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

Executives

Maria Riley - Director

Dominic P. Orr - Chairman, Chief Executive Officer, President and Chairman of Corporate Development Committee

Michael M. Galvin - Chief Financial Officer and Principal Accounting Officer

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

Analysts

Kent Schofield - Goldman Sachs Group Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

Jason Ader - William Blair & Company L.L.C., Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Lynn Um - Barclays Capital, Research Division

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

Amitabh Passi - UBS Investment Bank, Research Division

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

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Matthew Hoffman - Cowen and Company, LLC, Research Division

Aruba Networks (ARUN) Q4 2012 Earnings Call August 23, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Aruba Networks Fourth Quarter and Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 23, 2012. I would now like to turn the conference over to Maria Riley with 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 fourth quarter and full year 2012 results. This call is also being broadcast live over the web and can be accessed through the Investor Relations section of the Aruba Networks website at www.arubanetworks.com.

With me on today's call are Dominic Orr, Aruba's President and Chief Executive Officer; Michael Galvin, Aruba's Chief Financial Officer; and Keerti Melkote, Aruba's Co-founder and Chief Technology Officer.

After the market closed today, Aruba Networks issued a press release announcing the results for its fiscal fourth quarter ended July 31, 2012. 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 send you a copy.

We would like to remind you that during the course of this conference call, Aruba Networks' management will make forward-looking statements, including statements regarding the company's expectations regarding growth drivers, including the rapid proliferation of mobile devices, BYOD and IT spend; customer adoption and penetration of our MOVE architecture mobility access, which is a software solution; the company's ability to penetrate larger accounts; and the company's future economic performance, pipeline, financial condition, 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 would 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 view in the future, and we undertake no obligation to update these statements after this call.

For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q, filed with the SEC on June 7, 2012, 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.

I would like to announce that Aruba Networks will be attending the Jefferies Semiconductor & Hardware Corporate Access in Chicago on August 28; Deutsche Banks' Technology Conference in Las Vegas on September 12. We look forward to seeing many of you there.

Now, I would like to introduce 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 fourth quarter and full year 2012 conference call. In fiscal 2012, we grew revenue by 30% to $516.8 million, increased non-GAAP gross margin to 73% and increased non-GAAP operating margins to 20.8%. Additionally, we generated $112.9 million in cash from operations while repurchasing approximately $20 million of our common stock. In light of the volatility of the current macro environment, we are pleased with our execution throughout the year.

Moving to the details of the fourth quarter, we achieved our 13th consecutive quarter of record revenue, growing 22% year-over-year and 6% sequentially to $139.2 million. Our traditional key verticals, including education, healthcare and government, performed well in the quarter, and we had strong growth in the general enterprise, including managed services.

We experienced bookings growth in the key geographies in all 3 of our major theaters, with the exception of Southern Europe, which has a small percentage of revenue. We continue to believe that core wireless LAN demand remains very solid, and our bookings and linearity in the quarter were consistent with past Q4s.

Our value proposition continues to resonate with customer worldwide as organizations try to deal with the rapid proliferation of mobile devices and the BYOD phenomenon in the workplace. These trends will continue to fuel our momentum, and we believe our BYOD management solution uniquely solves this growing problem, and will continue to drive Aruba's growth for many years to come

Beyond BYOD, as new applications, such as unified communication and collaboration or UCC, move from the LAN Edge to the Mobile Edge, Aruba's highly secure context-aware MOVE architecture is well-positioned. In July, our MOVE architecture received qualification for Microsoft Lync Server Wi-Fi compliance program. This made MOVE the first wireless LAN solution that meets Microsoft Lync's standards in terms of quality of service delivery for voice and video. We are proud of this achievement as it exemplifies our unique context-aware approach of improving service delivery at the RF level by using intelligence about the user, device, application and location. Taken together, BYOD and UCC applications, such as Lync and FaceTime, are driving a higher requirement for network availability.

Our demonstrated differentiation and high availability against our competition assures that BYOD and UCC applications continue to perform flawlessly and without interruption. This differentiated approach to the mobile access network allows us to continue to win at a high rate, and we are in a strong competitive position as application providers enable a migration to wireless with the default connection at the Edge.

