Company Overview
AppDynamics, founded in 2008 and a leader in enterprise application performance monitoring, filed for a $100M IPO, and is another B2B software unicorn to file publicly.
They will trade under the ticker “APPD” on the NASDAQ stock exchange. Morgan Stanley is the lead-left bookrunner and Goldman Sachs and J.P. Morgan are the joint-lead bookrunners. Their last private market valuation was ~$1.9B. AppDynamics has been a highly sought after software company by VC and growth investors over the past 5 years. They’ve become the de facto leader in the large and increasingly important application performance monitoring market, and are usually the go-to choice for large enterprises looking for an APM solution. The company’s revenue growth has been impressive — AppDynamics did $158M in total revenue in the first 9 months of the year, up 54% YoY. In FY’16 (ending January 31st) they did $150.6M, up almost 85% YoY. The year before they grew revenue almost 250%. The company has nearly 1,200 FTEs and is based in San Francisco, California.
AppDynamics analyzes trillions of customer metrics each month and mostly targets mid-to large enterprises as customers. They have 1,975 total customers across every major industry and more than 275 of the Global 2000 — some representative customers include Capital One, Verizon, Salesforce, Aetna, Expedia, DirectTV, Williams Sonoma and Jetblue Airways. No customer was more than 10% of revenue over the past 3 years. The company sells their software mostly through direct sales, and also distributors, resellers and MSPs (managed service providers), although they offer a free self-serve trial where developers can sign up and starting using the product. They sell SaaS (and time-based licenses) contracts that are typically 1 or 3 years in duration and their implied average subscription ACV (annual contract value) across all customers is $86K, which is total implied ARR over customers. Their lowest pricing tier is $300/month. AppDynamics charges customers on a per-agent basis and for certain applications on a volume basis. The company has 630+ customers paying more than $50K in ACV, and 165+ paying more than $1M in TCV (total contract value), up from only 20 in January 2014.
AppDynamics’ application monitoring platform enables enterprises to monitor, analyze and optimize complex application environments — everything from the underlying code to the end-user actions, and can correlate these actions to help customers enhance end-user experiences and improve operational and business performance. The company deploys their agents in the cloud, on-premise or in hybrid infrastructure environments, and provides a unified view into all aspects of their customers’ computing environments. Their platform then uses machine learning to create baselines of behavior for software applications and end-users, thus enabling customers to detect and understand any deviations in real-time. The platform is separated into three main product suites — application performance monitoring, end-user monitoring and infrastructure visibility. Application performance monitoring is their flagship offering and is what generates the most revenue. The end-user monitoring product enables enterprises to monitor and optimize mobile and browser software applications, and the infrastructure visibility offering has database and server/service visibility monitoring modules.
Market Opportunity & Competition
AppDynamics reiterates relevant industry themes in the enterprise software world, such as the continued digital transformation of businesses, more and more customer-facing software and the consumerization of IT, rapid software development cycles, increased IT/infrastructure complexity and the failure of legacy ITOM, APM, DBMS, and other infrastructure vendors, thus creating an opportunity for AppDynamics. The company believes their TAM to be quite large — AppDynamics says they address a significant portion of the IT operations market ($23B by Gartner) and business intelligence/analytics market ($17B by Gartner), resulting in ~$40B of TAM. The company also estimates a smaller internal TAM of $12B by looking at all companies globally with more than $50M in 2015 revenue and applying a “conservative” recurring revenue assumption, based on the size of each of those potential customers.
They compete with systems management vendors such as BMC and CA, APM vendors like New Relic and Dynatrace, and large diversified IT companies like HP and Microsoft. The other fastest-growing competitor is New Relic, which went public at the end of 2014 and has a market cap of ~$1.5B. Unlike AppDynamics, which can operate in the cloud or on premise, New Relic operates in cloud-only environments.
Investors
The company has reportedly raised ~$315M from investors including Greylock, Lightspeed, IVP, Kleiner Perkins, General Atlantic, Altimeter, Battery Ventures, and Goldman Sachs. 5% pre-offering VC stockholders include Greylock (20.8%), Lightspeed (20.8%), IVP (8.3%), Kleiner Perkins (7.1%), and General Atlantic (5%). The last reported valuation was ~$1.9B post.
