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Specialist
Former VP at ConnectWise LLC
Key Insights
- Given the cost-cutting nature this macro environment has induced, the MSP channel, and subsequently ConnectWise, should be fairly well-positioned to managed macro headwinds
- ConnectWise’s valuation is certainly within the USD 6-8bn range, with the specialist noting that when Datto was purchased in June 2022, it garnered the same valuation even though its revenue stream was lower than ConnectWise’s current revenue stream
- Product segments can be broken down into three categories – Manage, Automate and Cybersecurity, with the specialist roughly estimating the revenue split among the three as 40%, 40% and 20%
- Specialist echoes ConnectWise’s relationship ecosystem with its MSP partners as a strength and noted that while churn will always occur, ConnectWise’s net retention has been steadily improving over the past several years
Questions
1.
Could you give an overview of ConnectWise’s operating environment? What are 2-3 key trends or drivers that you feel the investment community should be attuned to?
2.
At the 2022 Exchange conference in Denver, ConnectWise talked about the potential for SMB IT spend to cross the USD 200bn annual threshold within the next 3-5 years. Is that a plausible idea to you, and how are you thinking about the trajectory of IT spend at the SMB market level?
3.
We’re experiencing some macro headwinds, so how would you characterise the defensiveness of the MSP [managed service partner] channel and subsequently ConnectWise in a recessionary environment? If these headwinds continue, how would the declining health of SMBs impact MSPs and then the company?
4.
ConnectWise is facing a potential sale. According to CRN or The Channel Company, MSP executives across the channel have been interviewed over the past several weeks at a level of activity we haven’t seen since the last big acquisition in this space, that being the Datto-Kaseya merger of 2022. How likely do you see a sale of ConnectWise being in the very near term?
5.
You discussed changing hands, so just another PE sponsor. We saw a prominent sponsor eliminated from the selection process recently. According to a source, the minimum price set by it was too low. When we think about a valuation of ConnectWise, some have speculated in the USD 6bn-8bn range. Would you agree with this valuation? What characteristics make the company such an attractive asset for a buyer to pursue?
6.
You mentioned ConnectWise’s RMM [remote monitoring and management] tool. Would it be fair to break down the company into three distinct product segments – Manage, which would include the PSA [professional services automation] tool, Automate, so RMM, ITBoost and the IT automation tools, and then cybersecurity? What are your thoughts on those segments?
7.
How competitively positioned is ConnectWise’s cybersecurity offering compared to those of market peers such as Kaseya and N-able?
8.
At Kaseya Connect 2023, CEO Fred Voccola described ConnectWise’s security product segment as lacklustre. He asserted that the company’s 2020 acquisition of Perch really hampered its product portfolio in this space. Would you agree with or push back against this description? Do you think the Perch acquisition benefited ConnectWise?
9.
More broadly, how should investors think about ConnectWise’s competitive landscape and its positioning relative to Kaseya or N-able?
10.
What are your thoughts on the Datto-Kaseya merger? Has this shaken up the competitive landscape whatsoever? Again, Fred Voccola has been very vocal about Kaseya’s growth and industry leader perception, and he’s sidestepped questions around MSPs within the Datto ecosystem leaving for competitors. Is that something you’re seeing? If so, how much of an opportunity could there be for ConnectWise to capture frustrated Datto customers from Kaseya?
11.
PE chatter around ConnectWise stemmed from the company’s success earlier in 2023 in raising pricing around its tools. I think that was around as much as 10%. How would you characterise the company’s pricing power? Do you think it will have success in negotiating price increases on contract renewal with some of its MSP customers?
12.
How would you characterise ConnectWise’s relationships with its MSP partners? How likely would MSP churn be to competitors such as Kaseya and N-able if the company increased prices?
13.
