Q3 2021 Datto Holding Corp Earnings Call

[music].

Ladies and gentlemen, thank you for standing by my name is Brent and I won't be your conference operator today at this time I would like to welcome everyone to the Ghetto third quarter 2021 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

Speaker's remarks, there will be a question and answer session.

If you would like to ask a question at that time simply players press. The star followed by the number one on your telephone keypad, if you'd like to withdraw your question again and pressed start one. It is now my pleasure to turn today's call over to Mister Ryan Burkhardt Director of Investor Relations. Please go ahead.

Yeah, No one wanted to thank you for joining us today to review data third quarter 2021 financial results.

With me on the call today, or Tim Weller, Chief Executive Officer, and John Abbott Chief Financial Officer.

During this call we may make statements related to our business. It would be considered forward looking statements under federal securities laws, including projections of future operating results for our fourth quarter and full year ending December 31st 2021.

As a result of a number of factors actual results may differ materially from those projected and such statements East.

These actors are set forth in the earnings release that we issued today under the section captioned forward looking statements and.

And needs 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 R. S E C filings.

The following statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.

In addition data undertake 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 on our third quarter 2021 earnings press release, which can be found at an investor relations website a.

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 chew investor conferences in the coming weeks, including the R. B C capital markets Global Technology Conference.

And the Barclays TMT conference.

Please reach out to me if you're interested in joining our schedule.

With that I'll turn the call over to our Chief Executive Officer, Tim Weller Jim.

Thank you Ryan and many thanks to everyone for joining us on the call. This afternoon. We are excited to report strong Q3 results and to raise guidance again for 2021 I'll begin with a few highlights for the quarter followed by an update on to a significant product launches that we may insecurity, and cloud, which solidify our leading <unk>.

<unk> and providing cyber security solutions for our M. S P partners.

Finally, I'll turn the call over to John to discuss our financial results and guidance in more detail.

The third quarter was another record quarter for dental subscription revenue growth was 20% year over year, reflecting another quarter of sequential acceleration our growth continues to be paced in percentage terms by data SaaS protection and data wire amount both of which also have strong new secure.

Add ons, so our business continuity and disaster recovery product B C. D. R. For short continues to Reaccelerate with another sequential increase in new AOR overall, all major products and geography saw healthy growth.

We ended the quarter with $627 million of IRR up almost $29 million from two two and we added 400 net new msp's in the quarter, bringing the total number of MSP partners, we serve to 18200.

Per MSP also continued to increase demonstrating the ongoing strength of our MSP cars.

Overall, I'm delighted with the way our partner facing teams executed in delivering another great quarter on the product side in Q3, we launched two new significant offerings says defense as a security add on for our SaaS protection continuity product and data continuity for Microsoft Azure extending our <unk>.

Light ship B C D R product into the public cloud, whereas you're this far and away the most popular with Msp's.

Give us some additional details on each now.

Let me start with size defense, our newest security product. This product addresses the number one cyber security attack vector, which is E mail and related attachments in fact, Msp's report that 64% of rap somewhere attacks on their clients originate in Microsoft 365 Inboxes.

Our says defense solution has its foundations and our acquisition earlier this year of bit them in Israel based company.

We have run independent third party testing of our proprietary technology against five of the most widely used E Mail security solutions available today, and we come out in the top one or two on effectiveness and had the lowest false positive rate.

Says defense, even find zero death threats.

Following the acquisition, we work diligently with our new team members to tailor the product for MSP delivery.

According to data from the FBI fishing has exploded as the number one cyber crime and it is aimed at first of log in and password credentials. These stolen credentials are used by other cyber criminals to launch large coordinated ran some more attacks.

Says defense is based on a novel set of intellectual property that independent testing has shown to be best in class against sophisticated fishing and malware that target Microsoft 365, Inboxes, one drive sharepoint and teams that is a robust yet simple to use securities.

Illusion that eliminates the need for additional MSP head count we're in depth security training.

In addition, it is bundled with our size protection products, creating a strong margin opportunity for our MSP partners and a low friction purchasing motion.

The initial response to SaaS defense has been outstanding as partners recognize the critical need for E Mail security today and loves that says defense is highly effective easy to use and fit seamlessly with SaaS protection.

<unk> defense is a first line of security defense like Avi or firewalls, preventing malware from running in the second line of defense is data ransomware detection for RMM, which is now deployed on over 1.4 million endpoints up from over 1 million on our last call.

Our solution addresses escalated situations, where the attacker has actively bypassed the in place anti virus or Edr's solution and malware is running on servers or P. C's under direct control of the attacker without our ransomware detection. Each of these events would likely end and ran some where.