Financials and Metrics
In FY’16 the company did $150.6M in revenue, up 84% from FY’15. Rarely do software businesses grow near 100% at such scale. Multiplying the last quarter’s subscription revenue by four, it implies $170.3M of ARR, which has been growing on average ~16% QoQ for the past 7 quarters. SaaS (subscription) revenue is the focus of the company’s sales and marketing efforts, and is now 71% of total revenue, up from 57% a year ago. This rapid growth has not come without significant operating losses. In the first 9 months of FY’17 operating losses were $(87.9)M at a (55%) operating margin. That’s better from a $(88.8)M loss from last year at a (86)% operating margin. Last quarter’s operating margin improved to (39)%, so they are gaining leverage. I did an analysis of their implied SaaS sales efficiency (non-GAAP) and AppDynamics had a 0.9 CAC Ratio, implying a 14-month payback, which is up from a 0.6 CAC Ratio and a 21-month payback 1 year ago. Last quarter’s CAC Ratio is better than the median of other public high-growth SaaS companies.
AppDynamics tracks a few key non-GAAP metrics such as dollar-based net retention, billings and free cash flow (net cash provided by operating activities less PP&E). Their dollar-based net retention is quite good, and not surprising given the rapid growth and large scale of the business — in every reported period it’s been between ~120–130%. The company has been growing billings very quickly too — they did ~$237M in the 9-months ended Oct 2016, and did ~$259M in FY’16. Like many other software businesses, “land and expand” is a big part of their growth story. For customers who made their first purchase by or before October 2013, they had on average increased their spend 5x. Applying this methodology to their top 25 customers from life-to-date total contract value, these customers are up 14x on initial purchase. Moreover, 60%+ of new product contract value involves the sale of more than one of their applications. Their FY’12 customer cohort went from $1.2M to $9M in FY’16, a 65%+ CAGR.
Quarterly Subscription Revenue ($M)
Source: S-1
P&L (000's)
Source: S-1
Implied Ending ARR Over Past 7 Quarters ($M)
AppDynamics is growing ARR rapidly — they are also consistently adding more net new ARR quarter-over-quarter, which is very impressive at their scale. In the last 7 quarters they have added $9M, $10M, $16M, $17M, $23M, and $24M, respectively.
Source: S-1. Note: Implied ending ARR calculated by multiplying quarterly subscription revenue by four.
Quarterly Dollar-based Net Retention
Source: S-1. Note: Calculated by dividing the aggregate recurring contract value in the current trailing 12-month period by the previous trailing 12-month period.
Cohort Output from S-1
Source: S-1
Valuation
With regard to valuation, AppDynamics will likely be priced like other, fast-growing public software vendors. Public market investors will pay forward for growth and the company’s primary valuation metric will likely be enterprise value/sales. I expect them to get a premium multiple but given the large losses, I imagine the bankers will price it conservatively for a big day-1 pop. High-growth software companies trade at a ~5–6x NTM revenue median, and some closer to 10x or more (this comp set includes businesses like Salesforce, Workday, ServiceNow, Veeva, etc). Assuming they grow 54% in FY’17, which is the same growth rate for the first 9 months of the year (FY ending January 31), they will do ~$230M in FY’17. I applied a range of growth rates based on that $230M number given investors will look to their revenue one year out (FY’18). Assuming a range of growth rates and NTM revenue multiples, you can see the implied illustrative range of enterprise values below. Again, this could change quite a bit depending on when the company actually goes public and other macro market factors. I added a wide range of growth rates since companies usually set revenue expectations very low and try to beat the first few earnings reports by a significant margin (20–25%+) to give investors confidence in their ability to execute and beat plan.
Note: Enterprise value ranges and growth rates are illustrative.
I expect AppDynamics to have a successful IPO. As I mentioned earlier, it’s the go-to enterprise APM platform for dynamic and complex IT infrastructure environments, and its revenue growth and scale is a testament to their large (and growing) market opportunity. Public market investors like fast-growing leaders in huge markets and AppDynamics fits this mold. Even though they have large operating losses today, there is leverage in their model and historically have been investing in growth, and not near-term profitability. I also suspect AppDynamics has a medium-term and very believable plan to profitability for public market investors. I’m very much looking forward to pricing and trading.
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