Q2 2021 Datto Holding Corp Earnings Call
Ladies and gentlemen, this is the operator.
France will begin shortly.
Once again this is the operator conference will begin shortly please stand by.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Donald's second quarter, just thoughts on finding one earnings results. At this time all participants are in a listen only mode. Later, we will that come Jack a question and answer session and instructions will follow at that time, if I have answered your crap assistance during the conference. Please press star zero on your thoughts.
Oh I'm.
As a reminder, this conference call is being recorded.
I would like to turn the conference over to your host Mr. Ryan Burkart director of Investor Relations. Please go home.
Thank you operator, good afternoon, everyone and thank you for joining us today to review data with second quarter 2021 financial results with me on the call today are Tim Weller, Chief Executive Officer, and 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 third quarter ending September 32021, and full year ending December 31st 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 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.
Following these 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 I wonder it takes no obligation to publicly update or revise any forward looking statements made here.
Additionally, non-GAAP financial measures will be discussed on this conference call.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our second 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 in the coming weeks, including the BMO technology Summit the Jefferies Software conference in the Citi Technology Conference.
Please reach out to be if you're interested in joining our schedule.
With that.
I will turn the call over to our Chief Executive Officer, Tim Weller.
Jim.
Thank you Ryan and many thanks to everyone for joining us on this call. This afternoon.
We're excited to report strong Q2 results and to raise guidance again for 2021.
I'll begin with a few highlights from the quarter, followed by an update on security the central theme for us and for MSP as in 2021.
Then I'll update you on progress in the cloud and finally, I will turn the call over to John to discuss our financial results and guidance in more detail.
The second quarter was one of the strongest quarters in our history as the momentum we've seen recently accelerated in Q2 subscription revenue growth was 21% year over year.
We continue to benefit from a currency tailwind, but even in constant currency the year over year revenue growth was up 250 basis points from the Q1 equivalent number. So we're pleased with the continued acceleration.
This is our highest growth rate since the start of the pandemic and of course now off a higher base.
Once again, we saw strength across products led an absolute magnitude by the continued rebound in our flagship <unk> product, which was great to see and by sustained high growth rates and SaaS protection and RMM.
We ended the quarter with $598 million of IRR, which represents another strong sequential increase and is a key leading indicator of revenue growth in Q2, adjusted EBITDA was $45 million and we.
<unk> more than $22 million of free cash flow, representing our fifth consecutive quarter of positive free cash flow in.
In addition, we added 500 net new MSP is in the quarter up from 300, new additions in Q1, bringing the total number of MSP partners, we serve to 17800.
Overall I'm proud of the way our team executed in delivering a great quarter.
Now, let me shift to a few industry comments, it's a good time to be an MSP digital transformation and cyber security are the top strategic priorities for many small and medium businesses smbs around the world driving strong demand for managed services and the outlook is bright.
Based on our annual state of the MSP Survey Msp's expect these two trends to continue to drive revenue growth for years to come.
Most of the MSP as a reporting optimism about 2021 and the future but.
But the challenges are also growing for MSP and chief among them is an increase in cyber security attacks, which represent both opportunity and risk for mlps and their clients.
These days rarely a week goes by without another high profile security breach in the news.
This environment creates opportunities for MSP in the form of growing their revenue from being a trusted security provider for their SMB clients.
And it creates risks for MSP, because they themselves are increasingly under attack, particularly if their own tools, such as RMM or internal scripts are vulnerable to being weaponized to use against their clients and cyber attacks and of course, if they are SMB is get successfully attacked and cannot recover.
The entire MSP relationship is at risk.
A more practical level there is a challenge for MSP is that they simply cannot keep up with the fast moving global security threat actors and it's evolving attack vectors. Some visible recent events have crystallized. This for the MSP industry in the next 12 months to 24 months, we will see them rethinking their technology stacks and vendor choices.
<unk>.
The vast majority of Msp's now provide managed security services in one form or another that's why security has been at our core for years and I want to revisit our three concentric rings model for security securing data securing our MSP partners and helping those partners in securing their SMB clients.
Ring one in the center and have highest priority is securing data here our investment is high and rising continuously our security effort is it new the core of our team has been in place for years and we work every day to infuse the principles into our culture strong cyber security involves not only people and technology.
But also processes training and auditing that are dynamic overtime, we are deeply committed to making security everyone's priority at dental and it's been grained in our culture.
Companywide training to the software development process itself to pen testing to more training security as a way of life at dental we believe that our well funded ongoing and proactive approach to security is critical to our long term success.
<unk> two is securing our MSP partners, where we offer a thought leadership for MSP in the form of content Webinars live events, and even direct interaction with our security team.
A great example of this is the partner Security Forum that we recently hosted immediately following a well publicized global ransomware attack that severely impacted MSP.
While the attack did not impact at all or our products adversely we held this forum to personally engage with our partners reinforce security best practices and share details about our own policies and practices.
Over 2000 partners attended the Forum and had their questions answered by our most senior security and engineering leaders. In addition for this specific global attack, we released an agent detection monitor designed to identify compromised devices similar to the technology, we offered to MSP.
In the wake of other recent attacks.
This combination of partner engagement and security both in a time of crisis and day to day, along with technology, we create in near real time helps our partners become more secure and is what ring two is all about.
That brings us to ring, three which is about MSP securing their SMB clients using data technology products and making the good margin while doing so.
The new products, we have on this front are the data RMM ransomware detection in isolation product that was launched last December and our soon to be launched products based on the technology, we acquired in our purchase a bit dim.
Let's not forget our core continuity products, which are the backbone of any comprehensive cyber resilience strategy.
