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Aruba Networks Reports Fiscal Second Quarter 2015 Financial Results

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Aruba Networks, Inc. (NASDAQ:ARUN) today released financial results for its second quarter of fiscal year 2015 ended January 31, 2015.

Record revenue of $212.9 million grew 21 percent from the $176.4 million reported in Q2’14. GAAP net income for Q2’15 was $5.7 million, or $0.05 per diluted share, compared with a GAAP net loss of $10.7 million, or a loss of $0.10 per share, in Q2’14.

Non-GAAP net income for Q2’15 was $33.8 million, or $0.30 per diluted share, compared with non-GAAP net income of $21.4 million, or $0.18 per diluted share in Q2’14. A reconciliation between GAAP and non-GAAP information is contained in the tables below and can also be found in the supplementary tables located in the investor section of the company’s website at http://www.arubanetworks.com.

“We are pleased to report solid results for the second quarter, reflecting continued execution on our strategic plan,” said Dominic Orr, president and chief executive officer, Aruba Networks. “Our results were supported by continued growth in our key geographies, strong year-over-year performance in our Federal vertical, further success in penetrating the Global 2000, and increasing traction in our SME business. We believe we are well positioned to capitalize on the continued growth in WLAN, the potential opportunities from increased E-Rate funding later this year, and the continued 802.11ac refresh cycle.”

Commenting on the company’s financial results, Michael Galvin, chief financial officer, Aruba Networks, added, “We delivered a strong financial quarter on many fronts. Strong revenue growth and gross margin expansion coupled with prudent management of operating expenses led to a record quarter for non-GAAP operating margin. While the impact of E-Rate is uncertain in our fiscal third quarter, we are well positioned to capture this great opportunity in our fiscal fourth quarter and beyond.”

Recent Business Highlights

  • Aruba and its ClearPass Access Management System was once again positioned in the leaders quadrant of Gartner Inc.’s latest “Magic Quadrant for Network Access Control” report, demonstrating its continued leadership in access management.
  • The company was selected by the Wanda Group, the owners of China’s largest commercial properties for deployment in 59 malls and plazas showing further penetration in the Public Facing Enterprise (PFE). This mobile engagement will allow customers that visit Wanda’s retail establishments to access high-performance Wi-Fi for personal web browsing, as well as interactive and personalized shopping.
  • The company recently announced it had been selected by Nebraska Crossing Outlets (NEX), a large scale outdoor mall based in Gretna, Nebraska. This engagement, which features Aruba’s 802.11ac solution, will enable wireless mobility for the four million people the center serves. Aruba was selected based on its ability to deliver world class solutions in an environment where the wireless network is critical to the success of the center for essential business transactions, mobile Point of Sale (PoS), and shoppers using the complimentary Wi-Fi to stay connected.

Conference Call Information

Aruba will host a conference call for analysts and investors to discuss its second quarter of fiscal year 2015 results today at 4:30 p.m. Eastern time (1:30 p.m. Pacific time). Open to the public, investors may access the call by dialing +1-844-858-9856. A live webcast of the conference call will also be accessible from the “Investor Relations” section of the company’s website at www.arubanetworks.com. Following the webcast, an archived version will be available on the website for at least 90 days. To hear an audio replay of the call, parties in the United States and Canada should call +1-855-859-2056 and enter passcode 80845684. International parties can access the replay at +1-404-537-3406 and should enter passcode 80845684.

