Q4 2021 Datto Holding Corp Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
This time I would like to welcome everyone to the data fourth quarter 2021 earning results conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press to start one. Thank you Ryan Burkart director of Investor Relations you may be.
In your conference.
Thank you operator, good afternoon, everyone and thank you for joining us today to review <unk> fourth quarter and full year 2021 financial results with me on the call today are Jim <unk>, 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 first quarter ending March 31 2022.
Full year ending December 31, 2022.
As a result of a number of factors actual results to differ materially from those projected in such statements.
These factors are set forth in the earnings release that we issued today under the section captioned forward looking statements.
These and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission, we encourage all investors to read our SEC filings.
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 undertakes no obligation to publicly update or revise any forward looking statements made here.
Additionally, non-GAAP financial measures will be discussed on this conference call.
Reconciliation of these non-GAAP financial measures to our most directly comparable GAAP financial measures is available in our fourth quarter 2021 earnings press release, which can be found on our Investor Relations website.
Financial supplement and webcast of today's call are also available on our Investor Relations website.
With that I'd like to turn the call over to our Chief Executive Officer, Tim Weller Jim.
Thank you Ryan and many thanks to everyone for joining us on the call. This afternoon. We are excited to report strong Q4 results capping off an exceptional 2021 I'll begin with a few highlights from the quarter and the full year.
I would buy an update on our security journey, including a recent info site acquisition and then I will give you some insight into the key growth areas. We are focused on for 2022.
Finally, I will turn the call over to John to discuss our financial results and guidance in more detail.
The fourth quarter was another record quarter for data subscription revenue and <unk>.
Our growth continued to accelerate a pattern we saw throughout 2021.
Our growth was above 20% and net new <unk> in the quarter was a record $31 $7 million.
We continue to add new MSP partners and deepened our relationships with existing partners. The total number of MSP as we serve grew nearly 9% year over year to 18500 <unk>.
Our per MSP grew over 11%.
Our top MSP relationships also expanded as we ended the quarter with more than 1400 msp's with over $100000.
Which is up 27% year over year.
Demand was strong across our product suite.
Underpinned by the increasing need for security among Smbs, and our MSP partners, who serve them.
Daryl solutions help our MSP partners secure their clients' digital assets, both applications and data.
It was an excellent quarter overall and punctuated a great year for data.
2021 was a year of re acceleration following the headwinds of the pandemic in 2020 subscription.
Subscription revenue growth in constant currency terms bottomed out a year ago in Q1 2021 at 14% then accelerated to 17% in Q2, 18% in Q3 and 19% in Q4.
I'm pleased that we exceeded our targets in 2021, our first full year as a public company and our sites remain on building to 20% sustainable growth.
In 2021.
<unk> found themselves thrust into the security business seemingly overnight with high profile breaches in the news throughout the year and SMB clients, becoming vulnerable targets.
Security has always been at the core of everything we do at that and we made significant progress in 2021, broadening our security capabilities to help MSB and Dataquick addressed a large security opportunity in October we launched out of SaaS defense and application and email security add ons.
To our SaaS protection products, and we are seeing strong early adoption with revenue per seat roughly doubling for those who adopt SaaS defense.
We also saw rapid growth in our ransomware detection for RMM product, which is now active on nearly $1 7 million endpoints just over a year from launch.
These two products SaaS defense and ransomware detection on endpoints or frontline defense products that give msp's coverage across the vast majority of clients attack surfaces.
We also built on our industry leading position in the last line of security defense. Our continuity offerings. In addition to our best in class business continuity and disaster recovery solution for virtual machines across client locations in data centers, we launched data continuity for Microsoft Azure and <unk>.
Equivalent and highly performance solution that protects MSP client Azure public cloud workloads, providing protection against malicious ransomware attacks security breaches software service problems and cloud outages.
Lastly, our SaaS protection operating for Microsoft 365, and Google Workspaces continues to grow rapidly.
So we now protect data and applications wherever they live whether in private clouds or the top public clouds for MF space.
Let me now turn my attention forward to 2022 and talk about the themes of overall growth security products and the global opportunity.