Or worse. So we are incredibly proud of each save over the past year and there have been many we intend to continue to expand our product offerings on the front lines of defense going forward now, let's talk about the last line of security defense, which is recovery our market leading continuity products have been the last line.

A defense and security for Msp's and their clients since day, one and the importance of bullet proof flexible recovery is only increasing as cyber attacks become more common as a leader in continuity. We're now doing about 75000 restores per month and growing.

With our cloud deletion defense. We have also performed over 400 complete saves for partners and their clients on the brink of total data loss over the past couple of years. These are scenarios, where a cyber attack or locks a client's primary servers of the ransomware then actively of races, all backup images.

Local and cloud using stolen credentials in each case, the immutable copies and dabbles cloud save the day and prevented what could have been a business ending event for the end client.

That brings me to the newest member of the data continuity family dental continuity for Microsoft Azure, We brought Msp's and the investment community on the development journey all year. So we were thrilled to officially launch it in September much like size defense. The early response from partners has been incredibly energizing.

That'll continuity for Microsoft Azure or D. C. For short is comprehensive business continuity and disaster recovery solution that protects msp's and their clients Azure public cloud workloads, providing protection against malicious ran some more attacks security breaches serve.

<unk> software problems and cloud outages, we've recently announced our strategic partnership with Microsoft which was key in our development efforts and features a strong co marketing relationship on D. CMA.

We believe that will continuity for Microsoft Azure is the most secure highest performing continuity solution in the azure ecosystem on top of all this D. CMA is fully integrated into the data platform. So msp's can manage and protect their clients live applications and data and Azure.

Right alongside workloads and private clouds on virtual machines or on premises all from a single unified platform Importantly, R. D. CMA product restores Azure virtual machine images in the data cloud, which allows msp's to get their clients environments running quickly.

<unk>, even if azure itself is experiencing a cloud outage, while it's early in the public cloud move for Smbs worldwide end user spending on public cloud services is forecasted to grow more than 23% this year to greater than $330 billion. According to Gartner. This should prove to be a key grew.

Both area for Msp's and dad over a year's to come as Msp's support their clients in the migration to infrastructure as a service R. I S. We are now in position with a leading and differentiated solution to help our MSP partners on this journey.

Lastly, I will note that applications and data are growing everywhere and the public cloud led by Azure, but also in private clouds virtual machines and on Primp, we're seeing solid continuity growth in all arenas.

<unk> are also managing and protecting an increasing share of these SMB digital assets as they continue as an industry to eat into the 1.3 trillion dollars of global SMB spend msp's or even pushing into co managed services partnering with it departments and enterprise.

Government and <unk> clients data is market, leading comprehensive portfolio of continuity solutions allows msp's to protect digital assets wherever they live.

So those are the two major new product announcements in Q3, but we continue to have releases every quarter and sometimes every month across our product portfolio continuity RMM says PSA and networking with a particular focus on security features in each.

Security continues to be at the core of everything we do have data. We highlighted this recently for MSP partners at our data current event in early October it was the largest event in our history, attracting more than 4700 virtual attendees from 50 countries are primary message to the MSP.

<unk> was that they are now on the frontline in the global Cyber security Battle Cyber crime is now a one trillion dollar annual drag on the global economy, and the attackers are increasingly finding smb's to be attractive targets.

As the primary provider of services for their clients Msp's are now squarely in the security business. There are too strong implications that follow first MSP will increasingly choose their vendors based on security as the number one product attribute going forward trust in the security of their vendors.

Will matter more than bells, and whistles are costs second msp's have a massive opportunity in providing security solutions to protect their clients and to profit and grow from doing so.

For each of these two we believe we are strongly positioned to be a partner of choice with the best technology solutions in the cyber security Battle as a vendor we anticipate a large return on the years long investment we have made and will continue to make an internal security in fact, we announced the data alcon.

We are the only RMM vendor to have passed a stringent security audit called <unk> used by a consortium of leading technology and financial companies. We also pointed to a strong development pipeline on security products, which we will bring the market as sell through offerings that msp's can use to protect their SMB.

Clients, while also finding good margin for themselves my.

My call to action for Msp's that'll con was to define their security stack immediately and improve it over time that'll help our partners secure themselves and their clients both as a trusted advisor and with our innovative products, we will benefit from differentiated reliable products are scale.

And our persistent focus on security at our core.

My Dad will contino address including demos with our engineers have some key security in cloud products is posted in the Investor Relations section of our website <unk>.

<unk> also feature to keynote from our Chief Information Security Officer, MSP interviews and over 100 vendors sponsors consistent with our open ecosystem approach.

