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Aruba Networks, Inc. (NASDAQ:ARUN)

F2Q08 Earnings Call

February 26, 2008 5:00 pm ET

Executives

Chris Danne- The Blueshirt Group

Dominic Orr – President, Chief Executive Officer

Steffan Tomlinson - Chief Financial Officer

Keerti Melkote – Founder, Products and Partnerships

Analysts

Mark Sue - RBC Capital Markets

Inder Singh - Lehman Brothers

Greg Mesniaeff - Needham & Company

Sanjiv Wadhwani - Stifel Nicolaus

Ehud Gelblum – JP Morgan

Anton Wahlman – ThinkEquity

Bill Choi - Jefferies

Anil Doradla - Caris & Company

Blaine Carroll - FTN Midwest Securities

Operator

Welcome to the Aruba Networks second quarter fiscal 2008 conference call. (Operator Instructions) I’d now like to turn the call over to Chris Danne, with Investor Relations.

Chris Danne

Good afternoon and thank you for joining us on today’s conference call to discuss Aruba Networks’ fiscal second quarter 2008 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Aruba Networks website at www.arubanetworks.com.

With me on today’s call are Dominic Orr, Aruba’s Chief Executive Officer; Steffan Tomlinson, Chief Financial Officer; and Keerti Melkote, Founder and Head of Products and Partnerships.

After the market closed today Aruba Networks issued a press release announcing the results for its fiscal second quarter ended January 31, 2008. 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 it or e-mail you a copy.

We would like to remind you that during the course of this conference call, Aruba Networks’ management may make forward-looking statements including statements regarding expected revenues and non-GAAP EPS for the third quarter and fiscal year 2008, contributions of the Federal vertical in the third quarter, improvements of the company’s two-tier distribution channel, impact of the current economic environment on the company’s vertical markets, growth in the business and sales of the company’s products including it’s 802.11n solutions, investments in research and development and certain geographies, industry trends and market demand for the company’s products and other statements as the company’s future economic performance, financial conditions or results of operation.

These forward-looking statements are not historical facts, but rather are based on the company’s current expectations and beliefs. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements.

These risks and uncertainties include a variety of factors some of which are beyond our control. 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.

Please refer to our annual report on Form-10K filed with the SEC on October 12, 2007, our quarterly report on Form-10Q filed with the SEC on December 12, 2007 as well as our earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents maybe 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 including non-cash stock-based expenses. We have provided reconciliations of these non-GAAP measures to GAAP financial measures in the Investor Relations section of our website located at www.arubanetworks.com and in our earnings of press release.

Now I’d like to introduce Dominic Orr, President and Chief Executive of Aruba Networks.

Dominic Orr

Good afternoon and thank you for taking the time to attend our fiscal second quarter results conference call. We were disappointed with our performance in the second quarter. As we highlighted on our earlier conference call, the revenue shortfall was due to three main factors. A decrease in revenues in the Federal verticals, less leverage than we had anticipated from our new two-tier distribution network and softness in the general enterprise which has resulted in an elongated sales cycle in certain verticals.

Moving forward, we expect the Federal vertical to return to 10% to 20% of sales in our third quarter. Over time we also expect to see improvement from our two-tier distribution channel with more focus on the processes involved in bringing new channel partners onboard and making them productive. We anticipate that it will take another couple of quarters before we get significant more leverage out of this channel.

We have seen softness in the general enterprise with the hardest hit vertical to-date for us being the retail sector. In that market we are seeing a slowdown in new store expansion plans which has some impact on demand for our products and we expect this to continue. However, for existing stores there is the need for PCI compliance and an upgrade or replacement of the ageing wireless infrastructure currently existing in stores and warehouses.

It is important to note that the elongated sales cycle is not across all industries. In Q3, we expect to have four verticals, education, healthcare, Federal and high-tech, each at typical levels of between 10% to 20% of our sales. Nor is the softness across all geographies.

Given our strength in these core verticals, our geographic diversity and our technological differentiation, we are confident that we will continue to grow, but do want to be cautious given our conversion rate slowed in January. Our experience today is hardly conclusive and much of the feedback I have received is that CFOs and CIOs are just being a little more careful about spending with an uncertain uneconomic outlook.