Forward-Looking Statements

This press release contains forward-looking statements, including statements about anticipated business opportunities from increased E-Rate funding and timing thereof, the rate of adoption of 802.11ac technology, and the demand for wireless networks. These forward-looking statements involve risks and uncertainties, as well as assumptions, which if they do not fully materialize or prove incorrect, could cause Aruba’s results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include: (1) business, economic and competitive conditions and growth trends in the wireless networking industry, our vertical markets and various geographic regions; (2) changes in overall information technology spending, particularly in the education vertical; (3) the rate at which our customers elect to upgrade their networks to the latest 802.11ac technology and (4) those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Aruba’s Annual Report on Forms 10-K and 10-Q which were filed with the Securities and Exchange Commission (SEC) on September 24, 2014 and December 4, 2014, and are available on Aruba’s investor relations website at www.arubanetworks.com and on the SEC’s website at www.sec.gov. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

Non-GAAP Financial Measures

In addition to disclosing financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Form 8-K and the accompanying tables contain the following non-GAAP financial measures: non-GAAP net income, non-GAAP earnings per share (EPS), non-GAAP gross margins and non-GAAP operating margins. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, these measures may be different from non-GAAP measures used by other companies, limiting their usefulness for comparison purposes. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to Aruba’s GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in its financial results for the foreseeable future.

Non-GAAP net income and EPS. Aruba defines non-GAAP net income as net income plus stock-based compensation expenses and related payroll taxes, amortization expense of acquired intangible assets and other acquisition-related expenses and restructuring charges and other one-time charges related to restructuring actions. In addition, Aruba provides for non-GAAP income tax expense by applying generally accepted accounting principles to non-GAAP income, including direct and indirect tax effects of the pre-tax non-GAAP adjustments above, excluding tax related to the internal transfer of intellectual property. Aruba defines non-GAAP EPS as non-GAAP net income divided by the weighted average diluted shares outstanding. Aruba’s management regularly uses these non-GAAP financial measures to understand and manage its business and believes that these non-GAAP financial measures provide meaningful supplemental information regarding the company’s performance by excluding certain expenses that may not be indicative of Aruba’s “recurring operating results,” meaning its operating performance excluding not only stock-based compensation expenses and related payroll taxes, but also discrete charges that are infrequent in nature. Further, Aruba’s management excludes from non-GAAP net income the tax effects of these non-GAAP financial measures, as without excluding these tax effects, investors would only see the gross effect that excluding these expenses had on the company’s operating results. Because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use, Aruba’s management believes that providing non-GAAP financial measures that exclude stock-based compensation expenses allows investors to compare these results with those of other companies, as well as providing management with an important tool for financial and operational decision making and for evaluating the company’s operating results over different periods of time. Similarly, by excluding amortization expense of acquired intangible assets and other acquisition-related expenses, non-recurring patent-infringement settlements and the change in the valuation of the contingent rights liability, less the related tax effects, Aruba’s management believes that investors can better understand and measure the company’s recurring operating results.

There are a number of limitations related to the use of non-GAAP financial measures versus the corresponding GAAP financial measures. First, these non-GAAP financial measures exclude some costs, namely stock-based compensation expenses and related payroll taxes, that are recurring. Stock-based compensation expenses and related payroll taxes have been and will continue to be for the foreseeable future a significant recurring expense in Aruba’s business. Second, stock-based awards are an important part of Aruba’s employees’ compensation and impact their performance. Third, the components of the costs that Aruba excludes in its calculation of non-GAAP net income may differ from the components that its peer companies exclude when they report their results of operations. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financial measures and evaluates these non-GAAP financial measures together with their most directly comparable financial measures calculated in accordance with GAAP. The accompanying tables, as well as the supplementary materials located on the IR landing page of the Aruba web site, provide reconciliations between these financial measures and their most directly comparable GAAP equivalents.

About Aruba Networks, Inc.

Aruba Networks is a leading provider of next-generation network access solutions for the mobile enterprise. The company designs and delivers Mobility-Defined Networks that empower IT departments and #GenMobile, a new generation of tech-savvy users who rely on their mobile devices for every aspect of work and personal communication. To create a mobility experience that #GenMobile and IT can rely upon, Aruba Mobility-Defined NetworksTM automate infrastructure-wide performance optimization and trigger security actions that used to require manual IT intervention. The results are dramatically improved productivity and lower operational costs.