During the quarter, we added a record number of new customers, and our rate of quarterly new customer acquisition had accelerated throughout our fiscal 2012. We had solid bookings across all of our product lines, including Aruba Instant, a virtual controller product, which is extending our reach into distributor enterprise and mid-tier. We saw good traction with our mobility access switches, and we continue to make progress with our ClearPass platform. Our sales pipeline, requests for evaluations and bookings for ClearPass continue to rise and continue to exceed our expectations.

Key wins across our product portfolio included a Fortune 500 energy services company, a global technology equipment manufacturer and a global enterprise software company, all implementing ClearPass for services, such as on-boarding new devices, guest access and access policy management; a leading European restaurant operator deploying Aruba Instant to provide secure mobile point of sales and guest access applications across their locations; an operator of healthcare services using Aruba Instant for patient and staff access across its facilities; displacing a major competitor at a luxury car manufacturer that is now using Aruba to build its wireless LAN across its corporate campuses and manufacturing sites; some of the largest 20 school districts in the U.S., along with several other education institutions adopting Aruba Wireless LAN and our mobility access switches for their unified access system.

Additionally, we had solid growth for managed services among the general enterprise, where we sell our products through service providers. Our MOVE architecture's comprehensive management and deployment tools enable service providers to deploy secure wireless services faster and at a lower cost of operation, representing a profitable growth opportunity for them across diverse verticals. As examples, Q4 wins in the U.S. included a professional sports arena, a large quick-service restaurant chain and a major real estate management company.

In summary, we are successfully penetrating large enterprise accounts, while growing our business in our core vertical. Our success in winning large accounts position us well to expand our repeat revenues and accelerate our growth rate in the future. Our results this quarter further demonstrate our clear technology differentiation and leadership position and I'm pleased with our solid execution.

I would now like to turn the call over to Mike for a detailed financial review of the quarter.

Michael M. Galvin

Thank you, Dominic. In Q4 2012, total revenue came in at $139.2 million, a 6% increase sequentially, and 22% year-over-year. Product revenue of $117.1 million increased 6% sequentially and 21% year-over-year. Professional services and support revenue of $21.9 million increased 4% sequentially and 33% year-over-year. U.S. revenue grew 15% year-over-year, representing 63% of total Q4 revenue. EMEA revenue grew 48% year-over-year, representing 16% of total revenue for Q4. And Asia Pacific/Japan grew 34% year-over-year, representing 18% of total revenue.

On a sequential basis, United States showed strong momentum, growing by 14%. Total non-GAAP gross margin in Q4 was 73.6%, a 270-basis point increase from 70.9% in Q4 '11 and a 120-basis point increase from 72.4% in Q3 '12. Our Q4 '12 non-GAAP gross margin is above our guidance range of 70% to 72% due to favorable product and geographic mix, as well as our continued technology differentiation and competitive position. Q4 non-GAAP product gross margin was 72.9%, a 340-basis point increase from 69.5% in Q4 '11, and a 170-basis point increase from 71.2% in Q3 '12. Our non-GAAP services gross margin was 77.3% compared with 78.3% in the prior quarter and 78.8% in the same period a year ago. We continue to make both headcount and IT infrastructure investments in our services business.

Non-GAAP research and development expense was $20.5 million. As a percentage of revenue, R&D was 14.7%, slightly above Q3 '12. Non-GAAP sales and marketing expense increased to $44.2 million in Q4 from $40.6 million in Q3. As a percentage of revenue, Q4 sales and marketing expense was 31.7% compared to 30.7% in Q3. The increase was primarily due to incremental headcount-related investments and commissions.

Non-GAAP G&A expense decreased to $7.6 million in Q4 from $8.5 million in Q3 '12. As a percentage of revenue, G&A expense in Q4 was 5.5% compared to 6.4% in Q3. Our G&A expense can vary quarter-to-quarter based on the timing of professional service fees related to legal, accounting and compliance matters. Total headcount at the end of Q4 was 1,223, an increase of 57 from the prior quarter.

In total, Q4 non-GAAP operating expenses were $72.3 million or 51.9% of revenue, slightly up from Q3 '12. While we will continue to make investments in the business, we expect to grow revenue faster than expenses as a general trend.

