Datto

Prospectus Summary

PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”

Unless the context otherwise requires, the terms “Datto”, the “Company”, “our company”, “we”, “us” and “our” in this prospectus refer to Datto Holding Corp. and, where appropriate, its consolidated subsidiaries. The term “Vista” or “our Sponsor” refers to Vista Equity Partners, our equity sponsor and the term “Vista Funds” refers to Vista Foundation Fund II, L.P., Vista Foundation Fund II-A, L.P., VFF II FAF, L.P., Vista Foundation Fund II Executive, L.P., Vista Foundation Associates II, LLC and Merritt VI Aggregator, LLC.

DATTO HOLDING CORP.

Our Mission

Our mission is to create enterprise-grade technology for small and medium businesses delivered through our growing, global network of managed service provider partners.

Overview

Datto is the leading provider of cloud-based software and technology solutions purpose-built for delivery through the managed service provider, or MSP, channel to small and medium businesses, or SMBs. Our platform enables our 17,000 MSP partners to manage and grow their businesses serving the SMB information technology, or SMB IT, market. Our platform also combines mission-critical cloud-based software, technologies and security solutions that MSPs sell to SMBs, business management software to help MSPs scale their own businesses and marketing tools, content, training and industry-leading events that cultivate an empowered and highly engaged MSP partner community.

MSPs represent the future of IT management for SMBs. Digital transformation is driving SMB adoption of modern software and technology, while regulatory and data protection requirements and proliferating security threats are increasing the complexity and risk of IT for SMBs. These trends have created an inflection point in SMB adoption of MSPs for IT management. MSPs are equipped with the IT resources and expertise SMBs lack, providing a single source to meet all of an SMB’s IT needs. MSPs are trusted to select, procure, implement and manage software and technology stacks that support their SMB customers’ business needs. The number of MSPs continues to grow, with approximately 125,000 MSPs providing this critical function to millions of SMBs worldwide today.

We are committed to the success of MSPs. It is the foundation of our strategy and culture. We empower our MSP partner channel, creating enormous sales and support leverage for us to efficiently address the large but fragmented SMB IT market. Our MSP-centric platform enables our partners to generate recurring revenue through the sale of our solutions to SMBs and to scale and effectively manage their own businesses. Our relationships are directly with our MSP partners. We are the leading pure-play vendor serving the MSP market, and believe our MSP-centric approach is highly differentiating as it aligns our mutual incentives, creates a motivated and engaged sales channel and reinforces our position as an integral component of our MSP partners’ businesses.

Our cloud-based platform offerings include Unified Continuity, Networking and Business Management software solutions. Our Unified Continuity and Networking offerings ensure the ongoing availability and security of mission-critical IT systems for SMBs on-premise, in private clouds and in the public cloud. These solutions are simple for MSPs to deploy, configure and manage across their SMB customers through a single portal. Our Business Management software provides critical operational tools to MSPs for efficient workflow management and delivery of end-to-end managed services. Our platform also includes a host of business development tools, training and content to help MSPs address the challenges of marketing and selling to SMB customers.

We employ a land-and-expand business model and grow as our MSP partners grow. We seek to deliver tools and resources that are easy to adopt and enable recurring revenue growth and margin efficiency for our MSP partners. Our partners can expand their footprint with us on a frictionless basis as they increase the number of SMB customers they serve and the number of Datto products that they sell through to their SMB customers. As of December 31, 2019 and June 30, 2020, our dollar-based net retention rate was 119% and 115%, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics” for additional information regarding our dollar-based net retention rate.

We have a highly efficient go-to-market model, in which we leverage our inside sales force and the power of our brand to attract, retain and grow our MSP partners. As of June 30, 2020, we had over 17,000 MSP partners, of which over 1,000 accounted for annual run-rate revenue, or ARR, of $100,000 or more. MSP partners with over $100,000 of ARR accounted for 44% of our total ARR at June 30, 2020. As of June 30, 2020 our 10 largest partners represented less than 3% of our ARR and no single partner represented more than 0.5% of our ARR. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics” for additional information regarding ARR.

