Cisco Buys Springpath, Software-Centric Transition Continues

Cisco Systems Inc. (NASDAQ:CSCO) recently announced plans to acquire Sunnyvale-based start-up Springpath for $320 million. The company offers hyperconvergence software that enables server-based storage systems. The acquisition is expected to close in the first quarter of fiscal 2018.

Hyper-converged infrastructure (HCI) systems combine all the pieces (style storage arrays with more generic servers packed with disk and flash storage) necessary for data center computing. According to research firm IDC, the market is anticipated to be a $6-billion opportunity by 2020.

Cisco-Springpath relationship dates back to 2015, when the networking giant invested in the start-up. The relationship deepened further when they collaborated in early 2016 to launch HyperFlex, the industry’s first fully integrated hyperconverged infrastructure system.

HyperFlex combined Cisco’s Unified Computing System (UCS) blade servers with Springpath’s software at core. The product helped Cisco to enter the hyperconvergence market, which was dominated by the likes of Nutanix (NASDAQ:NTNX) , VMware (NYSE:VMW) , Dell-EMC and SimpliVity – acquired by Hewlett Packard Enterprise (NYSE:HPE) early this year.

Springpath to Boost Competitive Position

Springpath acquisition will boost Cisco’s competitive position in the HCI market. The optimistic expectation reflected a 1.92% increase in share price, which ultimately closed at $31.27 on Aug 22. Notably, the stock has gained 3.5% year to date, substantially underperforming the 18.9% rally of the industry it belongs to.

Springpath’s software – Data Platform – is based on Hardware Agnostic Log-Structured Objects (HALO) architecture, where the storage is maintained on a log-structured file system. This kind of file system is more efficient at handling inline de-duplication and compression of data as compared with append-only file systems like the Hadoop Distributed File System.

Cisco views that Nutanix and other product offerings fell short in addressing challenges related to networking and performance related to HCI systems. The company believes that HyperFlex is a better solution in this regard. The product gained strong traction with Cisco gaining almost 1800 customers last year.

Acquisitions Helping in Transition

The buyout also reflected Cisco’s focus on transitioning to a software company as its hardware and networking business continues to decline. In the last quarter, Switching, NGN Routing and Data Center revenues declined considerably.

Cisco has completed a plethora of acquisitions in the software space over the last couple of years. The big names were Jasper Technologies, a Internet of Things (IoT) cloud service provider, in 2016 for $1.4 billion and AppDynamics, an app performance management software provider, in early 2017 for $3.7 billion.

Springpath is Cisco’s fifth acquisition in 2017. During the fourth quarter, the company completed the acquisition of MindMeld. In the current quarter, the company closed the acquisitions of Viptela (software-defined wide area networking product provider) and Observable Networks (cloud-native network forensics security applications delivered as a service provider).

Zacks Rank

Cisco has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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