Datto CEO On BitDam Buy: ‘The Real Key Is Depth, Not Breadth’

‘Security and cloud are complex by nature, but we will make them simple and turn them into growth margin opportunities for our partners. ... We will continue to increase our investment in each area to expand our product offerings and addressable market, which we believe will drive strong partner retention,’ says Datto CEO Tim Weller.

2020 was a strong year for Datto, and an expanded focus on the cloud and security will drive the company to new heights in the year to come, said Datto CEO Tim Weller.

“Our enthusiasm for the MSP opportunity has never been higher as SMBs continue to accelerate their digital transformation,” Weller told investors during the company’s fiscal fourth quarter 2020 financial analyst conference call Thursday.

[Related: Datto CEO Tim Weller: IPO’s ‘MSP’ Ticker Symbol A ‘Shout-Out’ To Our Partners]

Weller also used the conference call to provide details about Datto’s acquisition of BitDam, the developer of Advanced Threat Protection (ATP) technology it said offers comprehensive defense against malware, phishing, business email compromise attacks, account compromise and spam.

Datto in the fall became a public company with the stock ticker “MSP” in what Weller at the time told CRN was a shout-out to the company’s customer base, which is exclusively MSPs.

With its global MSP ecosystem, Datto is positioned to capitalize on the global opportunities coming in 2021, particularly in two core areas, Weller said during his prepared remarks.

“The themes of cloud and security will be areas of focus for Datto as we deliver new solutions to our MSP partners in 2021,” he said.

Weller said all of Datto’s products have been cloud-managed from day one and have a deep infusion of security.

“In 2021, we will be more directly monetizing new products in these two areas,” he said. “In cloud, with Continuity for application workloads in the public cloud, and in security, with new products to help MSPs protect their SMB clients.”

Datto in 2021 plans to launch its first Continuity products for applications running in public clouds, particularly in Microsoft Azure, Weller said.

“This new Azure Continuity product will follow on the success of SaaS Continuity where we protect data in the cloud that is hosted in Microsoft 365 and Google Workspaces,” he said. “We plan to take Azure into beta with a group of partners in Q2.”

Weller said Azure Continuity is targeted at Datto’s installed base as the kind of technology MSPs would want to have in place before lifting and shifting servers to Azure and provides net-new opportunities.

Datto plans to be in beta in the second quarter with broader availability slated for later this year, he said.

Datto today also protects laptop and desktop PCs through the Datto Cloud with its Cloud Continuity for PCs .

Datto is offering several advantages with its Cloud Continuity line, Weller said.

First, MSPs trust Datto and its service model and will find the same benefits they see now as they move into the cloud, he said. Second, Datto’s offerings are hybrid in nature to give them the same experience whether workloads are on-premises or in public or private clouds and third, copies of applications and data in every live environment are stored securely away from public cloud providers in the Datto Cloud, he said. And, he added, the business model remains the same for MSPs.

“The long-term Continuity road map continues to be securing and protecting SMB applications and data anytime and, increasingly, anywhere in clouds and on-premises, on virtual machines and physical machines, servers and PCs,” he said.

On the security side, cyberattacks have proliferated over the past year with the work-from-home trend caused by the COVID-19 coronavirus pandemic, which Weller said leaves businesses increasingly vulnerable.

Datto works to increase security with a model that consists of three concentric rings, Weller said. They are securing Datto, securing Datto’s MSP partners and securing those MSPs’ customers.

Security continues to be one of MSPs’ most critical challenges, Weller said. Quoting from a Datto annual ransomware survey, he said 95 percent of MSPs report that their own businesses are increasingly targeted by attacks, while 70 percent report ransomware as SMBs’ most common malware threat.

Datto has approached security for years in two ways, via its Continuity line that has resulted in many restorations of backup images after primary servers were locked by ransomware, and via its RMM platform that provides patch management and system monitoring, Weller said.

“We recover and restore applications and data for victims of cybersecurity attacks and downtime events thousands of times a year, in many cases even after an attacker has locked or erased their production servers and their primary backup copies,” he said.

During some fourth-quarter 2020 cyberattacks, Datto within a matter of days created the Datto FireEye countermeasure scanner with protection scripts for MSPs whether or not they were Datto partners previously, resulting in over 1 million scans and many malicious detections within Datto’s partner systems, Weller said. The company did the same more recently to address the Silver Sparrow macOS malware, he said.

