Q1 2021 Datto Holding Corp Earnings Call

May 12, 2021

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Ladies and gentlemen. This is the operator you conference is scheduled to begin momentarily until that time line will again be placed on music hold please stay on line and thank you for your patience.

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Good day and thank you for standing by welcome to the data the first quarter 2021 earnings results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need press star one on your telephone.

Interest of time, please limit yourself to one question and one follow up question.

And please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speakers day, Mr. Ryan Burkart director of Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining US today to review data is first quarter 2021 financial results with me on the call today are Tim Weller, Chief Executive Officer.

John Abbott 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 second quarter, ending June 32021, and full year ending December 31 2021.

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.

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.

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.

<unk> non-GAAP financial measures will be discussed on this conference call.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our first quarter 2021 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.

I would also like to inform you that we will be participating in several investor conferences coming up in June including the William Blair growth Stock conference. The Evercore ISI TMT Conference and the Bank of America Global Technology Conference. Please reach out to me if you're interested in joining our schedule with that I'd like to turn the call over to <unk>.

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 report strong Q1 results and an improved outlook for 2021.

I'll begin with a few highlights from the quarter followed by comments on data Commerce, our latest product launch and then I'll update you on two key themes for 2021 cloud and security finally, I'll turn the call over to John to discuss our financial results and guidance in more detail.

This year started on a strong note as momentum from Q4 carried into Q1 with total revenue growth of 16% and subscription revenue growth of 17% year over year, we saw strength across our entire product suite led by continued rebounding of our B C. Dr products and strong growth.

Our SaaS protection and RMM products from.

Driven by the powerful trends of digital transformation and cyber resilience.

We ended the quarter with $573 million that IRR, which represents a higher sequential increase than in the previous quarter. We view this as a key leading indicator of revenue reacceleration.

In Q1, adjusted EBITDA was $47 million and we generated more than $24 million of free cash flow, representing our fourth consecutive quarter of positive free cash flow.

In addition, the number of MSP partners. We serve grew to 17300 up 300 from the end of 2020.

As you know we are the largest pure play it solutions provider to the MSP community and we are dedicated to serving this channel every day in our sales and support motions and in creating technology, which is purpose built for the managed service provider channel will provide msp's with mission critical sell through solutions for their <unk>.

B customers software tools to run their own business as efficiently and a wealth of resources to grow their businesses and expand their margins.

Never go round and MSP to sell directly to their SMB customers and that has established unique highly aligned relationships that we have spent years building one by one.

We are more than just another vendor to MSP. We are their trusted partner no. Other company of our scale can deliver on that promise to MSP and it creates a major barrier to entry from potential competitors.

Let me now briefly touch on our most recent product launch data commerce into the North American market.

Gatto Commerce is a real time, quoting and procurement platform for MSP that increases their efficiency and profitability.

Simple size, how MSB is quote sell and broke her with that'll commerce, we followed our well established playbook of how we entered networking RMM SaaS protection and security with small acquisitions of great teams and differentiated technology that we tailored for MSP.

We purchased the commerce technology in the Middle of 2020, and we operated at in Australia, and New Zealand last year, while adapting it to the unique demands of the North American market before commercially launching in April.

Consistent with our open ecosystem philosophy that'll commerce will work on virtually any PSA or RMM platforms partners are using and of course, it integrates seamlessly with Dallas PSA and RMM software.

I should also give a shout out to the data <unk> PSA and RMM teams for landing in the upper right quadrant of the Canal US research point of view grid.

Meanwhile, Forrester research recently concluded that the average payback period for data partners on an investment in our integrated solutions of unified continuity PSA and RMM is less than six months with a very high ROI.

Before I turn the call over to John to run through our financial results and outlook I wanted to leave you with some thoughts on two key themes for 2021 cloud and security.

Total helps MSP and their SMB clients in securing digital assets, both applications and data we protect those assets helped manage those assets and validate that protection and help users to connect to those assets protect manage connect.

All our products work together and that common goal of securing digital assets lets talk about cloud our software services, our cloud managed and delivered as SaaS applications, we operate our own exabyte scale data cloud that gives us the advantages of cost flexibility and control our partners and the SMB.

