we realigned our sales strategy in China. In Q2 '12, we anticipate our total non-GAAP gross margin to be at the higher end of our target range of 70% to 71%. Q1 non-GAAP product gross margin was 70.1%, a 60 basis point increase from Q4 '11 and in line with Q1 '11. Q1 non-GAAP services gross margin was 80.2%, compared with 78.8% in the prior quarter, and 82.1% in the same period a year ago.

Moving on to operating expenses, non-GAAP research and development expense was $16.7 million, in line with the prior quarter and down 70 basis points, as a percentage of revenues. We will continue to increase investment in R&D, including our pending acquisition of Avenda Systems. Non-GAAP sales and marketing expense increased to $37.1 million, from $35.8 million in the prior quarter. Sales and marketing decreased 40 basis points, as a percentage of revenue to 31.1%, compared with 31.5% in Q4.

Non-GAAP G&A expense of $8.4 million increased approximately $0.6 million and increased to 7%, as a percentage of revenue, an increase of 20 basis points from Q4 '11. A portion of the increase in G&A was due to acquisition activities and general legal fees. Total headcount at the end of the quarter was 1,137, an increase of 80 from the prior quarter.

In total, Q1 non-GAAP operating expenses were $62.2 million, or 52.1% of revenue, a decrease of 90 basis points from the fourth quarter. While we'll continue to make investments in the business in acquisitions like Avenda, we expect to grow revenue faster than expenses as a general trend. Our non-GAAP operating profit in Q1 was $23.3 million, or 19.5% of revenue, an increase of 160 basis points from the prior quarter. Our non-GAAP tax rate of 28.9% exceeded the higher end of our guidance range of 22% to 28% in Q1, up from 1.5% in Q4.

As we have previously discussed, our international operating entities were recently established to optimize our long-term tax structure for the company. We believe this will lead to a long-term, non-GAAP tax rate in the range of 22% to 28%. Our overall tax rate is subject to change, including from the projected geographic mix of the company's revenue, as well as changes resulting from any new U.S. or international regulations and interpretations. However, over the near term, we expect the non-GAAP tax rate to be in the range of 28% to 29%. Non-GAAP net income for the quarter was approximately $16.7 million, or $0.14 per diluted share. Q1 '12 EPS was negatively impacted by the higher tax rate by approximately $0.01, using the midpoint of our prior tax range. This compares to $20.2 million, or $0.17 per diluted share in Q4 '11, and $13.9 million, or $0.12 per share in Q1 '11.

The weighted average shares outstanding were 118.5 million shares on a diluted basis. On a GAAP basis, net loss was $0.5 million, or $0.00 per share, compared with a Q4 '11 net income of $68.2 million, or $0.57 per share and a Q1 '11 net income of $2.1 million, or $0.02 per share.

A full reconciliation of GAAP and non-GAAP information is contained in our financial results press release issued this afternoon. Turning to the balance sheet, we finished Q1 with cash and short-term investments of $265.8 million, an increase of $31.9 million over the prior quarter. Cash flow from operations was $16.5 million. We ended Q1 with $67.2 million of accounts receivable, down from the Q4 '11 balance of $68.6 million. Days sales outstanding were at the low end of our target range at 51 days, down from 54 days last quarter and up from 47 days in Q1 '11. As a reminder, our target range remains 50 to 55 days.

Moving down the balance sheet, total deferred revenue of $91.3 million increased 60% year-over-year and 33% sequentially. Short-term deferred revenue of $75.8 million increased 75% year-over-year and 39% sequentially. Inventory totaled $25.7 million at the end of Q1, a decrease of $4.2 million from the end of Q4. Inventory turns were 4.3 compared with 4.7 in the prior quarter.