Building on the security themes from <unk>, we will offer investors a deeper look into data in a few weeks at our first ever Investor day on Thursday December 9th we have an exciting agenda planned that will give you a better understanding of our products and technology and our unique go to market approach with our MSB channel partner.

Our financial model and the incredible opportunities. We see ahead in securing digital assets. We hope that you can join US look for registration information coming soon on our website. In summary, we are pleased to have delivered another record quarter and two significant new product launches that <unk>.

Line with the MSP industry shift toward a security one approach, we see great momentum across our business today and we're excited about our strong product cycle that will contribute to growth in 2022 and beyond we remain well positioned to capitalize on the large and growing opportunity with our.

Current product portfolio and roadmap and the deep trusted MSP relationships that we have built.

Finally, I want to thank everyone on the global data with team for all of your hard work and our MSP partners for their continued support with that I'll turn the call over to John.

Thank you and good afternoon, everyone. We're pleased to report terrific third quarter results today, where we outperformed across the board.

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 and the press release that we issued this afternoon and in the supplemental financials posted on our website.

Our third quarter results reflect great momentum across our suite of products and continued acceleration of our business third quarter recurring subscription revenue 146 $8 million grew 20% from Q3 last year subscription revenue growth is now accelerated every quarter of this year.

Subscription revenue comprised 93% of our total revenue, which came in at 157 $9 million in the quarter, representing 21% year over year growth well above the high end of our previous guidance.

Our revenue results reflect the benefit from foreign exchange rates of approximately one 5%.

Strong operating results drove the upside to our guidance with currency, providing less of a tailwind then we had forecasted.

<unk> September 30th was 626 $7 million up 20% from $522.8 million, a year ago, and nearly a $29 million increase sequentially.

We ended the quarter with more than 18200, MSP partners, a net increase of 400 and the quarter and we grew the number of msp's contributing over $100000 in a R. R to more than 1300, a 24% increase from a year ago.

Or sell through model continues to drive strong growth within our installed base of partners as a rollout data solutions to more SNB.

Those smbs consume more data and seeds.

And they both adopt more data products.

Our third quarter gross margin of 73% was in line with the strong margin we saw in Q3 2020.

Third quarter operating expenses were $80 $1 million, a 40% increase from Q3 last year as we continue to invest with a focus on security and cloud to drive revenue growth.

As a reminder, expenses reached a low point last year in Q3, when we saw the whole quarter impact of the expense reductions we had implemented in response to the Covid crisis.

The vast majority of the increase in operating expenses. This year was driven by personnel costs.

Within Opex sales and marketing expenses were $32.8 million, an increase of eight $6 million. When Q3 2020 as a result of expanded sales staffing levels as well as higher marketing and sales Commission expenses.

R&D expenses were $21.5 million, an increase of $6.8 million from Q3, 2020, which underscores or continued investment in technology development and security.

G&A expenses were $23.6 million, an increase of $8 million over Q3 last year, primarily driven by expenses associated with being a public company and recruiting costs related to increased hiring this year.

And finally depreciation expense within operating expenses was $2.1 million compared to $2.4 million in Q3 2020.

Operating income for the second quarter was 35 $8 million compared to $39 million in Q3 2020.

Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring costs and transaction related and other expenses was $43.8 million compared to 45 $8 million in Q3 2020.

Our adjusted EBITDA margins, where 28% reflecting continued hiring in the areas of security in cloud some normalization of travel and returned to office expense and costs associated with being a public company.

Capex in the quarter was $11.7 million in free cash flow with strong again at $23 million, our balance sheet remains very strong with no debt in approximately $207 million in cash at the end of the quarter.

Turning to guidance for the fourth quarter and full year. The increase in our 2021 guidance reflects our positive outlook for the continued acceleration of the business.

For the fourth quarter of 2021 revenues expected to be in the range of $161 million to $163 million. Adjusted EBITDA is expected to be in the range of $38 million to $40 million.

R Q4, total revenue guidance represents year over year growth of $16, 5% at the midpoint, including a half a percentage point of FX tailwind and we expect subscription revenue growth to be $17, 5% at the midpoint.

For the full year 2021, we're raising our revenue guidance to arrange a $615 million to $617 million.

And we're also raising our adjusted EBITDA guidance to a range of $174 million to $176 million.

Our full year revenue guidance represents year over year growth of approximately 18.5% at the midpoint, including a two percentage points FX tailwind. This is up meaningfully from our prior guidance for full year growth of 17.5%, which included a 2.5% FX tailwind.

We expect subscription revenue to account for over 93% of total revenue in 2021.

