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Tickers in this Article: ARUN, CSCO, JNPR, HPQ, MSI, MERU, MSFT
How much more needs to be said about the state of enterprise IT spending? Companies like Cisco (Nasdaq:CSCO), Riverbed (Nasdaq:RVBD), F5 (Nasdaq:FFIV) and Juniper (Nasdaq:JNPR) have all had their challenges and setbacks, leading many investors to reevaluate the health of the tech sector and reset valuations much lower. What seems to be evident in Aruba Networks' (Nasdaq:ARUN) earnings, though, is that there is still money out there for IT - perhaps not as much as a year ago, but enough that companies will still spend on the products they see as important to their operations.

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A Solid Close to the Fiscal Year
Aruba announced that fiscal fourth quarter revenue rose 47% compared to last year and almost 8% compared to the fiscal third quarter. Management did not give a lot of specificity regarding where revenue came from, other than to say that U.S. results were stronger than in Europe (not a surprise) and that the strongest markets were "general enterprise" and education (a minor surprise). In response to a question on the conference call, management indicated no particular weakness in the financial sector - a surprise perhaps given NetApp's (Nasdaq:NTAP) recent comments.

Profit performance was not bad either. Gross margin improved nearly one point on both a sequential and annual basis. The company reversed a small year-ago operating profit to an operating loss as Aruba continues to spend aggressively on R&D and sales/marketing efforts. Investors may also want to note that share-based compensation nearly doubled from the year-ago period and makes up 16% of fourth quarter revenue.

A Play on One of the Few Growth Categories
One of the most interesting parts of the Aruba story is that it plays directly into one of the only exciting areas of growth in technology these days. Dell and Hewlett-Packard (NYSE:HPQ) are not selling oodles of PCs to consumers or businesses, and likewise the providers of routers and other networking products are seeing some signs of flagging demand. But Apple (Nasdaq:AAPL) and Samsung seem to have no great difficulty pushing more smartphones and tablets into the market, and more and more businesses are adopting these in place of devices like the Research In Motion (Nasdaq:RIMM) Blackberry.

Aruba sells enterprise wireless networking systems that basically unify a company's wired and wireless infrastructure (letting employees access company networks from mobile devices, for instance). While Cisco is still far and away the dominant player in this space, Aruba is a share-taker - in part because of the quality of the company's products, as the company tried to illustrate in its earnings press release with the claim that Microsoft's (Nasdaq:MSFT) Lync Server works 75% better on Aruba than Cisco (and Microsoft is a partner of Aruba).

Ahead in the Industry
Given the solid performance of fellow, small WLAN up-and-comer Meru (Nasdaq:MERU), Aruba's performance is encouraging. Looking ahead, it seems pretty safe to assume that more and more companies are going to have to spend on WLAN equipment as mobile devices increasingly supplant traditional desktops and laptops.

It will be interesting, though, to see how competition in this market develops. WLAN is a very attractive growth market these days, and rivals like Cisco, Motorola Solutions (NYSE:MSI) and Juniper simply cannot afford to let it slip through their fingers. Count on these companies redoubling their efforts in this market, and that could include an acquisition of a company like Aruba or Meru.

The Bottom Line
Admittedly, it feels a bit silly to talk about valuation on a stock that trades at about 150 times trailing EBITDA and over 4 times trailing revenue. Still, if the company can grow revenue at a mid-teens rate or higher for the next five years, and improve free cash flow generation along the way, the shares may well be undervalued. Moreover, this is a tech company with growing market share, strong revenue growth and a beaten-down stock price. That's not a bad combination of more aggressive growth-oriented investors, but nobody should fool themselves about the risks here. (For additional reading, also see A Primer On Investing In The Tech Industry.)

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