Our non-GAAP operating profit in Q4 was $30.2 million or a record 21.7% of revenue, an increase of 110 basis points from the prior quarter. Our non-GAAP tax rate was 26.3% in Q4, and we finished the fiscal year with a full year non-GAAP tax rate of 28.1%, within our guidance range of 28% to 29%. Our improved tax rate in Q4 was due to the final true up of geographic mix of revenue and other discrete tax items. As we have previously discussed, 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 or interpretations. We expect our full year 2013 non-GAAP tax rate to be approximately 28%.

Non-GAAP net income for the quarter was $22.1 million or $0.18 per diluted share. This compares to $19.4 million or $0.16 per diluted share in Q3 '12 and $20.2 million or $0.17 per share in Q4 '11. The weighted average shares outstanding were 120.4 million shares on a diluted basis in Q4.

On a GAAP basis, net loss was $3 million or $0.03 per share compared with Q3 '12 net income of $6 million or $0.05 per diluted share, and a Q4 '11 net income of $68.2 million or $0.50 per share on a per-diluted share basis. As a reminder, GAAP Q4 '11 net income included a onetime tax benefit of $72.8 million, equal to $0.61 per share related to the establishment of our international operating entity. A full reconciliation of GAAP and non-GAAP information is contained in our financial results press release issued this afternoon.

For full fiscal year 2012, we achieved revenue of $516.8 million, up 30% from $396.5 million in 2011. Non-GAAP full year gross margin improved 140 basis points over 2011 to reach 73%. Full year non-GAAP operating margin grew to 20.8% from 17.8% in 2011, and non-GAAP net income of $77.5 million was up 12% over the prior year's net income of $69.3 million.

Turning to the balance sheet, we finished Q4 with cash and short-term investments of $346.2 million, an increase of $29.7 million over the prior quarter, and $112.3 million over July 31, 2011. Cash flow from operations in Q4 was a record $42.1 million and $119.9 million in FY '12.

During the fourth quarter, we announced a $100 million share repurchase program. Under this program, in the fourth quarter, we purchased 1.4 million shares of stock at an average price of $14.10 per share for an aggregate purchase of approximately $20 million. The weighted average shares outstanding impact of the buyback on the quarter's diluted share count was approximately 240,000 shares. Q1 '13 will reflect the full benefit of the 1.4 million shares repurchased.

We ended Q4 with $80.2 million of accounts receivable, a decrease from the Q3 '12 balance of $83.6 million. Days sales outstanding improved to 52 days, a decrease from 57 days in Q3 '12 and 54 days Q4 '11. Our DSO target range remains 50 to 55 days.

Total deferred revenue of $103 million increased 50% year-over-year and increased $11.6 million or 13% from Q3 '12. Short-term deferred revenue of $80.6 million increased 48% year-over-year and increased 14% sequentially. The primary changes in our deferred revenue balances are due to the inventory stocking orders of our value-added distributors. Aruba inventory totaled $22.2 million at the end of Q4, an increase of $1.7 million from the end of Q3.

Let me now turn to our first quarter of fiscal 2013 guidance. While the macroeconomic environment remains mixed, we continue to see strong demand for mobility products across our platform. We also plan to ramp our investment in our sales and engineering efforts to build upon our market position and technology leadership. Balancing all of these factors, we expect Q1 '13 revenue to be in the range of $141 million to $143 million, an increase of 18% to 20% year-over-year and 1% to 3% sequentially. We expect non-GAAP EPS to be approximately $0.17 per share using 122 million shares on a diluted basis.

With that, let me turn the call over to the operator to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from the line of Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Referring back to the guidance that you just gave, can you help us understand what you're thinking about in terms of the macroeconomic environment, given, especially you just put up such a strong quarter?

Michael M. Galvin

Yes. Kent, yes, the process of going through our forecast and our guidance. Obviously, we follow the same mechanics every quarter with regards to the buildup of the pipeline, the sales management forecast, et cetera. With that, we absolutely take into account things like the macroeconomic environment and that plays into it. We also take into account, if you look at our historical Q4 to Q1 revenue ramps, this guidance range is pretty consistent with the delta and growth rate between those. So we take all that into account and feel good about the range we put out there.

Dominic P. Orr

So I think Q1 visibility is good. We feel good about the pipeline, we feel good about the competitive position. Revenue is ramping in all across the board in terms of the portfolio. So the -- however, Q1 remains Q1. We normally -- is in a stocking position to prepare for the next fiscal year. We're increasing the field and R&D staffing. So sort of -- this is -- we feel this is the right prudent compromise.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Great. And then as a second question on the -- you just put up -- it looks like your best gross margin, or second best gross margin quarter from a product gross margin standpoint. How should we think about that flowing into Q1 and what sort of impact does that have on the operating margin?

