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After the Storm, Aruba Networks Rebuilds

NEW YORK ( TheStreet) -- Back in June, shortly after Aruba Networks (ARUN) was putting the pieces back together while recovering from "Hurricane Cisco" (CSCO - Get Report), I argued there was considerable value left in the stock. Too much was being made of a near-term hiccup. It wasn't a popular opinion. But it was a point that needed to be driven home.

I won't deny the legitimacy regarding concerns about Aruba's long-term health in the wireless local-area-network (WLAN) market. That Cisco owns more than 50% share of that industry is a big deal. But what transpired three months ago with Aruba losing as much as 44% of its value can only be described as pure panic selling and a gross overreaction. In the article in June I said the following:

"While I won't begrudge investors for having bailed on the stock, whether to lock gains or to cut their losses, this may prove later to have been an erratic move. For new investors, though, that are looking to 'test Aruba's waters,' the question to ask is, how much of Aruba's struggles has more to do with poor sales execution versus the idea Aruba might be losing both market share and its 'best of class' status."
[Read: <a target="blank" data-add-tracking="true" href=""><em>Syria and the Toxic Wind of Change</em></a>]

I don't believe I received any support on this. Aruba's management, meanwhile, which then guided for fourth-quarter earnings to come in below expectations, certainly didn't help its case. Nor did it help my argument. But the downbeat guidance wasn't a surprise. It certainly wouldn't have made sense to set the company up to fail after a disastrous quarter. Since then, however, cooler heads have prevailed.

While shares of Aruba are still 40% below their 52-week high, the stock is up almost 35% since three months ago. Management only guided for 7% growth, which (among other reasons) caused the panic, since this would have represented 15% growth deceleration. But that was not to be. Instead, fourth-quarter revenue came in 10% higher year over year, which was enough to beat Street estimates.

What's more, not only did product revenue inch higher by 7% year over year, the company also beat gross margin expectations, which also led to a beat in operating income. Although every analysts was using the "Hurricane Cisco" headline back in May, I found no evidence this quarter that Aruba was under similar pricing pressure. In fact, it was Cisco, not Aruba, that suffered this quarter due to softer-than-expected margins.

For Aruba, which is working to build credibility, margins are always going to be an issue. Fairly or unfairly, Cisco's presence and its far-reaching capabilities is always going to be tied with Aruba's long-term prospects. Even so, I don't think we should assume that customers are going to willingly bypass Aruba's best-of-breed WiFi business, in favor of discounted alternatives.

Right now, given the tough IT spending environment, customers may look to save. But this level of underinvestment won't last indefinitely, not if enterprises truly care about competing.
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