Capital expenditures for the you're expected 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%.

For calculating EPS, we estimate approximately 168 million fully diluted shares for Q4, and 167 million fully diluted shares for the whole year.

In closing we believe our Q3 results in 2021 guidance reflect the ongoing strength of the business. We're very excited about our momentum going into Q4 and look forward to talking more about our business at outlook at our upcoming Investor day on December 9th.

With that will open up the call for questions operator.

At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Your first question comes from the line of sang sang with Morgan Stanley. Your line is open.

Well. Thank you for taking my questions and I guess right off the top congrats the team for getting back to 20% a year ago. You guys were a 20% go or before the pandemic and to hit that this level is quite get chief MIT, which sort of leads to my next question, which is kind of bluntly do you think you can sort of keep it up at these.

At these levels with this sort of major product cycle that you have.

You know that's that's sort of set to be launched and then with that 10, if it wasn't.

If it was a.

Mothers sort of enterprise company that doesn't have the channel model that you guys have uhm, sometimes security slows down the sales cycle and with this big push into security I'm, just trying to see what the impact on the sales cycle at data would be relative to a traditional sort of copy selling to the enterprise.

Okay great.

Ended up judge John is going to take a shot at the at the numbers and I'll add something on security.

Yeah, No we were really happy to see.

R growth continue to accelerate that certainly has been the plan and.

See it hit the 20% Mark this quarter was great.

Look we won't draw a line in the sand here today, but you can see a clear trend in the constant currency revenue growth moving up from the low teens earlier this year to the high teens this quarter and that's the acceleration we've been noting and you've also noted <unk>, a leading indicator of future subscription revenue growth the twin.

There is positive.

And you've also her to say that we feel very well positioned in the market to continue to drive.

Increasing revenue growth and by implication AOR growth. So we think we're we're on a path and a trajectory that it's.

It's very strong and feel very confident about it.

And.

Send you. This is Tim I think the answer to your question on the security <unk>.

Products is if you think about our first couple of <unk> defense and ran some more detection their attachments, they're attaches to SaaS protection their attachments to RMM and I would think those would be the two biggest vectors you'd be looking for in an early quarters here both growing very rare.

Idly as we said in the opening remarks, and so would not expect any kind of slowdown in growth.

Meant to be accelerators in terms of actual sales cycle, because they are attached and.

Largely digital.

There is surely going to be some selling to the MSP initially some benchmarking, possibly against other solutions, but once you saw that first one and they like it then remember the in our cell through model.

Two of the selling so I wouldn't expect it to be meaningfully different and.

Again once in Msp's on then it starts to become even even more quick than than typical for us.

It makes perfect sense, and if I could sort of follow up with Asher continuity and I think you had a comment.

Given your script about partners being energized and frankly, we heard the same thing a year ago. It seemed like partners were sort of your especially a larger ones were sort of chomping at the bit for data to have a solution and sort of the public cloud backup use case and.

As we think about you know the type of Trashy you could see is there do you believe there's a bunch of pent up demand that you can sort of satiate relatively quickly versus launching let's say a net new service in another category that you guys had cats had previously had participated in.

Yeah. So you are spot on we brought the partner base along with US on the journey over the last year Alpha beta.

A lot of feedback effect designed by a leading partners.

So so yeah, we think it's going to be much better than in a brand new surprise product, we haven't hidden that we've talked to all of you.

The one caveat I would say is there is a number of elements of the value chain. So we start focused on partners who are already in Azure with primary workloads at least in part because we don't necessarily want to be the ones training partners. How to go there. It's it's not a completely turnkey. There is some work involved for them to move workloads and get operational and.

Public cloud so to speak there are some migration that has to occur. So I think for us in the first quarter may be a first or second quarter.

Of being live now it's a product market fit question, there's probably more handholding of the of the partners done there would be say in some of the security products because.

They have to they have to kind of test the solution thoroughly here right. This is very high stakes moving amid they come from a position of trust with that all but.

Is not one they're going to try on their favorite client on the very first day. So we'll check in each quarter and I think we're very focused as you wouldn't be in a new product an early adopter metrics usage conversions, all those kind of things and.

This will take care of itself over time once so we have those early testimonial so.

It's definitely pent up demand an incredible amount of opportunities in the pipeline though.

Understood I appreciate all the thoughts and thank you.

Your next question comes from the line of Matt Hedberg was RBC capital markets. Your line is open.

Yeah. Thank you. So much this is Matt swamps and on from that if I could just maybe follow up on standards question looking at the security products can you just kind of go over what you learned or what your MSP partners have learned from cross selling ran somewhere that they can pull over to SaaS defense, maybe what that tells you about how quickly.