Our business has experienced rapid growth since inception and generates revenue that is highly recurring. As of December 31, 2019, our ARR was $474.7 million and our revenue for the year ended December 31, 2019 was $458.8 million, of which approximately 90% was recurring subscription revenue. As of June 30, 2020, our ARR was $506.7 million and our revenue for the six months ended June 30, 2020 was $249.1 million of which approximately 94% was recurring subscription revenue. For the year ended December 31, 2019, our net loss was $31.2 million and our Adjusted EBITDA was $84.6 million. For the six months ended June 30, 2020, our net income was $10.1 million and our Adjusted EBITDA was $63.9 million. See “Selected Consolidated Financial Data—Adjusted EBITDA” for additional information regarding Adjusted EBITDA.

Industry Background

Significant industry trends are impacting the market for MSP-delivered IT, including:

A number of technology trends have created an inflection point in SMBs’ adoption of MSPs for IT management. These trends are greatly increasing the complexity of the IT challenges faced by SMBs and include:

With the democratization of technology, SMBs are under pressure to adopt digital solutions with enterprise-grade capabilities or risk being disrupted by their competitors. We believe that new business challenges arising from the COVID-19 pandemic are accelerating the digital transformation of SMBs. According to the International Data Corporation, a global research firm, by 2023, 67% of SMBs will have digital transformation as a key part of their IT strategy.

Our Differentiated Approach

We are committed to the success of MSPs. It is the foundation of our strategy and culture. We believe our MSP-centric approach is highly differentiating because it aligns our mutual incentives, creates a motivated and engaged sales channel and ensures we become an integral component of our MSP partners’ businesses. Our approach, combined with our expansive platform, has helped to establish us as the leading pure-play vendor serving the MSP market, with an extensive network of more than 17,000 MSP partners. We empower our MSP partner channel, creating enormous sales and support leverage for us to efficiently address the large, but fragmented, SMB IT market.

Our Unified Continuity and Networking solutions generate recurring revenue for MSPs as part of their managed services for SMBs. MSPs integrate these solutions into managed services that they offer to their SMB customers on their own terms, including pricing, packaging, billing and solution-bundling giving MSPs greater control over growth and profitability of their managed services. We also provide visibility and predictability to our MSP partners by delivering our solutions on a subscription basis.

Our Business Management offerings further this overall value proposition, enabling MSPs to scale and optimize the workflows and business processes associated with managed services delivery. Our solutions are purpose-built to address the specific needs of MSPs, enabling them to improve customer satisfaction, increase productivity, decrease response times and reduce costs, enhancing the overall profitability of their businesses.

Our platform also features business development tools and content to help MSPs address the challenges of marketing and selling to SMBs. We do not directly market or sell to SMBs to avoid competing with our MSP partners. Instead, we offer MSPs tools for marketing automation and content for marketing programs, as well as training and certifications. We further cultivate the broader MSP ecosystem through our thought leadership efforts and industry-leading events. Our open ecosystem events, such as DattoCon, DattoCon EMEA and MSP Technology Day, are among the largest MSP events in the world.

Our singular dedication to our partners has enabled us to create a network of more than 17,000 MSPs that rely upon Datto solutions to serve over one million SMBs. Our model of distribution through this network of MSPs mitigates the challenges of addressing the SMB market and provides us with the following benefits:

Key Strengths of Our Solutions

Datto is the largest pure-play vendor serving the MSP market with a unified, cloud-based platform that enables the end-to-end delivery of managed IT services to SMBs. Our platform combines mission-critical software, technologies and security solutions that MSPs sell to SMBs with business management software to help MSPs scale and grow their own businesses. Our solutions include Unified Continuity, Networking and Business Management.

Unified Continuity Solutions

Unified Continuity constitutes a suite of cloud-managed products and security solutions, including business continuity and disaster recovery, or BCDR, and SaaS protection. These products provide enterprise-grade data protection, ensure business uptime and establish a last line of defense against security threats by enabling the full image backup, virtualization, cloud replication and restoration of entire physical or virtual servers and PCs, whether on-premise at an SMB, remotely in a data center or in the cloud. The key differentiators of our Unified Continuity solutions include:

physical, virtual or cloud environments to any point in time, in a hardware-agnostic manner, as well as the ability to seamlessly protect and recover data from public cloud SaaS applications.