In addition to the solid performance of many of our core verticals, there were two other major positives in the second quarter. First, our new customer acquisition rate did not slow down. In fact, Q2 was another very strong quarter for new customer acquisitions.

In total, our customer count now exceeds 3,750 and key recent wins include a Fortune 50 energy company, a major government agency in Asia, a leading Southern California biomedical research and treatment center, one of the world’s largest airports, one of the nation’s largest insurance companies, and numerous major university and school districts worldwide.

We think this customer growth offers clear evidence that we are strategically well positioned. This continued success coupled with a large pipeline, and our strong competitive win rate gives us real confidence in the long-term future.

The second major positive during the quarter was the market reaction to our introduction of a complete 802.11n solution with ultra high performance. In November, we announced a major update to our product line, with the addition of two new ranges of multi-service mobility controllers and the new line of high performance 802.11n access points.

Our high-end controller, the MMC-6000 is designed to offer an impressive 80-gigabit per second throughput, while our new MMC-3000 series opened-up the small and mid-sized enterprise market.

In some cases, we believe that the emphasis on the value and longevity of capital purchases in the current market environment can encouraged wireless LAN prospects to consider moving to 802.11n sooner rather than later. We have already received 802.11n orders from dozens of customers for this technology ahead of forecasts, and have many more in trial.

Since this is a brand new technology, the evaluation process for 11n takes a little longer right now, but we should be able to shorten the process in a quarter or two as the technology goes more mainstream.

The strength of our new technology, the breadth of our verticals, and the size of our pipeline, gives us strong confidence in the prospects for long-term sustainable growth. Importantly, we believe we continue to win mindshare and customers with our unique enterprise mobility solutions. Given that, we will continue to increase our investment in our R&D leadership and in the geographies that do not show a macro economic slowdown.

Our confidence is also demonstrated today by our Board’s decision to authorize the $10 million stock repurchase program.

A little later in the call I will be happy to answer any questions that you may have. And now I’ll turn it to Steffan to go through the financials in more details.

Steffan Tomlinson

Before begin the discussion of our second quarter results, I would like to note that all comments made in the prepared remarks exclude the impact of non-cash stock based expenses unless specifically noted.

In Q2 total revenue of $40.6 million declined 13% sequentially and grew 53% year-over-year. Product revenue of $34.2 million decreased 11% sequentially and increased 51% year-over-year. Existing customers accounted for 65% of sales.

Professional services and support revenue of $5.5 million was down 24% sequentially and up 109% year-over-year. As we mentioned on our last earnings call, the prior quarter was impacted by a large professional services contract accounting for the sequential decline this quarter.

Ratable product and related services revenue of $0.9 million remained approximately flat compared with the immediately preceding quarter and declined 30% year-over-year as expected. Approximately 79% of our revenue came from indirect channels in Q2. The remaining 21% were direct sales. As a reminder, our indirect channels represent sales through our bars and distributors as well as our strategic OEM partner.

We had no 10% end customers in the quarter, and Alcatel-Lucent was a 10% partner. Approximately 67% of our sales were generated in the US with the remaining 33% coming from international customers.

We continue to produce strong gross margins in the second quarter. Overall, non-GAAP gross margins came in at 69.1% compared to 68.1% in the prior quarter. This strong performance was above our target range for gross margins at 65% to 68% partly due to product mix. We do expect margins to return to our target range as we see more sales going through our two-tier distribution partners.

Considering the drop in revenue, we did a good job managing expenses this quarter. Non-GAAP research and development expenses increased by approximately $918,000 from the prior quarter and as a percentage of revenues was 19.1% in Q2, ‘08.

Non-GAAP sales and marketing expenses decreased by almost $1.9 million from the prior quarter in actual dollars, but increased as a percentage of revenue from 40.7% in Q1 ‘08 to 42.1% in Q2 ‘08.

Non-GAAP G&A expenses increased in actual dollars by $214,000 and as a percentage of revenue from 7% in Q1 ‘08 to 8.6% in Q2 ‘08.

