Aruba Networks A’int Cisco Systems: Reasons Why I Listen to Earnings Calls

Over the years, I have listened to hundreds of companies earnings call.  Any company whose stock I plan to hold over a couple of quarters is required listening.  I love hearing all the numbers and stuff, but mostly I’m  listening for how the CEO handles adversity.  Companies are bound to hit issues from time to time, but how they manage it determines if its a keeper for me.  I love this Steve Jobs story:

Steve Jobs gives employees a little speech when they’re promoted to Vice President at Apple, according to Adam Lashinsky in a new article in Fortune that’s not online yet.  Lashinsky calls it the “Difference Between the Janitor and the Vice President.”

Jobs tells the VP that if the garbage in his office is not being emptied regularly for some reason, he would ask the janitor what the problem is. The janitor could reasonably respond by saying, “Well, the lock on the door was changed, and I couldn’t get a key.”

An irritation for Jobs, for an understandable excuse for why the janitor couldn’t do his job. As a janitor, he’s allowed to have excuses.  ”When you’re the janitor, reasons matter,” Jobs tells newly minted VPs, according to Lashinsky.

“Somewhere between the janitor and the CEO, reasons stop mattering,” says Jobs, adding, that Rubicon is “crossed when you become a VP.”  In other words, you have no excuse for failure. You are now responsible for any mistakes that happen, and it doesn’t matter what you say.  (Business Insider)

After the massive earthquake hit Japan in March, many companies were severely impacted either directly or indirectly through their supply chains.  Analysts were scrambling trying to understand the ramifications based on whatever information was available. Obviously, it was the first question asked on subsequent conference calls.  Tim Cook, Apple’s CEO, addressed it right up front on their April call.

Regarding our business in Japan, we had some revenue impact in Q2 but it was not material to Apple’s consolidated results. We believe revenues will be approximately $200 million less in Q3, and this has been factored into the guidance that Peter provided you earlier in his comments. Regarding our global supply chain, as a result of outstanding teamwork and unprecedented resilience of our partners, we did not have any supply or cost impact in our fiscal Q2 as a result of the tragedy, and we currently do not anticipate any material supply or cost impact in our fiscal Q3.

Several months ago, I sold my position in NXP Semiconductor. NXP is supposedly a leader in the upcoming Near Field Communication (NFC) smartphone technology.   Not only has the stock been a dud, but the CEO’s never ending excuses are irritating. In their last call, he blamed everything except locusts for its pathetic performance.  The earthquake in Japan, the US Debt Ceiling debacle and the slow ramp in NFC all played a roll in NXP missing expectations and lowering guidance.

 “Somewhere between the janitor and the CEO, reasons stop mattering.” 

Aruba Networks’ stock has been pounded.  On May 2, it hit its 52 week high of $36.40.  Three months later, it was trading at its 52 week low of $16.20.  The market hit a rough spot during that time frame, but why was Aruba cut in half?

Sometimes your competitors suck and drag you down with them – especially if the competitor is a bell weather like Cisco Systems.  John Cambers, Cisco’s CEO, wrote the book on excuses.  On their May 11th call, after countless quarters of under delivering he announced a major corporate restructuring.  According to Chambers, this restructuring was due to industry shifts placing pricing pressure across markets as well as government sector austerity measures hampering spending in the pubic sector.

Obviously, if Cisco was struggling – smaller companies must be suffering the same fate.  So, when Aruba reported on May 19th analysts had their radars up for any hint of problems.  Revenue and earnings were both above expectations. Guidance was within range, but analysts wanted more and gross margin were down on the quarter. The company had solid explanations, but it really didn’t matter with Cisco fresh on their minds.  The sell off was on.  More selling pressure was exerted with Juniper Network’s disappointment in July.

It really didn’t make sense to me that all networking company were sucking wind. Recession or no recession more people are accessing the internet everyday.  This requires constant upgrading, expanding  and repairing of corporate and public networks.  Thus, some companies are winning business no matter how much John Chambers cries.

On Aruba’s August 25th call, it proved it’s winning at Cisco’s expense.  The company’s earnings were in-line.  Revenue was above expectations and guidance was raised.  The company grew revenue 47% year over year.  It added over 4,500 new customers in the last 12 months. It boasted of a solid pipeline entering its next fiscal year.  The company also expressed confidence in its ability to grow faster than the market as well as it’s ability to increase market share going forward.

The call was one of the most bullish ones I have heard in awhile.  I suggest you take a listen to it on the company’s website.  I bought a starter position in Aruba on Friday and plan to add as the stock price increases.

Disclosure:  Long Apple and Aruba.

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  • Timbo8

    perhaps you can also explain why marketing costs have gone potty all of a sudden? maybe cisco is making them work harder? no leverage and a lunatic price. all yours.

  • Not sure about the marketing expense, but I do like the revenue and earnings growth. Just ran across this article. “Guess who is eating Cisco’s WiFi lunch” http://stks.co/1dx 

  • MikeSimpson

    Fail

  • Anonymous

    Great post- I totally agree about the conference calls.  company managment that tries to duck key issues or make excuses – especially the weather- really irk me.

    Not sure about ARUN- CSCO is back in the game, and seriously impacting ARUN- and the stock was WAY too expensive, as margins were dropping.  Maybe now it’s cheap enough, 25x p/e is close to it’s growth rate.

  • Thanks, ARUN’s fundys look pretty sweet…  pic.twitter.com/FNFfRot

  • boslanden

    Interesting post!  Like it!  In reference to Aruba,  I jumped on this back in 07 after they filed an IPO in Dec. 06.  I tend to research and track Venture capital firm investments,  Sequoia Capital,  easily one of the top 4 Venture firms on the planet, backed Aruba back then and still owns 20%.

    I dumped Aruba a couple of months ago.  This morning, I jumped back in!   The price is right and their future continues to look bright!

    Peace.

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