Before I discuss our Q2 '12 outlook, I'd like to comment on the Avenda acquisition. The acquisition is subject to standard closing conditions and is expected to close in the second quarter of Aruba's fiscal year 2012. The acquisition will be modestly dilutive next quarter, which is incorporated into our guidance. Let me now turn to our second quarter of fiscal 2012 guidance. We had a strong first quarter, achieving our 10th consecutive quarter of record revenue. Additionally, we showed strong improvement in our gross and operating margins. We currently expect Q2 '12 revenue to increase 31% to 33% year-over-year in the range of $124 million to $126 million. Incorporating the impact of the 28% to 29% non-GAAP tax rate and the Avenda acquisition, we expect non-GAAP EPS to be approximately $0.15, using 121 million shares on a diluted basis. With that, let me turn the call back over to Dominic.

Dominic P. Orr

Thanks, Mike. Mike, Keerti, 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 is from the line of Ryan Hutchinson with Lazard Capital Markets.

Edward Parker - Lazard Capital Markets LLC, Research Division

Hey,it's Edward Parker for Ryan. You did mention your deferred revenue was up a lot in the quarter on a sequential basis so maybe could you talk about what's driving that and maybe comment to what extent that was driven by product versus service?

Michael Galvin

Yes. So the bulk of that increase in the quarter was really broken into about 2 categories. One is our historical U.S. distributors Avnet and Catalyst, did their normal quarter end ordering, as they anticipate demand for the next quarter. And then the additional element to it is, we added a new U.S. distributor right at the end of the quarter, which is Cenex Corp. And they also did their initial orders anticipating their Q2 demand. And so that's really the bulk of the delta. And I just want to point out some -- that just to reemphasize to everybody, with our distributors in the U.S., all of our revenue is on sell through, obviously with POS. So that is deferred revenue where they are anticipating, they look at their quarter end balances and then they forecast up for their incoming demand and that's the result of those numbers.

Edward Parker - Lazard Capital Markets LLC, Research Division

So would you expect that to go down next quarter?

Michael Galvin

There is a little bit of an element there where their Q4 '11 ending balances were actually, they got pretty low on the 2 established ones. So there is a little bit of an effect there that accentuates this number. And then they got lower than normal at the end of Q4 '11.

Edward Parker - Lazard Capital Markets LLC, Research Division

Okay and just for Dom, maybe you could touch a little bit on the competitive dynamics in the quarter. As you know, your biggest competitor actually was down pretty meaningfully in the quarter, in the October quarter so maybe you could just touch on what you're seeing there?

Dominic P. Orr

Obviously, I cannot comment on their internal financial operations aspect, but from a marketing towards the market, to customers, competition perspective, to be honest, the last 90 days, if I have to use a single adjective, I would use the adjective, boring. It's actually the most boring 44% year-over-year quarter I have ever managed. And I say that to emphasize one point and that is whatever characteristic we've seen in customer buying behavior, our competitive advantage, relative competitors move, industry segment movement, that actually has very little change for our Q1 relative to our Q4. And so there's really no new recipe that I'm seeing either ourselves need to execute or our competitors coming up with new gimmicks. And basically, it is all of about execution, it's all about fulfilling the new demand that all the customers are saying that is being put on the network because of the influx of mobile devices and the BYOD phenomenon. And that really is what I would characterize the last 90 day.

Operator

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

Mark Sue - RBC Capital Markets, LLC, Research Division

Can you just touch on the rate of growth in terms of new customer wins? I think it was flat sequentially maybe what's going on there? And then if you could also touch on deal sizes with existing customers and how the order priority is changing and how that's impacting your order linearity when it comes to mobility?

Dominic P. Orr

So I would answer your question in reverse. I think it is clear that it's a common complaint about all our customers that the IT budget and the infrastructure budgets are not increasing. But also, it is common trend to see in our customers that fortunately for our company, that requirement of accepting these mobile devices to wireless LAN deployment, the priority of that is high. In terms of average transaction size, we do not see any major trending up or down. In terms of the number of customer acquisition, actually the metric that our company has been tracking is the quality of those customers, the amount of customers that we acquire that will become annuity customers that will come back. And so if you look at the new customer acquisitions, the profile of that compared to previous quarters, they remain relatively the same. But obviously, the absolute number is increasing. I believe this is the second-largest quarter in the history of the company in terms of customer acquisition.