Non-GAAP net income for the quarter was approximately $0.6 million or $0.01 per diluted share compared to a non-GAAP net income of $3.9 million in Q1 ‘08 or $0.04 per diluted share, and non-GAAP net loss of $3.2 million or $0.23 per share in Q2 ‘07.

The Q2 non-GAAP weighted average shares outstanding were at 91.2 million on a diluted basis. The GAAP net loss for the quarter was $3.5 million or $0.04 per share compared to a GAAP net loss of $0.6 million or $0.01 per share in Q1 ‘08 and a GAAP net loss of $7.2 million or $0.52 per share in Q2 ‘07.

Our second quarter of 2008 GAAP results included $4.1 million of non-cash stock based expenses.

Turning to the balance sheet, we finished January with $113 million of cash in short-term investments. This represented an increase of $4.7 million over last quarter. Short-term deferred revenue was $20.3 million at quarter end compared to $18.2 million at the end of Q1 ‘08.

Moving down the balance sheet, we ended Q2 with $25.7 million of accounts receivable decreasing from $29.5 million in Q1 of ‘08. Days sales outstanding were flat with Q2 at 57 days and modestly above our long-term DSO target of between 50 and 55 days.

Inventory totaled $17.3 million at the end of Q2 increasing from $12.4 million at the end of last quarter. This represented a sequential increase as we built inventory for a number of deals that slipped out at the quarter. We expect that inventory will go down in the coming quarter. Inventory turns were approximately three turns.

Moving forward, we continue to believe that our market opportunity is large and growing. Our pipeline is strong and we believe Federal will return to its normal level in the third quarter. At the same time, we are coming off of a miss and it is still early in the quarter. We generally do approximately 50% of our business in the last month of the quarter.

As Tom said earlier, we plan to increase our investment in R&D and building out our international sales and marketing teams along with the normal G&A spending related to being a public company. Given all these factors, we expect to see revenue in our third quarter of 2008, in the range of $41 million to $44 million with non-GAAP EPS of breakeven to negative $0.02 per share.

At this point we are not giving guidance beyond our fiscal third quarter and are not reiterating or updating our prior guidance for the year.

We clearly have a number of verticals that are not current being impacted by this slowdown and are pleased with our pipeline, number of new customers and interest in our new technologies. Having said that, we believe it is prudent to wait to factor in these positives until we get another quarter under our belt in this environment.

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

Dominic Orr

Steffan, Keerti and I would now be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Dominic and Steffan could you just talk about what’s happening in terms of lead generations, any changes there? Is it easier or is it still consistent in terms of new leads?

Dominic Orr

In terms of number of new leads we do not see any significant change. We have increased our staffing in this area and we are expecting a better run rate just by the increased investment.

Mark Sue - RBC Capital Markets

And along those lines what about wireless and mobility as a priority in the rank order of things as it relates to IT spending. Do you think the rank order has changed, improved, decreased in this passing environment?

Dominic Orr

So far, the verticals that we have chosen to focus in we do not see any decrease in priorities. For the general enterprises in certain geography, we do see the purchase cycle being lengthened. Projects are still existing. We do not see projects canceled, but we do see the signature cycle and evaluation cycle being lengthened.

Mark Sue - RBC Capital Markets

In terms of getting these appeals signed, you saw that lengthen last quarter. Is it status quo? Is it lengthening or is it probably where you are and does that actually start to improve just because linearity starts to improve in the upcoming quarter?

Dominic Orr

I think currently the quarter is still very early. I do not want to make a trend statement at this moment.

Mark Sue - RBC Capital Markets

But it seems like that the environment, generally in terms of the market, is still pretty healthy and you’re looking for good sequential growth and probably $41 million is a base number that we can build up on?

Steffan Tomlinson

Yes, we feel comfortable with the guidance that we’ve given. Historically as a proxy, February has been kind of modestly inline with our expectations and the three things that we continue to look for are robustness of pipeline, the number of new customers we’re able to acquire and the interest level in our technology.

