The Six Five Team discusses Cisco Buying Splunk.
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Transcript:
Daniel Newman: So we woke up, Pat, on Thursday morning to announcement that Cisco went back to the well. You remember it was probably about a year ago that there was rumors of Cisco going in to buy Splunk. And now apparently a deal has been reached at around $28 billion for this acquisition to take place. Now at the high level, let’s talk about what’s happening at Cisco. CEO Chuck Robbins over the last couple of years has been steadfast that the company needs to shift from a very hardware-centric CapEx to a very ARR and software centric business model. The company has leaned in heavily in security, has leaned in heavily in observability, and then of course it has its collaboration platforms as well. But these have been the areas where the company had substantial opportunities to grow in software.
Well, Splunk sort of it’s a bifecta. Given the company’s interest in both security and its interest in observability, ThousandEyes, AppD plus Splunk, you now have a very complete observability portfolio and you’ve expanded your security and by the way, bought a company that has made successfully the pivot from traditional software licensing model to an ARR model. And that’s really been the directive of leadership. So going back to Doug Merritt, who we worked very closely with at The Six Five, Pat, who was CEO, he started that transition and then later when Gary Steele, the new CEO was brought in to lead the transformation the rest of the way, we saw the company substantially growing its ARR, substantially growing its recurring and its cloud business, which was very important. So what’s Cisco getting? Cisco’s getting one of the leading names in observability to package up with its existing observability portfolio, $1 billion plus of ARR.
It’s getting a opportunity to quickly become the pretty much undisputed market leader in monitoring and observability across security and IT ops. And it’s able to do that by making this acquisition and also giving more value to its shareholders long-term by continuing to pivot the company’s revenues to higher ARR and higher cloud numbers and software numbers, which is what Cisco has been promising to the market.
So Pat, this was a kind of a deal I always expected to have happen. I wasn’t sure they actually came back richer than the original price tag, but over the four quarters since they talked about this, three to four quarters, they also did substantially increase their ARR and their cloud revenue each quarter at Splunk. So that continued to push multiple push value and I think over the last few weeks, as we’ve seen IPOs come off, as we’ve started to see more activity in M&A come off, prices are coming off the bottom and this was just another indicator that prices are coming off the bottom.
I think it’s a good move for Cisco. It’s a great thing for Splunk. Splunk investors have seen their stock absolutely pummeled and held down for a long time. This is going to give a nice return to those that stuck with Splunk for the long run. And I think for Cisco it helps meet the objective that the company’s had, which is that pivot that I’ve now reemphasized at least seven times since I started this little diatribe.
Patrick Moorhead: Wow, Dan, take a breath there. So I’m going to take a slightly different tack on here. I don’t want to repeat what Daniel says, but-
Daniel Newman: That was really smart.
Patrick Moorhead: A couple mega trends, or actually I wouldn’t call them mega trend … Well one’s a mega trend, which is data management platforms are super important as we get into, I don’t want to say the generative AI age, but it mattered with AI, it mattered with DL and it matters with analytics. We’re creating so much data that it needs to be tamed and managed and we talk about getting value from it and you need to have a data management platform.
And ironically, these were not in NDA Q&As, but my comment to Chuck and his executive team was the one thing you’re missing in your strategy is a data management platform, right? I like the observability as a service. I like the networking and security as a service. No, by the way, I really like that it crosses any type of cloud. It doesn’t matter where your infrastructure is.
Cisco is making money all along the way. Maybe I floated Cloudera to them as well, but they opted to do probably a 3X acquisition of Splunk there. And I’m not confused at Cloudera and Splunk. They do very different things, but this just makes sense. The other trend you have going on is that enterprises are sick of having 54 different security vendors, right? Over time, pretty much all new markets have these best in breed point solutions that enterprises have to integrate, architect and keep up with all of the revisions that go on. The other thing that we’ve always seen in IT is that just gets out of hand because what happens is these “best in breed”, if you’re integrating three additions after the new one, you’re not actually getting the best bits and you’re potentially creating security holes by having this plethora of vendors.
The other thing is the security game has become a data game, and I think they say that only 5% of red security issues actually get looked at by a human. It’s because there’s so many and you have AI coming in to … you get in this spy versus spy situation where humans can’t keep up. And the only way that you can do this is to have a data platform where you’re capturing all this data on the security side and you have some sort of AI to be able to better figure out what’s a red, what’s a yellow and what to ignore and what to act upon. And sometimes you act upon it automatically and that’s where this market’s going.
So Cisco’s one of the biggest security vendors out there. I think they’re number two to Microsoft’s number one. This makes sense. I need to think a little bit about the market concentration of this for regulators, but last time I checked, observability is a very fractualized market where concentration levels aren’t exactly that high, but in the end all depends how the regulators want to define market. And we will see. I’ve seen no articles, I’ve seen no analysis that said this is going to be a regulatory challenge, but it does need to go through the regulatory process.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