What’s ConnectWise’s typical revenue or business model with MSP or TSP [technology success provider] partners? In N-able’s Q4 2022 earnings call, the company said its RMM tool could be USD 1-3 per device depending on the organisation. Is that similar to what you’re seeing on pricing for ConnectWise’s tools or solution offerings?
14.
Could you discuss ConnectWise’s automation efforts? How do you expect AI and automation to impact the industry more broadly? Obviously, there’s been a great deal of excitement and exuberance around the notion of AI, especially since the advent of ChatGPT and its entry into the public lexicon.
15.
Comments I’ve heard describe ConnectWise’s organisational approach to innovation as stagnant. Do you think this is an accurate characterisation? Do you expect product innovation to be a priority for the company?
16.
ConnectWise’s Asio platform has been described by CEO Jason Magee as a centralised layer upon which the future product innovations you were alluding to will hinge. How are you thinking about the future of this platform?
17.
What aspects or workflows of an MSP business are most ripe for replacement by automation?
18.
What are your thoughts on ConnectWise’s recent alliance or partnership with Arrow Electronics, which was brought up at ConnectWise’s recent conference? I think it’s geared towards helping MSPs procure software and services. Do you view this in a favourable light? Could you discuss the company’s broader partnership ecosystem and its strength?
19.
What do you see as the biggest hurdles or challenges to ConnectWise over 2023 and beyond?
20.
Fred Voccola described ConnectWise as having a much lower growth rate than Kaseya. He estimated that the company’s organic growth rate was probably single digits, 6-7%. That would be in line with N-able’s growth rate. Yet, you talked about a double-digit growth, so would you push back against Fred’s estimate? What do you think the company’s organic growth rate is? Could it be single or double digits going forwards?
21.
Could you estimate the revenue contributions of the Manage, Automate and cybersecurity product segments to ConnectWise?
22.
What are your thoughts around Jason Magee and the overall leadership team of ConnectWise? How do you assess their performance? Do you think they’ll be able to navigate the macro headwinds and realise the growth opportunities we’ve discussed?
23.
We talked about an IPO earlier. What do you think have been the hesitancies for ConnectWise around an IPO?
24.
What’s your 12-18-month industry outlook? Who do you see as medium- or long-term winners and losers? Will ConnectWise be a winner?
25.
What could be attractive acquisition opportunities for ConnectWise to pursue? Where would the company stand to benefit most? Would it be an acquisition to bolster the cybersecurity or automation footprints? What tools or products would benefit?
26.
Is there anything we haven’t covered around ConnectWise or done justice to?
Transcript
5.
You discussed changing hands, so just another PE sponsor. We saw a prominent sponsor eliminated from the selection process recently. According to a source, the minimum price set by it was too low. When we think about a valuation of ConnectWise, some have speculated in the USD 6bn-8bn range. Would you agree with this valuation? What characteristics make the company such an attractive asset for a buyer to pursue?
SP: Datto’s valuation was around USD 6bn-8bn also, and if we look at the revenue size of Datto at that point of time when the acquisition happened, it was lower than the current revenue stream that ConnectWise is able to generate. Also, look at the profitability. Obviously the valuation is based on a couple of factors. The cash flow that the company generates, the demand for the products, and obviously there’s no market capitalisation here because this is not a listed organisation, but if I compare it with Datto then I think a valuation of around USD 5bn-7bn is definitely on the cards, I would say. Having said that, this also depends upon the negotiation that happens between the seller and the buyer.
10.
What are your thoughts on the Datto-Kaseya merger? Has this shaken up the competitive landscape whatsoever? Again, Fred Voccola has been very vocal about Kaseya’s growth and industry leader perception, and he’s sidestepped questions around MSPs within the Datto ecosystem leaving for competitors. Is that something you’re seeing? If so, how much of an opportunity could there be for ConnectWise to capture frustrated Datto customers from Kaseya?
SP: The focus is there, but I don’t have the strategic plan or the strategy that the organisation is adapting to take that route, so I don’t have much information. I shared what I knew.
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