Last night Datto priced its IPO at $27 per share, the top end of its range that TechCrunch covered last week. The data and security-focused software company had targeted a $24 to $27 per-share IPO price range, meaning that its final per-share value was at the top of its estimates.
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The Datto IPO won’t draw lots of attention; its business is somewhat dull, as selling software to managed service providers rarely excites. But, the public offering matters for a different reason: It gives us a fresh lens into today’s IPO market.
That lens is the perspective of slower, more profitable growth. What is that worth?
The value of quickly growing and unprofitable software and cloud companies is well known. Snowflake made a splash earlier this year on the back of huge growth and enormous losses. Investors ate its shares up, pushing its valuation to towering heights. This year we’ve even seen rapid growth and profits valued by public investors in the form of JFrog’s IPO.
But slower growth, software margins and profitability? Datto’s financial picture feels somewhat unique among the IPOs that TechCrunch has covered this year.
It’s a similar bet to the one that Egnyte is making; the enterprise software company crested $100 million ARR last year and announced that it grew by around 22% in the first half of 2020. And, it is profitable on an EBITDA basis. Therefore, the Datto IPO could provide a clue as to whether companies like Egnyte and the rest of the late-stage startup crop should be content to grow more slowly, but with the benefit of actually making money.
Lessons from Datto’s IPO pricing and revenue multiple
Here are the deal’s nuts and bolts:
- 22 million shares sold, with a 3.3 million share option for Datto’s underwriting banks.
- At $27 per share, $594 million raised sans option and $683.1 million with the option.
- A valuation of $4.25 billion without the option, $4.34 billion with the option.
Those final numbers are what we care about the most, as they give us a valuation mark to lean against.
Now we need a revenue number, which we can snag from the company’s quarterly results. In the quarter ending June 30, 2020, Datto generated just under $124.5 million in revenue, slightly less than in the sequentially preceding two quarters, notably.
On an annualized basis, that figure works out to $479.9 million. Using the company’s two valuation marks, Datto is about to lock down a revenue multiple — using an annualized denominator — of 8.86x to 9.04x. So let’s say 9x for the sake of simplicity.
Datto, which has managed two quarters of sequential revenue declines — from $126.1 million in the December 30, 2019 quarter to $124.6 million in the March 31, 2020 quarter, to the aforementioned $124.5 million in its most recent period — and only grew 16% in the first half of 2020 compared to the first half of 2019, is worth 9x revenues?
If that seems steep, bear in mind that Datto also posted its greatest known quarterly profit in that most recent quarter, $8.8 million in after-tax net income. Indeed, in three of the last four quarters, after paying taxes, Datto has been in the black.
So instead of seeing a software company with slow growth and some recent issues adding incremental revenue, investors are seeing a software company with rising profitability. And that’s worth a pretty penny, about $4.3 billion in this case, nearly three times what Vista paid for Datto back in 2017.
The takeaway from this is somewhat clear, I think: The profitability premium1 that we can infer in the case of Datto shows that investors do care about net income. And that software companies can still earn a healthy — albeit under prevailing norms, to be clear — multiple when they debut.
For Egnyte, it’s good news. The company is growing comfortably faster than Datto, and thus could expect to perhaps enjoy an even better multiple. At $110 million ARR at the half-year mark, to make up some numbers, Egnyte would be worth $1.1 billion at a 10x multiple, merely one click higher than Datto’s 9x. PitchBook data has Egnyte worth around $460 million after its Series E back in 2018. That’s healthy.
More IPOs like Datto’s own, please, as we’d love to learn more.
1The median public SaaS/cloud business is growing at 27% YoY, 68% more than Datto’s 16% growth. And the median SaaS/cloud company has better margins. Though the median business in the category has around twice the revenue multiple, I reckon that Datto would be worth far less if it was just breakeven. So, it’s managing more than half the prevailing revenue multiples on the back of profits and not growth; those three quarters of dropping revenue feel more than merely irksome.