Mark Sue - RBC Capital Markets, LLC, Research Division

And then maybe on channels index, how we might see the ramp there? I think this is a drive into the SMB segment and whether we might see some margin segregation, longer term or maybe not? And then perhaps an update on the Dell relationship and if the situation has changed, if any, with Alcatel?

Dominic P. Orr

Sure. I'd answer the seventh, eighth, ninth question, too. So regarding Cenex, as you might recall, a couple of quarters ago, we introduced a new prod line called Aruba Instant and the characteristic of that prod line is that the order control function run off virtual controllers off the access points and also it is characteristic by the fact that you can set up this whole instant network sooner than you can make a toast, out of your toaster. And we believe that with this capability, our prod line are ready to get access to markets that we traditionally do not address through our direct touch sales force and the spirit of the Cenex collaboration is to try to use some new, more mid-tier and low SMB resellers to promote this prod line for incremental business and market access. This obviously, wherever the company goes into a new market, it's going to be a multi-quarter effort and we just signed our Cenex relationship and issued a press release, I think probably about 30 days, within the last 30 days. Our relationship with Dell continued to strengthen and last quarter, actually, the internal milestone for this relationship actually had been exceeded. So I'm very, very pleased about that. Alcatel-Lucent, I suppose there might be some concern about the rumor about a portion of the enterprise business being spun off. I am obviously not in a position to address those rumors. What I am in a position to address is the teamwork between Alcatel-Lucent enterprise sales force and Aruba sales force remain very tight and, in fact, very recently we have won together a multiple, very large sized projects that I'm very pleased about. So I do not see any near-term prohibition to that relationship.

Mark Sue - RBC Capital Markets, LLC, Research Division

Congrats on a boring but good quarter.

Michael Galvin

And Mark, just to tie off for a second there. One other element to your question was on the instant with Cenex and the GM. I mean the GM of our instant product, the gross margin fits well within the company's gross margin profile.

Operator

Our next question comes from the line of Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Can you update us on your service provider strategy? It would be great get a just little bit of an update on that side. And then also, it would also be helpful, on the MOVE architecture side, can you update us as to is there any new design wins, things like that, that we can look forward to going forward?

Dominic P. Orr

I'll take the service provider one and Hitesh will take the MOVE one. For service provider, I want to re-captivate -- there is a managed service component for a large enterprise and there is a sell in of a service provider of our own internal IT requirement. And then there is a service provider deployed hot spot, so-called 3G upload infrastructure. Our stated focus has been strategically along the first 2. And then technically, opportunistically, we sometimes participate in the third. And did it continue to be our strategy that we will leverage the service provider to go at managed services for mobility service for a large enterprise and we continue to have a lot of success to provide our equipment as the internal infrastructure for their own IT needs for service provider and then opportunistically in some country, where we believe the business model fits, the gross margin profile fit, then we participate in that portion of the market as well. But it's more on a technical basis.

Hitesh Sheth

And the comment on MOVE, Kent, we are very pleased with the early traction we're seeing with the MOVE architecture overall. And what I would add on top of that is that the whole BYOD phenomenon is actually a very good driver for adoption of MOVE by customers. And earlier, when we introduced our mobile device access control solutions, that was a critical step in fulfilling our customers' needs and what you're seeing us do today with the acquisition of Avenda is deliver on the next building block in building out the entire MOVE architecture.

Operator

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

Jack Monti - UBS Investment Bank, Research Division

I was just curious if you could comment on linearity. Seems like a little bit more on the front of the quarter. I guess looking externally maybe it was the function of July quarter deals closing in August. Maybe just any type of color you could provide on linearity?

