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Coverage Initiation: Aruba Networks (ARUN)
Value Line recently initiated coverage of Aruba Networks (ARUN) in its flagship product, The Value Line Investment Survey. The company’s “vision” is to “transform the way that organizations design, deploy, manage and maintain user access networks to deliver a wide range of applications, from data to voice and video, to users wherever and whenever they want.” That’s a mouthful, which could be summarized as “the company’s products let any device connect to a network, regardless of connection, device, and location.” Its products solve a growing and vexing problem for companies, information technology professionals, and end users alike.
Aruba’s product portfolio includes high-speed 802.11n wireless local area networks ("WLANs"), Virtual Branching Networking solutions for branch offices and teleworkers, network operations tools, wireless intrusion prevention systems, and the AirWave Wireless Management Suite for managing wired, wireless, and mobile device networks. In addition, it recently introduced its Mobile Virtual Enterprise architecture, which unifies wired and wireless network infrastructures into one seamless access solution. Aruba’s products clearly fill a growing need as the world becomes increasingly mobile and wireless.
Although the company claims that its products have been sold to over 15,500 customers worldwide, it still faces stiff competition from major industry participants. This makes staying on the cutting edge vital to Aruba’s long-term success. Thus, research and development spending is a key metric that investors should monitor. Note, however, that many large companies, universities, and government entities from around the world have chosen Aruba products, which is, to some degree, a testament to the quality of its offerings, though no guarantee of long-term relevance. Examples of end users include The United States Air Force, the London School of Business, and China University of Geoscience.
Aruba sells its products directly through its own sales force and indirectly through resellers, distributors, and original equipment manufacturers. Third party sales channels accounted for over 90% of the company’s revenues in 2011, with ScanSource (SCSC), Avnet’s (AVT) Avnet Logistics, and Alcatel-Lucent (ALU) representing 19.4%, 17.1%, and 13.9% of sales, respectively. This trend continued in the recently completed fiscal 2012 period, though audited results are not yet available, highlighting the importance of these relationships to the company’s future. Third party resellers and distributors have historically focused on smaller-sized deals, while the direct sales force has tended to focus on large customers. Aruba’s marketing activities include lead generation, tele-sales, advertising, website operations, direct marketing, and public relations, among others.
Aruba outsources the majority of its manufacturing needs. The company’s manufacturing partners include Flextronics (FLEX), Sercomm, Accton, and Wistron. Although the company makes use of multiple manufacturing partners, the unexpected loss of any of these relationships could cause a material disruption to the company’s business. If one of the above companies were to experience operational problems for any reason, a similar, though perhaps more temporary, disruption in business operations could occur. The company also has major distribution facilities in Singapore (owned by Flextronics) and California; the loss of either would be similarly problematic.
Whenever possible, Aruba attempts to use components that are readily available. It also tends to use multiple sources for components, so that it can ensure both a steady supply and competitive pricing. The company, however, sources a limited number of components that are technically unique and only available from specific suppliers. There are, generally speaking, no long-term supply contracts involved in these relationships, though, in some cases, license agreements are hammered out that allow Aruba to incorporate the supplier’s components into its products.
The company also incorporates generally available software programs into its architecture based on license agreements with third parties. It has such agreements with Qualcomm’s (QCOM) Qualcomm Atheros, Netlogic Microsystems Corporation, and Broadcom Corporation (BRCM). Each of these companies is a supplier of certain unique components used by manufacturing partners in the production of Aruba products. The loss of any of these relationships, or those of unique physical components, could cause a material production disruption.
As a manufacturer of high-tech gear, Aruba’s performance is tied to the level of capital spending. If information technology spending were to decline, the company’s performance would likely suffer. However, there is increasing demand for mobile solutions, which are an integral aspect of Aruba’s offering. This may provide some protection from a more general IT slowdown. That said, the company’s sales can be difficult to predict because of the nature of its products, with large sales causing “lumpy” quarter to quarter performances.
The company’s products are also subject to numerous regulations, particularly the wireless and encryption technologies that they use. As such, a failure to conform to, or keep up with, relevant laws and regulations could cause a material disruption to operations or lead to notable fines and/or government imposed restrictions on its ability to sell products. Note that the company’s global footprint means that its products must comply with multiple sets of standards.
Although Aruba has yet to become consistently profitable, its products help solve a problem that is increasingly important in the IT sphere. Subscribers interested in investing in a company that appears to be on the verge of “black ink” should consult Value Line’s regular quarterly reports for the company. Note, that material news will be highlighted in supplemental reports as the news occurs.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.