Michael M. Galvin

Yes, Kent. We -- obviously, we feel really good about the gross margin performance. There's always variables in that, whether it's product mix or geo mix. There, from a product perspective, across the product lines, it performed well. Our APs continued to perform well. Also this quarter, you can see the strong sequential growth in mix of the Americas business and the U.S. business. As you guys know from past history, that is our strongest gross margin geography, if you will. So that plays into account in the results for the quarter. Our guidance range of 70% to 72%, we feel really good about, and really, even the high end of that range based on the dynamics we're seeing. We also feel, just in terms of competitive pricing and the way we're standing up in this environment against the competitors is favorable. And so all those things, we feel good about the high end of that range. Because of some of these things like geo mix does change quarter-to-quarter, that we feel the 70% to 72% is still the good range, but the high end of that range, we feel good about.

Dominic P. Orr

I want to further comment that we achieved this level of gross margin despite some of our larger competitors being very, very price-aggressive in some of the larger deals. So this is some of the proof about the differentiated offering of Aruba. In our target market, people buy on value and buy on total cost of ownership. So despite those bigger competitors trying to drop price, they did not succeed.

Operator

The next question is from the line of Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

The U.S. was up 14% sequentially following a quarter. I think it was just up 1% prior quarter. Was there some catch up during the quarter, or was it really the educational vertical which caused the higher growth rate for the U.S.? And in your classification of the macro, do you -- would you say that it's kind of business as usual or back to usual, all theaters except Southern Europe?

Michael M. Galvin

Yes, Mark. So the U.S. did have a strong sequential quarter. One thing you guys can look at is our Q4 is, if you look at the theater mix, it was pretty consistent. Europe and Asia on a sequential basis, Q3 to Q4, tend to have weaker quarters. The U.S. tends to have stronger sequential quarters. And so that really held through this year and that includes our core verticals in the education markets, et cetera. That was all pretty consistent. So that's the primary dynamic behind that mix.

Dominic P. Orr

And I think comment about macro condition outside -- around the world. Yes, other than Southern Europe, we actually -- we're still cautious of all of Europe. But for domestic and from the point of view of Asia Pacific/Japan, we feel pretty good.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And then on ClearPass, maybe if you could just give your thoughts on the size of deals. And maybe some -- recognizing it's early, some commitments from customers to whether or not they will make a big bet, all-in bet with Aruba from the -- from an architectural point of view?

Dominic P. Orr

I would say at this moment, our strategy is to satisfy the BYOD management aspect. That's the biggest paying [ph] point, and the access policy management, those are the key. But we are seeing significant -- in the pipeline and in deals that are closed that there is a significant number of deal that has the prolonged factor for other product portfolio. I would not go so far as to say full MOVE commitment from the customers. I -- the full MOVE architecture commitment deals tend to come from already long-established Aruba customers that already kind of well deployed in the wireless LAN side. For the ClearPass customer, particularly the new one, we're focusing mostly on the BYOD management.

Operator

The next question is from the line of Ryan Hutchinson with Lazard Capital Markets.

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

Two questions. First, on -- just some commentary, last quarter you talked about government projects that were frozen. Is that part of the strength that we're seeing with respect to North America? So it's somewhat of a follow-up. And then the visibility, with respect to that vertical coming up here in the October quarter. And then the second question has to do more with just the overall market, as you look out to 2013, understanding that you're not giving full year guidance, but just to get a sense, is the trajectory that you've provided in the first quarter relatively consistent with what you're thinking for their full year in the overall market, and that perhaps you would gain share, which would imply roughly plus or minus 20% growth?

