Why Cisco is paying $3.7 bn for AppDynamics that posted $150 mn revenue

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Cisco is set to buy AppDynamics, an application intelligence software company in San Francisco, for approximately $3.7 billion in cash and assumed equity awards.

ALSO READ: Cisco’s blog on strategies to buy AppDynamics

This is Cisco’s largest acquisition since it acquired security firm Sourcefire for $2.7 billion in 2013. Cisco plans to buy the company for $3.7 billion, nearly double that of the company’s latest valuation of $1.9 billion.

AppDynamics’s annual revenue was $23.6 million for the year ended Jan. 31, 2014; $81.9 million for the year ended Jan. 31, 2015; and $150.6 million for the year ended Jan. 31, 2016. AppDynamics is going for an IPO.

Enterprises tap AppDynamics’s cloud application and business monitoring platform to improve application and business performance.

“The combination of Cisco and AppDynamics will allow us to provide end to end visibility and intelligence from the network through to the application; which, combined with security and scale, and help IT to drive a new level of business results,” said Rowan Trollope, Cisco senior vice president and general manager of Cisco’s Internet of Things and Applications Business Group.

David Wadhwani is the CEO and president of AppDynamics.

AppDynamics and Cisco will provide customers with intelligent and actionable insights, helping them make speedy business decisions and improve business performance.

Headed by David Wadhwani, AppDynamics will be a new software business unit in Cisco’s IoT and Applications business, reporting to Rowan Trollope.

Analysis by Cassandra Mooshian, senior analyst at TBR

Cassandra Mooshian, senior analyst at TBR, says this purchase represents Cisco’s goal to derive a higher percentage of revenue from recurring software and services sales as the network hardware market is forecasted to contract over the long term.

Recurring software and services revenue accounted for 29 percent of Cisco’s total revenue in Q3 2016, 9 percent of which was generated from software subscriptions.

ALSO READ: TBR analysis on Cisco’s acquisition of AppDynamics

Acquiring AppDynamics underscores Cisco’s goal to grow its value proposition from not just that of a network infrastructure supplier, but to include domain expertise in application performance monitoring (APM) and management.

TBR says the purchase is a natural extension of Cisco’s Application Centric Infrastructure (ACI), the company’s flagship SDN framework. While ACI is integrated within Cisco’s Nexus switches, it remains to be seen whether the company will similarly bake in AppDynamics’ solution with hardware, or offer the software as a standalone offering.

TBR expects this arrangement will also drive professional services opportunities for Cisco Services as clients look to vendors more often, particularly Cisco and AppDynamics, for tools to monitor and manage applications running on infrastructure.

Additionally, one area of growth opportunity can be security services related to Internet of Things (IoT) and Cisco’s recently launched Security Services for Digital Transformation, part of the Cisco Security Advisory Services portfolio. It positions the company to capture transformative opportunities with clients by integrating its consult-build-run services and products into comprehensive solutions.

AppDynamics promises to contribute to Cisco’s IoT System, its broad collection of IoT capabilities available to customers through its pillars of Network Connectivity, Fog Computing, Security, Data Analytics, Management and Automation and Application Enablement.

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