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Summary:

It was only a decade ago when Cisco froze competitors from a market by simply showing up. Times change. Companies get big and unwieldily. And that is precisely the time to attack. All you need is some gumption, focus and the right products.

ipad-touchpad

It was only a decade ago when everyone was scared of Cisco Systems entering their market. Just as Microsoft would pre-announce a product and kill many-a-few startup dreams, Cisco could freeze out competitors by simply showing up.

Times change and companies like Microsoft and Cisco get too big and too unwieldily. They have to meet unnatural revenue and earnings growth expectations of the most unnatural group of people – Wall Street investors. In order to do so, they buy companies and technologies. And the clutter starts to eat away at the core. And that is precisely the time to attack.

With the right market, right product and extreme focus, anyone can take them on. Juniper Networks did so in the router market. And these days it is the little-known-but-rapidly-growing Aruba Networks which is having fun sniping at Cisco’s heels. The company make WiFi routers targeting large companies and software to manage wireless networks with tens of hundreds of users

Aruba, based in Sunnyvale, Calif., recently reported its fiscal 2011 (it ends July 31, 2011) and fiscal fourth quarter results, and they were astonishingly good. Revenue for the fourth quarter was $113.8 million, an increase of 47 percent from the $77.3 million reported in the same period last year. Net income for the quarter was $68.2 million, or $0.57 per share, compared with net income of $400,000, or $0.00 per share, in the fourth quarter. For the year, Aruba saw it’s revenue rise by 49 percent to hit $396.5 million, which led to net income of $70.7 million, or $0.60 per share. In 2010 the company reported a net loss of $34.0 million, or $0.38 per share.

I say astonishingly  because a whole slew of networking equipment makers have reported poor earnings, blaming Europe. The PC market is in a sustained slump. No such problems for Aruba. Its latest quarter was so good that it gained market share at the expense of Cisco. Aruba CEO Dominic Orr in a conference call with analysts pointed out:

According to the Dell’Oro Group, the enterprise wireless LAN market has grown more than 70 percent over the last eight reported calendar quarters. During this period, Aruba grew much faster than its competitors, gaining 5 percentage points of market share to 15.9 percent, including sales by our partners, while our main competitor, Cisco, lost slightly more than 4 points according to Dell’Oro’s Group report.

Orr and his company have been highly focused — it makes Wi-Fi products for the enterprises (corporations, big campuses and the government). It has diversified from making hardware to offering software to run corporate Wi-Fi networks. When I met Orr last year, he told me that iPad was the best thing that happened to his company. And how right he was. In his call with analysts he said:

I think the market at large has noticed that laptop and PC makers are under some non-trivial pressure from — in the enterprise spending perspective on the — basically the onslaught of the usage of mobile and mobile devices in terms of tablets and smartphones. To the extent that this is an established phenomenon, the connectivity of these new devices has only one choice; it is wireless.

I think most companies are beginning to feel okay with the idea of their employees bringing in their smartphones and iPads. In fact, with current economic downturn, it might be something companies may want to encourage as it allows them to save money.

But what they need is infrastructure to use these devices, and also obey corporate policies. And at the same time, we are moving towards the idea of virtual workspaces moving out of the realm of freelancer workers to big company employees who work from anywhere. Dell’Oro Group, a research firm, recently noted that wireless LAN revenues are going to top $8 billion by 2015.

Aruba’s bet on the right trends is result of inherent focus on a few things. In comparison, companies like Cisco are too distracted and have to focus on too many markets. Cisco, which is still the largest corporate Wi-Fi player brought in about $1.23 billion Wi-Fi revenues in 2010 according to analyst estimates versus $236 million for Aruba. Cisco had 56.8 percent of the market at the end of 2010 and by end of March 2011 it was down to 55.7 percent. Aruba which ended 2010 with 14 percent market share, now enjoys 15.9 percent of the market.

Shows what a little focus can do for you.

  1. ARUN currently sports a mighty P/E of 839: Y2K-ish, indeed. Many other technical considerations per trading in ARUN suggest present share price vulnerable. Not to discount the company’s interesting fundamentals. Only to suggest caveat emptor.

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  2. The end game is mesh networks – everything talking to everything else – over wireless networks. The network is the machine.

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  3. When Cisco first started, they did the same thing to the established big player Network System. Cisco concentrated on just one aspect, did it well and ate their lunch. Then expanded. What goes around comes around.
    Here’s Network Systems from bak then…
    http://www.geise.com/index.php/portfolio/print/network_systems_print/showcase/

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  4. The same Cisco that pompously last year announced vaporware to take on the iPad called the Cius? Unlike the HP TouchPad, the Cius was stillborn.

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    1. Yes I Know It All Saturday, August 27, 2011

      Anyone who still compares the Cius to Touchpad or any other consumer tablets has no qualification to discuss Cisco products.

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  5. What about Ruckus…

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  6. There are always new competitors for big companies like Cisco & Microsoft every now and then, Companies like Cisco can never just go they always come with better and improved solutions….

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  7. Hmmm… And here I thought Aruba missed consensus operating income (oh, that’s right, hype notwithstanding, they did).

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