Q3 2020 Datto Holding Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the data <unk> third quarter earnings Conference call.
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After the speaker's presentation, there will be a question and answer session.
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Moving on the conference over to your Speaker today, Ms. Kelsey turcotte.
Sure Great. Thank you. Please go ahead.
Thank you operator good afternoon. Thank you for joining us today to review data third quarter 2020 financial results.
With me on the call today are Kim <unk>, Chief Executive Officer John.
John Abbott, Chief Financial Officer, and that cash SVP of finance all three it will be available to take questions. After our prepared remarks.
During this call we may make statements related to our business that would be considered forward looking statements under federal securities laws, including projections of future operating results for our fourth quarter and full year ending December 31st 2020.
As a result of a number of factors actual results may differ materially from those projected in such statements.
Doctors are set forth in the earnings release that we issued today under the section Captioned Board bookings day.
And these and other important factors are described more fully in our reports filed with the Securities and Exchange Commission weighted.
We encourage all investors to read our FCC filing.
The following statements reflect our views as of today and should not be relied upon as representing our views as of any subsequent day.
In addition data undertakes no obligation to publicly update or revise any forward looking statements made here.
Additionally, non-GAAP financial measures will be discussed on this conference call.
A reconciliation of these non-GAAP financial measures the most directly comparable GAAP financial measures is available in our third quarter 2020 earnings press release, which can be found at www dot data dot com in the Investor Relations section also please note that up.
Financial supplement and webcast of today's call are available on our website in the Investor Relations section with that I'll turn the call over to our Chief Executive Officer, Tim Weller, Tim. Thank.
Thank you Kelsey and many thanks to everyone for joining us on the call. This afternoon works.
We're excited to report our initial quarter as a public company.
I want to extend a special thanks to our managed service provider partners. The M.S.P.'s around the world for your confidence in our data team and free around the clock efforts, keeping small and medium businesses. The SMB is online and connected with technology. During this pandemic I.
I would also like to thank the data team for their hard work and support during the IPO process. We are excited about this next day in our company's journey.
I'll start this afternoon with a few highlights from the quarter then because it is our first earnings call I want to take some time to share the data story and our operating philosophy. Finally, I will turn the call over to John Abbott, our CFO to discuss our financial results and guidance in more detail.
We reported a very strong third quarter driven by expansion from existing partners and by the addition of new MSP partners, which now total more than 17200 worldwide.
Subscription revenue for the quarter reached $123 million, an increase of 17% from prior year Q3 2019 and.
And represented approximately 94% of the $131 million of total revenue in Q3.
They are an important indicator of future subscription revenue growth also grew 17% year over year to $523 million.
Adjusted EBITDA reached $46 million in the quarter, and we generated $44 million in free cash flow, representing the second consecutive quarter of positive free cash flow and the company's recent history.
Looking forward, we believe the market opportunity ahead of us remains very attractive and we intend to continue ramping up our investments in technology innovation and growth, while prudently managing our expense structure.
Turning to the data story, we are the largest pure play I T solutions provider to the MSP community.
Our mission is to build the highest quality products provide best in class service and enable our MSP partners to effectively efficiently and profitably serve their small and medium business clients. The data brand means MSP assets, our ticker symbol and we wake up every morning, serving this channel every day in our sales.
In support motions, and then creating technology, which is purpose built for Msps, we call our over 17000 MSP partners non customers and we promise to never go round in MSP to sell directly to their SMB end users.
That pledge has established a bond that we have spent years building brick by brick and makes us more than just another vendor to msps, we are their trusted partner north.
No other company of our scale can deliver on that promise to msps and it creates a major barrier to entry from our competitors.
Managed services are a large and growing market with more than 125000 Msps worldwide.
In fact, Smbs spent about $137 billion with Msps in 2019, and that's growing about four times faster than the overall SMB I T market.
As MSP serves our SMB customers they face their own set of challenges. So data old prioritizes products that are reliable easy to deploy and centrally managed all in an effort to save msps time, and protect and enhance their relationships with their customers.
To that end, we offer 24, seven support and provide the msps tools resources and content they need to grow their business.
Our integrated cloud management platform is purpose built to empower msps and serving Smbs data is a creator of core technology and not a reseller.
Technology continuously per tax digital assets, both applications and data and provide secure access monitoring and management for those applications the data.
We hope Msps minimize business downtime for their SMB and we are the last line of defense when firewalls are breached data as lost or servers Phil.
The majority of our cloud based solutions are those that msps sell through to their end user SMB customers, helping our MSP partners grow their revenue and profit. These mission critical products include our flagship unified continuity line and our newer networking line.
We also help msps manage their own businesses efficiently with our business management products that we sell to Msps.
And finally, we provide a full range of free enablement resources to our partners that helps them in marketing to selling and supporting their SMB customers. This drives revenue and profit growth for our partners and for data.
Our MSP centric business model efficiently unlocks the large but highly fragmented SMB I T market for data.
We deploy Atlanta that expand go to market strategy executed by our sales team.
One data sales rep can cover dozens of MSP partners, who could then reach thousands of smbs.
Each MSP drives revenue growth for themselves and for data as day deploy our products and sell them through to their existing SMB customers and.
And then add new SMB customers, leveraging our sales enablement resources.
These customers can then expand usage with us and adopt additional data features a new products and this matter we grow our share of wallet with each MSP partner their success is our success.
This is an incredibly efficient sales model that provides the leverage in the business and cash buffer us from both economic and SMB volatility.