Dominic P. Orr

Got it. Ryan, regarding the Q3 federal projects flow-through, that is a little bit of element of that, but not a whole lot. In terms of visibility of project in the -- in federal this quarter, it is good. I'm happy with the level of pipeline we see there in our assessment of closure rates. I think -- in terms of general statement, I like to make in the federal business, looking forward to the new coming fiscal year, first of all, I think our security features continue to bring us the unique differentiation that still continue to be a very strong point of selling. But we're also benefiting -- I believe we will be benefiting from a lot of budget pressure around the federal government. What -- if you recall, 2 years ago, we have a benefit from the overall infrastructure, network infrastructure rightsizing movement because of the budget constraints on the enterprise side. But we are starting to see that in the U.S. government as well. So I think there will be several mid-term to long-term benefit from the network rightsizing shifting to wireless. So regarding the 2013 outlook, I can say is the vision and the strategy we announced in our Analyst Days in March about how we are going to use access management and BYOD as an entry point into larger enterprise, getting access to those large enterprise for annuity business. I can tell you now that we have 2 quarters into the strategy now, I'm much more convinced and confident that we're on the right track.

Operator

The next question is from the line of Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

Just compare and contrast, with the last quarter, obviously, you kind of ramped down spending at the end of last quarter. The DSOs were pretty high. They've come down a lot. Just can you give a sense of how this quarter felt versus last quarter? I mean, was it a -- did it feel significantly different in terms of the overall and how orders were coming in throughout the quarter and just the general sense that you had as the quarter progressed?

Dominic P. Orr

Yes. I think as we commented in the previous quarter's earnings call, it -- the quarter kind of came together late in the quarter. And we commented early on the prepared script that this quarter, the linearity was very, very much in line with the previous -- all the previous Q4s, which tend to be more linear. So yes, it was a more manageable quarter.

Michael M. Galvin

Yes. And Jason, I think the cadence there was very good through the quarter. And obviously, that kind of visibility, the investment portfolio was healthy, which it should be, both in headcount and programmatic spend. And so we feel really good about the investments we're putting down in the business.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. Then just a follow-up, as we look forward to catalysts over the next, let's say, 12 months, next fiscal year, how much do you guys feel like the Microsoft Surface tablet could be a Catalyst only because now you'll be able to -- can truly replace the laptop with all of the traditional Microsoft applications?

Keerti Melkote

Jason, this is Keerti here. Yes, I mean, it's actually is continuing to fuel the BYOD move, and from our perspective, more the merrier, right? So we see Microsoft tablet as being yet another tablet that will make its way in from the personal perspective and it's going to drive up the density of the wireless LAN and continue to drive demand for our products.

Dominic P. Orr

And one thing that I think is going to help in the whole movement is because there is, in the BYOD environment, some of the resistance by adoption rate; being faster is the IT administrators' kind of concern about manageability and the general expectation is the Microsoft platform will be more manageable for traditional management technique. So we expect that, that will actually will actuate some business.

Operator

The next question is from the line of Brian Modoff with Deutsche Bank.

Brian T. Modoff - Deutsche Bank AG, Research Division

Dominic, can you talk a little bit about the SMB market, how that's going for you in terms of, I know that's been a focus for you to penetrate. How -- what percent of revenues it is now? And how the overall market is shaping up for you in terms of getting in there, and how those distributors are reacting to your product?

Dominic P. Orr

Okay. So we actually -- I'm trying to get to the kind of the lower end of the -- and the middle of the mid-tier market with the Aruba Instant product line. We actually have not -- without mention to say that we're in the SMB section yet. So as far as Aruba Instant is concerned, I'm extremely pleased with its ramp, both in the distributor enterprise environment, as well as in the mid-tier environment. We're also seeing adoption in the -- some of the retail environment, as well as the K-12 environment. So -- and that's as far as I can say.

Michael M. Galvin

Yes. Brian, that also shows up, that, that mid-tier growth we're having shows up, our customer count has been accelerating throughout the year and that definitely helps on it. And we've talked about this before, but the gross margin profile of that business fits right into our -- the gross margin profile of the company, which is very encouraging.

Operator

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

Lynn Um - Barclays Capital, Research Division

I had a question on the managed services. You've talked about it from past 2 quarters, I guess. How -- I guess, what kind of an impact does that have on the overall gross margin profile?

Dominic P. Orr

The reason we're staying with the managed service portion of the service part of business is that it has a very similar profile to the enterprise business model. So we are very pleased about the rate it is going and also the gross margin profile.

Lynn Um - Barclays Capital, Research Division

Okay. And then just a follow-up. I guess bigger picture, I think the long-term model you gave at your Analyst Day was 67%, 70% in terms of gross margin. Could you just remind us again the variables that would take us to those levels from the current levels that we're at?