Those all remain at very high levels, but given where we are in the current economic climate and just coming off of the miss, we felt it prudent not to give guidance for the subsequent quarter or an update or reiterate our guidance for the full fiscal year.

Mark Sue - RBC Capital Markets

In this environment of reduced amount is the competition increased, decreased or stayed the same?

Dominic Orr

So, we actually have seen much earlier on in the game it becomes a two horse race, it’s Cisco versus us. As compared to like same time of last year that seemed to market seemed to be noisier.

Operator

The next question comes from the line of Inder Singh - Lehman Brothers.

Inder Singh - Lehman Brothers

Dominic just wanted to ask you about your comments on the two-tier strategy and if you could give some more color on why do you think that’s not been providing you the sort of leverage so far. And then what are you doing on a going forward basis accelerate that leverage for you in terms of regeneration and also I think in a revenue cycle conversion?

Dominic Orr

We signed up three major two-tier distributor. We had two steps. One is the first step is to convert our existing single tier bars to go through the operations to the two-tier and second it is to recruit incremental bars that these two-tier partners we believe will bring to us. And since these new partners have been selling competitor’s product the revenue through them will be incremental.

Now looking back it did takes us a bit longer time to switch over from a single tier to two-tier operation and secondly the process of on boarding the new bars in terms of creating joint promotion program, sales education, technical education, availability of demo equipment and so on. It took a longer cycle than we had anticipated and going forward this is the second part of the operation is what we are focusing on.

As of last week we have appointed a VP of Channel Operations with full attention on this activity to not only pay attention to the Americas operations, but leverage our new mechanisms and programs for worldwide operations as well.

Inder Singh - Lehman Brothers

And I think you mentioned in your comments earlier that there were four verticals including education, Federal, high-tech, etc., that I think together these four accounted for something close to 40% to 50% of your sales.

Are you shifting your focus to these four verticals increasingly for the foreseeable future here given that they seem to be maybe a bit more clear in terms of visibility and what about the other sort of half of the sales really is that what’s behind in term of your near term caution, that the verticals that fall outside these four?

Dominic Orr

We actually are active in close to 20 verticals and it is this four or five verticals that we see that the wireless deployments are mission critical. They are not optional and also we do not see any lengthening of cycle with a exception of the adaptation of 11n technology in the event that an account is interested in deploying the 11n or testing it out to make sure that they don’t need it, and they go ahead with 11a/b/g.

That affects some cycles, so there is some lengthening due to the technology’s transition and evaluation. But in these verticals definitely the procurements are happening crisply.

In the other verticals, they are geographic specific. I think in North America and North Europe we do see some lengthening of sales cycle in some of the vertical and that is indeed one of the bases of being prudent in terms of gauging the conversion rate of our partner.

Steffan Tomlinson

A one follow-on comment, Inder, we basically just again to reiterate we get approximately 10% to 20% of our sales from those core verticals. And when we look at the other verticals outside of the core five, we actually need those to contribute. But what we’re doing internally is we have industry marketing around the core of four or five verticals to attack those in order to make sure that we are getting as much sales momentum out of those verticals as possible.

Inder Singh - Lehman Brothers

Steffan, on the gross margin line, you had a nice ramp-up in the services gross margin and I think from the 63% level into the 76% plus level. What’s behind that and what do you think is sort of sustainable on a longer-term basis here?

Steffan Tomlinson

So Inder, actually the gross margins on a non-GAAP basis were 69.1% this quarter from 68.

Operator

Our next question comes from the line of Greg Mesniaeff - Needham & Company.

Greg Mesniaeff - Needham & Company

I was hoping you can address the whole 11n issue. You mentioned the uptake, in the press release. If you could just give us a quick overview as to which verticals you are seeing the quickest uptake of 11n. And also if you could address some industry talk recently about some backward compatibility issues between n and g. And whether there is any specific silicon involved in that compatibility or lack thereof. .

Keerti Melkote

In terms of vertical adoption, I’m seeing, we are seeing a lot adoption in the higher education vertical, primarily because in that segment the clients are actually showing up, the 11n endpoints are actually showing up sooner than anticipated. And so there is a definite trend there for rollouts of 11n technology.