We did not want to tell our story without mentioning the pandemic our MSP partners have proven to be very resilient. During this period given their position as trusted advisors delivering mission critical solutions to their SMB customers.
As msps support their customers transition to remote work they've been adopting data SaaS protection and remote monitoring management or RMS for short solutions at a record pace.
We see msps effectively adapting and longer term, we expect SMB digital transformation to be an irreversible tailwind for msps as smbs embrace more new technologies and do not fully revert back to offline models.
Our level of engagement with Msps has never been higher we've introduced data was first ever series of virtual MSP technology days.
Thousands of Msps joined us as we cultivated the MSP ecosystem was thought leadership education and peer interaction.
And previewed cutting edge technologies geared for this channel.
Finally, we were proud to be recognized by CRN as a winner of the 2020 CRN annual report card wards in the data protection and managed services software category.
The award voted on by more than 3000 solution providers in North America underscores our commitment to the MSP community and our willingness to go the extra mile to deliver best in class products and program offerings.
Since our founding over a decade ago, our sole focus has been to build an MSP centric culture that keeps these partners at the core of everything we do.
Our success at achieving this objective is a direct result of the hard work of our talented team of which I am incredibly proud to be apart.
This is an exciting time to be a data.
Looking ahead, we recognize that our IPO is just one step on the journey of our company and while we are excited to have achieved this milestone we have much more to do there.
We look forward to a strong close to the year and the speaking with many of you during the quarter now I will turn the call over to John.
Thank you Tim and good afternoon, everyone. It's exciting to be with you today on our first earnings call as a public company I know, we have investors analysts employees and maybe even some MSP partners on the call. We appreciate all of your support through the IPO process and look forward. This next chapter in our evolution.
As I review, our third quarter results today. Please note that ill be referring to non-GAAP metrics unless otherwise specified you can find a reconciliation of non-GAAP measures to GAAP measures in the press release that we issued this afternoon.
Given that this is our first call as a public company I want to start by sharing some perspectives about our business model and financial profile, then I'll walk through the highlights from the third quarter and finally, I'll close with guidance for the fourth quarter and full year and of course at the end, we will open up the call for questions.
Our financial model features a highly predictable subscription revenue stream, which is growing at scale, we reported more than $500 million in HR are as of the end of the third quarter. While total revenue grew with strong double digit rates.
Our recurring subscription revenue represents over 90% of our total revenue, reflecting the highly predictable and durable nature of our topline.
And the structural operating leverage from our MSP centric distribution model in combination with our track record of financial discipline has driven margin expansion and strong cash flow generation.
At the core of our business model is the unique relationship we have with our MSP partners, we take great pride in helping them profitably grow their businesses, which leads to growth in our business. We can turn builds shareholder value for data and.
And we believe we have a significant market opportunity in front of us to continue to drive profitable growth for us and our partners.
Our third quarter results reflect the strength of our operating model and focused execution.
Recurring subscription revenue grew 17% year over year to $122.8 million and comprise 94% of our total revenue of $130.7 million in the quarter.
The balance of revenue is derived from devices and professional services that enable subscription nothing is sold without a subscription.
If we look upstream at our key business drivers annual run rate revenue or a R.R. serves as a leading indicator of subscription revenue.
Growth in A.R.R. is driven by a combination of adding new msps, which start small and grow over time and the expansion of existing msps as they rollout data solutions to more of their smbs add new smbs and adopt new data products.
Hey are at September Thirtyth of this year was $522.8 million up 17% from $445.5 million, one year prior and importantly, increasing $16 million in the quarter almost double the increase we saw in Q2.
A clear and strong indication of the Reacceleration of the business.
So far this year, we've added a healthy cohort of new Msps, partially offset by MSP churn, resulting in continued net growth of MSP partners.
We ended the third quarter with over 17200 MSP partners up from 16200 at the end of Q3 last year data has a proven history of steadily expanding margins third quarter gross profit margin was 73.5 per set up for.
From 66.7 per said in Q3 2019, resulting from an increase in the revenue mix of higher margin subscription revenue and from the operating leverage we are realizing in our 24 by seven support function and in the infrastructure supporting our unified continuity solutions.
Third quarter operating expenses were $57 million or 43.6% of revenue reduction of 564 basis points year over year.
Within Opex sales and marketing expenses were $24.2 million, a slight decline from $24.5 million in Q3 last year.
Research and development expenses were $14.8 million, a slight increase from $14.4 million in Q3 last year.
General and administrative expenses were $15.6 million a decline from $16.8 million in Q3 last year.
And finally depreciation expense within operating expenses was $2.4 million compared to $2.3 million in Q3 last year.
Operating income for the third quarter was $39 million or 29.9 per cent of revenue compared to $20.5 million or 17.4 percentage of revenue in the prior year quarter.
Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring and transaction expenses was $45.8 million compared to $25.8 million in Q3 last year.
And Recalibrating our cost structure during Kobin, we further expanded our adjusted EBITDA margins to 35.1 per cent a significant increase from 21.9% in the third quarter last year.
However, we believe the adjusted EBITDA margins achieved this quarter artificially high reflecting the full quarter impact of certain expense reductions, we implemented in Q2 and significantly lower expenses associated with reduced travel events marketing and office costs during covance consistent with.
Our strategy discussed in our IPO, our focus is on growth.