Networking Solutions

Networking refers to our collection of integrated WiFi access points and connectivity offerings that enable MSPs to efficiently offer highly performant and reliable cloud-managed networking to their SMB customers. The key differentiators of our Networking solutions include:

Business Management Solutions

Business Management refers to our suite of integrated SaaS products for MSPs, including Autotask Professional Services Automation, or PSA, and Remote Monitoring and Management, or RMM, that provide critical operational tools to manage workflows and the delivery of end-to-end IT services. Built from inception to run in the cloud, these offerings allow MSPs to manage their businesses through a centralized hub and to increase operational efficiency. The key differentiators of our Business Management solutions include:

Key Benefits to Our MSP Partners

MSPs choose Datto and develop longstanding relationships with us not only for our innovative solutions but also for our comprehensive platform, which delivers the following key benefits to our MSP partners:

Our Market Opportunity

Our platform enables MSP partners to manage and grow their businesses serving the SMB IT market. The SMB IT market itself represents a massive opportunity, with Gartner estimating global SMB IT spend in 2019 reaching $1.2 trillion and growing at a 4.6% compound annual growth rate, or CAGR, through 2023.⁽¹⁾ We believe that MSPs represent the future of IT management for SMBs. We commissioned Frost & Sullivan, a third party market research company, to conduct an independent study to assess the portion of the overall SMB IT market related to managed services and our addressable market. According to the study, there were approximately 125,000 MSPs globally and the MSP portion of the SMB IT market represented approximately $137 billion in 2019. This portion was estimated to grow at a 16.4% CAGR from 2019 to 2023, growing nearly four times as fast as the overall SMB IT market.

Our integrated platform for MSPs is purpose-built to enable the end-to-end delivery of managed IT services to SMBs. To assess our addressable market, Frost & Sullivan surveyed MSPs globally and analyzed their spending on all market products and solutions related to Unified Continuity, Networking, and Business Management in the Americas, EMEA, and APAC regions. Based on this analysis, our total global market opportunity was estimated to be approximately $28 billion in 2019, growing at an expected CAGR of 17.0% to approximately $52 billion by 2023. Of the $28 billion, $16 billion was attributable to the Americas, $5 billion was attributable to EMEA and $7 billion was attributable to APAC. Our total market opportunity in the Americas was expected to grow at an 18.8% CAGR from 2019 to 2023.

To calculate our addressable market for Unified Continuity and Networking solutions by region, Frost & Sullivan multiplied their estimate of the total number of MSPs selling those solutions by their estimates of the average number of SMBs served per MSP and the average price MSPs paid for those solutions to serve each SMB customer in that region. To calculate our addressable market for Business Management solutions by region, Frost & Sullivan multiplied their estimate of the total number of MSPs by the average sales price of those solutions in that region.

Our Growth Strategy

We pursue numerous actions to drive our growth in subscription revenue. Key elements of our growth strategy include:

Impact of the COVID-19 Pandemic on Our Operations

Impact on Operations

In response to the COVID-19 pandemic, we implemented a number of measures to ensure the safety of our employees, the continuity of services to our MSP partners and their SMB customers and the availability of sufficient capacity throughout our supply chain. In March, we quickly shifted almost all of our employees to remote work, made substantial modifications to employee travel policies and cancelled or shifted our conferences and other MSP partner events to virtual-only. Given the success of these efforts, we anticipate these measures will remain in place through the third quarter of 2020 and could extend into future quarters. In addition, we took early action to increase our inventories of key device and cloud infrastructure components, and worked with our network of suppliers to facilitate fulfillment of future orders.

To date, we have experienced only a minor disruption in operations from the COVID-19 pandemic, with minimal impact to our ability to sell and deliver our solutions and provide 24/7 support to our MSP partners. We also took meaningful measures to reduce selected operating and capital expenses with a focus on driving healthy cash flow while preserving key investments in long-term growth.

Impact on MSPs and Their SMB Customers

During the first months of the pandemic we hosted a series of webinars to guide our MSP partners through uncertainty and educate them on various topics, including general crisis management, remote work plans, effective strategies for supporting, marketing and selling to their SMB customers through the pandemic, and “how to” programs for various community and governmental financial programs available to them and their SMB customers. We believe that certain business challenges arising from the pandemic are accelerating the digital transformation of SMBs. For example, remote work is fueling an increased dependence on digital solutions and introducing new cyberattack risks. Additionally, companies are increasingly required to operate online in order to reach and service customers and to compete effectively. We believe this transformation will be a catalyst for accelerated migration of SMB IT management to MSPs. As the leading pure-play vendor serving the MSP market, we believe that our business will benefit in the long-term from these trends.