Clients. They serve are at various stages of their own cloud journeys, but will operate for the most part and hybrid cloud environments for the foreseeable future what.

What we offer our partners is the ability to secure digital assets in a hybrid cloud world No matter, where data and applications live we believe our ability to offer a unified predictable experience across disparate environments is important to our partners who in many cases manage digital assets that run on premises for.

A high performance in private clouds, and M 365, and Google Workspaces and sometimes in the public cloud.

The next step for us in hybrid cloud protection as our Azure continuity product, which will give our partners with public cloud workloads. The same highly reliable data continuity performance and robust security that they have come to trust from data.

Our Azure product is on track for beta in Q2 and partner demand is very encouraging we expect azure to broaden our market opportunity for unified continuity and contribute to our ongoing re acceleration.

Look forward to sharing more in coming quarters.

Finally, let's talk about security.

Continuity as we deliberate fits squarely into any security framework, because we are involved in application and data recoveries every week many of which are a result of ransomware or other cyber attacks.

No what he used to be primarily providing protection against server crashes internet outages or the occasional natural disaster.

Now its defense against active cyber threats.

Always describe continuity as the last line of defense of security.

With our launch of ransomware from RMM in Q4, and the acquisition of <unk> in Q1, we are accelerating our path into other areas of security beyond just recovery.

With each new offering we plan to bring MSP strong margin opportunities as they protect their SMB clients and monetize security.

The early evidence is good.

Partner demand for our new ransomware detection in isolation feature for data RMM continues to grow with just under 500000 endpoints now protected almost double from 250000 less than a quarter ago.

We're also helping our partners shape their cyber resilience roadmaps with thought leadership for MSP is in the form of content Webinars and events like our recent MSP Tech day on cyber resilience. The event delivered a deep dive into cyber security business continuity and incident response to help MSP and their SMB.

<unk> protect against growing cyber threats.

Our leadership in security expands beyond our sponsored events to the international Arena, where data serves as a founding member of the Ransomware Task Force a broad coalition of experts and industry government law enforcement and international organizations coming together in the fight against Ransomware. The task Force recently released its ripped.

<unk> in an event, where the U S Secretary of Homeland security addressed an audience of U S policymakers and others with recommendations on how to confront this urgent national security risks for countries around the world.

Our own see sales participation shaped the task force guidance for MSP and Smbs to recommend financial funding and support to help MSP developed cyber resilience capabilities among other critical measures.

Closer to home, we continue to make ever increasing investments to ensure that our own infrastructure practices and products are secured to the highest standards in summary, I couldnt be more pleased with our Q1 results and see good momentum across the business, we remain as committed as ever to our MSP partners.

And see many opportunities to help them grow their businesses with margin enhancing sell through products and to operate more efficiently with our PSA commerce and RMM products.

Cloud and security have always been fundamental of data and we will continue to invest in these areas to abstract away their inherent complexity and turn them into growth and margin opportunities for MSP partners. Thank you for your interest in data and the MSP story with that I'll turn the call over to John to take you through our financial results and outlook John.

<unk>.

Thank you Tim and good afternoon, everyone. We're pleased to report strong first quarter results and 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 first quarter results reflect strong execution from our team and continued momentum across our whole suite of products.

First quarter recurring subscription revenue was $135 $6 million up 17% year over year, which includes a benefit from favorable foreign exchange rates of approximately 3% subscription.

Subscription revenue comprised 94 per cent of our total revenue of $144 $9 million in the quarter exceeding the high end of our previous guidance.

A R. R. At March 31 was $572 $5 million up 15.

<unk> from $498 4 million, a year ago, and importantly increased $30 million sequentially.

This included a benefit of approximately $4 million from our annual AAR, our currency exchange rate Recalibration.

Excluding this FX impact.

<unk> increased $26 million sequentially up from $20 million in Q4 of 2020 and $16 million in Q3, providing continued evidence of the reacceleration of the business.

We ended the first quarter with more than 17300, MSP partners, a net increase of 600 year over year and an increase of 300 sequentially.

We're encouraged by the return to growth in MSP partners in the first quarter and believe the increased churn associated with the pandemic is now largely behind us.

We also grew the number of M. S fees contributing over $100000 in a R. R to more than 1150 up from 1000 a year ago.

Our sell through model continues to drive strong growth within our installed base of partners as they rollout data solutions to more smbs, those smbs consume more data or seats and they both adopt more data products.

Our first quarter gross margins of 75 per cent, we're up from 71% in Q1 2020, driven by the operating leverage we are realizing in our 24 by seven support function and increased efficiencies in the infrastructure supporting our software solutions.

First quarter operating expenses were $69 $6 million, a slight reduction from Q1 last year, reflecting a lower cost structure during the pandemic.

Within Opex sales and marketing expenses were $29 6 million, a slight decline from $31 $3 million in Q1 2020.

R&D expenses were $17 $6 million, an increase from $16 $4 million in Q1 2020.

G&A expenses were $22 million, an increase from $19 5 million in Q1 2020, and now include public company costs.

And finally depreciation expense within operating expenses was $2 $1 million compared to $2 $5 million in Q1 2020.

Operating income for the first quarter was $39 $4 million or 27 per cent of revenue compared to $18 6 million or 15 per cent of revenue in Q1 2020.

Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring costs and transaction expenses was $46 $9 million compared to $25 million in Q1 2020.

In Recalibrating, our cost structure during COVID-19 and as a result of ongoing efficiency initiatives, we expanded our adjusted EBITDA margins to 32 per cent a significant increase from 20% in Q1 2020.

As we discussed on our last earnings call, we're investing in cloud and security to drive revenue growth and is commercial activity returns to pre pandemic levels. We expect adjusted EBITDA margins will revert total levels in the low to mid 20% range.

Free cash flow in the quarter was positive $24 $5 million compared to negative $15 $2 million in Q1 2020.

And we ended the quarter with just over $149 million in cash.

Turning to guidance from the second 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 continues to include the impact of incremental investments in the important areas of cloud and security.

For the second quarter of 2021 revenue is expected to be in the range of $146 million to $148 million.

Adjusted EBITDA is expected to be in the range of $34 million to $35 million.

For the full year 2021, we're raising our revenue guidance to a range of $594 million to $600 million.

And we're also raising our adjusted EBITDA guidance to a range of $134 million to $138 million.

Our Q2 revenue guidance represents year over year growth of 18% at the midpoint inclusive of a 3% FX tailwind and our full year revenue guidance represents year over year growth of 15% at the midpoint inclusive of a 2% FX tailwind.

It's important to remember that Q2, 'twenty 'twenty was our lowest revenue quarter last year as a result of COVID-19 impact, making that an easier comparison this year.

We expect subscription revenue to account for over 90% 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 per cent.

For calculating EPS, we estimate approximately 170 million fully diluted shares for Q2, and 175 million fully diluted shares for the full year.

In closing, we believe our Q1 results in 2020, one guidance reflect the ongoing reacceleration of the business. We're very excited about our momentum going into the rest of the year and look forward to reporting on our progress in the quarters to come with.

With that we'll open up the call for questions.

Operator.

As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.

And please remember to limit yourself to one question and one follow up question.

Your first question comes from the line of sight with Morgan Stanley.

Thank you for taking the questions and first off congrats to the team.

I'm really great Q1, I think particularly impressive list of a net new way our performance this quarter, even if you sort of normalize for the for the FX benefit. So my question is if you could speak to end market demand and.

And how that may have changed.

Do that across the portfolio and during the quarter and was there any sort of one time items or benefits, we should be thinking about that may have benefited Q1.

Yeah. Thank you.

I will.

I'll ask John to noodle on whether Theres. Some one timers other than what he said I don't think so but you know it's always been a little tough for US. We can survey the base of course, but when you have 17000 plus partners dealing with hundreds of thousands of F. N. B's per every story you have a partner struggling you'd have one who is having a record year. So I think we.

Just have a general sense across regions that reopening is occurring step by step and we think that was the case here I can't point to any for example have good good breadth across the product lines in terms of growth. So it's not one breakout superstar with good good International you know bouncing in good good.

Stick so.

I don't think I'd stick my neck out and say it was any.

Any one one thing, but you know clearly the longer the pandemic goes on and work from home or particular, smbs need more and more on the technology front and at the same time, we're optimistic we'll get additional reacceleration. Once msp's are able to get out of their their home caves. So to speak and then start seeing more of their customers.