And as we continue investing in technology innovation and expanding our global presence to drive revenue growth and his commercial activity returns to more normal levels. These expenses will increase and adjusted EBITDA margins will move down into the low to mid Twentys.
Free cash flow in the quarter was positive $43.6 million compared to negative $2.8 million in Q3 last year.
And we ended the third quarter with just over $100 million in cash.
Subsequent to the end of the quarter, we completed our IPO, where we sold 25.3 million shares of primary stock, which includes the underwriters full exercise of their overallotment option.
We used the net proceeds of $641.6 million to pay off our outstanding debt of $590.2 million with the remaining $51.4 million being added to our cash balance.
At that time, we also entered into a new $200 million revolving credit facility, which is undrawn and which provides us tremendous flexibility to invest in growth the business.
Turning to guidance for the fourth quarter and full year 2020.
As we begin to begin life as a public company, we want to ensure that we provide clarity and transparency to our shareholders, while maintaining our long term focus on the business to maximize value for our MSP partners, our employees and our shareholders.
The solid profitability in structural operating leverage in our business provides ample capacity for us to continue investing in technology innovation go to market resources in scaling infrastructure to support and sustain our long term growth and expand our leadership position in the market.
This balance and the ongoing recovery in re acceleration of the business from the Cove at lows of Q2 are reflected in our guidance.
For the fourth quarter of 2020 revenue is expected to be in the range of $133 million to $135 million.
Adjusted EBITDA is expected to be in the range of $38 million to $39 million.
For the full year 2020 revenue is expected to be in the range of $512.8 million to $514.8 million.
And adjusted EBITDA is expected to be in the range of $147.7 million to $148.7 million.
As you are looking ahead to Q4 I want to highlight some disclosure from our IPO prospectus that you'll see in our third quarter 10-Q also.
IPO triggered the vesting of certain employee options, which will add approximately $22 million to our stock based compensation expense in Q4.
The remaining value of those options will be expensed ratably at a more normal level is they continue investing over subsequent quarters.
In closing, we believe our Q3 results and Q4 guidance reflects the ongoing re acceleration of the business and that we're still in the early stages of that recovery.
We're very excited about our future and look forward to reporting on our progress in the quarters to come.
With that we'll open up the call for questions operator.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key and your first question comes from the line of Sanjit Singh from Morgan Stanley. Your line is open.
Hi, Thank you for taking the questions and congrats Tim and the data team on a successful IPO in your first quarter reporting earnings as a public company. So congrats on all fronts.
Maybe begin the conversation.
10, what's really shining through and John as well, what's really showing through this year is this the sort of structural profitability of the business, you know with EBITDA margins coming in well above 35%, which sort of.
Gives us confidence on like the model that you guys are running and so I guess the key questions around growth. So Tim I was wondering if you could sort of connect the dots for us about it through in terms of.
What you saw strength sort of peak coated compare this quarter's results to last quarter's results and actually go into for Q. What are the trends that you're seeing your business and what do you see me.
What are the assumptions, you're making that's underpinning your guidance for Q1, we that's a good price to begin.
Yes, thanks, and jet and appreciate the questions.
You know I think you've hit on a couple of the trends and John I will hand to you in a minute to and in terms of.
Characterize in some of the guidance and the context of this we have shown very very strong shift in structural margins you heard John.
Moving a bit lower on EBITDA, because we are first and foremost growth focused and we talked about that during our road show.
In Q2, we obviously saw you know the the sort of peak of cold. It from our perspective, you know, we'll look back and see April was the was the low for example, and we've been building brick by brick from there I think the best evidence of that this quarter is probably the air are in the sequential increase in that and.
Each each month has been a little better and I.
I think that's that's kind of how we we see it going as we get through the winter here, maybe a tough winter for for for the global.
Population, but weve got vaccines on the horizon and what have you. So msps have adjusted Smbs adjusted and then next year I think we also.
Would would start to see the effect of some of some product cycles for us as well but.
More business as usual and I think we just.
We think we can re accelerate each quarter as as as we go forward. So I don't have anything like that.
Specific point to point to but I don't know John if you have thoughts on.
And sort of the margin side versus guidance I mean, I'll just leave you with the overarching answer that we intend to reinvest for growth and and that involves technology product as well as global expansion on the go to market side.
Yes no.
Just to add to that Q3.
So the full impact from a full quarter impact of certain.
Cost savings initiatives that were initially.
Began in Q2.
But as you can see in the guidance in Q4 were already.
Seeing not just the impact of cost per being a public company, but the impact of our reinvesting in the business to.
To drive the growth.
And you can see in that guidance that we're guiding for the margin to to start coming down.
[music].
And I think Tim also pointed to the.
Our our is a great indicator of the Reacceleration of the business and we think both the Q3 results and the guidance for Q4.
Support that.
Reported that thesis in underlying net trajectory.
That's super helpful. John Let me just as one from one follow up Tim as we think about no fingers crossed on that better spending environment and a more broader economic recovery in calendar 2021.
If you sort of can you just sort of.
I'll take that as given from your guys perspective under what's under your control can you sort of characterize sort of the investments answered. The playbook that can get you are focusing your your team on in terms of driving this re acceleration story in 2021 and beyond terms of led on the go to market side.
On the product side Youre top top initiatives on book Thats funds.
Yes, I think when you look at go to market. We've we've done a few things one is a good segmentation of the base and we've learned a lot nothing like a crisis to teach you some us from key lessons.
And large msps you may want to be engaging with us in a different way the medium or small and so we continue to refine that under sundries leadership I think.