Listed on the NASDAQ and Russell 2000(R) Index, Aruba is based in Sunnyvale, California, and has operations throughout the Americas, Europe, Middle East, Africa and Asia Pacific regions. To learn more, visit Aruba at http://www.arubanetworks.com. For real-time news updates follow Aruba on Twitter and Facebook, and for the latest technical discussions on mobility and Aruba products visit Airheads Social at http://community.arubanetworks.com.

(c) 2015 Aruba Networks, Inc. Aruba Networks’ trademarks include Aruba Networks(R), Aruba The Mobile Edge Company(R) (stylized), Aruba Mobility-Defined NetworksTM, Aruba Mobility Management System(R), People Move Networks Must Follow(R), Mobile Edge Architecture(R), RFProtect(R), Green Island(R), ETips(R), ClientMatchTM, Virtual Intranet AccessTM, ClearPass Access Management SystemsTM, Aruba InstantTM, ArubaOSTM, xSecTM, ServiceEdgeTM, Aruba ClearPass Access Management SystemTM, AirmeshTM, AirWaveTM, Aruba CentralTM, and ARUBA@WORKTM. All rights reserved. All other trademarks are the property of their respective owners.

Aruba Networks, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
January 31, July 31,
2015 2014
Assets
Current assets
Cash and cash equivalents $ 151,949 $ 118,594
Short-term investments 139,049 166,359
Accounts receivable, net 114,109 102,256
Inventory 45,273 39,836
Deferred costs of revenue 12,113 12,721
Prepaids and other current assets 17,372 18,063
Deferred income tax assets, current 14,840 25,676
Total current assets 494,705 483,505
Property and equipment, net 30,360 27,261
Goodwill 67,242 67,242
Intangible assets, net 18,079 19,505
Deferred income tax assets, non-current 22,698 23,962
Other non-current assets 8,779 8,185
Total non-current assets 147,158 146,155
Total assets $ 641,863 $ 629,660
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 19,615 $ 23,763
Accrued liabilities 95,221 80,578
Deferred revenue, current 153,510 135,160
Total current liabilities 268,346 239,501
Deferred revenue, non-current 47,225 44,977
Other non-current liabilities 14,229 12,686
Total non-current liabilities 61,454 57,663
Total liabilities 329,800 297,164
Stockholders’ equity
Common stock 11 11
Additional paid-in capital 479,510 508,374
Accumulated other comprehensive loss (1,518 ) (1,523 )
Accumulated deficit (165,940 ) (174,366 )
Total stockholders’ equity 312,063 332,496
Total liabilities and stockholders’ equity $ 641,863 $ 629,660
Aruba Networks, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amount)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2015 2014 2015 2014
Revenue
Product $ 173,721 $ 141,755 $ 342,191 $ 272,586
Support and professional services 39,210 34,601 78,561 64,697
Total revenue 212,931 176,356 420,752 337,283
Cost of revenue
Product 51,536 43,303 103,166 83,421
Support and professional services 8,820 10,050 18,429 18,483
Total cost of revenue 60,356 53,353 121,595 101,904
Gross profit 152,575 123,003 299,157 235,379
Operating expenses
Research and development 43,179 42,585 85,413 83,030
Sales and marketing 72,280 69,569 144,255 132,613
General and administrative 15,674 14,468 31,289 28,983
Restructuring charges (482 ) 6,072
Total operating expenses 130,651 126,622 267,029 244,626
Operating income (loss) 21,924 (3,619 ) 32,128 (9,247 )
Other income (expense), net
Interest income 192 217 391 478
Other income (expense), net (1,266 ) (80 ) (2,018 ) 190
Total other income (expense), net (1,074 ) 137 (1,627 ) 668
Income (loss) before income taxes 20,850 (3,482 ) 30,501 (8,579 )
Provision for income taxes 15,167 7,219 22,075 9,949
Net income (loss) $ 5,683 $ (10,701 ) $ 8,426 $ (18,528 )
Net income (loss) per share – basic $ 0.05 $ (0.10 ) $ 0.08 $ (0.17 )
Net income (loss) per share – diluted $ 0.05 $ (0.10 ) $ 0.07 $ (0.17 )
Shares used in per share calculation – basic 107,891 107,153 108,132 109,608
Shares used in per share calculation – diluted 113,393 107,153 114,711 109,608
Aruba Networks, Inc.
Reconciliation between GAAP and Non-GAAP Measures
Non-GAAP Net Income and Non-GAAP Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2015 2014 2015 2014
GAAP net income (loss) $ 5,683 $ (10,701 ) $ 8,426 $ (18,528 )
Plus:
a) Stock-based compensation expense (*) 23,468 28,744 48,021 56,163
b) Payroll taxes on stock-based compensation expense 618 902 1,167 1,590