In the other verticals, I think they took a pause to evaluate 11n technology and in some cases they did a conversion because of the longevity of 11n, from an architecture perspective so they want to invest early and in some other cases they have stayed with a/b/g. So, I would say it’s spottier in other industries, but clearly there is a trend in higher end.

As far as the backward compatibility is concerned, we haven’t seen any evidence of 11n products not being backwards compatible with 11g. In fact they were designed from the ground up to be backwards compatible. And more recently, we also achieved WiFi certification of 11n products as well. So that essentially guarantees that we are going to be interoperable not only with 11n, but also backwards compatible with a/b/g products.

Operator

The next question comes from the line of Sanjiv Wadhwani - Stifel Nicolaus.

Sanjiv Wadhwani - Stifel Nicolaus

On the North America weakness, and I think, you mentioned that might have been some weakness in Europe, we just wanted to clarify outside of the US, are you seeing a fair amount of weakness across verticals? And then second question on the retail side, the PCI compliance, is there sort of a deadline for that or is this sort of an ongoing thing that they could finish on an as needed basis?

Dominic Orr

For the international market we’re seeing some a lengthening of sales cycle in North Europe, but the rest of geography continue to be strong. And we do not see any particular relationship to a vertical other than in the verticals that we identified there doesn’t seem to be any slow down, and lengthening of the cycle.

But regarding PCI compliance basically for the United States since January 1, 2007 this was a requirement for the retail enterprises to retrofit. Now there is a deadline. The way that the PCI compliance works is if you do not comply and there is a fraud that happened on a wireless, you get a fine and then of course your own reputation is punished.

So that really is the driving force there and that compliance requirement has kicked off in the UK, for example those since January of 2008 and we are seeing it’s spreading overseas.

Sanjiv Wadhwani - Stifel Nicolaus

So, but basically there is no specific sort of timeline to get it done, but as you have said obviously for fraud protection etc., they need to get it done as soon as possible?

Dominic Orr

I think it really is depending on the CIO and the Chief Security Officer’s agenda. And it does cost people resources and capital equipment. So, that’s a trade-off that we see each of the customer’s view of differently.

Sanjiv Wadhwani - Stifel Nicolaus

And to confirm retail has also been sort of in the 10% to 20% of revenues range?

Steffan Tomlinson

Historically retail has been smaller, but has been kind of an up-and comer to be a candidate to be in the 10% to 20% range. It’s been lumpy, and there are some seasonality patterns in each of the core five verticals that we focus on. So kind of depending on the quarter, retail has been within the 10% to 20% range, but we do count it as part of the core five because of the large opportunity and the amount of focus and energy we’ve put in to that both internally and externally.

Operator

The next question comes from the line of Ehud Gelblum – JP Morgan.

Ehud Gelblum – JP Morgan

You both mentioned that you believe that in this coming quarter Federal would come back and go back to normal levels. What are you basing that faith on, have you seen any indications from Federal? Are you basing it on the status of just seasonality in the business or have you seen order growth pick up at all so far this last quarter?

Keerti Melkote

So, basically we have a lot of won projects, it’s on programmatic mode in the roll out and then we have won some new projects and both these new projects as well as the programmatic roll out of that one project. We’re basically on hold in pattern in the November, December timeframe, because of the continued resolution situation. And since that situation was removed that we’re seeing the kind of trickling down effect in the momentum is moving again. So, that’s why we are confident.

Ehud Gelblum – JP Morgan

So it has to do with the budget passing.

Dominic Orr

Yes.

Ehud Gelblum – JP Morgan

And you are seeing the orders starting to pick up again, so you can feel good about that.

Dominic Orr

Yes.

Ehud Gelblum – JP Morgan

When you look at the balance sheet, the DSOs were again high, they were high last quarter, because, you’ve had a backend loaded quarter due to a couple of things that you’d mentioned. One, the lawsuit with Motorola, and two, you’d mentioned last quarter Cisco’s introduction of a product that people wanted to take a look at for .n and that’s why the DSOs went up.