We're definitely starting to accelerate our investment and focus internationally and I think you'll see us opening some new markets and as we go into 2021 now and.
So those are probably the two biggest pieces, but overall there there was a lot of room and just what I would call sales machine efficiency and picking up 5% here, 5% there everything from lead conversion to how we run our virtual road shows and so on so it's been an efficient selling year and we think we've just scratched the surface.
What we can do there.
On the product side, you know the my major caution about looking too far forward as the existing product set is very good and the tams are very large and we havent been that company that feels like we have to launch five new products a year, we've got very solid categories, we've talked quite a bit about shift into cloud and.
How all of our products are cloud managed we want to continue to put a big investment there and then it won't surprise you.
That all things sort of SaaS related for us in our protection suite as well as as well as our momentum have experienced very good tailwinds in in this world of remote work. So I think it's mostly.
More of the same and faster.
Our reliability has has left for this year and you could never squeeze out enough nines reliability, when you're in a continuity and data protection security business. So.
And I don't want to.
I don't want to Muse about too many other ideas, but we've got to get one or two tricks up our sleeve too.
Understood. Thank you thanks for taking questions I appreciate it.
You're welcome.
Your next question comes from the line of Brad Sills from Bank of America Securities. Your line is open.
Oh, Great Hey, guys. Thanks for taking my question.
Wanted to ask just maybe a follow up to that those comments that you made.
Thanks, so much for that color it sounds like when we look at the average spend per MSP.
Just take some market data out there.
It's about a $20 billion market with about 125000.
Piece out there that implies a much higher ti spend than where you guys are penetrated today with about a 30000.
Air our ASP.
So my question is it sounds like you feel like in order to go after that growing wallet share per MSP. It's really just about selling what you already have into the base is there is there a next leg coming is there a solution set within the stack that maybe the penetration is lower today, maybe it's on the business management.
Product side or.
Are there other categories that you think you'll enter over time that would really be the catalyst for growth.
Moving share of wallet within the Msps.
Yes, it's a great question the the nuance here and the way to think about this is the power of the sell through side. So I certainly don't want to leave you with the impression that we don't have a very rich product roadmap, but.
On a given day, if youve got 17000, Msps out there and how many sales reps. They each have that's your sales team and it's a heck of a lot easier for them to go find.
More smbs in general and add more data and technology.
In the field than it is for them to absorb yet another product we're throwing at them. So were deliberate in our pace in terms of how we how we do that and I think thats the nuance versus.
Many times enterprise companies, where you put profit number one day in and Thats. All the revenue again, and then you put product number two and then if there is an enterprise equivalent I think back to like sales force in the day and why they've done so well. They had this beautiful covert every time you add a sales rep. They automatically are going to get another sales force seats and for US we want.
Every time, an MSP as an SMB, we want to have more of that data will sell through going in there. So that's still the primary motion and truth be told that was you know and maybe to some degree it continues to be one of the challenges for Msps and covert in April May June timeframe spending.
A lot more time stabilizing their base getting them comfortable of remote work they can tell everybody safe.
Versus going to find new SMB. So so the vectors of growth are first and foremost penetrate the existing msps customer base, then help them find new SMB and then come back on the top and so we definitely have cross sell and you're right that in a given SMB or MSP or within a given region, we have a lot of upside depending.
Attrition we don't.
We don't have deep cross sell penetration across the space yet.
And then we use we use new products to drive that a around per MSP up from up from there. So it's more white space than not if that makes sense. When you look at that matrix sure.
Sure absolutely no thanks for that and then.
Other question is really on the net adds 200 MSP net adds this quarter it looks like you've been tracking to roughly that number in the last few quarters.
Maybe just some commentary on on that metric and.
Does this is the pandemic is weighing on the net adds number.
What would we expect maybe some of the sales and marketing efforts to resume after the pandemic that could be that could drive a catalyst here.
From maybe some growth in that metric.
Where are we just in terms of kind of the headwinds that you're seeing in the business.
From the pandemic and and when we when might we get through those.
Hey, Brad it's John I'll I'll.
I'll address that the 200, it's the key there is to remember that Thats, a net add number.
And this year actually has been a another very strong year into gross addition of new msps, but.
But it's been accompanied by higher churn of Msps as well and generally those have been smaller msps and that all makes sense in the context of kobin.
So the the cohort if you think about are those powerful cohort route the cohort of new Msps and 2020 is very strong. It's a it's a substantial number of new msps we.
We just experienced little more churn this year of of certain smaller msps.
Under the under the pressure of coated.
Yes. The other thing you can look at as force in the our per MSP.
Reflects that.
That dynamic as well and you can see the EMR per MSP rose again nicely in the quarter.
Our next question comes from a line of second Kalia from Barclays Capital. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here and congrats on becoming a public company.
Thanks.
Hey, Hey, Tim maybe maybe just start with you.
Can you talk a little bit about what data is doing to help customers drive resiliency for cloud workloads, particularly in Azure and maybe how growth from that market could impact data as business if at all.
Yes, it's a great question we were.
We generally feel like thats going to be in an incredible opportunity.
I think it's interesting with the.
With and enterprise had on versus an SMB had on the world of shift to cloud looks very different so first of all day.
That'll services today are all cloud managed and they have been from inception. So our partners are used to working in the cloud with us.
As SMB data and application starts to shift to the cloud the obvious step one is to move to over 365, M. Threesix five but that is clearly growing rapidly from Microsoft is growing very rapidly for us in the context of data to assess protection.