Dominic P. Orr

I would say it, that the month of July, the Q4 months. So every time when you close a quarter or a fiscal year, there is some overflow into the following month and this year was no exception. But other than that, linearity was reasonably within the profile of our previous Q1 and I'll let Mike to...

Michael Galvin

Yes, that's consistent within our profile of our historical Q1s.

Jack Monti - UBS Investment Bank, Research Division

And then if you could, I guess I'm just kind of curious, I get deterioration is the wrong word but some larger tech companies discuss deterioration, when they looked at some key accounts. I guess maybe if you could comment on some of your key accounts and kind of the discussions your sales folks have had with those key accounts and maybe if it's incrementally softer or just any type of perspective you can provide, we would appreciate.

Dominic P. Orr

If you're referring to our larger repeating customers, whether there's any perceivable delay in purchase cycle or procurement process, it is not noticeable to us in the last quarter. It's not been noticeable to us.

Operator

Our next question comes from the line of Brent Bracelin with Pacific Crest Securities.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

A quick question here for Mike. First off, wanted to go back to deferred revenue. That was obviously up meaningfully. I'm just trying to understand, is that all tied to a slight inventory catch up at the 2 existing distributors and adding this new one? And we shouldn't read anything more than that into that material increase. I'm just trying to understand it, obviously it's such a big increase, we haven't seen in 2 years. So would you attribute it all to kind of inventory catch up in Cenex?

Michael Galvin

Yes, that is the bulk of it. The couple of reasons that I named. The other aspects of our deferred revenue were kind of in their typical ranges and we've been operating with Avnet and Catalyst for a long time obviously and have a good flow with them, in terms of their demand forecasting, et cetera. And it's important to note, too, from that inventory, they put those orders in right at the end of our quarter, when they were getting depleted on their own inventory. So their balances and those deferred revenue balances are very fresh.

Dominic P. Orr

By the way, I want to add that clearly in this very financially cautious environment, all our partners, channel partners, are very, very careful about managing their own cash. So they do not unnecessarily order inventory if they do not have a foreseen needs in their forecast of using those inventory. I just want to make sure that everybody understands that dynamics.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

And then just trying to assess overall wireless LAN industry, and overall demand. I appreciate the color around kind of boring and uneventful color. Obviously, we're excited to see an exciting quarter. But could you provide any other color to help us gauge demand across the industry? Did size of deals shrink? Did you see any other signs on vertical weakness? Again, just trying to get any sort of color around the health of the industry. Clearly, you're doing better than some of the larger peers and so any color there you can provide could be helpful.

Dominic P. Orr

I think we see, the boring part relates to how did it compare to Q4, meaning there's no new, new observation or changes in market dynamics and a competitive position change and so on. That is the boring part. But obviously, I like to keep the boredom if we can keep the boredom at the right growth rate, which I think we were pleased with. In terms of the average deal size, we actually do not see any significant deviation, one way or the other. We're seeing more desire to have more full coverage of the buildings and campuses, that is a universal observation because with the new mobile devices and smartphones and tablets, you cannot restrict the deployment model as just a simple overlay in covering certain Hot Zone in your building because this BYOD device is so mobile and the application requires continuity to move from place to place. So I think one asset that actually benefits every vendor in this space is that compared to, like 18 months ago, the coverage model had significantly changed which requires, obviously, more equipment which is good for everybody.

Operator

Our next question comes from the line of Rohit Chopra with Wedbush.

Rohit N. Chopra - Wedbush Securities Inc., Research Division

I just had a few questions -- maybe you could -- and Hitesh maybe this for you, but could you just talk a little bit about Avenda? Maybe their key verticals, maybe somebody could address their revenue growth? I know you won't want to give the revenue number but at least you can talk about how fast they're growing. My other question is on China. You guys mentioned there's a reorg. Just wondering if you could talk about what changes you've made in China? Why are you making them? And then Dom, can you talk about AC and what you see as far as the early -- one will say something on AC and when do you think that takes off?