Given even what happened here, I would have thought the DSOs may have come down; your accounts receivable would have collected a little bit. Why are they still high? Is there something that we should maybe read into that or understand a little bit better there?

And if you can explain a little more about the inventory, and the levels, you mentioned some, but I’d love to hear some more about your thoughts about the aging of the inventory and how quickly you think you can get that off of your books and back down to normal levels?

Steffan Tomlinson

Sure. So, on DSOs, we were basically flat quarter-on-quarter. We’ve maintained 57 days sales outstanding. We would have liked to have it a little bit lower, and it was modestly above our target range of 50 to 55 days. We’re laser-focused on getting DSOs down.

Regarding the inventory balances, clearly there is sequential increase, and with a couple of weeks left in the quarter, we were still very optimistic about being able to make last quarter, and we built up the inventory to satisfy the demand for deals that ultimately slipped from last quarter.

So, our build plans are being adjusted accordingly. We plan on seeing inventory levels go down sequentially and kind of all that balanced with the fact that we want to make sure that we have enough inventory on hand to satisfy the demand for Q3.

Ehud Gelblum – JP Morgan

So, it sounds like your build plan for this quarter takes into account both the lower revenue number of $41 to $44, but in addition, the fact that you have maybe $5 million extra in inventory, so you’d be building that much less this quarter and expect to come back down again?

Steffan Tomlinson

Correct.

Ehud Gelblum – JP Morgan

Did you mention Steffan what the legal expenses were this quarter, if there are any?

Steffan Tomlinson

I did not, but we spent approximately $190,000 on the Motorola lawsuit, which was down sequentially. And just an update on Motorola, there hasn’t really been very much to report because things basically are running their course. So, the legal expenses will ebb and flow as the case progresses. But right now, somewhere between, call it $200,000 to $300,000 a quarter that’s what we’ve been running at approximately, and we don’t see any change to that in the near term.

Ehud Gelblum – JP Morgan

One thing on the gross margin, the services gross margin actually went up by a lot, I calculated around 77%, as the services revenues actually came down. Should we assume and there were 62% in the October quarter from [760 to 777] if I calculated that correctly, should we assume that it stays at that level as we go forward or is that something unnatural and what was behind that if you can kind of give a little color behind that?

Steffan Tomlinson

Sure, you may remember last quarter we talked about having one large professional services contract as part of the revenue in the professional services and support line that came in at very little gross margins. That did not reoccur this quarter so even though our revenues came down the gross margins for the business in the services and support line came back up, there is going to be some fluctuation.

Ehud Gelblum – JP Morgan

But they were much higher than you were even in the past say two or three quarters ago, you were nowhere near 77%.

Steffan Tomlinson

There are going to be fluctuations and I think that the gross margin in the services line will probably come back to normal in the coming quarter.

Ehud Gelblum – JP Morgan

Is that why finally the EPS guidance is down sequentially versus the $0.01 you did this quarter, while revenue is up slightly, is it mainly the services gross margin coming back down or is it little bit more in the OpEx we should be understanding?

Steffan Tomlinson

There are a couple of things. One is the gross margin, the other is we are going to be planning on making selective investments in research and development and sales and marketing, in international theaters where we don’t see any softness. So there is going to be continued investment in the OpEx line, but it’s a combination of both gross margin and OpEx.

Dominic Orr

And there are exciting product programs that are being funded that are being very actively worked on, that we don’t believe it is prudent for us to slow down because of last quarter.

Operator

The next question comes from the line of Anton Wahlman - ThinkEquity.

Anton Wahlman - ThinkEquity

I didn’t see in your press release the breakdown of the $4.093 million for the stock based, how it breaks down between COGS and the various overhead expenses. Could you go through those numbers please?

Steffan Tomlinson

Yes, $153,000 was for cost of revenues, $1,318,000 was for R&D, $1,713,000 was for sales and marketing, and $908,000 for G&A for a total of $4.1 million.

Anton Wahlman - ThinkEquity

Could talk a little bit about if you have been able to detect any specific demand for your UMA compliance solutions, you had a white paper out also on this in a little bit over a month ago I believe.