I want to touch on each of these briefly.
Catoe RMM ransomware detection in isolation is aimed at stopping the spread of infection by identifying and isolating hosts that have been infected. This product has proven to be very effective blocking a high volume of ransomware attacks each week and has seen incredible traction with new and existing partners since its.
Released late last year.
We are committed to ensuring our partners are well protected against malicious activity and to deliver on that promise in light of recent new threats, we decided to offer ransomware detection for all data RMM partners at no additional cost to the base RMM product for the next six months.
We think this is the right thing to do for our partners in these challenging times and we are confident that it will drive even stronger product adoption over the long term.
With this offer we recently surpassed a significant milestone in our ransomware detection, which is now deployed in over 1 million endpoints and doubling from the 500000, we reported on our last earnings call.
This is a testament to the growing threat of ransomware within the MSP community.
To give a shout out to our RMM team for listening to our partners innovating and delivering a product that is sorely needed in the market in.
In addition to ransomware detection, we continue to be on track to launch a new E mail and collaboration security products to the.
The product is based on the <unk> technology, we acquired earlier this year and it is tailored for our MSP partners. We are on track with our launch plan and it couldnt come at a better time for partners.
While this product data RMM ransomware detection in isolation and other new security products. We are developing are all on the front lines of defense, our continuity solutions, including <unk> and SaaS protection continue to play a critical role as the last lines of defense, enabling true cyber resilience.
Experts increasingly recognize that a well funded and determined attacker could breach any network eventually and it's important to be able to respond in real time and operate your business while simultaneously remediated. The security breach. This is why the explosion of ransomware is a key driver for continuity overall.
That'll continuity allows our partners and their SMB clients to operate on data platforms, while they eradicate the threat on their primary systems. We also recover and restore applications and data for victims of cyber security attacks thousands of times a year in many cases, even after the attackers have locked door race primary production.
Servers and the associated backup images, so with that'll continuity msp's can help their clients operate through a ransomware attack and restore their data to any point in time is if the ransomware attack never occurred.
That's ring three and we're just getting started look for us to develop new products and features that allow MSP is to grow by selling security with Daniel and will integrate these technologies into our strong security stack.
Now, let's talk about the cloud.
Every data product was born in the cloud where cloud native as opposed to having started life selling perpetual software licenses for on premises operation and then later lifting and shifting to cloud hosted or cloud native approach being in the cloud since inception has strong implications for our partners in terms of.
High security and reliability.
In center Daddle RMM. It was built on best of breed AWS platform tools and Leverages, both our own and Amazon security. It's scaled quickly from nothing to millions of endpoints. It's entirely cloud managed for an MSP who themselves might have tens of thousands of client endpoints.
That'll SaaS protection is the same operating seamlessly between our clients, Microsoft 365, or Google Workspace Cloud instance, and the data cloud.
Our new email and collaboration security product is also entirely cloud based.
Our auto task PSA was born in the cloud and never deployed on premises.
And finally, our flagship continuity product here again, it's cloud managed but of course for performance and bandwidth reasons, most partners prefer to deploy our service both locally on our high end Intel servers and within the data cloud. So they can virtualized machines and recover and restore applications.
And more flexible ways with the upcoming launch of doubtful continuity for Microsoft Azure Msp's, we'll get data security and reliability with client applications that are entirely in azure.
All with a simple user interface, they know and trust.
That'll continuity for Microsoft Azure is just wrapping up a successful beta program and is on track to begin commercial deployment with early adopter soon with general availability later this year.
In summary, we are pleased with our first half results and the strong momentum we have across our business today.
[noise] ahead, we're excited about the new product launches in security and cloud planned for the second half of 2021.
We remain well positioned to capitalize on the large and growing opportunity to help our MSP partners manage protect and connect their SMB clients applications and data in an increasingly digital world.
Finally, I want to thank everyone on the data team for all of their hard work and our MSP partners for their continued support.
With that I'll turn the call over to John.
Thank you Tim and good afternoon, everyone. We're pleased to report strong second quarter results today as I review our numbers. 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 second quarter results reflect strong momentum across our suite of products and continued acceleration of our business second quarter recurring subscription revenue was $141.7 million up 21% year over year, which includes a benefit from foreign exchange rates.
Approximately 4%.
Subscription revenue comprised 93% of our total revenue, which came in at $151.6 million in the quarter, representing 22% year over year growth exceeding the high end of our previous guidance.
A R. R. At June 30 was $597.9 million up 18% from $506.8 million, a year ago and increased over $25 million sequentially, maintaining the very strong increase we saw in Q1.
We ended the second quarter with more than 17800, MSP partners, a net increase of 500 in the quarter up from net adds of 300 in Q1.
We're now adding net new partners at a pace similar to pre pandemic levels.
We also grew the number of MSP is contributing over $100000 in a R. R to more than 250 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 second quarter gross margin of 74% was in line with the robust margin we saw in Q2.2020.
Second quarter operating expenses were $75.4 million or 26% increase from Q2 last year as we continue to invest with a focus on security and cloud to drive revenue growth.
The vast majority of the increase in operating expenses was driven by personnel costs on a constant currency basis Opex increased 23%.
Within Opex R&D expenses were $23 million, an increase of 38% from Q2, 2020, which underscores our continued investment in technology development and security.
G&A expenses were $22.8 million, an increase of 27% over Q2 last year, primarily driven by increased expenses associated with being a public company.
Sales and marketing expenses were $33 million, an increase of 23% from Q2.2020.
And finally depreciation expense within operating expenses was $2 million compared to $2.5 million in Q2 last year.
Operating income for the second quarter was $37 million or 24% of revenue compared to $32.4 million or 26% of revenue in Q2.2020.
Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring costs and transaction related and other expenses was $44.9 million compared.
Compared to $38.9 million in Q2.2020.
Our adjusted EBITDA margins were 30% a slight decline from 31% in Q2 last year.
As we discussed on recent earnings calls, we are investing in security and cloud to drive revenue growth and is commercial activity returns to pre pandemic levels. We expect adjusted EBITDA margins will decline to levels in the low to mid 20% range.
Free cash flow in the quarter was $22.2 million compared to $17.2 million in Q2, 2020, and we ended the quarter with approximately $180 million in cash.
Turning to guidance for the third quarter and full year. The increase in our 2021 revenue guidance reflects our positive outlook for the continued acceleration of the business and our EBITDA guidance includes the impact of incremental investments in the important areas of security and cloud.
On top of significant ongoing investment in our core products to drive long term revenue growth.
For the third quarter of 2021 revenue is expected to be in the range of $153 million to $155 million. Adjusted EBITDA is expected to be in the range of $32 million to $33 million.
Our Q3 revenue guidance represents year over year growth of 18% at the midpoint, including a 2% FX tailwind.
For the full year 2021, we're raising our revenue guidance to a range of $608 million to $612 million.
We're also raising our adjusted EBITDA guidance to a range of $151 million to $154 million.
Our full year revenue guidance represents year over year growth of approximately 17, 5% at the midpoint, including a 2.5% FX tailwind. This is up meaningfully from our prior guidance for full year growth of 15%, which included a 2% FX tailwind.
We expect subscription revenue to account for over 93% of total revenue in 2021 and for the subscription revenue growth rate to continue to increase through the end of the year on a constant currency basis.
We expect capital expenditures 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 169 million fully diluted shares for Q3, and 167 million fully diluted shares for the full year.
In closing, we believe our Q2 results and 2021 guidance reflects 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 that we'll open up the call for questions operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone.
Also ask that you limit yourself to one question one follow up and if your question has been answered or you wish to remove yourself from the queue. Please pass attached.
Your first question comes from the line of <unk> <unk> from Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Tim maybe first for you.
I was wondering if you could talk a little bit about the competitive environment.
Especially for other service providers to the MSP industry and I think you alluded to this in your prepared remarks, but maybe just to ask the question directly.
A couple of headlines on the tax.
Using sort of competitor sort of tools for MSP is the question is how do you feel about the competitive landscape.
If it is changing at all in sort of the MSP focused space does that does that makes sense.
Yes, but he said that it does let me.
Let me try to just riding thinking you, let me try to address that and sort of general and then I'll talk about the specific piece of your security question too. So I would say in general the competitive landscape has not changed that much in recent quarters.
Industry, obviously MSP is doing really well so I'm sure other vendors are having some success in in each of our product categories. We have a few day to day competitors and they are often different by category or even geographic region.
We win against MSP focused vendors on strength of technology of selling a broad platform of solutions and we focus on reliability performance security and of course everything we do is born in the cloud. So that's kind of how we play it against the MSP focused vendors. Obviously there are competitors are not MSP folks.
Companies, but how about MSP channel effort and there we of course win by tailoring our solutions to MSP, leveraging those deep and long relationships with our partners. So you know we're all in in the channel and we have been for a decade.
Within the channel and then in terms of some of the headlines security attached you mentioned you know I would say short term absolutely a positive for US you know we have won over some some of those for example, RMM partners, who are looking for an alternative our focus as you might imagine is always on helping msp's overall.
We had a long weekend one weekend. This summer just trying to help people get back on their feet and you know we're never trying to attack a competitor who had a negative event, but obviously we compete in the marketplace.
I'd be wrong, if I didn't tell you. It was a short term positive longer term I think the main impact of <unk>.
Not only the recent headline attack, but but just previous visible events.
These make the MSP community much more deeply aware of the global threat to their clients and their own businesses, which triggers very serious security conversations from RMM to continuity everything in between and we feel well prepared to have those conversations talked about that a series of Webinars and all the one on one.
Contact we have.
It also makes msp's evaluate candidly their entire tech stack and they're asking vendors now tough questions about internal security practices.
We think going forward they will be moving in as an industry or a security first mindset and and again, we welcome those conversations we've been making the investments here for years, and we will continue to invest evermore.
As a citizen maybe frustrating as a security company. It's it's just table Stakes I think primarily for any Tech company would tell you the same thing.
Yeah, absolutely that's well said John maybe maybe for my follow up for you great to see the AOR acceleration.
And you touched on this a little bit in the prepared remarks around FX and the contribution to revenue growth, but I was wondering if you could talk about FX from an AUR perspective, and what if any that is contributing to.
To the <unk> growth that we're seeing seen.
Sure. Thanks.
Thanks Hakan.
FX does have some impact on air are you may remember that we.
We adjust the FX in our once each year at the beginning of the year and this year. It added $3.6 million to the AAR are in Q1. So then if you look at it another way and I think.
You may be looking at growth rates.
Year over year growth rates.
The reported growth rate of 18% on a constant currency basis would be 17% about a one percentage point under 1% really impact.
Impact on the year over year growth.
Got it that's really helpful I'll get back in queue. Thanks, guys.
Great. Thanks.
Thank you and next up we have some good <unk> from Morgan Stanley. Your line is open Sir.
Yes, thank you for taking the questions and congrats to the team and really looks like we're on our way back at 20% growth, which is great to see definitely earlier than that.
So congrats all around I wanted to just follow up on <unk> question on the on the security topic.
All of the sort of big for MSP as we have two of them that have suffered meaningful security incident.