Michael M. Galvin

Yes, Lynn. It's really not surprising, when it comes down to product and geography. From a geography standpoint, we do plan to continue to grow the international part of the business. That definitely carries a lower gross margin with it so there's a weighting factor. On the product side, we do have a mix. We've got some weighting factors down like the switch. ClearPass is going to begin to bring some professional services revenue with it, which has a lower margin. And then -- but on the other hand, ClearPass software is obviously good gross margins. So we weigh all that out, and we do keep the long-term rate at 67% to 70% right now. Maybe the question is what's long term? We feel really good about where the gross margin profile is right now and the way it's performing. And so definitely, in the midterm, we feel really good about that in maintaining those levels.

Operator

The next question is from the line of Bill Choi with Janney Montgomery Scott.

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

Dominic, you talked about your strategy outline at the Analyst Day being on track, and I think that had 2 elements to it, which was the general enterprises in particular, that deal sizes are going to be big, and also the sales cycles are going to be long. I just want to make sure how much of a handle you have on that. So we have the average deal size has been getting larger and any way to quantify that? And also, has the average sales cycle kind of stabilized here as you get your handle on this? And then the last part of this is, if you do, can we see that acceleration in year-over-year growth rates?

Dominic P. Orr

Okay. So I think the element of the sales cycle has to relate to not Aruba, but the nature of getting into those larger Global 2000 multi-national. Obviously, we are not there to influence how fast they buy but we are there to influence whether they deploy the ClearPass solution and the BYOD management solution as an entry point. And for that, actually, the sales cycle is very good. In fact, as I mentioned in my prepared comment, by all measure, it exceed expect -- exceeded our expectation. So the -- we believe we have seen now enough cases that once we get into these larger enterprises, the full portfolio of Aruba product are starting to be evaluated. So the -- when I say that I'm more confident than ever, I'm -- I want to clarify that yes, this strategy of using our current portfolio with the leading ClearPass and BYOD management solutions to get into this larger account is working. It's working very nicely.

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

And so the end result of that is that you anticipate at some point the year-over-year growth rate to re-accelerate. So how far away are we from seeing that if you're starting to get a good sense for these larger deals now?

Dominic P. Orr

Obviously, I -- we all need, restricting to the forecast for the next quarter, which we have just given guidance. but I think in my Analyst Day discussion, I mentioned that any of this larger account is going to take a multi-quarter to get traction. And I am just going to report back and say we are getting traction.

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

Okay. And then ClearPass, any way to get some sense of attach rates to the deals, whether it's the larger deals, which verticals you're seeing that on? And as a result of that, broadly speaking, what is the mix between access point controllers and software modules?

Dominic P. Orr

Okay. So there's really 2 aspect of the sales. One is selling into our installed base. And if you look into the ClearPass sell into installed base, I actually looked at it recently and it is almost directly proportional to the verticals. So basically, we were surprised about the uniformity of the needs for ClearPass. We thought it was one vertical we needed more than the other. It turns out that, at least, in our installed base, that is quite uniform. And then for the general end of -- the new prospects, they are more skewed towards general enterprises. And that is exactly what our strategy guidance holds. And in terms of mix of -- the ClearPass software running on either virtual machines or on physical servers. So there's no direct relationship with controller and access point, but we have seen cases of ClearPass standalone. We have seen sales where the ClearPass, a $1 ClearPass can pull up to $3 of Aruba core products line -- products. And right now, it is too preliminary for me to make a statistical statement on it. I'm just giving you anecdotal information.

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

That's great. And, Mike, lastly, what is the number of new customers added in the quarter?

Michael M. Galvin

Yes, Bill. Last quarter, we stopped breaking that out explicitly. It was a record this quarter. And part of the reason we stopped doing that is because as we've emerged into the mid-tier, with our historical enterprise customers, that had a specific meaning to it. And now with the mid-tier customers coming in, there's really 2 different dynamics of the customer base there. And so we feel really good about the growth of both of them, but we -- the numbers are accelerating, and they're big. And so we just kind of thought we'd come back to you when we crossed 30,000 or something like that. So it's -- on a quarter-to-quarter basis, we just stopped reporting those.

Operator

The next question is from the line of Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Just a couple of questions. First one, depending on where your stock opens tomorrow, probably around $19, how should we think about your appetite to continue to exhaust the remaining $80 million in your authorization plan?