Next up next up and I say next because some msps have moved but not so many next will be the lift and shift of on premises windows servers, we think primarily to azure less likely cws or Google cloud and the case of Smbs and when our Msps are ready to go there with their clients broadly we will we will be with this.
As a gradual evolution there are some meaningful technical challenges that exist for them. This is not an enterprise CIO lifting up the you know the whole enterprise at once.
Then there's cloud pricing challenges can be very hard, especially in azure for them they sort of process what their bills going to look like 369 months on and and so there's a lot of experimentation going on right now and and were involved in some of that with them. Our long term vision of course remains offering msps, a seamless hybrid continuity solution single dashboard.
Lord single set of of.
You know to reports and so on and controls independent of where their workload set those server workloads in the SMB world are largely virtual machines today already and.
Today, largely on premises or in MSP datacenters and in the future there will be in public cloud. So we think the next couple of years starts to represent that migration for them and maybe their trailing the enterprise three four years or something.
Shift to cloud is a massive opportunity and I would leave it at that you should expect us to be investing accordingly, there and so it's pretty exciting.
Got it that's really helpful. John maybe from my follow up for you you touched on this in the in the in the prior question, but can you just talk a little bit about churn rates here in Q3, and maybe broad brush, how you're thinking about that in Q4 and maybe just as a reminder, can you just touch on how how the true.
Non rate here is different for data since you're selling to the msps rather than selling to the small medium businesses.
Net those msps ultimately service sorry, there's a lot there is that does that make sense yes.
Yes, no. Thank you Saket I think that.
Okay got it and.
Start by saying you know, we we obviously don't disclose churn rates, we do and did talk about in our prospectus the growth retention rate, which Pico bid was 88% and.
As you saw as the growth retention rate went down to 84% at June Thirtyth, we can see the impact of Cove in.
And then that's also reflected in those MSP net growth numbers that we talked about.
But we do feel like whether it was free cove, it or or during co vid that the relationship we have with the Msps does buffer us from the ultimate end customer SMB churn.
And if you think about.
What broadly people would consider normal SMB churn levels or even elevated SMB churn levels. During total and we feel like the churn levels that we've experienced are below those because of that that relationship with msps.
And so.
Q4.
Our numbers reflect.
I think a pretty consistent.
Okay.
Pattern that we've seen during the year and.
We are assuming generally is as we look ahead as it relates to covert net we're sort of steady state in what we're all seeing right now in the world and.
Not that it gets a lot worse or that it miraculously gets a lot better so.
Your next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
Great. Thanks, so much and I Echo my congrats on a fantastic milestone for data.
My question first for Tim Tim used you sit in a very unique position with a leveraged view into SMB health and we've seen some more encouraging signs from from other software companies, but just curious to hear your thoughts and what you're seeing real time that maybe you could share and perhaps what gives you optimism and Conversely, what might be cause for concern.
Yes, it's a good question.
We do see something I don't have the perfect lens that you might think sometimes msps are or not.
Sharings here, so forthcoming I guess with what's going on in their client base. It on a day they are pretty guarded in some ways, but we certainly saw the trends early verticals.
Not not hard to figure out in April and May the travel and restaurant hotel businesses like that were struggling msps, who serve them thankfully, we're very rare for us, but when they did the impact was immediate I think then over the summer. What we heard is Q2 was was stabilize get the remote work in Q2 Q3.
Free the summer was a bit more of a struggle to find new SMB. So I think you're right in your commentary that smbs have figured out a way to go forward. The stimulus money was helpful. They've remap their businesses to the new world of remote work and the biggest thing for Msps has been now how do we.
Go get new SMB is how do I get somebody to take my call Missoula, If I can't go door to door I cant meet them at the club and I can't use my old selling.
Motions and so I think one by one msps are starting to figure that out and we've seen that coming back into improved numbers for us. So.
Msps themselves have been fine in general we talked about not having offer that brought of relief smbs in general have been fine, but we want to see now that further penetration of msps to capture the SMB digital.
Transformation, that's that's ongoing so.
I hope that helps a little bit we certainly havent had that many partners raising their hands, saying.
Total customer bases tipping over there is very very much better feeling then what you are hearing in March and April at the moment.
That's very helpful. I appreciate the color and maybe just from John John operating cash flow was much stronger than we had modeled can you talk us through the puts and takes any any one timers to call out and how should we think about cash flow into Q4 next year.
Yes, great.
Great question, it really definitely a peak in in margins here in Q3.
In addition to.
Lower expenditures that just because of cove in whether that was travel events T. any office expenses, a number of items like that.
We also saw the full quarter impact of a number of expense savings initiatives that we had.
Implemented in Q2, and you may remember those were very strategically.
Developed where we where we considered what are the important long term growth areas of the business and make sure that we are continuing to invest in spend in those areas.
And in other areas are there ways to dial down the expenditure redeploy cash expenditures or.
Just find more efficiencies in the business and doing the things we do so.
We definitely recalibrated the expense level to to a new place.
And we feel good about that and we feel like we've created a lot of capacity for investment.
But as you can see reflected in the Q4 guidance we're already.
We're already reinvesting in accelerating that reinvestment.
Because we feel good about the trajectory on the top line and we feel really good about the opportunity set ahead of us and so you can expect us to continue to invest to drive that growth.
And we feel good about the capacity that we have to do that on the call. You may have heard I added the remark that.
That over the course of the coming quarters that.
As that investment ramps, you'll see expenses go up in margins continue to come down a bit.
Into the low to mid 20% range.
Your next question comes from the line of Walter Pritchard from Citi. Your line is open.
Hi, Thanks.
Tim I'm wondering how you're thinking about the sort of sold into MSP type business. The auto task and it's RM and kind of holding that what did you see there how do you expect that as we get a recovery and how to cope with that will behave and then just curious if you saw that somewhat suppressed given msps are a little bit tighter tiger type of strength.
Well its good instincts certainly in Q2.
Easiest thing for an MSP to do if they had to adjust their their expense line a little bit was to trim. Some seats in a in something like a PS say or for that matter any other cell two tools. They had we don't have much in the cell to side, but we saw see compression.
John mentioned, not only see compression, but some churn in.
At higher than historical levels on the smaller msps.
And so I think we had that we saw that better in Q3 as I said.
And and somewhere in my remarks that sequentially.
All the products all did well Q3 over Q2, so that stabilized RMS is the other piece of that and they obviously go well together, our Mems been terrific threw out and that's obviously a very consistent with new models are remote work employees going home not been able to visit branch offices et cetera, just a more remote monitoring you can put in the better and.
And that was on top of already good trends for us and you know in.
In our Mem, we're more of an attacker than a defender were not the largest market share were newer kid on the block and a more mature category and so thats been a very good story. So really those are the two pieces for for us and.
So so far so good we still remain very bullish on on the cell to side of the house.
Got it and John on your end, noting that your you took the action in Q1 to get your expense base line to prepare to have aligned and then youve been coming out of this hiring could you help us understand maybe month by month during Q3 and sort of how you expect the hiring to proceed during during the fourth quarter do you expect to be kind of back to the run rate that you.
Like to be.
During Q4 this would be helpful to understand that progression.
Yes, I think it will take it takes a few quarters, we put up we put a hard stop on the hiring machine in Q2 is we all.
Stop to figure out, which way was up and.
And found ways to.
Evaluate the business and the expense base and recalibrate that and then once we got comfortable.
That that the business was as resilient as it was that MSP.
Base was was holding in there and that we were actually continuing to see good growth.
We started to to.
Start that machine back up and the growth machine and hiring and that takes a little little while to get the pipeline.
We filled and we think thats moving along now but it takes time it will take probably a couple of quarters to.
To get where we want to day.
Your next question comes from the line of Brent Thill from Jefferies. Your line is open.
Hey, guys its John from Brian and Congrats on that first earnings reported as a public company I just wanted to double click on May the international markets. It's only a quarter of your revenue, but it looked like it meaningfully outperformed the you EPS. This quarter was there anything particular, there any additional traction you're seeing in EMEA or.
Okay.
Yes, it's a good question.
We have said its round numbers a quarter it's.
We would expect it to overtime grow faster, we're very underpenetrated, there and and even a different way to think about it is we're well over over 90% in English speaking countries. Today. So as we start to do better on the continent. In Europe, you know those have been newer markets for us and we're starting to build on them.
And.
Even from a fledgling presence now in a back on the continent. So I don't think it was any broad trend I think.
Good day, just said they just had a good quarter, we tease all the different.
Regions about who is going to win.
I think we did see some particularly good strength in in Australia. This particular, this particular quarter and.
It's always a little hard northern hemisphere, Southern Hemisphere winter is summer in summer as winter. So it's a little bit hard to predict but we've got a very loyal and solid partner base down in Australia New Zealand.
Ill give them a shout out for free.
For a terrific quarter, but I.
I think similar patterns and trends in all of our major markets I wouldn't call. It anything is being structural to the markets.
Good day here and then any big takeaways from your virtual MSP Tech day, any surprises or consistent request from customers.
You know the biggest surprise for sure is just the volume that we've been getting I mean these are for our virtual events, we've done two of them and.
We're getting numbers that are as big or bigger than we would have expected a live conference at sites in other technical it's it's fairly tough to sit there and then but you can obviously measure it we've got another one coming up soon and I think.
The level of engagement.
Has been following that's been very high people felt a little form they tell you what they are interested in post engagement. You know you can engage them either with sales engineer or true traditional sales or if its existing partner even a success rep. So weve been.
Pleasantly surprised at how efficient the engagement model is and we've obviously done a wide variety of virtual road shows smaller hits C.. So might jump on talk about security you can get a few hundred msps onto that on very short notice and then you get a chance to engage afterwards on the product side, but we keep most of that pretty high level.
So.
And it's you know it's their competitors can dial listen you know you don't have to be adaptable partner. There. They are very much informational educational, but we find a fair amount of.
Lead Gen activity on the on the backend of those so it's it's definitely going to be a model, we'll stick with even post kobin.
Your next question comes from the line of Matt Hedberg from RBC capital markets. Your line is open.
Oh, great guys. Thanks for taking my question I guess, it could be either Tim Tim or John.
In the prepared remarks, you talked about the early stage of the recovery and obviously you saw some sequential knew where our AD was was there anything unique about that like you can catch up spend or or pent up demand that may have driven some of that Q3 strength and I know you don't guide day, our RV historically speaking we tend to see some.
Sequential share our new air are up into Q4.
Turning is there anything you're seeing that would suggest that that that that may still play out this year.
Hey, Matt This is John.
No. There was I don't know that I would say there was any real catch up or pent up demand. Obviously in Q2, there were certainly a period.
As I said, where everybody the whole world stood still for a month or so right trying to figure out.
From where this was headed but.
There was not a particular catch up on the driver of that that that we would point to.
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And I guess.
As far as seasonality and our our historically.
There was a sawtooth pattern to two are.
Our our growth where you would see it climb steadily.
Across the quarters Q1 to Q4, and then fall slightly in Q1, but.
This year Weve, obviously seen that disrupted by coated.
And seeing some nice acceleration in a R.R.
And so an unclear whether that patterns been a hold or not in this environment.
Nothing is normalized 2020.
Yes, but expect.
Yes, but but it is true that that just every company in every industry, even not tech has some mental notion of an annual cycle and so there is some typically is on budget dollars left everybody's fighting for it in Q4. So no I don't know if we're going to be able to call. This year normal, but maybe return to that kind of a softer there's nothing we do special.
To to cause that and we try to grow every quarter.
Got it and then that's Super helpful. Tim and then maybe John just a quick one maybe I missed it.
Can you help us out with share count for for Q4.
Finally diluted basis.
Yes.
Gets a little tricky for if you're if you're looking at it doing EPS calculations.
Fully diluted count for Q4, we would suggest using a 165 million shares.
For the quarter and 145 million shares for the full year.
If youre.
Looking ahead, you will see in that in the 10-Q that the basic share count.
As on the cover of the Q I guess that was as of November 15th.
The basic share count is 161 million.
Post IPO here and if you include options.
Net total share count would be closer to $171 million.
Your next question comes from the line of Kirk Materne from Evercore ISI. Your line is open.
Hi, yes, thanks and.
My congrats on the successful IPO I guess, Tim when we've been out talking to maybe from the folks in your sales organization over the last month or quarter Youve seen some incremental traction versus where we were in to Q1.
It really about sort of just customers reengaging on that net new basis expand basis, meaning you have to look back three months ago, what maybe surprised you more just as just kind of curious if it was more the the existing customers willingness to expand perhaps at a faster cadence than to care or are you seeing it also on.
On the lands because as John mentioned, you had a nice sort of net net add quarter from a from a new customer perspective. So just wondering I realize it's probably balanced a little bit just kind of curious if you could add some color on the margin.
Yes.
Both both were good at both both were.
Surely better Q3 versus Q2 remember the lands for US what you call landed a new MSP typically doesn't come with much revenue you might literally get them for one subscription and so you know you're not going to make your quarter or even your year on that first MSP that said occasionally we get large deals we did have a couple.
Good size, what I might call a displacement, where you might get 50 subscriptions to come over from a competitor all at once those catch your attention, though because they are less than normal.
I think.
You know, it's hard for us to say, new SMB versus existing penetration I think the msps kind of gathered up their feathers. So to speak Q2 was difficult for the whole World Q3, Okay. I got to grow this business and the new normal and remember in Q3, nobody had any visibility on vaccines or where the world's going second wave third wave. So.
I better get after it in a more you know remote concepts start selling grow my business and then I think on our side, we got a lot better organized an a credit the whole gord go to market team looking out a few months in pipeline you know understanding okay.
What can we do and what can we do in this model, which products are actually likely to accelerate you know, Matt and the marketing team also lining up some of the online virtual marketing. So I think we just got more efficient msps got more efficient and I would call. It more of a ground game I don't think I can point to anything that double door.
Some unique insight it was just better execution and as the world's getting more used to doing business in this manner, so and but a lot of these free these insights as I said, we will certainly carry on.
But after people are back back to offices and things so were more digital every day.
Due to time constraints. We please ask that you limit yourself to one question. Your next question comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Keith Bachman your line is open.
Yes, thank you very much.
I guess with the with the constraint on one question.
I wanted to ask a little bit about.
They are per MSP from the question is oriented around 2021.
I assume.
As co. Good receipts are hopefully covered recedes. Your net adds increases, but I just want a little hint here a little bit about how you see that.
Yeah, how you envision that during the course of 2001 and related to that is how you would anticipate day, our growth from where I'm going to the question is you've been growing a our per MSP double digits effectively for the last three quarters, almost four quarters, but as you are.
MSP base I would assume increases a little bit does each day, our per MSP volume go down a little bit because you said.
You know the initial land so to speak is fewer dollars associate with that but if you could just talk about how you anticipate.
That metric unfolding during the course of net.
Next year that would be great. Thanks.
Sure Keith this is John.
I think you're pointing to all the right dynamics and it really is a a bit of a mix issue right is the the new msps are coming in there typically coming in at a at a very low A.R.R.
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And then a little bit of the question. One thing. We saw this year is that was occurring but we also had some msps more msps churning and by and large they were fairly low a R.R. as well which drove the.
Strong increase in the quarter of eight.
Our per MSP.
I don't know that it necessarily that net dynamic necessarily changes next year I mean, a lot of it depends on when are we past kobin wins, when we back to normal assets.
Thats mid year next year.
Maybe maybe by then or sometime before then we get back to a little bit more normal churn levels.
But we feel good about the trajectory of.
Of.
Of the Aer RM, we feel good about the trajectory of the.
The Msps and it's all those pieces coming together right the sale.
The MSP selling to their SMB base, the extent to which they are able to add more smbs.
That all go into that mix of HR per MSP.
Your next question comes from the line of credit per cabinet from Macquarie. Your line is open.
Hi, Thanks for taking the question and again, congratulations on the quarter and your recent entrance into the public market.
I'd like to dig into your sales and marketing a little bit more here.
As you are already operating with kind of a very low sales marketing intensity compared to a number of software peers. So we picked up and how your MSP partners are discussing your value proposition as both an easy to use easy to deploy solution and also advocating for your platform to each other and online communities. You also highlighted that during this recent quarter.
You held your second virtual MSP technology day, So I would like to ask how do you think that word of mouth and digital cultivation play into your go to market strategy and are there any areas of your go to market that you think could terribly change once the world is on a trajectory to emerge from the Lockdowns.
Oh, Thank you as it goes from those are good insights actually and you've hit on the word community there.
You know online and offline. So go Msps talk there an interesting bunch because these are techies, there's a 125000 plus of them around the world and they don't view themselves so much as direct competitors.
Clearly have three of you put an RFP under the end user you might be but they they tend to share best practices online, there's a number of private social forums, where msps get together.
Publicly in person and so one of our best favorite things to do in person is have a lunch with 25 prospects in sprinkle in three existing partners and just let them talk we're very open very transparent we have a full pretty meaningful business development team. That's just out interacting with partners other vendors.
His new prospects, just generally being helpful and it does drive this community and partnership so we've taken as much as we can have that experience online.
Said, though we're very digital now and have been from wells. So we've pushed the limits on that and we will continue to play that going forward, but I also think things like our industry, leading Datacomm conference, where a few thousand msps get together once a year in the us once a year and.
Amir.
We're all dying to get back there and.
Bad dozens of emails from Msps, asking essentially me to predict Kobe when can we all get back in person in a hotel and.
Total I'm going to have to be a lagging indicator on that but.
You are hitting on something very good which is keep it easy keep it easy to deploy.
Reference partners in effect bring other partners, and then and cooperate and in a community. So that's how we're going to continue to play going forward I think more digitally than ever but we'll we'll definitely be back in person.
Your next question comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thank you very much and thanks, guys for taking the question.
Tim you mentioned that it has become more challenging for MSP defined.
New Smbs as well as the fact that many of these smbs are remapping have businesses to a remote work environment.
And I realize that we are in.
Targeted waters here just given the pandemic.
I'm curious how you see this playing out going forward in other words is there a tipping point in terms of customer side or something else whereby these newly.
Digitized smbs weaker level of complexity, where you know you think though don't need to engage in MSP, how do you sort of see that going forward.
Yes, that's a great question, Greg and Theres up.
The killer research think piece to be written in there somewhere I'm sure because.
It is different for the three person flower shop in the 100 person law from and one thing we discussed and came to grips with with evidence I think more than we might have had before we had a GAAP before we're kind of underlining the admin SMB. The MSP is going for the organization that cares about uptime that cares about 10.
Acknowledging continuity that that says we can't run our business for a day without technology car dealership insurance company. You know, we're going to lose a lot of money if were offline, so thats, where the msps honed in and as you said one by one now as you know as other businesses start to get more digital more online more people ordering.
The net more people doing delivery all the different things that are E commerce related.
They start to run a much more complex environment and the cost of being offline for even a few hours gets very measurable and I think thats, where msps come of the point of entry. We don't feel like we've heard stories that they can't sell and close Smbs, it's been more of a.
Is this the most important thing to do today right. It's been such a dramatic first four or five months, there and cope with that.
Getting back on the horse and going out into the market and trying to sell wasn't always at the top of everybody's list and we think they've normalize that much more in in Q3, and we see a lot of excitement I've talked to a few msps in last couple of months told me. They are having record years and they're accelerating the number of proposals that are going out. So there are definitely been cement.
Must be is running right into the value of the storm and and saying change is good and I think just more MSP is up to adopt that too to get better too.
Returned to previous levels.
Your next question comes from the line of Jason Adder from William Blair. Your line is open.
Yes. Thank you. Thanks for squeezing me in I guess, Tim I wanted to ask about the relative growth rates between.
Hi continuity in business management, I think you talked about some effect from Covance on business management I assume there was an effect on unified continuity as well and then maybe as it related to that maybe talk about some of the drivers for for continuity. This year I mean, I imagine ransomware is a big one.
Yes, I think if you look at unified continuity versus business management. They probably have been the same I think within business management early on we said per se what was impacted a bit see compression in some smaller msps within unified continuity, particularly those first couple of months.
On premises.
You know deployments became difficult for for some people, depending where they where regionally depending on their ability to get get in there and work on servers et cetera, I'm sure you've heard some of that.
With some of your equipment companies may be.
But.
In the in the main no not one different than the other when we blended all in I think.
Those were offset by strength in our momentum and SaaS protection and so.
The beauty of the model now is we're serving many different environments and you know the engine has has definitely gone from single product to Multiproduct over the last couple of years and yes.
Yes.
It's nice to see and this particular thing.
This particular time.
So I would probably just leave it at that John I don't know if you have any.
Anything you want to address at the end here.
No were up I think.
I think that covered it.
And when we saw good revenue growth across all products.
And feel good as Tim said about having having the whole suite.
At quarter to quarter, some will do better than others and so that's that's that's great to have that mix.
There are no further questions at this time Mr. Taylor I turn the call back over to you for some closing remarks.
Great well I'll keep it short and sweet. Thank you all for joining us today, where we're thrilled to report our first quarter as a public company and get the journey started together appreciate your interest and look forward to engaging in and.
In Q4, EBITDA and beyond so have have a nice evening and thanks for joining.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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