Cisco places $3.7 billion bet on AppDynamics: What it means

Cisco is paying a hefty premium but will gain important new technology in return.
Written by Chris Kanaracus, Contributor

Cisco is taking application performance management startup AppDynamics off the table for $3.7 billion on the eve of its long-awaited IPO. AppDynamics was most recently valued at $1.9 billion, making Cisco's move seem like a bold one indeed.

The deal is expected to close later this year. AppDynamics will become a new software business unit reporting to Rowan Trollope, SVP and GM of Cisco's Internet of Things (IoT) and Applications business.

AppDynamics competes with the likes of New Relic and Dynatrace, as well as APM suites such as those offered by CA Technologies and BMC. (While Splunk is sometimes named as an AppDynamics rival, in practice many customers use the products jointly given Splunk's emphasis on log analysis.)

In its IPO prospectus, AppDynamics took pains to spell out the difference between its approach and that of legacy IT management and monitoring tools:

"Our integrated suite of applications monitors the performance of software applications and IT infrastructures, down to the underlying code, and automatically correlates them into logical 'business transactions,' such as booking a flight in a web browser, transferring money on a mobile device, getting directions through a car's navigation system or locating physical goods in an inventory system.

Real-time information about the performance of these business transactions provides our customers with actionable insights into their end-user experiences, the activities required to improve them and the business outcomes associated with them.

[L]egacy offerings are often resource-intensive, expensive and generally incapable of supporting complex, modern software applications and IT architectures, such as cloud and hybrid deployments, production-first software environments and microservices."

AppDynamics is available on-premises, on public clouds, such as Microsoft Azure and Amazon Web Services, and in hybrid deployment form. The company targets mid-to-large enterprises and has roughly 2,000 customers in 50 countries. It estimates the total addressable market for its products at $12 billion.

Like most startups, AppDynamics has racked up plenty of losses, with its deficit standing at $477 million as of Oct. 31, according to the prospectus. But it has also experienced steady growth, with revenue of $158.4 million as of Oct. 31, a 54 percent rise year over year.

That pace of growth speaks to the premium Cisco paid for AppDynamics, which may not have been able to sustain it as an independent. Moving under Cisco's ownership and taking advantage of its massive channel will not only help AppDynamics reach more customers and cross-sell into Cisco's installed base, but also lower the cost of sales significantly.

Overall, Cisco's move to acquire AppDynamics is a timely and necessary one, says Constellation Research VP and principal analyst Holger Mueller. "With the expectation of enterprises building more software in-house, the need for application performance management becomes even more important," he says.

Meanwhile, Cisco needs to reinvent itself and create new revenue streams as it tries to shift from a networking-centric vendor to one focused more on enterprise software, Mueller adds. "But is a work in progress and Cisco must show that the new entities can grow and how it will address further missing pieces."

At first glance, AppDynamics seems like a fairly logical acquisition that extends Cisco's core capabilities, although the price tag raises an eyebrow, says Constellation Research VP and principal analyst Andy Mulholland. "The answer is that AppDynamics is all about enabling the new network of millions of devices and apps orchestrated in a constantly changing set of digital services," he says. "The new IoT/app/cloud infrastructure is inherently a network of a huge number of elements integrating in a constantly shifting pattern of 'outcomes' and that results in a game change in network management as it is currently understood."

Cisco needs AppDynamics' capabilities "as part of their strategy to move toward being the network of high-value interactions, as well as needing to prevent any direct competitor from gaining from a relationship with AppDynamics," Mulholland adds.

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