And it seems to me that in terms of the cost savings that can be achieved by an enterprise in a harsher economic climate this ought to be an attractive motivation for deploying your systems aside from their capability of fully supporting all of the laptops and what have you. So is it possible for you to detect any specific demand where you can identify the business has come in the door as a result of desire to deploy UMA?

Keerti Melkote

I think in Japan clearly one of the leading deployment factors for us is actually the deployment of dual-mode phones. So in that region we see business coming in directly tied to voice. But if you look at the UMA-based business that you mentioned I’m seeing trials and pilots, but I don’t think we can actually attribute any direct revenue at this point to the deployment of UMA in the enterprise.

Dominic Orr

But there are significantly upturn of interest in North America, so it used to be the interest is in North Asia, North Europe, but I think in the last six months we’re actually seeing significant uptake in interest in pilots in North America.

Keerti Melkote

And again a little bit more color on the whole fixed mobile convergence trend, UMA is basically driven by the service provider side. And what enterprises are looking for is an extension of their desk phone. And so the enterprise FMC solutions are gaining a lot of interest. And we are under trials and pilots in both those areas providing UMA based solutions as well as e-FMC solutions in the market.

Anton Wahlman - ThinkEquity

And of course the solution today is WiFi, would you consider other radio based technologies as they may become of interest to the enterprise maybe a year or two from now in the areas of licensed spectrum femtocells, for example, as they could be the alternative that service providers would be pushing in this regard?

Keerti Melkote

Definitely, Aruba’s core competence of the user-centric architecture within the ArubaOS is media type link level protocol agnostic and we would be able to deploy both in not only in all wireless media environments of various standards also in a wired environment as well.

Operator

The next question comes from the line of Bill Choi - Jefferies.

Bill Choi - Jefferies

A question on AirWave which I guess is set to close in Q3. The deal had a major stock component. You announced the deal when the stock was around $13.50 today it’s around $5. Can you talk about whether this can be reworked or whether we are still looking at a similar amount of stock?

Steffan Tomlinson

So what we discussed on the call prior when we announced the AirWave acquisition was 65% stock, 35% cash. We are going to be basically honoring that and if we have do some fine tweaking to that, we will, but the same amount of the deal consideration will stay the same at $37 million.

Bill Choi - Jefferies

So the stock component could be as much as like 4.8 million shares?

Steffan Tomlinson

That’s something that we are not going to speculate on, but we will do what’s right for the deal.

Bill Choi - Jefferies

Do you have a percentage of sales by repeat customers for this quarter as well as a year ago I think it was like 72% last quarter?

Steffan Tomlinson

Sure, so, install base’s percent of revenues this quarter was 65%. So it was down sequentially from what was kind of near an all-time high of 72% last quarter. I don’t have the year ago period at my fingertips.

Dominic Orr

So it is roughly within range, it’s not an atypical quarter in that sense.

Steffan Tomlinson

Correct.

Bill Choi - Jefferies

Well I mean beside the Fed, like you said you had one program related project that got pushed out due to budgetary constraints. What can you say about the installed base level business from your other verticals? Are you seeing that they might only be let’s say 20% done, but in this environment just saying, “Hey we’ve got these areas done we’re probably not going to look at”. How does that rank in terms of priority versus new customers?

Dominic Orr

I would say most of the deployment continue that I’m aware of several construction projects with a new building when they come on it’s delayed, whether it’s economic or construction project related I don’t know. But we are also do see that even among our installed base some interest of 11n. Sometimes take the customer cycles to evaluate and delaying the normal upgrade because they are trying to decide whether they should do the old product upgrade or roll over to 11n.

Bill Choi - Jefferies

But, what is your general visibility into installed base expanding their wireless footprints, or do you have any kind of incentive specifically for guys who already started with you to continue to build out their wireless network?

Dominic Orr

So, we see customer have two types of operations, typically the kind of accounts we win, we win the central and the IT organization, the architecture. And then from there, there are customers whose wireless projects are centrally funded and then that those schedules are much more visible to us.

The other kind of customers basically once they define the corporate standard, the funding will come from the business line and in those cases we need to work on with those line of business heads and operations people to get each project turn on.