We could see the initial adoption you mentioned the ease of use of going into these new solutions from the existing.

Yeah, I think it's too early to draw strong conclusions in fact, one one focus now is for us to market. Some of the success we've had.

In both of those products in terms of stopping attacks.

A tax rates as defense I described as a first line of defense. So.

This is seeing all the thousands of emails coming into your Inboxes and trying to block anything from getting going.

Ransomware detection second line of defense Something's already up and running it it it's bypassed all the other frontline's antivirus Edr things you've put in and so we're definitely gathering a lot of telemetry were understanding.

Everything from which environments, which aves, which edr's, which email filters are are working well together, which ones are working well on their own so.

You are on the right thread, but I would say it's too early.

For us to.

B, a deep conversations with partners, they're still trying to figure out their full stacks I think 2022 will be the year of.

Standardizing MSP security stacks that I alluded to that and my dad Akan keynote and I think we will be will be beating the drum on that all all year long.

Thank you that that's Super helpful. And then John again, great to see the error.

But it seemed like adjusted EBITDA might've been the biggest outperformer for the quarter and as well as in the guidance could you just talk to us a little bit more about how you're thinking about balancing growth and profitability next year, especially with the presumption that there's gonna be some returning calls so can you later too.

Yeah.

Great question and observation because that is a balanced it's.

That.

It's tough to strike in a pandemic when there's a big chunk of your your expense base, it's difficult to predict but uhm growth is by far our number one priority.

And so that's definitely the focus and we're investing to drive that top line growth and you're <unk>, you're seeing that.

Roll through here quarter after quarter Uhm, the peace of the expense.

Forecasted expense increased it's much harder to predict is the part that's associated with returned to work with her in the normal travel.

That'll con ended up being a virtual event not a live event in Q4 and Q3. So there's there's a lot of.

There's a lot of <unk>.

Expense in that returned to normal sort of pace of activity travel office expense all of that so uhm.

Just been happening a little more slowly than we had original of forecasted had projected the other thing I would say is that the revenue outperformances blowing through at a very high flow through right.

That's that's helping to drive the outperformance on EBITDA as well.

Alright, Thank you for the time.

At your next question your.

Your next question comes from the line of Jason Ader was William Blair. Your line is open.

Hi, everyone. This is Billy Fitzsimmons on for gas Nader came maybe for you from a competitive standpoint, we've been hearing from from.

Several data protection vendors in recent quarters, one who has historically focused on the enterprise market view, the MSP channel, it's a strategic area of focus and a potential growth opportunity. So on the one hand.

The interest from them in this market kind of validate the opportunity do you guys have been pursuing sense central deception on the other hand, there's there's potential for extra competition. So is the leaders in the space. What are you seeing from a competitive standpoint, and what do you expect to see on that front.

Yeah. You know this is an area that we've been in for well over a decade. There's always competition. We could list off 25, 30 names that have that have come and gone. It's a very large tam so it sustains many many players.

We've made the point many times, it's very hard to do both direct and channel well. So we don't spend as much time worrying about large direct selling organizations, particularly enterprise focused ones, who say hey channel is going to be important. This year that means a junior person is going to get you know a target steps.

8% of their total revenue and it's very hard Msp's remember they have long memories and they want vendors that are in the channel on a on a permanent basis, not dabbling and definitely not ever contacting their end clients and you can go on social media and find this all day long and that will make.

That representation of promise. We're also very good at what we do I agree with what you said it continues to be validating for the space. It's large if anything you're starting to see msp's enter co-manage business and take on some government E D U and enterprise business and will always stick with the msp's, but.

They're sort of opportunity.

Slow as in in both directions. When you think about why we when we save the MSP time were highly secure we have those long term trusted partnerships and our tech is purpose built for msp's not converted direct enterprise C. I O features but purpose built for Msp's and lastly, we leave him a great margin.

Opportunity, which is so key to them really becoming your channel partner right that is the sales team, it's not selling to them and that's what's so hard to break in the mentality when you come from enterprise So.

As you said, it's validating for the space and when we feel okay, not not any real shift in the market.

Got it fixed him and if I could sneak a second one and when you look at news headlines everyone's obviously talk about a labor shortage and challenges in acquiring talent can I know this is something you kind of touched on it that have gone now, but but can you talk about the impact of later for day labor shortage on them Msp's and your business and I guess, there's multiple facets up.

To that so so first be curious how the labor shortages impacting msp's in their customers.

Imagine it would be a significant tailwind to MSP demand, but second also be curious shortage is affecting your ability to hire talented that out.