Michael M. Galvin

Oh, on the stock repurchase?

Amitabh Passi - UBS Investment Bank, Research Division

Yes, yes.

Michael M. Galvin

Yes. So we're not being explicit with our future plans. Obviously we described what we did in Q4. We continue to look at all the dynamics around our capital structure, use of cash, dilutive -- the dilution on our shares, et cetera. So we tackle it every 90 days, and obviously, our cash generation in the company is very strong, which is a great factor. So we'll tackle it these next 90 days and come back to you.

Dominic P. Orr

But on a Board of Director level, that $100 million have been put aside. So that stock repurchase, there's -- we have no second thought about it, so...

Amitabh Passi - UBS Investment Bank, Research Division

Okay, excellent. And then just -- I don't know if you can help us here. If we assumed top line growth of around 20%, can you help us just -- maybe give us some guidelines in terms of the variable nature of OpEx? How should we think about OpEx growth relative to revenue growth, if indeed we assume something like 20% growth for fiscal '13?

Michael M. Galvin

Yes. Again, as a general trend, we absolutely have shown there's leverage in the model. We think we'll continue to do that. As we've approached some of these key target levels that we went after, the first one really being 20%, we've slowed that growth down intentionally to invest in the business. We just think the return on our OpEx money to top line growth is very good for the future outlook. So we're going to continue to do that. So we plan to deliver, I'll say, incremental, but the pace of the incremental will slow down significantly. And we're really going to invest for that top line.

Operator

The next question is from the line of Rohit Chopra with Wedbush Securities.

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

I don't want to take anything away from the quarter, and you did well for the year, but I want to ask you about the quarter particularly in competition. If you look at Cisco, they grew roughly the same year-over-year, actually just a little bit more than you. So could you talk about how -- you did mention a little bit about this, but talk a little bit more about competition and what you're seeing? I know they have a product cycle.

Dominic P. Orr

Right. So let me separate about competition, and then the numbers. So from a competitive point of view, for the large enterprise against a larger competitor, I feel very, very good. I think if you asked me the last 12 months, I feel like we are in the most superior position. We have recently demonstrated again and again because of our Layer 4-7 awareness capability, we can differentiate traffic, support multimedia better, support high density better. We have recently announced high availability on supporting the UCC applications, much better than all the other competitors in the large enterprise space. So I feel very, very good despite there's some probably chest pounding by some of them. But I think it's just some new hands pounding old chests. And that's what it is, old chests. Now, for the low -- the smaller competitors, we continue to see them active in the lower mid-tier and particularly the K-12 space, and that's an area that we have unleashed Aruba Instant. And that is still growing well. And I'm very, very positive in the next 2, 3 quarters, we are going to put a lot of pressure on the smaller guys. I have no doubt about that. Regarding numbers, I want to emphasize that we -- our core target market is large and medium enterprises and distributor enterprises, large campuses. And with Aruba Instant now, we're taking it down a little bit lower in the mid-tier. But we do not participate in SMB, we do not participate in carry infrastructure, we do not participate in some of the countries where the service provider hotspot market do not return gross margin. The numbers that you have quoted from other companies, they have -- they lump everything together. So I have no problem looking at my market space. That way we think that we are very differentiated. We have very high gross margin business in those area. I believe I'm doing very well, and we're gaining share.

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

Dom, and I just want to follow-up with Alcatel and Dell. Are they moving in an upward direction this quarter versus last quarter?

Dominic P. Orr

I think the OEM relationship have up and down quarter. I think generally speaking, they are growing roughly at the pace of Aruba's business. For the Alcatel, Alcatel really has bigger exposure to -- in Europe. So you can see proportionally that, like everybody who has concentration of business in Europe, the European part of the business is more challenging.

Operator

The next question is from the line of Tavis McCourt..

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Mike, deferred revenues were very strong as you mentioned before, but I think they're even stronger than last year's Q4. And I'm wondering, what was the dynamic that drove that specifically? What were the channel inventories, relatively lean coming out of last quarter, or any incentives in place for that? And then secondly, I wonder if you could talk a little bit about the roadmap for ClearPass. Should we expect this ultimately to become a true kind of mobile device management suite to displace some of those solution points of vendors out there? Or is that not the goal for that?

