Aruba Networks, Inc. Rating: Buy

Transcription

1 TECHNOLOGY Kevin Dede, CFA James R. Moore Company Update September 29, 2008 Key Metrics ARUN - NASDAQ $4.93 Pricing Date 09/26/2008 Price Target $ Week Range $21.38-$4.05 Shares Outstanding (mm) 88.9 Market Capitalization ($mm) $ Mo Average Daily Volume 670,999 Institutional Ownership 68% ROE 2.9% Book Value/Share $1.47 Price/Book 3.4x EPS($) FY: July Prior Curr. Prior Curr. 2007A 2008A 2008A 2009E 2009E 1Q-Oct E 2Q-Jan E 3Q-Apr (0.01) E 4Q-Jul E FY (0.06) E P/E NM NM 37.9x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008A 2008A 2009E 2009E 1Q-Oct E 2Q-Jan E 3Q-Apr E 4Q-Jul E FY E 1 Year Price History for ARUN Q3 Q1 Q Created by BlueMatrix Company Description: Aruba Networks, Inc. is an industry leader in the design and marketing of commercial Wi-Fi integrated network components and software. Based in Sunnyvale, California, Aruba's products contain value-added features and functionality that specifically address the integration of Wi-Fi networking into existing local area networks and help address special commercial applications such as hospitals and schools, where VoIP is important Aruba Networks, Inc. Rating: Buy Not an 'Enterprise' Play! Misconception Provides Opportunity; Buy Investment Highlights: Poor timing? An unfavorable sequence of uncontrollable events led Aruba to report its July quarter before the Labor Day Holiday. Wall Street sell-side advocates noted Aruba's 13% Q-Q sales growth to $48.3mm, exceeding the consensus estimate of $46.5mm, as a solid indication of broader adoption of n and acknowledgment of Aruba's superior technology. Favorable reports were issued right after the earnings report on the Friday before Labor Day, but it seems these comments fell upon deaf ears. Reports from analysts with adverse opinions were issued the following week and have apparently had greater market influence as Aruba shares have since floundered. Apparent misunderstanding. Besides the earnings release timing, we think there's a disconnect between Wall Street's perception and the factors that weigh most heavily on Aruba's sales. Strong sales in the July quarter, and confidence for continued strength in the balance of the fiscal year stem from the education sector and a resurgence in the federal sector. In the education market, academic institutions are moving rapidly to adopt the new (and as yet unratified) n Wi-Fi technology, which can support connection speeds north of 100 Mbps. Aruba has seen strong interest around the world, with recent (press release) wins in China and Malaysia. From a marketing perspective, Aruba easily leverages its U.S. effort abroad as the market appears to easily grasp Aruba's advantages, and as such, we suspect there is much happening behind the scenes in the international education market. A recent partnership with Foundry (FDRY - $ Nasdaq) to address the federal sector, we believe, signals continuing business there. Lastly, we believe Aruba recently won two highly significant deals serving large, national retail chains. So, what's the bottom line? None of Aruba's key customer groups represent the traditional 'enterprise' sector, and Aruba's customers are as yet unaffected by current financial market woes. Instead, these key customers are making investment decisions to build the foundation for improved service and operations in the future. This is a strategic imperative for institutions of higher education, for the federal sector, and for brand-name retail establishments, and clearly why we continue to believe Aruba's business expands. We raised our estimates and price target following FY08 results. On the heels of the July earnings release, our confidence in Aruba's performance increased, and we see the shares trading toward $8.00, garnering valuation multiples in line with other high-growth Wi-Fi and networking related companies. The Disclosure section may be found on pages 5-6 of this report. The Valuation section may be found on page 5 of this report.

