By Jeremy C. Owens, MarketWatch
ROSLAN RAHMAN/AFP/Getty Images
Cisco Systems Inc. has agreed to pay $2.35 billion for security startup Duo Security, the companies announced Thursday morning, beefing up the networking company’s software offerings.
Duo is an authentication service that focuses on two-factor authorization, helping to identify a company’s employees across a range of devices or applications, a product somewhat similar to Okta Inc. /zigman2/quotes/210420951/composite OKTA -2.96% , which went public in 2017 and currently has a market cap of more than $5 billion. The deal gives Cisco /zigman2/quotes/209509471/composite CSCO -2.82% , one of the larger players in the security market, a cloud native to boost recurring revenue and services.
“We’ve been building a world-class security architecture for some time,” Cisco Security executive David Goeckleler said in an interview with MarketWatch ahead of the announcement Tuesday morning. “What Duo allows us to do is extend that architecture to wherever users are.”
Duo had raised about $118 million in venture funding, including investments from large tech players such as Workday Inc. /zigman2/quotes/201157610/composite WDAY -1.13% and Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL -2.35% /zigman2/quotes/205453964/composite GOOG -2.24% , according to FactSet, and had previously been valued at about half the total Cisco is paying. The deal, which will be paid out in cash with some assumed equity awards, is expected to close in the first quarter.
Duo co-founders Dug Song and Jon Oberheide told MarketWatch in the Thursday morning interview that they feel they have developed a “new firewall for cloud and mobile,” and that combining with Cisco will be “jet fuel for the business.”
“Cisco is a company we’ve been working with quite some time,” said Song, who serves as chief executive and will continue to lead the business within Cisco. “They have a unique command of the modern market.”
“This allows us to skip steps one and two to building a global scale,” Song added.
Duo, founded in 2009, was a rare unicorn of the Midwest, with its headquarters in the college town of Ann Arbor, Mich. Cisco will maintain the team there, said Goeckeler, adding, “Dug’s built a great team in Ann Arbor.”
The deal is Cisco’s biggest since it acquired AppDynamics for $3.7 billion in January of 2017. AppDynamics tracks and manages data and performance from business-focused applications.
Cisco has been trying to build up its software offerings for years as a way to add steady recurring revenue to its core networking business, an effort that has accelerated under Chief Executive Chuck Robbins. Authentication services for businesses fits in with many of the software offerings Cisco is known for, such as virtual private networks, or VPNs.
“[Duo] fits into our architecture and allows us to extend it in a dramatic way,” Goeckeler said.
Duo said in early 2017 that it had recorded $73 million in annual recurring revenue in 2016, growing that total 135% from the year before. In a similar announcement in early 2018, Duo said it had surpassed $100 million in ARR.
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Cisco Security topped $2 billion in annual revenue for the first time in the 2017 fiscal year, reporting $2.15 billion in sales out of Cisco’s total of $48 billion. Cisco is scheduled to wrap up the 2018 fiscal year with a fiscal fourth-quarter report on Aug. 15, and analysts on average expect the company to report quarterly security revenue of $612 million, which would give an annual total of $2.34 billion.
Security companies have faced pressure this earnings season, as growth rates struggle to help the companies live up to high expectations. Many believe that a wave of consolidation is likely in an industry that has produced many startups seeking to solve a single security issue, but customers may be tiring of tapping dozens of different vendors for their security needs.
“As you see consolidation start to happen, we’ll see growth start to pop back up” for the companies that survive, FireEye Inc. /zigman2/quotes/204730283/composite FEYE -2.74% Chief Executive Kevin Mandia told MarketWatch on Wednesday.
Cisco shares bounced around through 11 a.m. Eastern time Thursday, when they were trading 0.2% higher, and have gained 9.3% so far this year. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.57% , which counts Cisco as a component, has gained 2.5% in 2018 and the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.57% has added 5.2%.