And their customers. So can I know you sort of addressed this a little bit on your screen.
So, but if you can just sort of pinpoint.
From the MSP community side.
How you're sort of giving them confidence you mentioned about that and sort of reevaluating their technology stack over the next 12 to 18 months.
From a security angle what is sort of the.
123 bullet point of why they shouldn't be gravitating towards data.
Some of the other players in the space.
Yeah. Thanks, Thanks, Angela I think.
You know certainly from a comfort perspective, you do everything from you know the Webinars, we walk through for an hour with people you know here's how our supply chain works here is what we do in QA, Here's what we do in continuous release.
Release processes.
You know we answer questions surveys I've seen MSP shooting over lists of 15 questions. They want every vendor.
Answer completely did one of those myself that weekend late on a Friday night I didn't know I was going to get grilled by the guy but to give you a sense I've spent 30 minutes with a partner I've talked to probably twice in my life.
And he was really coming coming at me you know what we're gonna ask every vendor these tough questions and he seem satisfied I got an email from the salesperson afterwards said the guy wants to look at our entire stack I wasn't selling them anything. So it's very clear they are rethinking impressing RC soes on calls all of our senior reports into him are on call. So.
I think every vendor.
In the world not just MSP is probably feeling that kind of a thing.
You know you had a question about I think kind of how we have approached it look we haven't said will be everything to everybody. We're going to build what we believe will be a fairly full stack, but there will be a.
A layered approach security experts will tell anybody he was a layered approach we started off by recommending basic adenovirus or endpoint protection.
There's a bunch of good ones there those tend to work to prevent intrusion infection by malware.
With signature based approaches so our approach within RMM for example, as complementary we're watching the actual machine system activity to find an isolate malware that slipped past the navy or edr and when we stop it and we have many of those saves every week now it means other protection has slipped and you know the malware we've gone.
Now to do its work and damage and we go beyond individual endpoints, we look across multiple endpoints. The MSP gets an entire universe of end point of view, which helps them manage ransomware attacks, which increasingly are orchestrated across systems. So.
You know all controlled in data, where I meant by the cloud then we're about to take it up a notch with a pending launch of our email and collaboration security within our dental SaaS.
SaaS protection the technology, we bought from them earlier in the year end.
We're going to bring malware ransomware now to the Microsoft 365 environment, including email teams and so on and that has to be the largest security attack vector when youre thinking about SMB. So that's going to be very shortly now a meaningful leap in our security coverage and.
I think broadly covered now across end users and line of business apps and then finally, you know continuity as the last line of defense in whether it's BC, Dr. SaaS protection cloud continuity.
We view that as kind of core to cyber resilience and absolutely thousands of times a year recovering restoring applications and data on that mix shift of why you're restoring has surely shifted towards.
Towards ransomware, and even live attacks, we see live attackers attacking production servers, destroying backup images.
But we're able to restore for our partners.
To points in time as if those attacks never occurred. So you know we desire and are already playing up and download the full security stack, we're filling in the holes and we.
We will continue to do so.
Does that help characterize it.
No.
Excellent job Tim I appreciate it.
A follow up question on sort of dovetail on your answer there.
Getting right into the timelines for the acuity launching four got a possibility on azure.
Which is also which is also really encouraging from that sort of go to market MSP enablement side can you give us a sense of when these.
Services come out a preview in beta mode.
Any sense on like in terms of important important MSP partners, how ready are they to like go to market with these offerings. Once once you get into sort of G E.
Yes.
Yeah. It's a good question I think on the kind of Microsoft 365 environment email teams et cetera, you have to assume every MSP in virtually every SMB is is there in some way shape or form so that is an attach.
Trying to take care of SaaS protection clients, and say Hey, do you want World class email protection you want teams protected do you want to stop malware ransomware inside there. So that's going to be more of an attach sale with existing partners, but at the same time, we think it's a it's a headline bundle now.
To the degree we were losing to other competitors, who might have had a bundle there but that one's a little more straightforward I think the Azure. One is one where you don't want to go into the marketplace and teach every MSP Azure. So your initial targets out there is MSP that are familiar with azure and wanting something.
We're now about to deliver we're confident it's going to be very unique is as I described in terms of our technology.
Technology and product feature set for them and the beta has really been about getting that uniqueness.
And at the same time, there is a defensive nature to that because if somebody is going to leave on premises and go to azure.
Until this day, we wouldn't have had had an offering but you know.
We think there's a big universe of MSP is out there that are already using azure and not happy with their current either primary backup solution or or even in the rare case with whatever theyre doing on continuity. So that's a more readymade market it'll be a little you know the first quarter will be a little more hand to hand combat and trying to feel our way into the market, but the.
Our response has been fantastic.
That's great to hear I'll see before thank you for your understanding.
Yep.
Thank you. Your next question comes from the line of Jason Ader from William Blair. Your line is open Sir.
Yeah.
Hey, Thank you Hey, guys I wanted to follow up on that last question and actually ask him.
What steps has that <unk> taken to ensure that your code.
Your code is not hijacked by criminals.
And the way in a way that some of your competitors have.
Scene.
The malicious code is injected and then the RMM goes out and then all of a sudden they can get into your customers' networks.
Yeah, I'll give you.
So it's the CEO level knowledge of it we could go to the CTO of the CSO or right down to the.
Security engineer level in subsequent conversations.
We didn't just think of over the July 4th weekend I'll tell you that upfront you know we've been thinking about supply chain software hardware or otherwise now for several years. It is a vexing problem for everybody.
We you know.