2 Wireless Equipment Companies - Comparable Valuation Analysis September 29, /26/08 Market Sales EV/Sales EPS P/E Company Ticker Rating Price Cap C2008E C2009E C2008E C2009E C2008E C2009E C2008E C2009E Airspan Networks Inc. AIRN NR $0.31 $18 $89 $118 NM NM ($0.45) ($0.24) NM NM Alvarion Ltd. ALVR BUY $6.31 $407 $292 $ x 0.7x $0.16 $0.35 NM 18.0x Anaren, Inc. ANEN NR $10.48 $151 $138 $ x 0.7x $0.74 $ x 10.3x Axesstel, Inc. AFT NR $0.69 $16 $124 $ x 0.2x $0.10 $ x 6.9x Ceragon Networks Ltd. CRNT BUY $8.01 $312 $220 $ x 0.7x $0.52 $ x 11.4x CommScope Inc. CTV NR $36.72 $2,971 $4,232 $4, x 1.1x $3.52 $ x 8.7x EMS Technologies, Inc. ELMG NR $21.64 $341 $333 $ x 0.6x $1.33 $ x 13.6x Endwave Corporation ENWV NR $5.20 $48 $66 $78 NM NM $0.09 $0.30 NM 17.3x Harris Stratex Networks, Inc. HSTX HOLD $7.52 $440 $752 $ x 0.4x $0.60 $ x 9.4x Novatel Wireless, Inc. NVTL HOLD $6.29 $198 $350 $ x 0.2x $0.41 $ x 14.0x Palm, Inc. PALM BUY $6.66 $721 $1,305 $1, x 0.7x ($0.64) ($0.11) NM NM Powerwave Technologies, Inc. PWAV BUY $4.05 $531 $942 $ x 0.8x $0.18 $ x 12.7x Sierra Wireless, Inc. SWIR BUY $9.92 $312 $588 $ x 0.2x $1.48 $ x 6.2x Starent Networks, Corp. STAR SELL $12.54 $933 $242 $ x 2.1x $0.83 $ x 17.2x AVERAGE $ x 0.7x 13.5x 12.1x Aruba Networks, Inc. ARUN BUY $4.93 $438 $196 $ x 1.4x $0.02 $0.19 NM 25.9x Source: Company reports, First Call, and Morgan Joseph & Co. Inc. estimates NOTE: Estimates for uncovered companies are based on First Call Consensus estimates. NOTE 2: Prices are as of close of date above "Price" column. 2 MORGAN JOSEPH & CO. INC.

3 Large and Small Cap Comparison September 29, /26/08 Market EV/Sales Large Cap Ticker Price Cap C2008E C2009E Motorola, Inc. MOT $7.63 $17, x 0.4x Cisco Systems, Inc. CSCO $23.82 $144, x 2.8x Research in Motion Ltd RIMM $70.76 $40, x 2.7x Juniper Networks, Inc. JNPR $23.02 $12, x 2.6x Qualcomm Incorporated QCOM $45.84 $75, x 5.4x Nortel Networks Corporation NT $2.54 $1, x 0.2x LM Ericsson Telephone Co. ERIC $10.37 $33, x 0.8x Nokia Corporation NOK $19.68 $74, x 0.8x Alcatel Lucent ALU $4.33 $9, x 0.4x Group Average: $45, x 1.8x Aruba Networks, Inc. ARUN $4.93 $ x 1.4x 9/26/08 Market EV/Sales Small Cap Ticker Price Cap C2008E C2009E Airvana, Inc. AIRV $5.74 $ x 0.9x Netgear, Inc. NTGR $14.91 $ x 0.4x Extreme Networks, Inc. EXTR $2.77 $ x 0.5x Sycamore Networks, Inc. SCMR $3.35 $ x 1.7x Ceragon Networks Ltd. CRNT $8.01 $ x 0.7x Harris Stratex Networks, Inc. HSTX $7.52 $ x 0.4x Alvarion Ltd. ALVR $6.31 $ x 0.7x Foundry Networks, Inc. FDRY $18.29 $2, x 2.5x Atheros Communications, Inc ATHR $23.44 $1, x 1.9x F5 Networks, Inc. FFIV $23.84 $1, x 2.1x Group Average: $ x 1.2x Aruba Networks, Inc. ARUN $4.93 $ x 1.4x Sources: Thomson First Call, Morgan Joseph estimates (Market Cap in $mms) Current ratings: CRNT: Buy; HSTX: Hold; ALVR: Buy; ARUN: Buy; Others not rated 3 MORGAN JOSEPH & CO. INC.