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

2,932 3,393 5,919 6,999
d) Restructuring charges (482 ) 6,072
e) Other one-time charges related to restructuring actions (**) 1,111 1,543
f) Non-GAAP income tax effects 484 (985 ) (6,931 ) (6,004 )
Non-GAAP net income $ 33,814 $ 21,353 $ 64,217 $ 40,220
GAAP net income (loss) per share $ 0.05 $ (0.10 ) $ 0.07 $ (0.17 )
Plus:
a) Stock-based compensation expense (*) 0.21 0.25 0.42 0.47
b) Payroll taxes on stock-based compensation expense 0.01 0.01 0.01 0.01

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

0.03 0.03 0.05 0.06
d) Restructuring charges 0.05
e) Other one-time charges related to restructuring actions (**) 0.01 0.01
f) Non-GAAP income tax effects (0.01 ) (0.06 ) (0.05 )
Non-GAAP net income per share (***) $ 0.30 $ 0.18 $ 0.56 $ 0.34
Shares used in GAAP per share calculation – diluted 113,393 107,153 114,711 109,608
Shares used in Non-GAAP per share calculation – diluted 113,393 116,346 114,711 118,953
(*) Stock-based compensation expense for the six months ended January 31, 2015 excludes charges of $273,000 derived directly from the Company’s restructuring plan, which were included in the Restructuring charges line in the three months ended October 31, 2014.
(**) Other one-time charges related to restructuring actions include temporary redundant headcount, headcount-related and facility costs, recruiting costs and other travel and headcount-related costs associated with employee transitions to lower cost operating locations. These costs are not considered exit costs under U.S. Generally Accepted Accounting Principles, thus such costs have been excluded from the Restructuring charges line in the consolidated statements of operations.
(***) The sum of the EPS impacts may not total to Non-GAAP net income per common share due to different share counts used in calculating GAAP income (loss) per common share and Non-GAAP income per common share and due to rounding of individual line items. The GAAP income (loss) per common share calculation may use a lower share count as it may exclude potentially dilutive shares which are included in calculating non-GAAP income per common share.
Aruba Networks, Inc.
Reconciliation between GAAP and Non-GAAP Measures
Non-GAAP Gross Margin and Non-GAAP Operating Margin
(In thousands, except percentages)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2015 2014 2015 2014
Revenue $ 212,931 $ 176,356 $ 420,752 $ 337,283
Non-GAAP Gross Margin:
GAAP gross profit $ 152,575 $ 123,003 $ 299,157 $ 235,379
Plus:
a) Stock-based compensation expense 1,744 2,202 3,443 4,359
b) Payroll taxes on stock-based compensation expense 51 99 79 164

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

1,896 2,026 3,846 4,033

d) Other one-time charges related to restructuring actions (*)

26 27
Non-GAAP gross profit $ 156,292 $ 127,330 $ 306,552 $ 243,935
GAAP gross margin 71.7 % 69.7 % 71.1 % 69.8 %
Plus:
a) Stock-based compensation expense 0.8 % 1.3 % 0.9 % 1.3 %
b) Payroll taxes on stock-based compensation expense 0.1 %