Bill Choi - Jefferies

When you talked about the impact of elongated sales cycles and things, are you seeing more of an impact on guys who already bought your products or new guys who are considering installing your product?

Dominic Orr

I would say probably more for the new projects, that we’ve seen the elongation. For the existing customer the elongation is more likely due to technology evaluation and features evaluation.

Operator

The next question comes from the line of Anil Doradla - Caris & Company.

Anil Doradla - Caris & Company

You said I think about 50% more projects in the pipeline or something like that. What is it by new customers, new projects, new rollouts, how do we look at the 50% new projects?

Dominic Orr

Sorry, I don’t believe that’s something that we’ve said.

Anil Doradla - Caris & Company

So you talked about four verticals out there, would it be fair to say a majority of them are the new projects in those four verticals, or are there any particularly new verticals that you’re seeing new projects in?

Dominic Orr

No, no, actually, we’re seeing new projects in all kinds of verticals. We’re just saying that we’re seeing the spending definitely have not slowed down in those verticals.

Anil Doradla - Caris & Company

You talked about 802.11n shaping up actually ahead of your forecast? And can you give a little bit more color on that?

Dominic Orr

I think right now, we have dozens of paid customers, and we have many, many pilots. That’s the extent to which, I would like to relate information to you.

Anil Doradla - Caris & Company

So, in terms of 802.11n break-up between n and non-n, I mean is it going to be more than 10% of the revenues going into the quarter, or I mean how do we look at it?

Dominic Orr

It is hard because we have controllers and all our controllers are 11n ready, and we have software that applies to all media type. Access point is the only components that are different for the a/b/g versus the n. When we look at projects; we look at projects as a whole.

So, it would be very hard to kind of just piece out. And even for some customer who decided to do 11n, some of them choose to do 11n on a high-density area for the hotspot area and so on. Whereas the other portion of the network is still staying with 11a/b/g either for historical installed reason or for a cost reason, because 11n still is a more expensive technology.

Anil Doradla - Caris & Company

So basically what you are saying is that because the access controllers, the multi-purpose access controller a/b/g and n, it makes it a little difficult, because access points you clearly know where your access points are going right?

Dominic Orr

We’re saying that yes because the access point is really just one product of a big solution that we’ve delivered.

Operator

Your next question comes from Blaine Carroll - FTN Midwest Securities.

Blaine Carroll - FTN Midwest Securities

Dominic, one of the things you mentioned was the increase in sales and marketing in the international markets, and I am wondering if that isn’t an effort to go more direct sales or whether it’s to support your channels over there?

Dominic Orr

Our international model is 100% indirect fulfillment, but in each geography we have a direct touch model because of the type of account that we target required a direct touch. So, the investment will go in terms of investing in territory managers, system engineers, and the marketing funding for our channel partners and training and demo equipment and so on.

Blaine Carroll - FTN Midwest Securities

First of all, cash flow from operations, secondly, if you could touch on the share count during the quarter, it went down sequentially, what should we be looking at for share count going forward. And then just getting back to the AirWave’s question, if you do issue more stock at what point does it become a dilutive acquisition during fiscal ‘08?

Steffan Tomlinson

Cash flow from operations was a positive $4.1 million. Share count in the quarter declined primarily because the stock price declined. And when we go through the treasury method, etc., we had a lower share count. What we’re looking at for the share count for next quarter on a diluted basis is roughly 90 million. So, it will be roughly down $1.2 million sequentially.

And regarding AirWave and potential to give a dilutive impact to the company, it’s too soon to speculate in terms of what we’re going to be doing other than saying the total deal consideration is $37 million. We will have a split between cash and stock. And if we have to modulate the percentages we will do so, but we will always keep an eye towards making sure that we’re doing everything in the best interest of our shareholders.

Blaine Carroll - FTN Midwest Securities

Who determines that modulation, you guys or AirWave’s?

Dominic Orr

Obviously, it’s a mutual consideration.

Operator

At this time I would like to turn it back to management for closing remarks.

Dominic Orr

I want to thank you for your attention and your time for attending to our quarter Q2 conference call. Have a good day.

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