Yeah, there's three levels really write the S. M. B is definitely struggling to find tech talent all talent, you've seen minimum wage prices going going up even in terms of labor costs that means they don't hire the tech talent, they're searching for msp's at the same at the same time, when they're squeezed on TACAN need more and more and more and they're getting increasingly.

Turned about security you ripple that up one level the MSP fines roll your own tech solutions to be less interesting than they did a couple of years ago, because even if their mentality is I'll take care of this myself who's myself the owner operator as you scale. Your MSP you need more turnkey solutions and.

That's what's leading to two darrow.

And then third as you said it has been a challenging market for talent, but.

Some combination of being a leader being a scale being public and working on very cool technical problems has allowed us to basically fill the seats. This year, we've had a great year on on talent and our momentum is good there. So I won't tell you that our talent acquisition team isn't working harder than ever.

It's definitely the same market for everybody, but we've gotten what we need and we think the net of all of those layers.

A flow of opportunity towards towards us.

Perfect. Thanks, Tim really appreciate it.

Your next question comes from the line of Edward Maggi was Bergen for capital. Your line is open.

It's taking my question guys and congrats on an excellent quarter. My first question relates to the comments made on continuity for Azure can you talk about the market opportunity here now it's products opens you up to an entirely new market up msp's and Smbs with public cloud workloads that.

He possibly could out of address previously thanks.

Yeah, I mean, you use or have answered. The question. There we have not had on as your solution. We think it's early but that said there are surely some new msp's. The started in recent years that might have chosen to start an azure and there are surely some existing msp's of ours, who either took on clients that were already in azure or.

You know they are down the road now of experimenting and starting to move somewhere close to Azure. So while we overall think it's a new ish market for Smbs and Msp's.

We also see this is largely on net new.

New opportunity for US now of course, we can also defend against anybody else who might have their eyes on our partner and client base and might have thought were vulnerable with azure. So there was a defensive element too, but but largely largely out it's gonna be a net net new and very similar go to market very similar unified dashboard every.

Think it's a way to sort of just think about different set of workloads. So it's expanded our market.

Very helpful very exciting my second one put it in here, we know that data was clearly broadcast at this focus on security as a key tarmac for growth or.

You guys are far more than that you're far more than the platform beyond proactive and reactive defense is there anything you want to add with regard to other product areas that may align with business management tools for M S p's, including automation payment and procure or any other solution areas.

Yeah. It's interesting you know we have framed everything for the better part of a year around the this framework and the different stages and we've been signaling.

First second last line of defense and trying to signal, where our products are going for msp's, but you're absolutely right. The minute you start moving your workloads into clouds, moving them to Multilocation and and now in a pandemic moving them home. You know you are in this ultimate remote work environment and so down on networking.

I think is finally, something people say I understand why data winter. The endpoints are scattered all over the world you have to have strong networking that has a strong security component you won't be surprised to learn and then you hit on business management, we don't always think about that as security, but everything. We've just described is certainly coming through.

<unk> ticketing system that sitting in our PSA tool.

Managing all those assets you think about the first stage and in this framework is around identity and discovery of assets. So the PSA is still playing commerce is still playing very very well. It just it doesn't fit as well and what people think about is traditional security software but.

Everything we do starts with security and asks how can we elevate our game there.

Great. Thanks for asking my questions nothing further from me.

Okay.

And you said that your next <unk>. Your next question comes from the line of Kirk's My turn with Evercore ISI. Your line is open.

Yeah. Thank you very much this is Peter Berkeley on for Kurt just for me I mean, yeah, you guys, obviously add another strong quarter of net new M. S. P. At so just hoping to unpack that a little bit you know like how much. It that's related to just the continued reopening of the economy and you know.

Can be as continue to locate digitize their turning to you first days are are you seeing somebody ignore security offerings granted they're very early and they're not they're add on products not stand alone, but are you seeing that security maybe Paul in some net new MSP is that you know that was the silver bullet because they're messing previously.

Yeah, Peter Uhm, Great question yet.

We feel very good about the <unk>.

Net ads in the quarter and really every quarter. This year been we feel like we've returned to levels of growth and MSP net adds that.

Are important for the future growth of the business and so obviously the the net ads are a net of the gross adds in the churn churn last year was a little bit higher that was what what took the net ads download and churn obviously this year.

As has abated uhm.

On your question of sort of what's what's bringing in the M. S fees. It's actually an interesting question. If you think back.

Even three or four years ago, New M. S fees were coming in as a B C. D are partners right in our our land.

