Datto (NYSE: MSP), a cloud backup software company, raised $594 million from investors when it went public. Founded in 2007, the company has established a firm foothold for companies needing backup services. With 1,600 employees, Datto has grown rapidly through acquisitions. Since it began trading on October 21, the stock closed at $27.90 on October 26, slightly down from its peak of over $30 per share.
Datto Earns $500 Million Through Backup and Other Services
In its initial public offering (IPO) documents, Datto revealed several key facts about its business model.
Revenue. The company has $507 million in annual recurring revenue (ARR) as of 2019. Management forecasts it will reach $520 million by September 2020 compared to $445 million earned in the first nine months of 2019.
Indirect selling model. Datto relies on third parties—managed service providers (MSPs)—to sell its products to companies. This emphasis is apparent in the company's management approach: "We foster an MSP-centric culture—actual MSP partners speak at each new employee orientation to nurture that environment from day one." In financial terms, large MSPs (i.e., those linked to $100,000 in ARR) account for 44% of the company's annual revenue as of June 30, 2020. As a result, Datto needs to maintain positive relationships with MSPs to maintain its business.
Net Income. In 2019, the company reported a net loss of $31 million. It is common for newer technologies to be unprofitable.
High-value customers. Through its managed service providers (MSP), Datto has acquired more than 1,000 customers who pay over $100,000 per year.
High customer loyalty. Early indicators suggest that customers are highly loyal to the company. Datto reports it has a 115% dollar-based net retention. This ability to retain and grow revenue from customers suggests Datto will grow steadily with its current customer base.
Substantial debt. The proceeds from its IPO may play a critical role in helping the company to manage its debts. At the end of 2019, Datto had $546 million in long term debt. That means that the company's annual revenue is almost equal to its long-term debt load.
Steady spending on research and development. Like other technology firms, Datto spends significant resources on research and development (R&D). In 2018, Datto spent $54 million on R&D (i.e., 14% of 2018 revenues) and then $60 million in 2019 (i.e., 13% of 2019 revenues). So far, 2020 R&D spending appears to be in line with previous years in dollar terms. Datto spent $32 million on R&D in the first six months of 2020.
How Datto Helps Small and Medium-Size Companies Through IT
Datto is known for its backup software. However, there is much more to Datto's product suite than backup services. They also offer tools to help companies manage their network infrastructure, including wireless networks.
The company’s experience in backup extends to backing up and restoring entire software as a service (SaaS) applications. Also, Datto provides IT management tools like remote monitoring and management (RMM). Such management tools make it easier for managed service providers to serve small business clients in different locations. That capability means that IT services can be managed remotely, which reduces the impact of the COVID-19 pandemic on MSPs and Datto.
Even as Datto continues to invest in R&D, it is also reaching out to the developer community for new ideas. The company's Developer Program offers support for technical needs and sales. Thanks to the developer program, Datto has integrations with accounting tools (e.g., Sage One, etc.) and remote monitoring tools (e.g., Auvik, Barracuda, etc.).
Datto Acquired Four Companies Before Going Public in 2020
Growth through acquisition is not a strategy limited to technology giants. Datto has acquired several companies over the years. The financial terms of the acquisitions were not disclosed. However, it is possible to estimate each acquisition's impact in terms of product, employees, and customers.
Gluh (announced July 2020). Based in Australia, Gluh produced a software solution to assist in IT procurement for managed service providers. They built a technology that can produce quotes in 30 seconds so that MSPs can sell more products.
Open-Mesh (announced January 2017). Established in 2007, Open-Mesh was a wireless network technology company. When it was acquired, it was already used by 90,000 wireless networks around the world.
Backupify (announced December 2014). Founded in 2008, this company offered backup solutions for cloud data. At the time of the acquisition, Backupify had approximately 100 companies. The Backupify acquisition helped Datto acquire higher value customer accounts.
Paradeon Technologies (announced July 2013). Founded in 2011, Datto's first acquisition gave the company a foothold in Europe. Paradeon developed software for managed service providers in the United Kingdom.
Bruce Harpham is an author and marketing consultant based in Canada. His first book "Project Managers At Work" shared real-world success lessons from NASA, Google, and other organizations. His articles have been published in CIO.com, InfoWorld, Canadian Business, and other organizations. Visit BruceHarpham.com for articles, interviews with tech leaders, and updates on future books.