Hitesh Sheth

Rohit, on Avenda, a couple of data points. One is that given the stage of the company, again very, very early stage. And as such, their revenue is too small to really discuss at large. But that said, their customer base happens to, while small, very nicely intersect with ours. They are very much targeted at mainstream enterprise and the feedback we got during our diligence was very positive, in terms of the value that they bring to the customers, and that was a contributing factor to us acquiring them.

Dominic P. Orr

This remains, I want to reemphasize, this is primarily a technology acquisition and their intellectual property will be very soon, very tightly integrated with the rest of the Aruba Networks services offering. So that is the more important aspect than the standalone SKU, which obviously we will promote.

Michael Galvin

I think there was a question there on the China sales strategy. So as you know, over the last few quarters, we have talked about from a gross margin dynamic, some of the business, some of the higher volume, lower margin business that we had begun to engage in China. And our strategy and kind of realignment is getting away from that higher volume, low margin business and really focusing on our sweet spot, which is the enterprise, which obviously brings better margins. And so that's the shift that we're talking about.

Keerti Melkote

And then the last question on dot11 AC, this is Keerti, for the rest of the listeners on the call, Dot 11 AC is the next speed bump in the wireless LAN technology in that you now have the ability to go in excess of one gigabit per second on a Wi-Fi connection. It's a standard that's still being developed in IEEE and being certified in the Wi-Fi Alliance. We expect consumer class product to hit the market sometime next calendar year and enterprise class products to hit the market in 2013. So at least for the next couple of years, we will not see any significant introduction of dot11 AC in the enterprise market. But being a leading technology provider in the space, we're clearly watching the space and developing advanced prototypes ourselves. And we fully expect that once 11 AC comes along, we'll be ready with the products that will take the industry to the next level.

Rohit N. Chopra - Wedbush Securities Inc., Research Division

And then just a real quick follow up. Are you guys experiencing any issues with the floods in Thailand like getting supply of drives for the controller, anything like that?

Michael Galvin

No, I think there's been no disruption to our supply chain.

Operator

Our next question comes from the line of Bill Choi with Janney Capital Markets.

William H. Choi - Janney Montgomery Scott LLC, Research Division

Boring is good, Dominic. Especially since markets giving us enough excitement.

Dominic P. Orr

Yes, we try to help.

William H. Choi - Janney Montgomery Scott LLC, Research Division

I just wanted to understand the revenue guidance. First of all, so this Avenda, you've -- essentially saying we don't even know exactly when it close in the quarter but think of it as pretty much no impact to the revenue guidance you provided. And also how are you thinking about, I guess, it borders onto a new fiscal year for your corporate customers, what kind of thought process are you building in for kind of customers do budget in and how early they spend it? And then I have another follow-up question.

Michael Galvin

To reiterate what Hitesh said, it's from a revenue materiality standpoint. There's not a real impact on the quarter.

Dominic P. Orr

I guess I wanted to understand the nature of your second question is do we have any active methodology to make sure wireless LAN is built in into the 2012 procurement priorities? There's something along that line?

William H. Choi - Janney Montgomery Scott LLC, Research Division

More like what kind of visibility would you have after some of the corporate budget flush that occurs in December and to January?

Dominic P. Orr

I think the main theme there, is that most of our customers are expecting a tight, maybe flat IT budget. But all of them are complaining, most of them at least complaining of their tight budget, too much of that is dedicated for infrastructure. And in order to fulfill all the new projects, they have to somehow squeeze the infrastructure budget and one way to squeeze it is to go to the cloud, to save the leverage computing equipment and so on. The other way is to go with what we call the rightsizing project is basically do not upgrade your wired infrastructure except for where it is needed. And instead of doing a full wired infrastructure upgrade, with some wireless capability to build the rightsized integrated wire and wireless refresh. And that will actually exacerbate the value of the MOVE architecture and also fits very well into our currently running, rightsizing program and a lot of initiatives you can count on will be riding on top of that industry trend.

