Aruba Networks (ARUN) Gets Clobbered by Cisco (CSCO)

Shares of network equipment maker Aruba Networks (ARUN) plummeted last week, after the company reported disappointing third quarter earnings followed by weak fourth quarter guidance. For the third quarter, Aruba reported a net loss of $0.18 per share, or $20.2 million, compared to the profit of $0.05 per share, or $6.0 million, it reported in the prior year quarter. Adjusting for one-time charges, Aruba earned $0.11 per share, which still missed the consensus estimate of $0.12 per share.

Revenue rose 12% to $147.1 million, which slightly topped the analyst forecast of $145.4 million. Daily Chart
Aruba blamed its lackluster earnings on increased competition from market heavyweight Cisco Systems (CSCO), which recently reported better-than-expected earnings. More specifically, Cisco has been bundling wireless products with routers and data centers at a discount, with the intended goal of shutting out smaller competitors such as Aruba. That pricing pressure means that Cisco is willing to sacrifice margins to grow its already dominant market share in networking equipment. Mizuho Securities USA analyst Joanna Makris sees the problem as a longer-term issue that could sink Aruba's core business. Aruba CEO Dominic Orr also acknowledged an "uncertain" macro environment, as the private sector, especially the telecom industry, remains conservative with its networking purchases, while the public sector scales back on purchases due to spending cuts. Orr also acknowledged Cisco's pressure, stating, "We expect to see a heightened level of competition and bundling strategy from our largest competitor." Indeed, Cisco's strong earnings indicate that time may be running out for the smaller players. During its third quarter, Cisco reported that a 14.5% year-on-year increase in profit and a 5.4% increase in revenue. Both its top and bottom lines topped analyst estimates. To top off all that bad news, Aruba also offered a bleak forecast for the current quarter. The company now expects to earn an adjusted $0.10 to $0.12 for the fourth quarter, which ends in July. Revenue is expected to come in at $150 million. Analysts had expected Aruba to earn $0.16 per share on revenue of $152.8 million. In response, shares of Aruba plunged 30% on May 17, logging its biggest intraday decline since February 2008. Trading volume was also exceedingly high, at 55.5 million shares compared to a daily average of 3.1 million. Over a dozen brokerages downgraded the stock. The stock eventually recovered slightly by the end of the day, thanks to a market-wide rally, but it is still sitting at a multi-year low. The stock now trades at 14.9 times forward earnings with a 5-year PEG ratio of 1.4, and does not pay a dividend. Other News About ARUN Why Aruba Networks Shares Plunged Aruba's devastating earnings report revisited. Aruba Networks' Stock in Nose Dive After Awful Earnings Report Is Aruba headed for the scrap heap? Other Stocks in the News Two Fad Footwear Stock sto Avoid and One to Buy Which of these footwear stocks are fads? Why Facebook is Crazy About Waze Why does Facebook want to expand its reach in mobile mapping? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on May 24, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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