Start culturally and build it in from the beginning there's no engineer of data all that doesn't think about security. They know it's their own responsibilities, it's not the the CSO and security teams responsibility on the backend, but like internal controls in a financial world you want to build it in to the code into the steps we run all the tools you would probably imagine that do code.
Code reviews.
We have internal cyber attack teams that really take the gloves off and are allowed to sort of focus.
That everything from how we build code to even social engineering people give up passwords that are in key spots in the supply chain.
You know I think when you think about that cloud from inception comment that also drives right to the heart of it.
You can't take data wire amendment sit around in your shop and look at it it's not on your servers right. It is it is in in the cloud in this case Amazon's.
Cloud. So that also gives you another line of defense right and you see the world trying to move to two kind of cloud based really platform as a service type some offering so it's a it was a dozen things will walk through some of those on our on our.
Well I'd call with with MSP, but.
You know as I've always said and security will tell you as much as we can but we're not going to tell you all the details and we're not gonna translated into Russian Chinese and and other language, where a lot of these attackers are live so.
There's some some balancing act there, but just know we didn't just start. This this is a multi year journey, we've been on and you're never done you're never done.
Okay, Great and then a follow up for John.
John The Q3 guide implies a pretty big jump in Opex, we're modeling something around $12 million.
Sequential.
Expansion in Opex.
I know you said you gave some reasons why your opex will be higher but that seems like pretty extreme can you walk us through where that might be coming from.
Sure.
And we recognize it.
It reflects a pretty big increase we've been it's consistent with what we've been saying that its really the ramp in investments predominantly in people personnel.
Predominantly and supportive.
Security and cloud initiatives and new product initiatives along those lines.
And that you know that hiring has been ramping throughout the year and.
The other component is an expectation of increased.
Travel.
In person events.
Yeah.
That come with an opening up of the economy end.
You know move away from sort of the pandemic shut down.
We don't have a crystal ball on that so some of that is is sort of a guess as good as anybody's. We are seeing some increase in those areas.
You can tell even from our results in Q2, they havent been increasing quite as quickly as we had thought but.
As we thought they might.
Those are really the drivers there's there's nothing new there and are consistent with.
The overall economy.
There could be a little bit of upside if we go back into some kind of.
Semi locked down.
Yeah, that's right okay.
Alright, Thank you guys.
Absolutely.
Thanks, Jason.
Thank you. Our next question comes from the line of Matt Hedberg from RBC capital markets. Your line is open Sir.
Yeah. Thank you this is Matt Swanson on for Matt.
Tim the MSP adds were really strong in the quarter could you talk a little bit more about kind of the dynamics that made that up.
We're seeing less churn or more add those things are starting to normalize and to the extent that churn is improving can you just talk a little bit about kind of the health of the MSP its customer base close SMB is how that economy is looking from your conversations.
Yeah, Hey, Matt.
And John May have a numeric common or two but you know we said on our last few calls.
Even all the way through 2020, we had real solid gross adds so gross adds are still very solid. It is true that you know that the churn side of Msp's, probably from the beginning of the year has dropped and you see it kind of continuing now to drop so we've known the gross was under there and we just have to uncover it get to the other side of the Pan.
Mick and reopening.
We think theres still some room, we don't think we're 100% out of that you can get this delta variant depends on which country you're talking about in terms of are we getting closer or they're not as close to normal and I think that applies to the SMB churn side as well right, they're still active debate about.
Stimulus money into that drying up and we broadly believe msp's have told US last year was about stabilizing their business and this year, they're back on growth and.
You know I think overall that the industry environment is meaningfully better than it was even even six months ago, but nobody's going to tell you that their SMB basis.
Completely back to normal health again, so we still think there's acceleration of reopening in the future just from underlying.
Economic issues in most places so.
That's probably as much as I would know John I don't know if you have a <unk>.
Specific numbers, we've given you want to add to that but I'd say its strong gross adds throughout the last two years. It just less churn now.
Yeah, No I think that covenant thanks, Tim.
Yeah, that's super helpful. And then if I could kind of follow up on the security theme of Q&A here, but more on a product side. When you think about your roadmap I guess two questions. One would be how partner influenced are the areas that you're moving into in terms of the conversations you're having with MSP.
Their pain points.
And then I guess the other side of that would be you mentioned, bringing out more products is there any cadence that you'd be comfortable kind of sharing like what your goals would be is it.
Product a year or two products a year kind of how you think about building out the stack.
Yeah, Let me I'll go backwards on those cadence wise I would say no I mean, we're.
We've gone from having continuity and we've always had as I said some security built into the rest of the toolset, but RMM as sort of swung to the forefront over the last 18 months or so with endpoints and you know we got out there starting Q4 of last year with a ransomware detection isolation, we've got the bit dam technology coming.
So theres a big focus I think you know for everybody on endpoints, obviously, a cross standpoint, where our Mems starts come to play there is still a few holes you. If you got out your AR.
Your guide on the enterprise side and looked at your eight or 10 kind of key things in the stack, we want to fill a couple of those in I don't know that we would build all of them. For example, I don't know if we've ever discussed building onto virus Theres, some great antivirus and endpoint solutions out there, we'd probably just let people pick their favorite, but you know I don't want to tip. Our hand, we've got two or three other things and develop.
And then in terms of product areas in security that we think will be perfect for MSP and get us much closer to that full coverage in terms of what they're trying to do we.
We do engage them for sure all summer we've had people testing on our email security for example, a lot of life data and we're going to get a lot more life data now of course from the ransomware detection.
Over 1 million endpoints, we tend to focus on ease of use on cost points, where does the MSP need the cost point, so they can get margin.
And then on helping them market. So you don't have a situation with almost 18000 partners not so many of them have C. So there's not so many of them are security experts and so a lot of what we're doing is bringing expertise to them help them translate that how can you get the doctor's office that your client.
That's your client how do you get them thinking about paying at 20 Bucks a month for security, it's such a low number.
To protect all of those those endpoints in any business. That's that's got real revenue and so we've got to move out of that one $2 a month antivirus mentality to $10.20 a month to protect your individual users and I think that's probably where we spend the most time with MSP and helping you can tailor those solutions and then of course integrate into our product sets.
We want them to be easy to use.
That's super helpful. Thank you guys so much overtime.
Youre welcome.
Yeah.
Thank you and your next question comes from the line of Kirk <unk> from Evercore ISI. Your line is open.
Yeah. Thanks, very much Tim maybe just a follow up on your last comment on that sort of environment out there.
Are they reinvesting in going after new clients at this point in time or is a lot of the growth coming to them from just expansion I think theyre existing customers I assume.
But I was wondering cause me heading on one side or the other.
Yes, I think the answer is is not particularly helpful. I would say it depends right I had a couple of MSP calls today just by coincidence.
The one guy is about to merge with another person East you know a few million Bucks He's got our sights set on $100 million.
He absolutely wants to Blitz, the country in and thinks he's got a stack in order and he wants to go you know to take take out every MSP. He can get which is fantastic for us because.
It's a good strong downhole partnership and in other cases, you had people that served restaurants in.
It spent last year trying to get back on their on their feet and are now just starting to think about the penetration. So we do a fair amount on marketing and all of our business development all of those events or conferences are all around both dimensions I think it's easier for them in general to go find new clients because going back to the.
<unk> client and saying Gee can you pay me, 20% more 40% more you know what's that conversation look like.
You know that's a little tougher I would say MSP is in general start on the tech side of the world not the sales side of the world, but but again, you've got all flavors in all varieties.
You know, we're trying to support them in both I do think security will be another real stair step up rate, maybe last year, they were putting in zoom or something.
Remote work.
Cause caused the clients they have to pay some more money.
But you know.
This year, we think security really is the is the headline for them and we're encouraging them you've got to ask for more money you got to get paid for your time. If you are going to be the security expert for your clients.
That's helpful. And then maybe one other I would say a nice jump in the number of customers.
100000, I was just kind of curious on the net in lands, though is you're landing sites going up at all of these days given the breadth of your product and you mentioned a couple customers talking about sort of moving over.
The whole stack. So it's just kind of curious if you're landing searched our penguin is going up as our air France, He is going up as well.
Yeah, I wouldn't I wouldn't think so John do you have some data on that I mean, we still tend to land with one product.
Yes, I mean, a couple a couple of thoughts there.
First is just a reminder, that that new partners do tend to come on at a smaller.
For MSP.
Start with one or two part one product and then grow.
Even start with one instance of one product one SMB.
Yeah.
Installation and then grow that being said to your point.
With.
More products on the truck today than we had you know three or four years ago.
We are bringing in new MSP partners with different first products and just the C. D R.
But I would say that the.
M. R. R. A R. R for those new MSP easy, we're adding has held up very nicely.
Even even today and remains strong relative to what it's been historically.
Super Thanks, guys congrats on the quarter.
Okay. Thanks Curt.
Thank you and your next question comes from the line of Brad <unk> from Macquarie. Your line is open Sir.
Okay. Thank you and congratulations on the strong quarter here.
You know high level question here around just what you're seeing from both MSP and some of the small businesses that they're serving.
See that out there are small businesses are sophisticated enough in their approach to cyber security, but they recognize business continuity solutions are needed to hedge against.
<unk> spread outages from ransomware or is this something that youre seeing on the security side of the business. That's more kind of MSP led most case with MSP is really guidance.
Small businesses about best practices for cyber security.
It's it's almost surely at this stage, mostly MSP led us as one of my.
Partners famously said.
You either had an attack or you have not had an attack if you've had an attack even paid tens of thousands of dollars to prevent the next one if you haven't what's the big deal and why am I paying for this now it says its insurance or by any other by any of their nature in any domain right and so msp's are the ones that are leading this now and you know it's inter.
The thing we've always had some MSP some that have sort of said to clients I won't take you. One if you don't use data continuity because I know at some point youll have some problem whatever it is hurricane wildfire or cyber attack it doesn't matter and I won't be able to restore your environment and if I don't do that youre going to fire me as an MSP.
So that was required and they might have some other vendors in other areas that are required and I think that's where it's going I think MSP is youre going to have to define their stack and just tell the law firm the car dealership whoever they are working for this is our stack I can't protect you. If you don't let me put the security stack and here's the price otherwise I can't I can't.
B your MSP right that that is fundamentally at the core what an MSP is doing securing the digital assets applications data.
Their clients and then we can talk about your website and other fun stuff do you want to get into but I have to start off just like us just like a CIO at an enterprise protection first so we will see a you know, we'll see how that evolves, but again, if if an SMB or a neighbor has had an attack of course theyre going to say I want to.
I want the best Security stack, you can get but it really is the MSP driving and knowing their expo was done that entire revenue stream.
They have if they have a breach those where the tough calls in the recent events. The MSP themselves is a tough call with the vendor, but calling your grocery store client and telling them they've had ransomware and you don't know how to unlock it you know that's that's just imagine making that call not good.
That makes a lot of sense to with many of these cyber security policies become more selective and also just ICR across the board.
Separately, but on a similar topic about some of the.
Small business side trends. So we've all been hearing about the impacts of tighter labor markets, where skilled personnel are you hearing anything or seeing anything that may suggest that small businesses are increasingly looking at MSP as a force multiplier in this competitive labor market.
Not anything different than it's been going on for a long time, you know, it's it's hard enough for smbs to get it.
Expertise MSP struggled to get expertise, which is why we tell them to Lena knutsen and so many of these areas and you know why the webinars and other kinds of events. We do are well attended so I can't imagine it's anything different than you're seeing in the broad economy. You can read the headlines every day, it's a war for talent.
I got to believe Smbs are are facing that even more acutely on the tech side.
Thank you and again congratulations on the quarter.
It's Fred.
Next up we have another question from Koji Ikeda from Bank of America. Your line is open.
Hey, guys, Hey, Tim Hey, John Thanks for taking my questions just a couple from me.
Maybe a question for John on the FX.
Got it down pretty quickly here I want to make sure I got it down right I guess could you remind us where does that FX tailwind coming from and then on the guidance.
I wrote down two 5% tailwind now in and before it was 2% is that right and then I guess last question a matter of fact.
Affect EBITDA at all or you know your operating expenses and how it built on EBITDA.
Yeah, Let me let me.
And through those.
The FX exposure for US is really comes from four predominant.
Currencies.
British pounds Canadian dollars euros and.
Australian dollars.
And your last question was does it affect.
<unk> expenses it does affect expenses give you an example.
We said the Opex was up 26% year over year on a constant currency basis. Those opex numbers were up 23% year over year. So that gives you a sense in Q2.
Got it.
Got it got it okay cool.
Thanks, John Thanks for that.
Yes, the tailwind Q Q.
Q3, and full year guidance.
Yeah, Yeah, Yeah, Yeah, yeah, Yeah, the Q3 guidance reflects a 2%.
FX tailwind and full year is two 5%.
Which obviously points to lower impact in the second half of the year than we had here in the first and second quarters.
And just as a reminder, the last guidance we gave for the full year was 2%.
FX tailwind, so just a little bit higher given what we saw here in the first and second quarter.
Got it thanks, John and maybe a question for Tim you know switching gears here.
Datacom.
I saw that in the press release, you guys are planning on holding an in person or a hybrid datacom in October.
I guess any sort of commentary there on the scale, how you're planning on the scale the size of that versus the last one you held I think it was in 2019, maybe any color on you know the initial traction at this point in time versus past Datacom at this time in point and how should we be thinking about you know new MSP pipeline build.
Out of the Datacom. Thank you.
Yeah. So look I mean I have the same crystal ball you have to watch it.
Everything from the local government numbers in Washington, and Seattle, where it's scheduled to a large gathering delta variance other variance vaccine right. So we're watching all the data like we were last year last year, we made decision and it was clearly the right decision in hindsight to cancel the event. This year, we've said it'll be a hybrid event and.
I think you know the the.
Msp's will decide you know how many people decided they want to come in in person, if that's possible clearly health and safety predominate and if it is not possible we won't do it and you know we're not going to put our employees. Some sps other vendor partners. It's a large open ecosystem conference. So I would think a betting person would assume it's meaningfully smaller than a full size.
So event in terms of in person, but one thing that's happened in gone very well for us in our in the pandemic because we've had some phenomenal one 2000 plus person events many of those actually and so we know how to run large virtual events at scale as well, so we feel pretty pretty well hedged and you know we've got plan a plan b.
On on all of those things.
You know I wouldn't say that it's a it's a transactional conference so I wouldn't.
You know our datacom happens or not is not going to be a big driver of that month or that quarter's numbers. We we play the long game, we focus on relationships you know education, there might be as many non dental partners as Dido partners at a show there might be people dot com and have no interest in data and we're okay with all of that right. We just we're on the high road and thought.
They're shipping to conference really drives that and I always likened it to kind of an RSA security.
Conference. So I think John gave some commentary on the Opex, where it was Jason's question.
It's a meaningful cost so if it doesn't happen as much in person by fewer sandwiches.
Beers for people. So it's a it's really a near term cost, but a long term driver of adoption and thought leadership.
Got it got it thanks, Tim Thanks, John for taking my questions I appreciate it.
Youre welcome.
Thank you and your next question comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thank you and good afternoon guys.
I'll be quick just in the interest of time, the free ransomware detection promotion for our OEM partners when does it actually begin.
It began right after the most recent events. So I want to say mid July just the last few weeks just it was a.
We were we were coming up.
600000 endpoints end of June so, we might've had a little more momentum for the next couple of weeks and then.
Big.
Big jump, obviously, one time jump with the free but we think it'll continue to have increased adoption through the end of the year.
We're happy about that and obviously on new deals and it helps yourself helps velocity, we will start charging for it again in Q1 and you.
You know again, we've seen higher velocity and higher asps when we bundle that on the large deals in any case. So we think it's a win win and it was this just an opportunistic move.
I agree it seems like a.
Like a very smart move and I was just wondering and I realize it's very early but if there are any data yet that indicate greater take rates or greater adoption of RMM. Since his promotion began or if you have that that expectation of that occurring over the balance of about six months.
Yeah, it's hard to sift out the variables I mean, we had a great strength in our madmen in July, but you're coming off of.
One competitor event Youre coming off of a lot of people you know in the MSP space going what's my stack, what's my RMM, you've got our free promotion, we didnt, we didnt really sort of do it to try to juice. They are a mammoth number. So we've got the best case, we've got a few weeks of data it would be hard to hard to sift out, but it's definitely a product with a tailwind in building on Europe.
Pandemic.
I mean, the other thing I would say.
When we first launched it.
Reg back in December we had promotional period at that point and.
I think we saw him in that promotional period than it was.
Help hold to the sales of RMM, whether it's selling more RMM.
<unk>.
Holding a stronger average selling price for RMM. So it's been helpful. On a number of months and then once we started charging for it actually.
Delivering a little revenue on its own.
Alright, perfect and then John I know.
<unk> is a lagging indicator, but do you have a view of when that's likely to tick back up.
Well we.
I think last reported that is into 2020 and it was 111% and at that point I think highlighted that it was likely bottoming out at in Q4 Q1 than it did in fact bottom out in Q4 and has been moving back up ever since.
The historical levels.
Excited to see it moving.
It will continue.
Alright terrific good to hear thank you.
Yes.
Thank you. Our next question comes from the line of Brent Thill from Jefferies. Your line is open Sir.
Hey, guys give Joe on for Brent really appreciate the question.
John how should we think about seasonality of <unk> going forward, if I'm doing my constant currency math correct. I think there was a slight tick down in <unk> at it and <unk> and.
I'm aware <unk> was a record quarter I, just want to figure out how to model going forward.
Yes.
Yeah, no. It's a good question no real seasonality I don't think there's I mean.
It's hard to say during the pandemic right. Historically, we might have said there was a little bit of.
Within a quarter each month that it got a little higher than maybe over the course of the year. It got a little higher but I think with the pandemic that has kind of gone out the window.
I wouldn't suggest theres any real seasonality.
Youre right Q1 was really an exceptionally strong quarter.
Adding $26 million.
FX adjusted and we feel like we essentially matched at remarkable level here in Q2.
More than triple what we did last year.
I mentioned that the year over year growth rate of 18% and 17% FX adjusted.
And looking forward, where we've obviously guided to higher revenue range in Q3 and for the full year.
There's obviously, a leading indicator of revenue and.
As I said on the on the call.
We feel good about continued acceleration and as you've probably heard me say before the growth an increase in net.
Delta quarter over quarter is not going to be linear there'll be some ups and downs like youre seeing now, but we feel good about.
The long term increase in that number.
Okay. That's helpful and then Tim maybe stepping away from our numbers anything that surprised you in the quarter or anything you want to emphasize that we might not be able to see from our vantage point outside the business.
It's funny, we do have Q&A prep yesterday.
That that came up and it's really you know.
Even the board last week commented just a pretty good quarter.
Broadly all regions all products. So there is always something you wanted to do a little better but.
You know, we're a little bit of a reflection of the industry to given our mean.
Meaningfully large position as the leader so.
I think it speaks as well for the industry, but the team worked hard and and the engines firing on all cylinders at the moment, so I wouldn't.
I don't think there's much to pick on in their environment is good.
Awesome sounds good thanks, guys.
Thank you. Our next question comes from the line of Edward Maggie from bearing Baird. Your line is open.
Hey, guys. Thanks for taking my question and congrats on excellent quarter.
Did that you double the number of end points enabled with R&M ransomware detection to over $1 million, which is a great milestone or able to share a little more info into where this is in terms of the adoption cycle within the arm and customer base.
We haven't talked about the total.
You know it's.
It's one of those things that I think has a lot more to do with MSP is being busy though then wanting to technology I mean, what we might you know maybe by the end of the year. We've got this discrete bundle going now so it might be they'll get more of a level, but I described in my one of my answers I think it was for Sandridge question security experts require a layer recommend a layered approach that doesn't mean you run.
Ill put 12 layers on on every end point. So I think a lot of this is just MSP is getting comfortable in recommending to a friend and and you know.
We've removed pricing as a barrier. So now it's just what do they have on their mind, especially in security you can imagine they're looking at many elements of.
The stack, but we havent given.
And overall, what RMM endpoint number that I'm aware of to date so.
Great great, Thanks for that and and pivoting away from the security talk and conducting our groundwork we've heard that the large public cloud companies and offering their competitive point solutions, having some cases been looking to directly cut out the MSP, but they're channel chain. It just matches. What you guys have heard from the channel. How is this challenging you guys and can we talk about how this play.
And to your overall strategic focus of maintaining an MSP focus go to market strategy.
Yeah, I'll take a stab at that the only large public cloud company, that's meaningful irrelevant in the MSP space today is Microsoft and you know I've got 30 years of history with them and they are absolutely a channel company and have always created incredible room for the channel and I think somebody actually flashed me something.
Yesterday on an on an Instagram posts that so they have 400000 channel partners I don't know, if that's true or not but it could be you know that that's that's how they think about it.
Azure is where MSP or looking in general to take their windows servers, if theyre going to move to infrastructure as a service. So many MSP is run their own data centers. So there's certainly some what I might call private cloud, where there isn't rackspace equinix or even in the basement of the Msp's office, where they are running windows servers, there but.
They tend to not like enterprise they tend to not be sort of best focused on Google or AWS, just given their scale Microsoft made it very easy very turnkey and we are.
Very focused there. So you know you'll see our relationship with Microsoft is strong and we view that in the same way they do helping to build SMB base within Azure and I think youll see us working quite closely together so.
No not the opposite of a challenge for Msp's I think theyre embracing the MSP channel and we'll continue to do so.
Great. Thanks for that nothing further.
Okay.
Thank you and thank you and I'm showing no further question at this time I would now like to turn the conference back to our CEO, Mr. Tim <unk> for closing remarks.
Well. Thank you I just thanks, everybody for joining sorry, we ran a few minutes over I had been told the question queue is empty now and we always try to get them. All done. So it was a terrific quarter and we are we look forward to seeing you all on our next call. Thanks for the interest in data and have a good rest of summer take care.
Thank you ladies and gentlemen that concludes today's conference call. Thank you all for joining you may now all disconnect.
[music].
Sure.
[music].