William H. Choi - Janney Montgomery Scott LLC, Research Division

And then on Avenda, I guess I just wanted to understand a little bit more is it -- is the acquisition largely timed to market because they have all of the certifications with other devices and across other operating systems? And when I think about potential overlap with your MOVE architecture, I thought your architecture was actually quite comprehensive, does this somewhat overlap and perhaps hinder at least the fixed switch component? If you could kind of do all this in a centralized appliance format that Avenda is doing? And then finally, Mike, did you actually give out 10% customer numbers?

Keerti Melkote

I'll take the architecture question first. Yes, it is timed to market in the sense that Avenda allows us to expand our reach to all kinds of devices, not just Apple IOS devices, which is what we initially supported with the MOVE architecture and the MDAC service, in particular. So it expands what we already did with MOVE and does in no way conflict with what we have. And your question, in answer to your question on the switch side, the architecture is independent of the access method. So the access model, whether it's wireless or wired or remote access, the idea is to apply the same set of access policies, no matter how you connect. And as customers transition from wired to wireless, we expect there to be lesser wired and more wireless overtime but it doesn't mean the wired has gone away. What customers are asking for is a unified architecture. And that's what MOVE is. So on that perspective, wired switching design wins are built into any MOVE architecture wins that we have.

Hitesh Sheth

And just to be very explicit, Avenda augments MOVE. It is not an overlap with MOVE in any way, shape or form. And any device concept that Keerti just talked about. In addition to that, what Avenda does for us, it really enhances our policy and posture capabilities of MOVE architecture which is really essential if you deliver on the promise of context over networking.

William H. Choi - Janney Montgomery Scott LLC, Research Division

But if you could use other people's existing switches and not get them to swap to your own fixed switches, doesn't that at least hurt some of the new fixed switch opportunities?

Hitesh Sheth

Right. So in one level, our ability to coexist in a heterogeneous network has always been a hallmark of Aruba from day one. As such, we don't require customers to rip and replace all their gear. That said, if you look at our access portfolio, they have unique attributes, including the wired product lines. They will not be available to -- with other products regardless of Avenda. So we don't see this taking away from our opportunities to sell at the wired end of our architecture.

Dominic P. Orr

For example, if you apply Avenda to the non-Aruba wired infrastructure. You can still enforce this access policy, but in order to give the special performance delivery commitment and so on, that is time when you may want to upgrade to the Aruba wired infrastructure.

Michael Galvin

Yes, one more. Hey, Bill. Yes, we had 2 10% customers in the quarter, which were Avnet and Catalyst, our 2 U.S. distributors.

Operator

[Operator Instructions] Our next question is from the line of Jonathan Ruykhaver from Morgan Keegan.

Jonathan B. Ruykhaver - Morgan Keegan & Company, Inc., Research Division

I'm kind of curious about the Suite B cryptography, whether it's had any kind of impact or influence on federal deals?

Hitesh Sheth

I think what we're seeing with our Suite B technology, it definitely has given us a leg up in the federal market. And as such, it is a very positive influence in our federal business.

Jonathan B. Ruykhaver - Morgan Keegan & Company, Inc., Research Division

So you'd be comfortable saying it is related to -- relative to other wireless LAN vendors is you'd sell it to the federal government going forward?

Dominic P. Orr

It certainly keeps a distance from the level of security and the kind of programs that we can have access to and clearly differentiated ourselves. But obviously for programs of that nature, it's going to be a multi-quarter selling effort, which we feel very good about the pipeline. And as this program and pilot deploy, we will reap the benefit of this differentiated feature.

Operator

Our next question comes from the line of Sanjiv Wadhwani with Stifel Nicolaus.