Impact on Financial Performance

We benefit from a subscription revenue model and were able to grow revenue and expand operating margins over the first two quarters of 2020. As a result of the pandemic, we have experienced lower sales bookings, moderately slower ARR and subscription revenue growth (18% year over year subscription revenue growth in the second quarter of 2020, compared to 20% to 24% in each of the prior four quarters), and lower MSP partner net additions (the addition of new MSP partners in the first two quarters of 2020 was mostly offset by lost MSP partners resulting in an MSP partner count of just over 17,000 as of June 30, 2020). In addition to the impacts on our sales, we have experienced moderately slower and lower cash collections from existing MSP partners, resulting in an increase in our bad debt expense. The net effect of our moderately slower growth and the measures we have taken to reduce expenses has resulted in substantially increased cash flows and operating margins.

As of the date of this prospectus, the full impact of the COVID-19 pandemic on the global economy and the extent to which the pandemic may continue to impact our financial condition or results of operations remain uncertain. While we believe the end result of the pandemic will accelerate MSP adoption and demand for our services, the magnitude of the effect of the pandemic on our business will depend, in part, on the length and severity of the restrictions (including the effects of recently announced “re-opening” plans following a recent slowdown of the virus infection rate in certain countries and localities) and other limitations on our ability to conduct our business in the ordinary course. The longer the pandemic continues or if it resurges, the more severe the impacts described above are expected to be on our business. The severity, duration and impact of these business disruptions remain fluid and will depend on many factors, including the speed and effectiveness of containment efforts around the world. See “Risk Factors — Risks Related to Our Business — The impact of the ongoing COVID-19 pandemic, including the resulting global economic uncertainty, is highly uncertain and difficult to predict at this time, but it may have a material adverse impact on our business, prospects, results of operations, financial condition, liquidity and cash flows”.

Recent Operating Results (Preliminary and Unaudited)

We are in the process of finalizing our results as of and for the three months ended September 30, 2020. We have presented below certain preliminary results representing our estimates for the three months ended September 30, 2020, which are based only on currently available information and do not present all necessary information for an understanding of our financial condition as of September 30, 2020 or our results of operations for the three months ended September 30, 2020. We have provided ranges, rather than specific amounts, for the preliminary estimates for the unaudited financial and other data described below primarily because our financial closing procedures for the three months ended September 30, 2020 are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from the preliminary estimates. This financial information has been prepared by and is the responsibility of our management. Our independent registered public accounting firm has not audited, reviewed or performed any procedures with respect to this preliminary financial data or the accounting treatment thereof and does not express an opinion or any other form of assurance with respect thereto. We expect to complete our interim financial statements for the three months ended September 30, 2020 subsequent to the completion of this offering. While we are currently unaware of any items that would require us to make adjustments to the financial information set forth below, it is possible that we or our independent registered public accounting firm may identify such items as we complete our interim financial statements and any resulting changes could be material. Accordingly, undue reliance should not be placed on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period and should be read together with “Risk Factors”, “Forward-Looking Statements”, and our consolidated financial statements and related notes included in this Registration Statement. Adjusted EBITDA is a supplemental measure that is not calculated and presented in accordance with GAAP. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA. Annual Run-Rate Revenue, or ARR, and MSP Partners are key performance metrics used to evaluate our business. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations—Key Performance Metrics” for further description on ARR and MSP Partners.

We expect total revenue to increase % to % for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

We expect income from operations of $ for the three months ended September 30, 2020 compared to income from operations of $13.1 million for the three months ended September 30, 2019.

We expect ARR of $ million to $ million as of September 30, 2020 as compared to ARR of $445.4 million as of September 30, 2019.

As of September 30, 2020, we had over MSP partners, as compared to 16,200 MSP Partners as of September 30, 2019.

Risks Associated with Our Business

There are a number of risks related to our business, this offering and our common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. Some of the principal risks related to our business include the following: