Cisco Systems (CSCO) is apparently willing to pay top dollar in order to make its ambitious software vision a reality.
On Wednesday, Bloomberg reported that Cisco recently approached Datadog (DDOG) , which carried out a very successful IPO today, with a buyout offer that was "significantly higher" than the $7 billion IPO valuation Datadog was aiming for. Datadog is said to have turned down Cisco's offer out of a belief that "it could be worth more as a public company over time."
That time is now. With Datadog's shares currently up more than 30% from their elevated $27 IPO price, the company sports an $11.8 billion market cap after accounting for outstanding stock options. That gives Datadog an eye-popping valuation of roughly 44 times the revenue it reported for its last four quarters, and (given its recent, 70%-plus, revenue growth rates) perhaps around 25 times the revenue it will record over its next four quarters.
With Cisco having laid out a vision of providing an end-to-end set of software solutions for monitoring and analyzing the performance of a company's infrastructure and apps regardless of where they reside, and with the company more generally eager to grow its subscription software revenue, it's not hard to see how (valuation aside) buying Datadog would fit with its strategic thinking.
Datadog offers a cloud/SaaS software platform that blurs traditional lines between hardware infrastructure, app and event log monitoring. Among the selling points the company likes to emphasize: Strong support for monitoring cloud apps and infrastructures, the ability to create highly customizable dashboards that give a unified view of a firm's IT operations and an ecosystem that includes more than 350 out-of-the-box integrations with third-party software and services.
In its Q2 2019 "Wave" report for intelligent app and service monitoring, research firm Forrester placed Datadog in its "Leaders" wave, along with Dynatrace (DT) (it went public in early August) and private Zenoss and ScienceLogic. Likewise, user reviews of Datadog's software by IT pros are generally positive, with reviewers often praising both the reach of Datadog's platform and its ease-of-use.
As others have noted, there is some overlap between Datadog's platform and that of Cisco's AppDynamics application performance monitoring (APM) software unit, which Cisco bought for $3.7 billion in 2017. Though AppDynamics competes to a greater extent with firms such as Dynatrace and New Relic (NEWR) , Datadog does list all three companies as rivals in its IPO filing.
It also lists traditional infrastructure monitoring software players such as IBM (IBM) , CA Technologies (owned by Broadcom (AVGO) ) and BMC Software, log management software providers such as Splunk (SPLK) and Elastic (ESTC) and the monitoring tools provided by public cloud giants Amazon (AMZN) , Microsoft (MSFT) and Google (GOOGL) for their own infrastructures.
In that context, Cisco's (reported) willingness to pay steep multiples to acquire Datadog when it already owns AppDynamics points to a desire to leave no stone unturned as it pursues its end-to-end IT monitoring and analytics software strategy. It's worth noting here that in addition to buying AppDynamics, Cisco has in recent years launched analytics software that relies on telemetry data to help secure networks and workloads. It has also rolled out subscription-based software platforms for its office and data center switch lines that (among other things) aim to automate routine management tasks and make it easier to provision networking resources and set security policies.
Thanks to these moves, as well as a slew of other software-related acquisitions and organic investments, Cisco's software exposure has grown considerably over the last several years. The company's Applications reporting segment is now on a $6 billion annual run rate, and (though this isn't broken out) a meaningful fraction of the revenue produced by its Infrastructure Platforms and Security segments appears to come from software as well. Also, Cisco noted on its last earnings call that 70% of its software revenue now involves subscriptions, up from 58% a year earlier.
Once can definitely question the price that Cisco was reportedly willing to pay for Datadog. But at a time when enterprise software spend continues growing as a percentage of total IT spend, and Cisco's core networking hardware franchises face plenty of direct and indirect competition, the company's broader willingness to bet heavily on becoming a top IT infrastructure software player definitely has a logic to it.