Aruba Networks Revenue Growth Disappears In Thin Air

| About: Aruba Networks, (ARUN)

Aruba Networks (NASDAQ:ARUN) continues reporting strong revenue growth as customers latch on to the BYOD (bring your own device) enterprise wireless solutions. Unfortunately though, Aruba continues to struggle at turning that revenue growth into earnings per share growth.

A main culprit is that shares outstanding continue to soar from 116.2M in Q2'11 to 120M in Q2'12. The company guided towards 122M in Q3'12. It remains very difficult to grow earnings per share with existing shareholders being diluted this quickly.

Another issue is the Non-GAAP net income margin dropped from over 17% last year to slightly over 15%. Combined with the diluted share growth explains how a fast growing next generation wireless equipment maker only grows earnings from $0.14 to $0.16 in a year of 35% revenue growth. Strong technology companies typically see earnings jump over 50% with that growth as more revenue drops to the bottom line as the company gets larger.

Q2'12 Results:

  • Reports revenues rose 34.5% YoY to $126.3M versus the $125.2M consensus.
  • Reports earnings of $0.16 versus the $0.15 consensus estimates and $0.14 reported last year.

Q3'12 Guidance:

  • Expects revenues of $130M-132M or 23%-25% YoY growth versus consensus of $131.1M
  • Expects Non-GAAP eps of $0.16 versus consensus of $0.16.
  • Shares outstanding will increase to 122M from 120M in the previous quarter.

With EPS guidance flat year over year, the company just isn't providing a good explanation of why investors should buy this stock. The company is either facing margin pressure from major competitor Cisco Systems (NASDAQ:CSCO) or engineering talent competition from Ubiquiti Networks (NASDAQ:UBNT) as the stock based compensation remains off the charts.

As a good example, Ubiquiti recently reported 95% revenue growth and 124% net income growth in the last quarter. The company also only reported $211K of stock-based compensation. Something maybe Aruba should learn about if it wants to attract more investors.

From a technology view, Aruba remains one of the most exciting stocks around. Providing products for VPN applications that enable seamless security on both public and private wireless networks that ensure remote security for iPad, iPhone, and iPod Touch devices has huge potential. Unfortunately the stock trades based on revenue growth and not earnings.

Disclosure: I am long CSCO.

Additional disclosure: Report provided for informative purposes only. Please consult a financial advisor before making any investment decisions.