Landon expand strategy as we get in with a product M. S fees joined <unk> at a fairly low <unk> and then.

Standardized on dental product and spread that across their their SMB customer base and so.

That was the picture three or four years ago today with the expansion of our suite of products we're seeing.

A number of other products being that lead product it brings the MSP in the door and so.

You're touching on an important point, that's I think it's only helping us in that marketplace for to build new alliances with MSP partners.

Great. Thanks very much.

Yep.

Your next question is from key Sparkman was BMO. Your line is open.

Hi, This is Adam Hall, it's on for Keith So first congrats on the quarter and thanks for taking my question, but.

But so first I wanted to ask about the <unk> acquisition contribution to your Q for revenue Guide and then secondarily, how should we think about that revenue contribution of bit them now that's the fence as what you look towards F Y 22. Thank you.

Sure Adam Good good question Fair question, where they're very little contribution to revenue in queue for right. We just launched this as defense product bookings starting to ramp, but we'll have very little impact on the revenue in queue for.

And next year will still be fairly early days, but you've heard him talk about the sales motion areas and attached to SaaS protection, which is our highest velocity sales product and so we're excited about the potential and the opportunity there and again still very early days too too.

Predict exactly what that trajectory, you'll be but but we feel very good about it and obviously next year will will start to have an impact on the revenue numbers.

Okay got it that's helpful. Thank you that's it for me.

Your next question comes from the lineup Craig Moscowitz switched Mizuho. Your line is open.

Hi, Thanks. This is actually not very long for Greg. So now that you've productize multiple security offerings have you given any thought as to whether bundling makes sense.

Oh without a doubt you know and if you think about our first to hear ransomware detections bundled in with our ma'am and and says defenses bundled their massage protection, but I think you would.

First expect us to extend those bundles, but you know again in my earlier.

Comments I said, we would definitely be looking at a more complete data security stack, where an open ecosystem company. We may have some other components in there, but yeah, but bundling will be important to the degree that it adds.

Time savings and efficiency convenience in particular efficacy for.

Four msp's, that's the lens, we use but I would think there'll be some very interesting bundles head.

Great and how is your outlook PSA business, that's causing.

John I don't know if I agree with you want to add anything on that.

Just.

Growth or.

Yeah, Yeah, we really had this quarter uhm contributions across the board all products. All Geography's were really strong. So we don't call out specific numbers for individual products, but uhm good growth across the board.

Alright, thanks very much.

Sure.

Your next question comes from the line of know how Celski with North last capital market. Your line is open.

Yep. Thank you.

That's on.

Acceleration of 20% year over here for all of US are they are are.

Basis points, there what was the biggest driver of the acceleration between let's say grocery tension MSP growth.

Upsell and knew that neither MSP customers.

Yeah.

No hall, thanks for the question.

It's.

Our business model the real driver is the sell through right and so while the net new MSP additions are planning seats for the longer term growth it's that sell through motion. That's that's the real driver and so it's the expansion with existing Msp's.

The E R or per MSP growth that really drives it sort of in the current periods.

And as I said earlier, we received we saw strength across all products all geography's on that front. So.

Got great. Thank you and then what's the rationale for guiding to it to her a basis plant yogurt deceleration a subscription revenue September 7th quarter.

Sorry, you might've seen that one more time.

What's the rationale for why are you guys from guiding for a deceleration and the year of miracles subscription revenue, So just posted 20% and you're getting too.

5% for the December quarter, what's what's the rationale behind this day celebration.

Yeah, it's really it's really about.

Constant currency view right on a constant currency basis, we see the business continuing to accelerated it's just it's just currency adjustments.

Okay. So just to be clear what was the currency adjustment for subscription revenue into September <unk>.

In <unk>.

Q3 currency adjustment was one 5%.

Got it okay understood and then just for further clarity June quarter, what was the <unk> on subscription revenue then.

Uhm I've got that here hold on Q2 tailwind was that was the peak, 4% Q1, it was 3%.

Got it okay, great. Thank you very much congratulations.

Yes, Thank you in the hall.

Your next question is from.

<unk> is from <unk> Kelly up with Barclays. Your line is open.

Awesome, Hey, guys. Thanks for taking my questions here and and squeeze me in.

John maybe just to start with you and I think you touched on this a little bit in the prior question, but.

That are are per customer.

Actually accelerated year on year off of.

Not in not an easy comp I would argue.

And I know that AOR per customer can be a loaded metric.

But can you just touch on what you think is driving that.

I guess, what I, what I'm, maybe seeing as you are not just adding more mfp's, but but getting more AOR generation out of them.

Maybe you could just touch on that that dynamic all but.

Sure well the.

New Msp's, we add or will come in.

At at a much slower E. R. R M.

MSP right until you I mean, you could see a quarter if we had huge.

MSP additions, where the air or per MSP in total.

Could could come down, but that'd probably be a good problem to have.

But the existing M S p's.

That increase.

It really reflects the recovery in our net revenue retention that that we've talked about as well you may remember prepandemic that was at 119%. The we talked about that it was going to bottom out at Q4, and Q4 Q1 time period, which it did we reported 111%.

In Q4 and each quarter. Since then it's been marching steadily back upwards.

Towards those prepandemic levels. So it really is that.

Growth with those existing M S p's.

Selling them additional products then.

Selling more data solutions across there.

There S M V base, and and obviously expanding their SNB customer base, which we work hand in hand with them to do.

Got it got it that's that's very helpful.

Maybe maybe for you I apologize if this question was asked earlier, but.

On the on the Daniel Ash a product.

Understanding that it's still very early.

How do you start to think about the air impact.

There may be comparing it to be C. D. R and I realized that may may very well be apples and oranges, but is there a way that you think about sort of I dunno per workload or per per MSP type of AOR per customer for azure versus traditional D. C. D. R. Instead of higher value product is a lower value is.

It is it similar.

Uh-huh.

Yeah, I know, what you're grasping at where where where maybe five six weeks into this thing. So [laughter] no no early to drive trend line, but we thought deeply about this and more importantly interviewed 100 plus partners on this the.

The opening line is very similar there. There's there's no reason to think a workload that's on premise or a virtual machine and and MSP data center looks meaningfully different and Azure certainly the value the msp's willing to to to pay to protect that workload will will be similar I think.

There are some cases.

That are dependent on ratios of data applications performance parameters that might make it a little higher a little lower so I don't think you're getting complete apples to apples on a skew basis, but we became much more optimistic earlier this year when I reported this I think on on our Q1 call that the opportunity on Ah.

Her workload per client per MSP basis. As you describe is is not lower than we actually are not afraid of migrations. For example, and then you know what we think is going to be very interesting as azure should be more efficient for msp's and we think it's a fantastic sandbox for product innovation and.

So we just need to be careful to not get ahead of ourselves right day. One it's all about getting that first hundred thousand 5000, you're trying to really get the M. S. P base built get them comfortable using it so all their net new Azure just automatically comes to us and we achieved that with our on premise and virtual data centers salute.

<unk>, we have so many msp's now.

You saw that 100000 plus.

Your account with so many msp's it or just standardized on data and I think that to me is the is the goal of 2022, we should just get that army of sellers that has standardized on Darrell continuity for Microsoft Azure. So that's how we're thinking about it right and so what's the <unk> opportunity there.

The same or bigger and it'll just keeps shifting towards that cloud as time goes on.

Makes a lot of sense. Thanks, guys.

Okay I think it was like.

Again, if you would like to ask a question press star followed by the number one on your telephone keypad. Your next question comes from Fred Havemeyer, What's Mccorry. Your line is open.

Hey, guys. It's it's bread I wanted to ask you know in the past we've talked about how M. S. P's Chatty group of customers in a pretty tight community and it seems like many M. S. P's have been you know.

Chatting about some of the shortcomings of some other products that they've been using in the marketplace Uhm I wanted to ask generally of those net new MSP, you're seeing coming on to data is platform. This year.

Where have they been coming from exactly are they no women's from competitors, primarily are you addressing more white space in the market just any sort of context. You can you can offer around all this would be very helpful. Thank you.

Yeah, I think it's a little different in each product, we we've been fairly unimpeachable on performance and continuity for many years. So I think there is always.

Question of are they ready to pay for the very best turnkey solution as I said the labels should labor shortage, probably helps us so that might be a little bit organic net new you know where they might've been rolling their own solution certainly as people move upmarket they come off of lower and backup only products and come into our sort of.

World where.

We're absolutely taking share in RMM and I've said before we're you know we're probably <unk>.

Number four or five somewhere in there unarmed men, but but have definitely been taking share for several years from from a couple of a larger players.

And I think that's going to be true in a couple of other faster growing product lines as well. So it's definitely not a zero sum game, though every one of these markets is growing and I think on the back of the pandemic now has is kind of reaccelerated.

As as you as you're sure to get into the details so.

I appreciate it thank you.

There are no further questions at this time I will turn the call back over to Mr. Tim Weller.

Well, great. We're at the top of the hour. Thank you all for your interest for the great questions and we.

We hope to see a large number of view at our Investor day, and just about a month watch watch the I R website for details take care.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

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