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

0.9 % 1.1 % 0.9 % 1.2 %
d) Other one-time charges related to restructuring actions (*)
Non-GAAP gross margin 73.4 % 72.2 % 72.9 % 72.3 %
Non-GAAP Operating Margin:
GAAP operating income (loss) $ 21,924 $ (3,619 ) $ 32,128 $ (9,247 )
Plus:
a) Stock-based compensation expense (**) 23,468 28,744 48,021 56,163
b) Payroll taxes on stock-based compensation expense 618 902 1,167 1,590

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

2,932 3,393 5,919 6,999
d) Restructuring charges (482 ) 6,072
e) Other one-time charges related to restructuring actions (*) 1,111 1,543
Non-GAAP operating income $ 49,571 $ 29,420 $ 94,850 $ 55,505
GAAP operating margin 10.3 % (2.1 %) 7.6 % (2.7 %)
Plus:
a) Stock-based compensation expense (**) 11.0 % 16.3 % 11.4 % 16.7 %
b) Payroll taxes on stock-based compensation expense 0.3 % 0.5 % 0.3 % 0.4 %

c) Amortization expense of acquired intangible assets and other acquisition-related expenses

1.4 % 2.0 % 1.4 % 2.1 %
d) Restructuring charges (0.2 %) 1.4 %
e) Other one-time charges related to restructuring actions (*) 0.5 % 0.4 %
Non-GAAP operating margin 23.3 % 16.7 % 22.5 % 16.5 %
(*) Other one-time charges related to restructuring actions include temporary redundant headcount, headcount-related and facility costs, recruiting costs and other travel and headcount-related costs associated with employee transitions to lower cost operating locations. These costs are not considered exit costs under U.S. Generally Accepted Accounting Principles, thus such costs have been excluded from the Restructuring charges line in the consolidated statements of operations.
(**) Stock-based compensation expense for the six months ended January 31, 2015 excludes charges of $273,000 derived directly from the Company’s restructuring plan, which were included in the Restructuring charges line in the three months ended October 31, 2014.
Aruba Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
January 31, January 31,
2015 2014

Cash flows from operating activities

Net income (loss) $ 8,426 $ (18,528 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 14,267 14,250
Change in provision for doubtful accounts 79 (173 )
Inventory reserves for excess, obsolescence and other 5,027 2,937
Stock-based compensation expense 48,294 56,163
Amortization of discounts and premiums on short-term investments 680 1,129

(Gain) loss on disposal of property and equipment, intangibles and other

(712 ) 232
Deferred income taxes 11,231 3,979
Excess tax benefit associated with stock-based compensation (6,365 ) (721 )
Changes in operating assets and liabilities:
Accounts receivable (11,932 ) 11,212
Inventory (9,430 ) (11,451 )
Deferred costs of revenue 608 (4,069 )
Prepaids and other current assets 211 2,373
Other non-current assets 606 (2,058 )
Accounts payable and other current and non-current liabilities 24,784 (34,700 )
Deferred revenue 20,598 34,028
Net cash provided by operating activities 106,372 54,603
Cash flows from investing activities
Purchases of short-term investments (65,720 ) (87,119 )
Proceeds from sales of short-term investments 12,799 89,240
Proceeds from maturities of short-term investments 79,559 99,083
Purchases of property and equipment (13,031 ) (7,854 )
Purchases of intangible assets (2,840 )
Investment in a privately-held company (1,200 )
Net cash provided by investing activities 9,567 93,350
Cash flows from financing activities
Proceeds from issuance of common stock 16,051 10,473
Repurchases of common stock under stock repurchase program (105,000 ) (193,504 )

Excess tax benefit associated with stock-based compensation

6,365 721
Net cash used in financing activities (82,584 ) (182,310 )
Net increase (decrease) in cash and cash equivalents 33,355 (34,357 )
Cash and cash equivalents, beginning of period 118,594 144,919
Cash and cash equivalents, end of period $ 151,949 $ 110,562

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