Datto also recently started releasing its first products with margin opportunities for MSPs looking to protect their customers, starting with Ransomware Detection and Isolation for Datto RMM, which has been deployed in over 250,000 machines in only 90 days, Weller said.

Datto followed it this week with the acquisition of BitDam, which protects cloud-based applications from ransomware, malware and phishing attacks, in a deal valued at $46 million.

Datto declined to break out the expected revenue or EBITDA impact of the BitDam acquisition on its 2021 financials and declined to say how many people Datto gained with the acquisition.

Weller said Datto has acquired a team that has worked together for several years, one that has many more ideas than they could have moved forward on as a startup.

“The real key is depth, not breadth,” he said. ”We need to get this integrated into our core platforms, get it into the hands of MSPs, and get them producing margin as fast as possible. That is going to require a nice narrowing of their focus. But then, we can start to broaden from there. And it’s not lost on us that [BitDam’s] based in Israel and there’s a great amount of security technology talent over there as well, so we’ll be adding several people there going forward.”

Datto has already started integrating the BitDam technology into its own offerings and later this year it will be available to Datto’s 17,000 MSPs to take their SMB customers, Weller said.

“Security and cloud are complex by nature, but we will make them simple and turn them into growth margin opportunities for our partners,” he said. “We continue to believe both opportunities are enormous, and feel Datto is well positioned. We will continue to increase our investment in each area to expand our product offerings and addressable market, which we believe will drive strong partner retention and boost long-term revenue growth.”

When asked whether the SolarWinds-related MSP attack will drive demand for cyber-resilience, Weller said Datto was ready to quickly respond to MSPs’ looking for help.

“Obviously, it demands more attention on security as a theme, which we were already in the mode of anyway,” he said. ”Security for most tech companies like us is opportunity and risk. ... In direct response to that specific attack, we were able to quickly release some countermeasure scripts for both our MSPs with our RMM tool as well as we just posted it in the public domain. We did the same for Silver Sparrow [macOS malware]. And I think, yesterday or today, we did the same for the recent Microsoft hacks as well. It‘s something we’re getting pretty well versed in.”

For its fourth fiscal quarter 2020, which ended Dec. 31, Datto reported revenue of $139.0 million, up 10 percent over the $126.1 million the company reported for its fourth fiscal quarter 2019.

Included in that was subscription revenue of $129.0 million, up 16 percent from last year’s $111.1 million.

Datto also reported a GAAP loss for the quarter of $7.2 million, or 5 cents per share, which was better than the loss of $8.2 million, or 6.2 cents per share, it reported last year. On a non-GAAP basis, Datto reported net income for the quarter of $25.7 million, or 17 cents per share, up from last year’s $1.3 million, or 1 cent per share.

For all of fiscal year 2020, Datto reported revenue of $518.8 million, up 13 percent over last year’s revenue of $458.8 million.

That included annual subscription revenue of $485.3 million, up 18 percent over the $412.2 million it reported last year.

Datto reported GAAP net income of $22.5 million, or 16 cents per share, a significant improvement from last year’s loss of $31.2 million, or 23 cents per share. On a non-GAAP basis, Datto reported net income of $76.6 million, or 55 cents per share, up from last year’s $15.3 million, or 11 cents per share.

Datto also reported annual run-rate revenue of $542.8 million, up 14 percent over last year’s $474.8 million.

John Abbot, Datto’s CFO, said during the conference call that the company’s annual run-rate revenue per MSP has expanded to nearly $32,000 from $28,600 a year ago. It has been expanding each quarter despite the fluctuation in MSP count, Abbot said.

The growth reflects the growth in larger partners, the increasing adoption of Datto products by MSPs, and the churn of smaller partners, Abbot said.

“It is important to note that adding more MSPs actually brings the average down because those new MSPs start small and grow their business with Datto over time,” he said.

Datto’s revenue for the fourth quarter beat analyst expectations by $5.0 million, according to analysts surveyed by Seeking Alpha. GAAP earnings per share were 5 cents lower than expected, while non-GAAP earnings per share were 5 cents higher than expected, Seeking Alpha said.