A little bit of that for our team as well so wish.

I wish I had some tomorrow specific therefore, you, but John I don't know anything beyond what you said in the prepared remarks, you want to add.

No no extraordinary one time items. The FX was the one point, we wanted to call out, but even as you say, excluding the FX. It was a terrific quarter and a great increase in a R. R. It's really just a continuation of the reacceleration in the business that we've been seeing in that we've been talking about and.

You heard Ken mentioned before that D C D or had a nice rebound in Q4 and that's continued.

That's continued and we continue to see great strength in data protection and RMM.

With the with great contributions from other products as well. So it's standard has had really across the board products geographies.

<unk> continued a continued momentum.

I appreciate the context on both of those fronts.

I wanted to hit was around security one cloud number tailwind obviously the country is going through another headline pretty tricky meaningful ransomware attack that has a lot of customers.

Frankly looking for solutions I wanted to get a sense Ken in terms of sort of meeting what is likely to be incremental demand on this front around ransomware attacks.

How the security offering is positioned I know <unk> kind of plays into that as well, but in terms of.

Your security efforts are you in a position if the business in a position to help customers.

Meet that challenge when it comes to comes to range somewhere.

Yes, no no question about it and we highlighted I think signaled very strongly our intentions on our last call. What a difference a year makes the I think the headlines you and I read are sort of scary and that's being processed by smbs as an increased willingness to pay some money for security you know beyond maybe the antiviral.

They've had in there for 15 years, so that's absolutely rippling through and I think youre going to see M. S piece now trying to figure out what their full stack and you know starting to view themselves as basically security companies. You know if you cannot protect your SMB all the rest of the creature comforts in zoom conference calls or whatever price.

Solutions Youre, providing start to not matter I think we've had good exposure here you've heard me from the IPO onward talk about security as the last line of defense and you know excuse me continuity as the last line of defense and security strategy, all called out the recovery phase, but by then something bad is happening now in ransomware, we're finding out.

We can get on the front end of that on the prevention side and so you know a couple of data points I'd give you one is our our kind of state of the industry reporting Msp's last year listed ransomware is the number one problem facing MSP and that's before all the recent round of half a dozen visible attacks I think the homeland security Secretary just warned of increasing ransomware risks.

To smbs.

Our our own C. So we put out a release has joined as a founding member of the Ransomware Task force. They just put their report out and you.

You know, it's just it's just everywhere.

Pleased to see that I think some government money is even going to be coming this way as well. So it's not just the smbs MSP themselves have exposure and if you get your hands on their assets then that can be weaponized. So it's basically in every conversation I would I would leave it there and we think we're in good shape to capitalize on it.

Understood. Thanks, Tim Congrats on the corner.

Thank you.

Your next question comes from.

<unk> with Barclays.

Hey, guys. Thanks for taking my questions here.

How're you doing.

Hey, Tim maybe maybe first for you.

Maybe just just affecting one particular part of the Iraq. It was great to see the customer adds start to increase again right not just from last quarter, where we had some pandemic related churn, but even above the run rate that we saw true through through 2020, and so maybe the question is how do you sort of feel anecdotally about.

The pipeline here for customer adds over the next couple of quarters.

Yes.

Good thank you socket and Hello.

You know I think we noted in the past couple of quarterly calls, but even I think when we first met you a year ago gross MSP ads were a were solid throughout 2020, it's not been a gross ads question pandemic comes along Q2 Q3, you see some disruption at the lower end of our base, where some msp's, we're struggling and we tightened our.

Credit policies et cetera, so now that most of that is passed.

We're seeing net MSP as growing and we would expect that dynamic in normal economy normal markets. Two to continue there's still plenty of MSP is out there a lot of runway when you think about 125000 plus.

<unk> globally, so optimistic on that front.

Got it got it that makes a lot of sense, John maybe from my follow up for you understanding you don't you don't guide to net new E. R. R.

Is there anything you want to call out.

Seasonally or.

I mean, you called out FX doesn't sound like there are any other anomalies that we should be thinking about it but just sort of broad brush.

How should we sort of be thinking about modeling error on our net new <unk>.

Through the rest of 2021, because you do have some easier comps in.

You know a recovery and such so any sort of.

Color you could give on how we should think about AOR as the year sort of progresses.

Yeah, No. That's a good question talking thanks and historically.

I think you may know.

We actually had a saw tooth pattern with a R. R climbing each quarter Q1 through Q4, and then falling slightly again in Q1 book, we're starting to grow again, obviously this year in Q1, if we didnt follow that pattern.

We had a very strong quarter even without.

Without the impact of <unk>.

Capex $26 million increase was the second highest or increase.

As ever and we think that reflects the strong momentum we're seeing in our business.

As you said, we don't guide to <unk>, but we've guided to higher revenue range in Q2 and for the full year.

And.

Obviously <unk> is a leading indicator of revenue and we're focused on continuing to drive higher growth in E R, which we which we view as that leading indicator and driver of the revenue growth and as you can imagine that will always come in a straight linear.

Linear increase but we do believe the overall trend will be up and consistent with our theme of Reacceleration.

Very helpful guys. Thanks again.

Yep. Thank you.

Your next question comes from the line of Matt Hedberg with RBC capital markets.

Oh, great. Thanks for taking my question guys, Tim I wanted to ask about Datacom versus you had a press release out on it earlier and you obviously referenced it in your script.

I know you don't talk specifically about pricing that's up to the Msp's, but can you talk about the mechanism for pricing how might it MSP price this relative to your other solutions.

Yeah, It's a great question Matt.

This is at the moment, what I would describe in the cell two categories. So it's a subscription that theyre buying to help them with a pain point in terms of just share time, if you've got dozens or hundreds of customers at an MSP.

Buying those laptops buying the mouse by dealing with all of that things that are broken getting that procurement function that we all have that larger companies and is abstracted away from us that's front and center for MSP. It's noise at the help desk level. It takes a lot of time so.

We found this tool we acquired last year and put it into a platform now it's in North America, and Australia, and New Zealand and effectively it's a flat rate subscription price. So on the one hand, we think it's going to be a great revenue opportunity on the other hand, it fits into our strategy of.

Platforms for MSP. So some cases would give them some platforms email platforms other marketing digital content. In this case, we thought there was a real revenue opportunity there and obviously it starts to put us in the flow of their purchasing cycles connects perfectly back into auto task PSA on our end, but it's also an open ecosystem to.

That's consistent with our our our theme as a company and so connection to other PSA is as well so let's think about it as kind of getting into the top of their workflow.

That's great really seems super complementary and additive to your stack I mean, I guess, one more product question now that unified continuity is available on Azure.

I'm curious what did you learn from your beta testing.

Just sort of.

What sort of feedback did you get.

And it's probably hard to anticipate what the demand is going to be like for that but just sort of curious on on maybe that aspect of it.

What you've learned.

Yes. So first let me just calibrate on the last call I said, we will go into beta in Q2. So gathering those names now we've come we've come out of Alpha and the beta so the learnings we've had so far though we've been live with many partners now for four months I think our around obviously first and foremost technology, we want to make sure it's as bullet.

Proof from a solution as our on premises from private cloud solutions are and I think our confidence there is high.

Candidly the second set of learnings around what Msp's are struggling with in their move to Azure. So you can find a few start dialing msp's debt have moved everything to Azure love. It you can find msp's that are 70 525, 25 75, you can find MSP that moved there and came back and they just have a variety of technology.

Business process and economic challenges right economic being interesting you don't quite know what your six month Azure Bill is going to look like because it goes up not down and so I think kind of understanding their journeys as MSP isn't the journeys of different workloads into the cloud has been very insightful for us we've never thought there was going to be.

<unk> quarter magic ear with kind of everything moves to the cloud it's going to be this multi year drawn out journey and our goal is to abstract away all of that for them. So that their continuity solution is a little bit indifferent as to whether it's on Prem private cloud Azure and.

We're I think we're getting increasingly confident that's going to happen, but we havent you guys looking at screen shots, we're into the details with their Texan and what have you. So that's what the summer is about there was a broader much deeper beta to kind of get that last bit in Polish on it.

Got it got it great to hear congrats on the acceleration guys.

Thank you.

Your next question comes from the line of Jason Ader with William Blair.

Yeah good afternoon.

Tim I was wondering how you thought that the emerging labor shortage.

I mean I don't know.

We have enough data to safely say there is a labor shortage, but I'm wondering if you've thought about this and what impact it might have on F. N B I T outsourcing as smbs cannot get people.

It's a great question I don't know if we've you know I mean other than everybody is a war for talent. So everybody is facing the same thing to me the rise of the MSP and you and I talked about this even in the big zinc piece you did last year.

The rise of the MSP is really around Smbs, having trouble getting technology and the rise of data on other vendors serving MSP, there's even msp's are having trouble getting the right kind of technology talent. So it can't be helping.

<unk> it has to be helping Msp's I do think you'll see the strength. We've got for example in SaaS protection and RMM in some of our other cloud products.

The more you can kind of G O shift so to speak and bring the tech to you in terms of dashboards and other things.

The more you can relieve pressure on that but it's not a question. We've asked as explicitly as you have and I see the same signs you do theres definitely a.

A shortage you can multiply that by some factor when you get an attack and security.

And if you guys had a have you been hiring and if you had any difficulties hiring.

So far so good but it's a battle, but we have a very large sourcing and recruiting team and.

We've been.

We've been hiring at a very good clip and I think you'll see that in our quarterly our quarterly numbers as we as we roll forward. So.

So so far so good obviously, we've had to maintain more geographic flexibility than we might have a year ago, but that's that's the same for every tech company we know.

Okay, Great and then one quick one for John John You said the FX adjustment in Q1 was 4 million what was it a year ago and the Q1 of a year ago.

Let me circle back to you.

Yeah, you may have seen a lot I was ready to talk about Q4, and I was ready to talk about full year last year I didn't have Q1 right in front of me.

It was a good bit less of an impact.

You know last year in quarter, two last year I know that.

The pattern last year. It was was it was a headwind in the.

First part of the year and then a tailwind at the end of the year I want to take Q4. It was a tailwind of about one per cent and for the full year. It was about zero. So maybe that gives you a little bit of some from the shape that's true.

Perfect. Thank you.

Yes, absolutely.

Your next question comes from the line of Koji Aikido with Bank of America.

Hey, guys. Thanks for taking my questions really nice quarter.

Just I wanted to dig into a prior question on that commerce application and the pricing mechanism in and maybe coming at it from a different angle too.

Look at the product set over here with this E Commerce I C.

Quote sell and pick here and one of the first thing that popped into my mind is invoices and payments I guess is there is that something that you guys think about as a potential monetization lever that you could add to this commerce platform.

Absolutely there is.

There's a number of ways this could go.

For us job one is you.

You have to build out the platform you've got to build up the MSP and then you build out the platform in terms of connecting all of the different vendors into that platform. So theres a lot of plumbing work to do.

Even before you get to the salad procure part, which we're particularly good at and we think we're very uniquely good at the procure side of that the quoting is what generates the volume.

Think about being an MSP and the customers are calling or e-mailing, hey, I need to get X Y Z or maybe you are calling them, saying you need a new Dell server, here's what it looks like it's a big ticket items.

You're constantly having to send those quotes across track those quotes get the approvals and so the tool starts at the very top of that funnel, but downstream.

You're spot on there is a number of interesting interesting ways to go with it. So right now we're sort of trying to build the base set at the top.

The funnel so to speak.

Got it got it. Thank you that's very helpful and I wanted to ask a question on on the MSP Tech day. It sounds like this is the.

The fourth Tech day, and you guys had I guess any any sort of feedback that you got from the NSP, there and maybe any sort of color from the number of attendees from this event versus maybe the prior events either in an absolute or from a qualitative perspective. Thank you.

Yeah.

What was interesting about it from me as it was a.

Slightly lower attendance than continuity and RMM the previous to that we've done but given that at the time, we only had just announced ransomware away a very limited specific security offerings that the number was much much bigger than we could have imagined. So we've had our CSO and our team out there.

Doing thought leadership on security for a couple of years with MSP and you know it was probably twice as large as our previous largest webinar and I know the size of our webinars as comparable to anybody that's in the security business. So I think it represents hey dad was been talking about security are concentric rings model protect agile first then protect MSP.

Then and only then get the revenue opportunities we're into concentric circle three now here comes data with some some actual sell through revenue opportunities for us and we obviously announced the EBIT damn acquisition concurrent with that as well. So it was meant to signal a new era of data and we're going to try to get.

Some some revenue and margin into Msp's pockets as the security.

Comes more and more of a focus so.

That's the Colorado give you.

Yeah no. Thank you very helpful. Thanks, again, and a nice quarter guys.

Thank you Sir.

Thank you.

Your next question comes from the line of Kirk maternal with Evercore ISI.

Yeah, Thanks, and I'll add my congrats.

That's on the quarter, Tim I was wondering if you could talk a little bit about some of the progress you're making at that sort of high end of your MSP customer base, obviously, the economies reopening that obviously helps on the on the sell through.

But do you think within that sort of upper cohort or quartile. However, you want to scrap a book.

M. A c's 10 year over a 100 Grand a year do you feel like you're taking share with them from a wallet perspective and is there any particular product in general that you feel like Youre doing better with those kind of bigger clients of yours are partners rather.

Yeah. It's a good question I don't think they talk to US you know they all tend to play it a little close to the vest. So I don't think they talk to us about wallet share and where else. They are we obviously at an account level with the rep have a good sense.

The very largest ones tend to not be completely standardized if they're serving hundreds of customers day inherit when they inherit whether it's networking other continuity solutions and so you're you're working your way through that from a penetration perspective.

Definitely that piece of the base grows as fast or faster than the company, though I mean, so you can definitely assume where we're gaining overall share.

In that part of the base.

And at the same time it can be a little misleading you know 100000 sounds big but you could you could imagine us moving upstream into million dollar plus sort of accounts as time goes on too. So as we grew the product sets together.

Do think people are starting to think about us.

A different way we've had a number of big displacements for example, up there where we beat our competitor in.

I immediately get a couple of larger accounts, which is unusual mostly we start small medium and then we grow them and.

I think we're feeling.

More confident in our ability to sort of execute a little bit upmarket, but otherwise all of the different segments have grown pretty nicely for us and we still focus on the whole spectrum.

Okay. That's helpful and John you guys, obviously, you've had a nice lift in gross margins.

What should we think about on that front I know, obviously with people coming back to the office spending coming back adjusted EBITDA in general is going to come back down a little bit, but just how should we think about gross margins is there anything we should consider as that product mix, maybe shifts a little bit as we go forward.

And the next year or two.

Yeah, It's a good question Kurt.

Yeah, obviously.

Good gross margins in the quarter 70 per cent.

Non-GAAP versus 71% last year and.

Overall, we're pleased with the progress we've made on gross margins and I think that does on the one hand reflect the underlying strength of the business model and the great work the team's done in driving operating leverage both in the 24 by seven support team and delivering increased efficiencies in the infrastructure.

While our software solutions.

And but we're approaching our long term target levels.

Day that we've talked about right and so as we do I think there are a couple things to keep in mind, one new products have the potential to average in some.

Slightly lower margin.

Just out of the box.

And then we're seeing on the on the more mature products.

But on the other hand, as we moved from more products that don't require devices. That's obviously going to continue to be beneficial to margins.

And as you pointed out certain expenses related to COVID-19 that remain low like travel events office expenses not a lot of that is up in in the cost of revenue, but there was a little bit so.

Hopefully that helps some.

That's great. Thanks, guys congrats on the quarter.

Thanks.

Your next question comes from the line of Keith Bachman with bank of Montreal.

Hi, many thanks, Tim I wanted to direct the first question to you and on the.

The backhaul.

Opportunity that you've seen from my view.

Clarification, when do you think it'll be T. A.

And then the real question is how do you frame the growth potential I know previous question surrounded pricing I was just wondering how much is Microsoft pricing.

That's one solution.

Do you think about that in terms of how you price your offering.

And the second part of that is how do you. How do you think about the growth potential here in terms of workloads migrating from on premise to Azure over say the next two years and just trying to understand what the growth potential here might be and then I have a follow up per turn for John If I could.

Yeah. Thanks, Keith It's a great question you know, we think of it right now as a large new net demand opportunity for us in terms of MSP and end clients that are in Azure and.

And you know not being well served right Microsoft has kind of a lower end what I'll call backup solution you check the box you have to do something if youre moving to Azure and then they've got a little higher end.

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