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

So a couple of questions. Dom, there were obviously some troubled spots overall during the last quarter for a lot of companies. Europe, federal government, financial services. Can you just talk about how those trended? I know you generally said that all verticals and geographies did well. Just curious if you could give some granular information on how those 3 progressed full year?

Dominic P. Orr

So from a demand perspective, I actually have been reading probably the same documents that you have in terms of people worrying about the European theater and so on. So my first comment is our Europe, Middle East, Africa, EMEA theater, actually from a demand perspective have been delivering the strongest result the last couple of quarters now. And part of that is because we have a very widespread geography. It is not restricted to a couple of key countries and specifically, our geographic expansion is in such a way that all the key countries people are worrying about, financial difficulties are not where we're deriving even a significant portion of our demand. So we feel reasonably covered over there. And for Asia-Pacific? I think, in general, everybody's growing. I think Mike mentioned that in China, we have refocused somewhat more on the higher-margin enterprise market segment, relatively speaking, and our demand in Japan is very good, very strong. So I think everywhere we choose to focus on go-to-market, I actually do not see any blocking factor because of the global economic situation. Where we may not be deriving as much benefit is actually an area that we have not invested. I think, as you've seen in one of our included in our press release, we just announced that we opened up a formal office, subsidiary in Brazil. So you will continue to see that. We will be more aggressive in going into territories that we have traditionally under-invested, which we believe will have better returns in the near future.

Operator

Our next question is from the line of Lynn Um with Barclays Capital.

Lynn Um - Barclays Capital

Just a follow-up on that last question. Sounds like demand was strong across the geographies. I guess on a year-over-year basis, if I did my math correctly I think international has been a bit lagging. Were there any troubled spots that just didn't perform as expected in terms of the international region?

Michael Galvin

With regards to the international growth year-on-year, breaking that out a little bit, Europe was very, very solid to strong. And that, when you look at the 3 main theaters, Asia was the slowest of those breakdowns. Part of that is the -- some of the refocused sales strategy that I talked about. Outside of China, the results in Asia were very solid to strong across the region. But we did take an impact from some of that refocused strategy.

Operator

We have time for one final question and that will come from the line of Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity LLC, Research Division

A couple of questions on the gross margin and the operating margin, the gross margin did improve significantly and so did operating margin. You've guided to 70% to 71% for the next quarter, at the high end. I'm just -- clarification is that are you -- is that because you expect the Asia business, which is slow to catch up? And what will make you increase your operating margin target model? Are you going to do it in the near term? Are you comfortable with what you have right now?

Michael Galvin

Yes. So first, on the gross margin. As you know, quarter by quarter, lots of different variables go into that number. Two of the biggest are geographic mix and product mix. And that will obviously continue. We feel great about the performance this quarter. We feel really good about our range and being at the higher end of that 70% to 71% and we just feel very solid about our gross margin in the near future. With regards to the operating margin and where that's at, we don't have any changes to the model for the near term. We are going to continue. We like the market share that we're grabbing and we like the revenue growth that we're putting up and we're going to continue to invest to capture that. And including things like Avenda and tucking those types of acquisitions into our P&L. So there's no near-term change to the model but we do think we've shown good leverage in the model, even with that.

Operator

Ladies and gentlemen, this does conclude our question-and-answer session. This time, I'd like to turn the conference back over to Mr. Orr for any closing comments.

Dominic P. Orr

Again, we thank you for being on the call today and I would like to take a moment to thank our valued employees, customers and partners for a strong start to fiscal 2012. And I would also like to take this opportunity to welcome our future employees from Avenda. We are pleased with our performance and excited about the opportunities for the future. Thank you for listening and we look forward to updating you on our progress in the coming months. Have a good evening.

Operator

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 using the access code of 4484568 followed by the # key. This does conclude the Aruba Networks Earnings Conference Call. Thank you very much for your participation. You may now disconnect.

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

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

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

Source: Aruba Networks' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts