David Cummings on Startups

Notes from the AppDynamics S-1 IPO Filing

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David Cummings

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AppDynamics, a fast-growing application performance management software company, just filed their S-1 IPO filing to go public. AppDynamics has raised a huge amount of money ($300+ million) and is growing super fast (>50%), making it one of the higher profile B2B software companies to file recently.

Here are a few notes from the S-1:

  • The 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. (pg. 1)
  • 1,975 customers (pg. 2)
  • Revenues (pg. 2):
    • 2014 – $23.6 million
    • 2015 – $81.9 million
    • 2016 – $150.6 million
  • Net losses (pg. 2):
    • 2014 – $68.3 million
    • 2015 – $94.2 million
    • 2016 – $134.1 million
  • Industry Background (pg. 2):
    • Enterprises are Undergoing Digital Transformations
    • IT Investments are Moving to Customer-Facing Software Applications
    • Velocity is Critical
    • Accelerating IT Complexity
  • Internally estimate that the total addressable market for the solution is approximately $12 billion (pg. 4)
  • Revenues nine months ended October 31, 2016 (pg. 12):
    • Subscription $110 million
    • License $32.6 million
    • Professional services $15.7 million
    • Total: $158.4 million
  • Accumulated deficit of $476.8 million as of October 31, 2016 (pg. 16)
  • Mix of time-based licenses, SaaS subscriptions and perpetual licenses and the mix of applications sold (pg. 23)
  • Competition for people in our industry, especially in the San Francisco Bay Area is intense and often leads to increased compensation and other personnel costs. (pg. 29)
  • Federal, state and foreign net operating loss carryforwards (NOLs) of $182.1 million, $199.8 million and $94.7 million (pg. 42)
  • Cash, cash equivalents and marketable securities of $142 million (pg. 57)
  • SaaS subscriptions and time-based licenses are typically one or three years in duration, and are bundled with software updates and customer support services (pg. 67)
  • As of October 31, 2016, we had more than 165 customers with a life-to-date total contract value greater than $1 million, an increase from just over 20 such customers as of January 31, 2014 (pg. 70)
  • We have increased our sales and marketing headcount from 157, as of January 31, 2014, to 485, as of October 31, 2016 (pg. 70)
  • 2016 dollar-based net retention rate of 123% (pg. 71)
  • In the fiscal year ended January 31, 2015, we recognized the settlement costs of $10.0 million related to our litigation with CA, Inc. (pg. 75)
  • Founder/Chairman equity: 14.2% (pg. 153)

I think AppDynamics has the scale and growth to have a well received IPO but I think the heavy losses and high percentage of license and services revenue relative to subscription revenue will make it less desirable compared to equivalent SaaS companies.

Congratulations to the entire team at AppDynamics for building a large, fast-growing company.

What else? What are some more thoughts on the AppDynamics S-1 IPO filing?

Comments

5 responses to “Notes from the AppDynamics S-1 IPO Filing”

  1. Jamie Bardin Avatar
    Jamie Bardin

    I haven’t read the S1 yet, but not sure that I’d be all over this one…revenues are growing at a very healthy clip, almost ~4X YOY prior year, ~2X YOY this year…and while revenue is finally outstripping net losses, it is still scaling, albeit slower than revenue, indicating serious investment in growth without significant returns to scale, yet. If it were me, I think I’d raise another mezzanine round and get to profitability…because at this stage, there isn’t anything to indicate they will…at least not clearly. Certainly one to watch with a great set of investors…

    Reply
  2. Sandy Kory Avatar
    Sandy Kory

    Their overall revenue growth and its slowing pace mask the torrid subscription revenue growth, from ~60m to ~110m year over year in most recent 9 months and from 22.5m to 42.5m in most recent 3 months. The strong negative net revenue retention and solid gross margins are also compelling. The only (relatively small) weakness I see is that they don’t seem to have great sales/marketing efficiency (hence the high net losses), though it’s getting better and there is a mitigating factor in the massive scaling of the sales force in past year ie efficiency could trend up as sales force tenure grows.

    Their board likely has been waiting to file until they think they can get a nice bump up from their last private round valuation of 1.9b. Given they should be ~200m in sub rev run rate as of this quarter and should be crossing 300m sub run rate in 2017, I think this should see a 2.5b+ market cap and perhaps even surpass Veeva as highest revenue multiple in public SaaS.

    Reply
  3. Jacob Avatar
    Jacob

    Nice summary, thanks for posting.

    Other points to note:
    – paying New CEO $20m cash out the last round of $150M to get him on board and remove founder Jyoti.

    – competitor NR has taken a big hit and despite higher and most consistent revenue and lower loss their market cap is < 1.5B after 2 years on the public market. Note that at their peak they hit 1.9B.

    – VC investors have been waiting for a long time and want a way out ASAP. They have tried to sell the company in the last 6months (after the secret IPO) but they failed to get anyone (most likely IBM or CA) willing to pay anywhere near as high as they want.

    – this is a highly competitive market with SaaS specialist like NR and companies like Datadog (adding more APM) so really tough to win this broad game. For enterprise/gov play Dynatrace has big market share and they will face very tough competition. In other words growing revenue will to 200+ and beyond will be much much harder. If they could do it they would've waited the extra 12 months but it is highly unlikely.

    – note that they are trying to re-architect their platform as it wasn't built to deal with cloud/micro service and webscale environment moving from MySQL type DB to newer which is not easy to accomplish and will create problems for them as they try to upgrade exisiting customers.

    – one of their key partner code-centric saw the architecture limitations and went and started InstanaHQ as they understood that AppD can't easily re-architect their tool.

    Overall the reason that they grew in the last 2 years was agrresive and huge spend on sales and marketing which as the filing shows is not sustainable.

    For those thinking of investing good luck because you will certainly need it and a little more.

    Reply
  4. John Alex Avatar
    John Alex

    I worked at one of AppDynamics partners in Europa. According to my observations, things are not going well at Appdynamics due to high growth and unsuccessful people employed. When you need anything, it is taking very long time. The team in Europa is making all the decisions on their own and US people are not aware of it. With this amount of loss, I do not think that Appdynamics will be successful in the long run. There should be changes on the team and number of people should be decreased. There are lots of people doing nothing rather than burning money.

    Reply
  5. abttwo Avatar
    abttwo

    David – what do you make of AppDynamics selling to Cisco (https://betanews.com/2017/01/30/cisco-buys-appdynamics/) right before the IPO?

    Reply

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