4 Morgan Joseph & Co. ARUN --- FYE 7/31 Sales COGS Gross Profit R&D Selling & Marketing G&A In-process R&D Total Expenses Operating Income Total Other Income (Exp) Pretax Tax Exp. Acc chg ('06) Net EPS Shares Outstanding Margin Analysis Gross Margin R&D Ratio S&M Ratio G&A Ratio Operating Margin Pretax Margin Tax Rate Net Margin Percent Change Total Sales Cost of Revenue Gross Profit R&D Expenses S&M Expenses G&A Expenses Operating Income Pretax Income Net Income Share Count EPS Quarterly Income Statement & Forecast ($ millions) 7/31/08 A 7/31/09 E ESTIMATE Q1A Q2A Q3A Q4A YEAR Q1E Q2E Q3E Q4E YEAR 10/31/07 01/31/08 04/30/08 07/31/08 7/31/ /31/08 01/31/09 04/30/09 07/31/09 7/31/2009 $46.73 $40.65 $42.61 $48.28 $ $51.00 $54.00 $58.50 $61.50 $ (0.28) (1.36) (0.83) (1.09) $0.04 $0.01 ($0.01) $0.00 $0.04 $0.01 $0.02 $0.04 $0.05 $ % 69.1% 70.7% 68.7% 69.1% 67.5% 67.5% 67.6% 67.6% 67.6% 14.7% 19.1% 19.5% 17.1% 17.5% 16.5% 16.1% 15.4% 15.1% 15.7% 40.7% 42.1% 45.1% 43.9% 42.9% 42.3% 40.8% 38.5% 37.5% 39.6% 7.0% 8.6% 9.2% 7.5% 8.0% 7.3% 7.0% 6.7% 6.5% 6.8% 5.8% -0.7% -3.2% 0.3% 0.7% 1.5% 3.6% 7.0% 8.5% 5.3% 8.7% 2.1% -2.0% 0.9% 2.5% 2.1% 4.3% 7.7% 9.3% 6.1% 5.5% 27.0% -31.3% 58.9% 21.4% 14.5% 14.5% 14.5% 14.5% 14.5% 8.2% 1.5% -2.6% 0.4% 2.0% 1.8% 3.7% 6.6% 8.0% 5.2% 90.7% 52.5% 22.9% 15.8% 39.8% 9.1% 32.9% 37.3% 27.4% 26.2% 54.8% 24.2% 20.2% 16.8% 27.9% 11.3% 39.7% 51.8% 31.9% 32.6% 113.8% 69.9% 24.1% 15.4% 45.9% 8.1% 29.8% 31.3% 25.3% 23.4% 40.8% 47.1% 37.7% 26.2% 37.2% 22.6% 12.0% 8.4% 12.4% 13.5% 91.6% 44.0% 26.5% 12.9% 37.2% 13.4% 28.9% 17.3% 8.9% 16.6% 167.4% 136.8% 64.7% 139.1% 150.8% 112.8% 108.7% -0.9% 110.9% 107.6% % -91.3% % -85.0% % -71.1% % % % 902.1% % % % -79.5% % -73.4% 175.4% % % 201.2% % % % -91.3% % -76.0% 222.7% % % 227.6% 609.1% 552.7% -2.0% -4.9% 154.9% -4.0% 0.7% 15.8% 6.8% 4.4% % % % -90.8% % -74.9% 220.5% % % 213.9% Source: Co. reports and MJ research 4 MORGAN JOSEPH & CO. INC.

5 Required Disclosures Rating and Price Target History for: Aruba Networks, Inc. (ARUN) as of /29/08 I:Buy:$6.5 08/29/08 Buy:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q Created by BlueMatrix Price Target Our price target is $8.00. Valuation Methodology Our $8.00 price target is derived by applying a 2.5x multiple to our calendar 2009 EV/Sales estimate, which we deem appropriate given the company's growth prospects relative to comparable peers Atheros and F5 Networks, which have similar growth characteristics, and are presently trading at 2.8x and 3.2x multiples, respectively, on calendar 2009 estimates. Also, the group of large capitalization companies included in our peer valuation analysis illustrates that a larger multiple may be accorded to companies generating more consistent cash flows. We certainly believe that should be the case for Aruba, as the company continues to gain scale. Risk Factors External economic environment decreasing enterprise spending. Aruba could be more severely affected by a downturn in enterprise spending than the company's largest competitor, Cisco (CSCO - $ NASDAQ), given Aruba's current operating losses. Competition from Cisco. Heightened competition from Cisco's new mobility networking products could depress Aruba's revenues and reduce the company's market share in the WLAN industry. Legal expenses. The current lawsuit filed against Aruba is expected to cost $200,000 - $300,000 per quarter but surprises, as seen in F3Q08 ($500,000), could unexpectedly increase operating expenses. Security. A key Aruba feature is the OS software and security that protects the company's user-centric networks. Should the integrity of the network be compromised by a breach in security, Aruba's reputation as a leader in WLAN security could suffer and materially affect the company's financial results. I, Kevin Dede, CFA, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. I, James Moore, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. 5 MORGAN JOSEPH & CO. INC.

6 Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.