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Ratio of Software Revenue to Get a Boost at Cisco by AppDynamics Deal

Ratio of Software Revenue to Get a Boost at Cisco by AppDynamics Deal
Cisco Systems Inc has been struggling to build its software business as is evident from the company financial reports and internal documents and hence the company’s decision to acquire software startup AppDynamics for $3.7 billion, nearly double the private-market valuation, reflects those struggles.
In the most recent quarter, there has been a stalling of the push by Cisco CEO Chuck Robbins to boost the share of revenues from software. Recurring software and services was responsible for the generation of 29 percent of Cisco's $12.4 billion in fiscal first quarter revenues, executives said on its earnings call. Compared to the same figure for the same period a year earlier – which was at 25 percent, this was a very slight improvement.
According to internal documents of Cisco that a section of media claim to have viewed, one of Cisco’s key product lines is dramatically underperforming that software revenue ratio. In order to route information to data centers, a mix of hardware and software is used by Cisco’s N9000 switch. And hoping to boost software revenue in its networking division, Cisco paid $863 million in 2013 for the technology from a startup named Insieme.
While there were only about $89 million in connected contracts for the so-called Application Centric Infrastructure software product designed to be sold alongside it, Cisco had $888 million in contracts for N9000 switches, which does include a software component as of the end of fiscal 2016 year last summer, the documents  showed.
Therefore the software-to-hardware revenue ratio for Cisco emerging from that takeover was of about 10 percent which was well below the overall average of the company as suggested by those numbers. There were no comments made by a company spokesman as the figures were unreleased, nor said what percentage of switch revenue comes from software.
The lagging software component could help explain why Cisco was eager to pay a premium for AppDynamics even thugh the N9000 switch will be a small part of Cisco’s revenue.
In an indication that software revenue will grow, in its most recent quarter, the amount of deferred revenue attributable to recurring software sales grew 48 percent, Cisco spokesman Jim Brady noted.
"As we continue to evolve our business toward a more software-centric, recurring revenue model, we are very pleased with our incremental growth in this area," Brady said.
"We feel the acquisition of AppDynamics ... will also accelerate our transition toward software-based solutions that deliver predictable and recurring revenue."
AppDynamics had been valued at $1.9 billion in its most recent round of private financing and whose primary product is software that helps monitor how fast apps run on servers. Just at the last moment that AppDynamics was about to go public as AppDynamics Inc, Cisco swooped in with an all-cash offer for nearly double its valuation of the financing round.

Christopher J. Mitchell

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