Michael M. Galvin

Okay, Tavis, on the deferred revenues, yes, without a doubt, the biggest variable there is those stocking levels of the VAD. And not surprisingly, those new orders for restocking come in usually late in the quarter. There is some timing differences. Sometimes, they do happen literally in the last 10 days of the quarter, and sometimes they happen in the first 10 days of the next quarter. So we do get lumpiness on the snapshot that happens at the balance sheet. I do think though, if you take kind of a rolling quarter average of that balance, you get a very accurate depiction of where the VADs are and the kind of business they're doing with us. They run a very tight margin cash flow-based business, and their turns are extremely high for obvious reasons. And so they've only got one interest in buying inventory, and that's to get rid of it. And so that remains true. So I think if you get over a little bit of the lumpiness at the quarters and take a rolling quarter average, you got a reflection of how that business is doing.

Dominic P. Orr

And Tavis, regarding the -- our ClearPass investment and go-to-market strategy, this space of mobility management is a very wide space. We see a lot of benefit for combining mobile device management, mobile application management functionality provided by a lot of our ecosystem vendors, our partners and our basic ClearPass functionality. I think there might be a 5% to 10% overlap of functionality here and there. But in general, our position in front of the customer, in front of the market is to enhance the value of the mobile device management and application management vendors' offering, using ClearPass as a base.

Keerti Melkote

And if you look at the deployments in general, what we've seen is MDM typically gets deployed when it's a corporate asset. And our solutions do get adopted when it's a personal device because we don't extend the whole management to the device. We just provision the device to be on Board. That's the main difference. And -- which is why we see the core system to continue to have MDM players along.

Michael M. Galvin

And in fact, we do have a very active ecosystem partnership of -- practically all the MDM vendors.

Operator

The next question is from the line of Matthew Hoffman with Cowen and Company.

Matthew Hoffman - Cowen and Company, LLC, Research Division

Dominic, let me follow-up on the earlier Microsoft question and some of your prepared comments on Microsoft Lync. I think you were asked about the Surface tablet earlier. But I was hoping you could -- I could get your take on the impact of embedding Skype in the WinGate product, where do you think you see generally will be a bigger driver for BYOD or whether it's still all about apps in the enterprise?

Dominic P. Orr

Okay. Matt, if you don't mind, I'm going to defer it to Keerti to answer.

Keerti Melkote

So in terms of BYOD, I think the first wave of BYOD was really devices. And we saw IOS devices, Android devices and with Microsoft tablets. We'll see the surface also makes it wave. The next wave we see happening is really the apps that are running on the tablets and IOS devices and so on. In fact, the first impact we are seeing is really around UCC where you're taking applications like Lync, applications like, FaceTime, even collaborations applications like GoToMeeting and so on that are being used on these tablets. So what's happening is BYOD is combining with UCC and driving the availability requirement of the network higher. And also, the QoS requirement obviously, because of these our interactive applications, is also going way up. And if you look at prior schemes, you could differentiate applications by the device. So if you had a phone, a physical hard phone or a computer that only separated data, you can no longer do that. You can't connect device to a port and say this port belongs to voice, this port belongs to data. You have to understand application that is running inside the device, and then apply the right quality of service technique. And what they have done in the architecture, MOVE architecture, is build that context awareness around the user, the device, the application and location, and then apply the right policy. So that is application that's what we do.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

So that might suggest denser build-out from the future maybe if UCC becomes a more important app going forward?

Keerti Melkote

Absolutely, yes. I think we've already seen netbooks migrate from pure coverage model to a capacity model and we continue to see that happening.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Great. And last question for Mike here, inventory did tick up slightly after several quarters of trending down. Are we at the end of the road here with cash generation, coming not from pulling down inventory number and just help us think about that number moving into first half of the next fiscal year.

Michael M. Galvin

Yes. It was up slightly. We do feel good about the inventory management. We definitely feel good about the cash generation. And we've obviously got a profitable model. And we just continue to work our working capital prudently. So I don't have an explicit guidance on that number except to say we feel good about it. And we feel good about the continued cash generation for the company.

Dominic P. Orr

Well, again, we thank -- we thank you all for being on the call today. I'd like to take a moment to thank our valued employees, customers and partners for your dedication and commitment and hard work. Thank you for listening, and we're looking forward to updating you on our progress the coming months. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.

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 Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts