Q4 2020 Datto Holding Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to your Data's fourth quarter 2020 earnings results Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, Mr. Ryan Burkart Ghettoes director of Investor Relations. Thank you Sir Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us today to review data its fourth quarter and full year 2020 financial results.
With me on the call today are Tim Weller, our Chief Executive Officer, and John Abbott, Our Chief Financial Officer.
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 first quarter and full year ending March 31 2021 in.
At December 31, 2021, respectively.
As a result of a number of factors actual results may differ materially from those projected in such statements.
These factors are set forth in the earnings release that we issued today under the section captioned forward looking statements.
And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission, we encourage all investors to read our SEC filings.
The following statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
In addition data undertakes no obligation to publicly update or revise any forward looking statements made here in.
Additionally, non-GAAP financial measures will be discussed on this conference call are.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our fourth quarter full year 2020 earnings press release, which can be found on our Investor Relations website.
Our financial supplement and webcast of today's call are also available on our Investor Relations website.
With that I'd like to turn the call over to our Chief Executive Officer, Tim Weller Yeah.
Thank you Ryan and many thanks to everyone for joining us on the call. This afternoon.
We're excited to reported strong fourth quarter results capping off a milestone year for dental I'll start with a few highlights from the quarter and year, then I'll discuss two of specific strategic initiatives for 2021, including our recent acquisition a bit down and finally I'll turn the call over to John to discuss our financial results and guidance in more.
Detail.
Our enthusiasm for the MSP opportunity has never been higher as Smbs continue to accelerate their digital transformation last year introduced a new set of challenges for data and for the global economy, but despite those challenges we grew full year subscription revenue, 18% year over year.
Expanded our cash flow margins and deepened our strong global MSP partner relationships. Our performance is a testament to the demand for data platform. The unique and symbiotic relationship we have with MSP and the power of our recurring revenue subscription model, we are well positioned to capitalize.
Lies on the global opportunity in front of us and the themes of cloud and security will be areas of focus for data as we deliver new solutions to our MSP partners in 2021.
First I'll touch on our strong fourth quarter results, we delivered another great quarter, primarily by continued expansion from existing partners with newer MSP is beginning their journey of growth with dental.
We were particularly pleased to see new sales from our core <unk> business rebound nicely with continued strength in SaaS protection and data RMM as well subscription.
<unk> revenue for the quarter reached $129 million, an increase of 16% from Q4 2019, and total revenue was $139 million exceeding our previous Q4 revenue guidance.
We ended the quarter with $543 million of IRR, which represents an even higher sequential increase than in the previous quarter.
We view this as a key leading indicator of revenue Reacceleration.
In Q4, adjusted EBITDA was $41 million, and we generated $23 million and free cash flow. This represented our third consecutive quarter of positive free cash flow.
Before John sales and some details on the numbers for you I'd like to describe progress on the two areas of highest strategic focus in 2021 for dental and probably for the MSP industry overall and those are cloud and security. They are fundamental long term shifts for all companies and both have been in data <unk> DNA since inception.
All of our products have been cloud managed for example from day, one and a deep infusion of security is also common across our product set which at their heart or about data protection and monitoring.
In 2021, we will be more directly monetizing new products in these two areas in cloud with continuity for application workloads in the public cloud and in security with new products to help msp's protect their SMB clients.
So, let's first talk about cloud.
As I said dental products are all cloud managed in 2021, we will be launching our first continuity product for applications running in the public cloud, specifically Azure, which is the most relevant for our partners, who largely run windows based servers.
This new Azure cloud continuity product will follow on the success of SaaS continuity, where we protect data in the cloud that is hosted in Microsoft 365, and Google Workspaces.
We plan to take Azure into beta with a group of partners in Q2.
Of course, we also protect laptops and desktops today directly to our data cloud with our cloud continuity for Pcs line of business as well.
The advantage is data will bring the cloud continuity are many.
First our MSP Trust us and our service model and the same technology benefits. They know will be there in the cloud.
Second our solutions will be hybrid cloud focused so partners get a unified user experience independent of whether their workloads are on premises in private clouds or in public clouds. This is critical in a multi tenant deployment, where an MSP and clients have diverse workloads in many places.
Third copies of applications and data from every live environment are stored securely away from public cloud providers and our proprietary exabyte scale data cloud.
And finally, the business model will be familiar and transparent as usual with data, which is something that has caused many MSP and their clients to delay migrations to the public cloud.
We will be solving both economic and technology challenges for our partners.
The long term continuity roadmap continues to be securing and protecting SMB applications and data anytime and increasingly anywhere in clouds and on premises on virtual machines, and physical machines servers and Pcs.
Now, let me turn to security as Covid has accelerated digital transformation and remote work cyber attacks have also proliferating, leaving enterprises and smbs increasingly vulnerable to address this trend we have developed a model best visualized in three concentric rings secure.
Securing darrow, securing our MSP partners and helping those partners in securing their SMB clients. The inner ring. One is that we continue to invest heavily in technology and the best information security team in the industry, which leads our efforts to scale, our infrastructure practices and products to the highest standards data.
For information Security Officer was recently invited to join the Institute for Security and technologies multi sector Ransomware task force in the fight against cyber crime ransom.
Ransomware continues to be the most critical problem Smbs and Msp's face today in fact, 95% of Msp's report that their own businesses are increasingly being targeted by attacks and 70% of Msp's report ransomware is the most common malware threats smbs both according to.
<unk> annual Ransomware report survey let.
Let me give you two simple examples of how data has been a security company throughout its lifetime.
One is continuity, where many urgent restorations of backup images are as a result of primary servers being locked by ransomware anal.
Another example is RMM, where patch management and system monitoring are fundamental to the protection of end points, we recover and restore applications and data for victims of cyber security attacks and downtime events.
Tens of times a year in many cases, even after attacker has locked or raised their production servers and their primary backup copies.
Of course strong cyber security involves not only technology, but also people processes training and auditing and these need to be dynamic over time experts increasingly recognizing an attacker will breach any network eventually and it's important to be able to respond in real time and operate your business and systems, while remediated it well.
Funded ongoing and proactive approach to security is what's most important here we call our cyber resilience.
So let's ring one protect agile ring two is protecting our partners MSP and their SMB clients also need cyber resilience as I described it not just the old world with a collection of point solutions like antivirus or firewalls cyber resilience is a living breathing security mindset and it cost real money. This means risks.
And opportunities for Msp's, we started ring two with thought leadership for MSP in the form of content Webinars live events, and even direct interaction with our security team.
But we also take action and offered tangible technology help in response to the Q4 of cyber attacks on several per.
Prominent company companies and nations data will move quickly to help the MSP community within a matter of days, we created the data of Fireeye countermeasure scanner. The scanner use the signatures that fireeye released to the public and we provide a detection scripts to msp's, whether or not there were a data customer. This one release resulted in over 1 million.
<unk> scans and many malicious detections within data partner systems.
Continuing the proactive approach, we really similar scanners to the MSP community a couple of weeks ago to address the silver sparrow malware a threat to Mac OS.
Now, let's talk about ring three this is about offering msp's new products with margin opportunities to help them protect their SMB clients. While we have always been in security. This marks the beginning of us offering specific products or features that allow msp's to grow while selling security with that'll our first century here was ransomware.
Section in isolation for data wire amount, which we launched in December and which has now been deployed on over 250000 machines. In just the first 90 days, we've seen numerous verified saves from ransomware, where our product isolated identified isolated and prevent the spread of the infection.
Our second foray as this week's bit dam acquisition bid dams technology protects cloud based applications from ransomware malware and phishing attacks. We are thrilled to welcome Beth dams elite team of security experts to do as we continue to shape the cyber resilience roadmap for M. S piece.
We are starting the process of integrating their cutting edge technology into our platform. Starting later this year a bit dammed solutions will be offered to our 17000 msp's to help secure the millions of smbs that they serve.
In summary security and cloud are complex by nature, but we will make them simple and turn them into a growth and margin opportunities for our partners. We continue to believe both opportunities are enormous and field data was well positioned we will continued to increase our investment in each area to expand our product offerings and addressable market, which we.
I believe will drive strong partner retention and boost long term revenue growth.
John will give you the specific guidance, but you will see that our 2021 adjusted EBITDA margins reflect the impact of the best Damn acquisition and the increasing investment in security and cloud as previewed on our last call in.
In closing 2020 was a milestone year, we are thrilled with the progress we made throughout the year, culminating with our IPO in October.
Our strong fourth quarter and full year results and a good early start to this year as you can see in our Q1 guidance position us well for growth in 2021 and beyond I'll now turn the call over to John to go through the financials in more detail John.
Thank you Tim and good afternoon, everyone. We're pleased to report strong fourth quarter and full year 2020 results.
As I review our numbers today. Please note that I'll 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 and in the supplemental financials posted on our website.
Our fourth quarter results reflect the strength of our operating model and focused execution.
Fourth quarter recurring subscription revenue grew 16% year over year to $129 million and comprised 93 per cent of our total revenue of $139 million in the quarter exceeding our previous guidance.
A R. R. At December 31 was $542 $8 million up 14% from $474 $8 million, a year ago, and importantly increased $20 million sequentially up from a $16 million increase in Q3, and an $8 million increase in Q2.
Two.
Continued evidence of the Reacceleration of the business when.
When you think of our growth as a leading indicator of subscription revenue growth and the acceleration we're seeing in a R. R will take a few quarters to impact revenue growth.
We ended the fourth quarter with more than 17000, MSP partners and net increase of 400 year over year, but slightly down sequentially.
The small sequential decrease was driven by higher than normal churn of smaller M. S piece that we believe were challenged more than most by the economic fallout of the pandemic.
These churned investees averaged less than $9000 of a R. R. While our overall <unk> per M. S. P expanded to nearly $32000 at December 31 2020.
Up from $28600 the year before.
Importantly, we added a strong cohort of new M. S piece with more than 3000 growth M. S. P additions in 2020, which was not far off from the levels, we were adding prior to the pandemic.
These new MSP partners, typically start small and expand over time, helping to fuel future growth.
We also grew the number of M. S piece contributing over $100000 in a R. R to more than 1100 up from 950 at year end 2019.
On another positive note year to date in 2021 we've seen several hundred net new M. S. P additions.
Our fourth quarter gross margins of 74% were up from 65 per cent in Q4 2019, driven by an increase in the mix of higher margin subscription revenue and from the operating leverage we are realizing in our 24 by seven support function and in infrastructure supporting our unified continuity.
Illusions.
Fourth quarter operating expenses were $68 $3 million or $49 one per cent of revenue a reduction of 712 basis points year over year within Opex sales and marketing expenses were $27 2 million a slight decline from 30.
$6 million in Q4, 2019 research and development expenses were $18 $5 million, an increase from $16 1 million in Q4 2019.
General and administrative expenses were $25 million a decline from 21 $8 million in Q4 2019, and now include public company costs.
And finally depreciation expense within operating expenses was $2 $2 million compared to $2 $5 million in Q4 2019.
Operating income for the fourth quarter was $34 million or $24 five per cent of revenue compared to $11 $3 million or $8 nine per cent of revenue in Q4 2019.
Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring costs and transaction expenses was $48 million compared to $17 $1 million in Q4 2019.
In Recalibrating, our cost structure during Covid, we further expanded our adjusted EBITDA margins to $29 four per cent a significant increase from 13, 6% in Q4 2019.
As we discussed on our last earnings call. We believe the adjusted EBITDA margins remained artificial artificially high reflecting certain extent reductions we implemented in Q2 and significantly lower expenses associated with reduced travel and event marketing and office costs during COVID-19.
As we continue investing in technology innovation to drive revenue growth and commercial activity returns to more normal levels. These expenses will increase and margin will return to more normalized levels.
Free cash flow in the quarter was positive $22 $7 million compared to negative $5 $8 million in Q4 2019.
We ended the quarter with just over $170 million in cash.
As a reminder, we completed our IPO in the fourth quarter with net proceeds of over $640 million, which we used to pay off our outstanding debt of $590 million with the remaining proceeds added to our cash balance or used to cover other IPO transaction costs.
We also entered into a new $200 million revolving credit facility, which remains undrawn and which provides us with tremendous flexibility to invest and grow the business. Additionally.
Additionally, the IPO triggered the vesting of certain employee options, which added approximately $23 million to our stock based compensation expense in Q4.
The remaining value of those options will be expensed ratably at a more normal level as they continue vesting over subsequent quarters.
Moving to our full year 2020 results total revenue grew 13% year over year to $518 $8 million and subscription revenue grew 18% year over year to $485 3 million, we delivered full year adjusted EBITDA of 100 and <unk>.
$85 million, an increase of 78% year over year.
Turning to guidance for the first quarter and full year 2021.
The solid profitability and structural operating leverage in our business provides ample capacity for us to continue investing in technology innovation go to market resources and scaling infrastructure to support and sustain our long term growth and expand our leadership position in the market.
Our 2021 guidance includes a modest amount of <unk> revenue in the second half of the year and the expected EBITDA dilution from the acquisition along with the impact of the incremental investments in the important areas of cloud and security.
The purchase price for <unk> was $46 million in cash and we expect the acquisition will contribute meaningfully to revenue growth in 2022.
For the first quarter of 2021 revenue is expected to be in the range of 142 million to $144 million.
Adjusted EBITDA is expected to be in the range of $45 million to $46 million.
For the full year 2021 revenue is expected to be in the range of $582 million to $590 million and adjusted EBITDA is expected to be in the range of $130 million to $135 million we.
We expect subscription revenue to continue to be in the low to mid 90% range of total revenue in 2021 and capital expenses to be in the high single digit percentage range of revenue.
As a reminder, for non-GAAP income taxes, we use an effective tax rate of 25%.
And for calculating EPS, we estimate approximately 170 million fully diluted shares for Q1, and 175 million fully diluted shares for the full year.
In closing, we believe our Q4 results in 2020, one guidance reflect the ongoing reacceleration of the business. We're very excited about the 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.
Ladies and gentlemen, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Matt Hedberg with RBC capital markets.
Oh, Hey, guys. Thanks for taking my questions congrats on the quarter.
I guess either for timber John.
Just thinking through your ability to add new MSP I think John in your script. You noted you started there was a strong start to the year with MSP ads just sort of wondering how you think about the cadence post COVID-19.
Is it kind of revert back to kind of the trends you saw in 2019 or 18, just just maybe a little bit more perspective on that.
Yeah, Matt It's Tim. Thank you I'll give you I'll make a comment and John welcome to jump in too.
We actually had good steady gross ads John referenced the number 3000, we had good steady gross adds throughout last year, obviously COVID-19 hits in Q2 and you.
You know some of the lower end there.
Came under some financial challenge and by the end of the year, we kind of finished that clean up but nothing we're saying we think Q4 will be the the low there in Q1. It will go up again, so I would.
Say, it's a macroeconomic effect that we feel pretty good about going into reopening.
Sure Okay no that's helpful.
Okay. Yeah, no. Thank you and then I guess Tim.
Tim you talked about.
Continuity for Azure apps.
Which sounds which sounds like it's a nice addition.
Maybe I just wanted to get a little bit more sense of maybe if you could just sort of double click on that and maybe a bit more on the timing there.
It seems like a real interesting opportunity, especially for your install base.
Yeah. It definitely is I think.
You know I would tell you it's for the installed base and as much as that's one of the elements you would want to have before you lift and shift those servers into azure, but.
Clearly for us well.
We will also be represent a very nice net new opportunity, where there are many azure service already of course that we can go.
Now address directly all on the same platform, so I'd, probably won't add much on timing other than it's gone really really well and we said we'd be in beta in Q2 with broader availability later this year, so probably probably about all I want to say at the moment, but I think you have the basics of the opportunity and the scale of it.
Excellent. Thank you very much.
Thanks Pat.
Your next question comes from the line of Scott <unk> with Barclays.
Hey, guys, it's <unk> from Barclays. Thanks for taking my questions here.
Socket.
Hey, guys.
Hey, Tim maybe maybe for you.
I'd love to also kind of dig into cloud and the cloud and security commentary a little bit.
Maybe maybe on cloud you mentioned something interesting in your prepared remarks around maybe some economic differentiation around the azure offering.
Almost sounded like transparency in pricing I was wondering if you could just dig into a little bit more around what that means broad brushes of course, and then on security I was just wondering if you could go one level deeper on what sort of products a bit dam is offering that you think could be the most significant margin opportunities for your MSP customers.
Does that does that makes sense.
Yeah, I'll take I'll take the first shot at each of those.
So on economics, I think the key is and you'll know this as well as anybody as a cloud analyst.
When you move into a cloud whether it's AWS Azure et cetera, you know youll move from knowing the cost of your Dell server your Vmware.
<unk> on top of that server.
When it's in your building you can sort of put a box around those capex and opex and when you move over to a public cloud.
You might have a hazard a guess on the way in but you really don't have a big idea of what it's going to cost two years and you know.
That becomes a running joke in the industry, what's your third month's Bill and it goes up right as you move more terabytes you use more compute.
And so I think one of the things that's caused some MSP and their clients to be hesitant about the public cloud is some of those early horror stories, and obviously others will tell you hey, it's so much better that can remove labor.
Obviously, a strong long term trend towards cloud. So we're just entering of the fact that you have to not only solve the technical elements.
Of that move, but you have to have to solve the economic elements as well you have to be able to tell MSP. What you think it's going to cost on day, one and what you think it's going to cost three to five years in and we've done a lot of studying of that so I won't say more of it I don't want to let the cat out of the bag so to speak but.
Anybody that tells you Hey, we've got copy and paste technology and it just works great in Azure might work on the first day of like that but yeah theres a lot of nuance that we've discovered and we think it's one of the reasons Msp's are moving maybe quite as quickly as they would have so on your security question.
You know we drilled right in on the crux of it we look at the world in terms of MSP margin and so I think I said initially it feels like a very strong fit with our SaaS protection for M 365, Google Workspaces and that whole ecosystem.
And you know without giving exact pricing, we've certainly worked back from what end users and Msp's pay there and.
In terms of dollars per seats and.
We will price accordingly to make sure we have very good margin for MSP.
And that kind of a product set they do address a wide spectrum of collaboration tools with the technology its pretty generally applicable and we'll have to sort of work through new applications as we get to that point, but initially it's just getting getting focused in that SaaS protection 365, Google kind of work.
Workspace area, where msp's live and breathe today, so it's that that'll be job one.
Scott Yeah that does that does John maybe for you just on the financial side.
How do you think about the interplay of AOR per per MSP customer next year.
And growth in the customer base and maybe as part of that.
Any any comment that you'd be willing to make them just overall AOR growth or no.
Any sort of any sort of visibility for next year on a R. R.
Sure. Thanks socket.
As as you've seen our per MSP has expanded nicely here over time up to nearly 32000.
Per M. S. P from 28, 6000, a year ago and has been consistently expanding each quarter, even with some of the fluctuations in M. S. P count and that obviously is reflecting the.
The continued growth with some of our larger with our larger partners. It reflects M. S p's adopting more data products.
And it's also to some degree a reflection of the churn of some of those smaller partners.
And in General we would expect this metric will it would continue to expand.
In the future, but it's important to note that.
Ironically, adding more M. S. PS can actually brings the average down because those new M. S. P's.
Start small and growth.
Their business with that over time so.
Arguably if we had a blow out period for new M. S piece, the the metric a per MSP could even go the other way, we haven't seen that happen but.
Just the way the math works it could happen that way given again that the new MSP is coming at a lower.
There are and we're not guiding on a R R but.
You know, we'll point to R. R.
Recent reacceleration in and sort of continued reacceleration.
From Q2 to Q3 and in Q3 to Q4 in <unk>.
We obviously you can see in our guidance for Q1, we feel good about and for the year, we feel good about the year and the.
The only thing I would add I guess as we would expect the broader economic reopening stimulus package, probably doesn't hurt right to provide a tailwind.
To the business.
Absolutely very helpful guys. Thanks very much.
Thank you.
Yes.
Your next question comes from the line of Jason Ader with William Blair.
Hey, guys. Thank you for the question.
I wanted to first ask about fit them.
For the.
Detail on price paid could.
Could you give us a sense of the specific revenue contribution in 2021 and also the EBITDA impact from the deal.
Yeah, we didn't break out either of those we tried to give you a little color that is that it's a it's a small number this year were really factoring very little of that into the 2021 revenue and obviously that would be later in the year anyway.
And then but the EBITDA impact right, we inherit all of those expenses.
Of the business day, one so the EBIT pack EBITDA impact is.
Uh huh.
When I characterize that maybe anyway.
Oh My God.
$10 million.
We're not really giving us, giving a number but it's I'll say, it's a you know it's meaningful it was worth mentioning so how many people in the company are coming over.
We haven't we haven't put that out either.
Okay.
Okay.
And then just on the on the.
Comment on the year to date.
Additions of net new wireless piece I think you said several hundred net new wireless piece.
Is that just a kind of economic.
Impact there.
Things are starting to loosen up a little bit.
Or was it more of a.
Kind of our internal focus and you guys said you know what Q4 was not what we wanted or Q3 wasn't why we why are we doing to really kind of double down on adding new EMS Pes in Q1.
Yeah, No Jason I'll, just say what I said before you know we've had a good steady machine for producing gross MSP is there's lots of MSP in the world and so you are bringing them on obviously in our model, we generally bring them on small when we grow them from there and so if you.
You know if you want to attribute what bill said that higher churn to the pandemic, which I would in general economic.
The growth engine is still there as things get better on the churn side now going into reopening we just we just see it growing so no special programs on our end.
Two to drive that I do think we're getting a little bit more global now every day and so.
Is that growth maybe towards the back half we might see some some some pick up there, but I don't think we're doing anything special we're always interested in new MSP isn't as many as we can get.
It's really been a Jason it's really been a churn factor right the gross add.
Held up remarkably well.
Despite COVID-19.
Uh huh.
It's really been churn and as Tim said.
It was as we ended the year there it was it was.
I would say clean up if you will.
Covid related economic.
Environment related and we're seeing that turn and feel good about the net positive.
Movement now.
Great and then last quick one for me John for you just on the NR.
Down to around 11, 111% I think I saw which is that our trailing 12 months number.
It is it is and so it's always backward looking so that that's the right way to think about it. It's just like revenue growth, we sort of been saying from the get go that a R. R is our leading indicator and that's what where we're seeing that the early re acceleration and we continue to see it and it's not until we lap the COVID-19 lows of.
Q2 that we're going to that we're going to see things like the subscription revenue growth in the net.
Net retention start turning back the other way.
And where do you think.
<unk>.
It gets back to ultimately I'm trying to.
Give you a specific timeframe, but but what would you be happy with.
Yeah, I mean, we don't we don't.
See any reason why it wouldnt get back to historical levels and that's certainly.
What we're aiming towards.
Gotcha Okay.
Thank you guys have a good night.
Great. Thank you.
Thanks, Jason.
Your next question comes from the line of Sanjay <unk> with Morgan Stanley.
Hi, everyone. This is calvin on for Sanjay.
Congrats on the quarter I have two questions for you guys. So first is on on solar storm can you give us a sense an overview on how the attacks have affected conversations with M. S. P's. Our MSP is more likely now to look at continuity solutions and how large of an impact do you think the attack.
This will have on security awareness and uptake of of your new ransomware solutions as well as the existing core product set.
And Kelvin it's Tim.
It's a great question you know I think.
I think you know you hit on it right driving more demand for cyber resilience in our products as well.
There's probably a fair way to characterize the output obviously demands more attention on security as a theme which.
Which we were already in the mode of anyway security for most tech companies like us there's opportunity on risk I think.
We mentioned in the script in direct response to that specific attack, we were able to quickly release, some countermeasure scripts for both RF, our MSP within RMM tool as well as we just posted in the public domain and we did the same for for the silver silver Sparrow, and actually I think either yesterday or today.
We did the same for the recent Microsoft.
Ex as well so it's something we're getting fairly well versed in.
I think on a go forward basis. We are we continue to focus inward on security to make sure we're at that level and now with them and our momentum we started to talk about focusing outward but.
I, probably wouldn't comment much on.
Whether it helped our pipelines a little bit or not.
Never wish.
Where does that kind of an event on another company. So just overall very strong tailwind for security, obviously and I am sure you are hearing that in other companies.
Right.
No that makes a lot of sense. Thank you for that and then on the second one.
On bit damped specifically.
When you when you thought about the company and the product set there how did you SaaS they need in the marketplace and specifically on the ability for for Msp's ramp on it get trained up and how does it fit into the broader security strategy that day.
You are pursuing there.
Yeah. So it's a good question we first.
First and foremost want a great technology and a great team.
And Trust me, we've looked at dozens of security companies. There are other very interesting ones out there. So you have to kind of find that fit.
We did and I think when you get down to the products of protecting collaboration tools you would expect that the kind of vectors there would be as I said along the SaaS.
Cash flow that line of thinking start with M 365, Google Youll.
You'll see with a ransomware, we're driving into our amount which is another kind.
Say vector of growth there and it'll be interesting to see if we can get some of that technology accelerating us there and then the third piece is obviously, we run our cloud exabyte scale and.
We have a lot of data there and that data needs protecting and we do that well today, but again in this world you have to keep raising your your perimeter wall.
And in the fourth one is you know data networking, we connect all of these things and that is evolving towards a software defined networking world.
You'll see a lot of traffic and a need security. So as I said it has broad applicability, but watch for us in round. One here to stay focused on kind of that says vector of growth with or with their set of technologies.
Awesome. Thank you guys.
Thank you.
Your next question comes from the line of Keith Bachman with bank of Montreal.
Many thanks. Thank you for taking the question Tim I wanted to direct this to you and I wanted to go back to us or backup and we've had some conversations over the last 45 days with MSP and even some of the customers.
And detected more interest in migrating from on premise to cloud.
And then also more interest in the Saar backup as a potential solution.
Most of the Mlps did mention that your solution wasn't Pal and so I just wanted to ask you on.
Hey, how youre thinking about features and cooperation in cost and what I mean by feature.
Feature parity with what.
We're backup has is there any technology challenges that you're facing and delivering the solution, particularly from Microsoft in terms of being able to enable the caddo.
Capabilities and when you think about the margin you mentioned that you would be competitive in pricing with data excuse me with is or what how would that compete in terms of your on Prem solution that you're offering customers versus if they go to war.
And use you for back up how does that is there a risk of kind of cannibalization on margins I know that's a lot.
But what I'm really trying to understand are you at least get roofing share as more workloads coda was or for your backup solution and argue risk at all for margin degradation point of view.
Yeah I think.
It's a great question right.
A year ago, I would not have been able to answer the question I would have had all the same questions. You you have had we've gone deep and understand the opportunity here, we actually think it's a great opportunity to gain share.
Azure is a big world already and anybody that's in there now we are not addressing although I have heard weird stories about MSP.
Some solutions together I suppose our existing solution would work in a crude way but.
We're going to be there and theres going to be a lot of net new.
Also if people are on Prem today, and moving to Azure, we have a high level of confidence in what we're going to deliver there technically and so we think we can actually gain some share.
In the migration.
And I think we're going to be fine on margin you know there's a there are some economies of scale you get there.
As well so feeling like this is net new opportunity for us for sure and we're racing to get there we've been patient and as much as we want to deliver a data quality solution and I'll walk you through a few points really because you said a lot of things I tried to catch them look Microsoft as a backup option and candidly they've offered.
Server backup products since the dawn of Windows in decades ago, right Theres always Microsoft backup of some sort.
I'd call it more backup and true continuity, but it's table stakes to get customers into Azure, you can't say, hey come to my cloud if there isn't some backup of some sort and the ecosystem hasn't built up in the <unk>.
Early days enough, but there are several reasons. We're confident we can win first from a technology perspective, we think we will do more than their solution with.
With true continuity, all the functionality and we obviously need to have strong differentiation here. Secondly, it's interesting we have a partnership with Microsoft business relationship as do many and they have historically left backup continuity to channel partners as a value added service and we don't see a big reason why that would not be the case here. So.
You have to have backup if your if your azure any Microsoft product and even Google cloud any of the Biggs, but.
Our strong Gatto Azure, a continuity solution is likely to bring thousands of MSP and their entire end user universe towards azure versus other public cloud. So we think it'll be symbiotic and be fine I think the third thing to note is that we have a hybrid cloud solution. So the MSP is going to get a uni.
<unk> purchased management support and experience across all their workloads and for many years and MSP that has hundreds of end users is going to be sitting there with application servers in the public cloud and private cloud in their own data centers on premises and theyre going to be living in a multi tenant environment.
But that they do each day and each of those servers can be a different types and different locations and the real key for us will be to unify that which you know you wouldn't do a fewer Microsoft that wouldn't make sense. So I think that last point is basically worth dwelling on in your mind, a little bit we don't see that.
Anybody winning with a seamless hybrid cloud solution and in fact, where people have done azure backup to date, they've generally built something very specific where they've done it through acquisition and they don't really even have a common platform. So that's kind of how we're thinking about and Keith and I hope I hit five years or six questions along the way there.
And thank you for that comprehensive response.
Thank you for.
And we know when they are behind you.
Your mind, Yeah, we know what's on your minds and like sort of a demo of it it's probably the most I can tell you at this point, but we will we'll ride your excitement through the year here.
No that's terrific and just Tim as you think about my follow on question is and again. Thank you for the comprehensive response as you think about mix, how do you think about mix.
In terms of backup versus the other in terms of your revenue profile 12 to 18 months from now versus where it is today do you see that changing meaningfully including recent M&A or do you see it.
How do you see that mix unfolding.
Yes, it's a good question I don't know that I want to put a number on it John will kick me under the virtual table here.
I think you know I remain fairly bullish on the continuity lines of business.
Certainly from their smaller scale, you would expect things like says in networking and our momentum to be able to grow faster on a per cent basis. So you're just in a way debating a relative growth.
Thing and I think of a betting person would say if we're doing acquisitions over the time frame you suggested they would be in newer cloud focused security focused types of.
Types of arrangements. So the mix will continue to shift, but it's it's it's anybody's guess.
And then if you want to count Azure and traditional continuity.
And then the race gets even more interesting right because that's going to be a.
Very big growth area most likely.
Okay well. Thank you for the response, that's it for me I'll cede the floor tiers.
Great.
Your next question comes from the line.
Net sales with Bofa securities.
Oh, Great Hey, guys. Thanks for taking my question I wanted to ask another way of asking I guess, the net revenue retention question.
When you look out you know post pandemic exiting the pandemic are there any categories of expansion that perhaps may have been held back that you would think could see some acceleration obviously the gross retention is the churn that you mentioned is the main reason for the deceleration.
It sounds like your visibility into Reacceleration is good. So if you could just comment on where where do you think that cross sell up sell opportunity that may have been impacted could could come back in any categories you'd call out.
Yes, I mean, I think it's I'll take a first pass and Tim certainly can add.
You heard Tim say BCD are already we feel at least fourthquarter, we felt some rebounding, which was very healthy and will be will be a positive to net retention, but you know you look through that it's obviously any particular industry verticals that may have.
Hit, particularly badly in the in the pandemic.
Net a rebounding in and where our MSP partners have exposure or new prospective MSP partners have exposure, where we'll will obviously benefit from that so.
That's one sort of angle to look at it the other is.
As you hear us talking about.
Adding layering in security products.
<unk> and networking growth across any of those vectors will also provide.
Growth in support to higher net.
Retention numbers and drive that.
That sell through.
And cross sell activity.
Thanks, So much John and then one more if I may.
Just any commentary you'd make on the PSA solution.
Is that how is that cross sell opportunity how does that cross sell activity.
Trending and maybe just a reminder, as to kind of how penetrated it is and where the opportunity is from here. Thank you.
Hey, Brad this is Tim.
The you know.
The PSA is a little different than the other products in the following sense, it's what I would call kind of a base platform product and as much as an MSP uses it to run their business right ticketing CRM some of their employee transactions things like that and so.
So theres less less share shifts there.
We actually are.
In Q2, you know talked about PSA was one of the first areas to get a hit and the pandemic in terms of some of the smaller msp's dropping some seat count it's a way to kind of tighten their belts that seat count came back in Q3, and Q3 Q4 exit very good trend for us in PSA, but.
I wouldn't think about that one as much as this massive displacement of competitors as much as kind of net new demand.
We've brought a lot of features there we've added some documentation, which some people upsell and but we've sort of built it in and a couple other dimensions as well. So you know where the focus is on stickiness and then winning net new MSP and <unk>.
You know, it's there's a few platforms out there for PSA there are two big ones were one of the two and I think we feel.
Quite a bit better about that today than say, we would have a year ago that was the one that was.
More and more challenging, but it not only contributes to growth, but again it helps with stickiness. It helps kind of lock down the partners that are on that platform.
That's great. Thanks, so much Tim appreciate it.
Yeah Youre welcome.
Thank you.
Our next question comes from the line.
With.
With Macquarie.
Hey, Thank you for taking the question.
And then stepping back with that damn. It appears that you acquired not only a company with interesting technology, but also a robust and qualified engineering team with extensive cyber security experience. So I'm curious with the inclusion of the <unk> team into Dato how do you.
That this could help your product portfolio evolved and potentially advance your product roadmap.
Yeah, Hey, Fred this is Tim.
I'd go back to my three concentric rings, you know we've got a.
A very strong internal security team and.
You know that has an offensive or defensive capabilities compliance new technology and so in some sense. We're we're feeling good they're pre built them, but never hurts to have more more smart security folks on.
I think ring two has always been about MSP and thought leadership that the exciting part now is that we're in ring three for the first time in the last 90 days now ransomware and beat them and so you know.
This is a startup team in some sense they've been together for years and they have many many more ideas than they could have been <unk> it as a startup.
The real key is actually depth breadth round, one here right, we need to get this integrated into our core platforms get it into the hands of MSP and get them producing margin as fast as possible that's going to require a nice narrowing their focus but then you know we can start to broaden from there and you know it.
It's not lost on us that it's a it's based in Israel and theirs.
Great amount of security technology talent over there as well so we'd be adding adding.
Adding people hopefully going forward, so really an accelerant in several dimensions for our ambitions and security, which we.
We took our time and we're confident we found the best and a great cultural fit on top of that which is so important in the net of merger.
Yeah. Thank you I think you hit on partly on my follow up question around this but I'm curious with the acquisition of an Israeli company.
Could this also be the start of a longer term Israeli or let's say overseas high quality engineering effort as well, having say access to top tier talent in countries such as Israel.
Yeah. It's look it's a global war for talent. So you know Israel becomes another attractive spot for us we have a meaningful team in London and in the surrounds we have technology development teams in Denmark.
You know I think I'm, losing track I think we have five or six countries already where we have developers absolutely are among the many benefits is a clear.
Clear base of operations for technology and.
A market that's got great talent pool so.
Thank you.
Thanks, Brad welcome.
Your next question comes from the line of Gregg Moskowitz with Mizuho.
Okay. Thanks, very much. So I know there was an earlier question on seller storm, but I actually wanted to ask about the recent Microsoft exchange on premise server breach Tim do you think that the nature of this breach will accelerate the shift to cloud for for MSP and then also what impact if any do you think that this might have on data.
Moving forward.
Yes, it's obviously an emerging and you know we have we literally just released the scripts for it which is pretty crazy because it's usually like a one or two person.
A couple of all nighters here to do it so we've got the heroes.
I don't know how fundamental it is Greg for the following reasons you know to me the exchange servers have been moving for years now and then you would have the numbers.
More than I I.
Well you know what sticks in my mind that will kind of a year and a half ago, we had Kevin mitnick.
The main stage at famous hacker from back in my day and.
He went into somebody's 0365, email box and showed us ransomware click on the wrong email lockup every email in the box. So just because you're moving to the cloud doesn't mean security is not an issue and I think that's going to be very exciting and interesting for MSP.
It's a totally new way of doing business and we talk about investing in cloud investing in security.
They are synergistic so.
No I think people are almost numb to the pain. There is so many of these attacks.
Tax coming out but.
We've heard very little in the last week on this one the solar storm quite a little more attention I think from MSP, but let's just say they're in a different place. This this year than they were a year ago, both theyre feeling overwhelmed, but I think they're starting to say hey, there is some real revenue opportunity and smbs should be paying a lot more money than they used to four.
Security, So that's kind of how it would I would cast it.
Got it thanks, Tim and then John are you able to expand just a bit on what assumptions around SMB recovery are embedded in your 2021 revenue guidance. Thanks.
Sure.
We don't have a tie our guidance tied to a specific sort of.
Macro economic model, but we.
We absolutely assume that second half of the year that apparently there was a broader reopening and you know both from a revenue standpoint, and an expense standpoint.
We see the impacts of that.
Alright, great. Thank you.
Sure.
Thanks, Greg.
Your last question comes from the line of Brent Thill with Jefferies.
Hey, guys. This is Joe on for Brent really appreciate the question I may have missed it but can you quantify what the gross renewal rate is in the quarter I think it was <unk> 84 per cent and <unk>, an 88% last year just curious what it was this quarter.
Sure.
This quarter was 88 so.
The 84 was really the low in the year.
Awesome.
Fantastic you hear and that'll help retention rates going forward.
And that's it.
That is a dollar based obviously not yet.
Yep.
Got it that that was clear.
And then just.
Clearly growth is a priority for you guys and you've been clear that you're moving past work from home savings and you're investing a lot in product maybe could you just talk a little bit more about the investments on the go to market side.
You don't have a traditional sales model and where youre spending there.
I could take.
Shai just qualitative and John you May may have said, a number or two in the past I want to reiterate but yeah.
You're right, it's not a traditional model so throwing 100 quota bearing reps at something may or may not speed. It up the MSP bases is who do the ones that do the selling for us.
That said you know we've talked about moving more global more international so there's hiring going on there.
Would expect that.
We'd be adding expertise in security cloud you know some of the newer things we rollout over time, but John has a word for it matching the functions or something.
So that things like product marketing and what have you for security cloud sales engineers security cloud. So I don't think it's anything unusual John you may have some more color on that.
No just.
It may not be just adding sales people for example, right. It's there's a lot in our sales and marketing umbrella.
And a lot of it's geared towards enabling our MSP partners, who effectively an extension of our sales team.
Sure.
That's helpful. Thanks, guys.
I would now like to turn the call back over to Tim Taylor for any closing remarks.
Yeah.
Well. Thank you all again for joining the call.
We very much appreciate your interest in dazzle, where we're really excited about the outlook for 2021 and.
I'm sure. Many of you like me are excited about summer maybe getting outdoors. So we look forward to speaking with you again very soon take care.
Ladies and gentlemen, this concludes today's conference call. Thank you.
You for your participation Goodbye now disconnect.
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Okay.
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