Aruba Networks: Remain On The Sidelines Despite The After Market Jump

| About: Aruba Networks, (ARUN)
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Aruba Networks (ARUN), the seller of wireless local area networks, reported its fourth quarter results on Thursday after the close. Shares of the company rose some 15% in after hours trading.

Fourth Quarter Results

Aruba Networks reported fourth quarter revenues of $139.2 million, up 22% on the year. On average, analysts expected revenues to come in at $136.8 million. The company reported a GAAP net loss of $3.0 million, or $0.03 per share. Last year, the company earned $68.2 million, which included a one-time tax benefit of $72.8 million.

Non-GAAP earnings came in at $22.1 million, or $0.18 per share. This compares to earnings of $0.17 per share last year. Earnings beat analysts consensus by a penny.

During the quarter, Aruba Networks made sure it complies with Microsoft's guidelines for voice and video. According to tests, Aruba's Wi-Fi networks, showed a 75% better performance compared to Cisco's comparable networks.

Furthermore the board of directors, authorized a share repurchase program of $100 million. During the final quarter, Aruba repurchased roughly 1.4 million shares, at an average price of $14.10 per share, for a total consideration of $20 million.

CEO Dominic Orr commented on the results, "In the fourth quarter, we achieved our thirteenth consecutive quarter of record revenue, growing revenue 22 percent year-on-year and 6 percent sequentially. Our traditional core verticals performed well in the quarter and we saw continued growth among the general enterprise. We believe that demand for wireless LAN networks remains solid."


Aruba Networks ended its fourth quarter with $346 million in cash, equivalents and short term investments. The company operates without any significant debt outstanding. For the full year of its fiscal 2012, Aruba Networks reported revenues of $516.8 million. GAAP net losses came in at $8.9 million, or $0.08 per share.

Factoring in a 15% increase in after-hours trading, the market values the firm at roughly $2.2 billion. This values the firm's operating assets at roughly $1.8-$1.9 billion. The valuation implies an annual revenue multiple of 3.6 times.

The valuation multiple compares to a revenue multiple of 2.2 times for Cisco (CSCO) and 1.7 times for Motorola Solutions (MSI).

Currently, Aruba Networks does not pay a dividend.

Investment Thesis

Year to date, shares of Aruba Networks trade with small gains of 5%, factoring in the after-hours gains. Shares swiftly rose to $25 in February of the year, but lost roughly half their value ever since. In July, Aruba Networks reached year to date lows of $12 per share. In a reaction to the decline in the share price, Aruba Networks announced a $100 million repurchase program, sufficient to retire 5% of its shares outstanding.

Over the past five years, shares of Aruba Networks trade roughly flat. Shareholders have seen a roller-coaster ride in the meantime. In 2008, shares hit lows of $2 per share, and peaked at $35 in the beginning of 2011.

In the meantime, Aruba Networks increased its annual revenues from $178 million in 2008, to $517 million in 2012. At the same time, net losses narrowed from $17 million to $9 million. The number of shares outstanding increased by roughly 40% during the time period.

Despite the strong revenue growth, I remain on the sidelines. Aruba trades at premium revenue multiples compared to its competitors, while it shows a lack of structural profitability. Despite these arguments, I do not find the company a convincing sell. A take-out is always possible given the size of the companies, and cash-rich competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.