First growth.
We're in the Golden age of the MSP and we see a large opportunity to help msp's capture the generational shift thats happening now in SMB. It management, the secular trends of digital transformation shift to cloud remote work tack labor shortage, and especially cyber security attacks are.
Driving strong demand for msp's, creating an amazing growth opportunity for both our MSP partners and for data at our recent Investor day, we laid out the case in four pieces for our past the 20% sustainable growth first the massive and expanding global MSP industry.
And our leading position within it.
Our product portfolio to address the security needs of MSP and their clients.
Third the many levers of growth in our unique sell through business model and for US the major international opportunity in.
In 2022, we see opportunities to drive growth across our entire product suite.
The MSP channel leader and continuity and we expect to build on this leadership position with sustained growth in our flagship <unk> product and through introducing MSP is the data continuity for Microsoft Azure or <unk> for short.
We continue to view <unk> as a net new opportunity to build business with all of those MSP is globally, who will use azure today and are not yet data partners.
And the PSA market, we have a strong presence with our auto test product, which continues to grow nicely and we've recently introduced add ons, such as documentation and data commerce for quoting our procurement to extend our MSP business management category.
As we highlighted at our Investor day, leading our overall acceleration in revenue growth are the data and user and endpoint security platforms SaaS protection and our members.
This is a large and fast growing market with tens of millions of users and often multiple endpoints per user or.
Addressable market continues to grow as we add msp's those MSP clients those clients add employees and endpoints and we launch new products.
These are the multiple levers of growth in our business model.
That's the gross savings next let's talk a bit more about security I'll remind you of our three concentric rings approach first we have invested for years and continue to invest in data ozone security protecting our systems employees and assets.
We invest in protecting our partners, helping MSP secure themselves with our thought leadership resources and embedding security into the data products. They rely on daily both rings wanted to produce only indirect revenue through high trust in our brand and solutions and ring.
Three are the new data products, which provide MSP is a direct revenue and margin opportunity to sell through to their clients in 2021 that met SaaS defense and ransomware detection for RMM, we got off to a fast start in 2020 to further bolster.
Our cyber security leadership with the acquisition of Cyber Security Company Info site and innovator in endpoint detection and response or Edr technologies and in managed detection and response or MTR services.
Last year, we acquired bed down and integrated it into our SaaS protection platform before launching it as SaaS defense.
An analogous fashion info sites technologies will now be integrated with other new security technologies that are internal teams have been developing and everything will be neatly package for launch later this year well integrated within data RMM with an eye toward further securing endpoints and increasing the dollar.
As per end point, we are able to command the <unk> team and technology augment <unk> capabilities within the critical protect detect and respond phases of the niche security framework, particularly in endpoint security all of this in addition to core RMS and the identified stage and.
Continuity in the recovery stage.
Looking at the Big picture data has product offerings in every phase of the NIST framework.
2022 will see us deepened and broadened our portfolio of security products, all integrated build for ease of use by MSP and their multi tenant environments and targeting the highest efficacy in stopping cyber attacks.
We sell our own technology solutions and are not a security reseller like many competitors, we have been patient over a multiyear period and building and acquiring our proprietary security components. This also means higher long term margin potential for data and our MSP.
We have high standards and are thrilled with the field data on what our SaaS defense and ransomware detection solutions are catching and isolating live real world attacks that other vendor products have often missed its this combination of high effectiveness and ease of management for MSP that will continue.
To define our security product strategy going forward.
Our third theme. This year is global expansion, we already have a strong global business with over 30% of our revenue coming from outside of the U S. But we see an opportunity to grow our global presence. Even further our first wave of international growth came largely from English speaking countries and we still see great.
<unk> in these regions.
The next evolution is more broadly localizing our solutions for non English speaking countries and we're investing in global technology platforms, new people and processes and some key partnerships. This will be a pivotal year in opening up this next frontier of global opportunities for data.
Finally, let me comment on investment as we continue to see acceleration in the top line ahead of us and we continued to affect a broader pivot to security products investment will remain strong.
Our solid unit economics attractive gross margins and positive free cash flow gives us confidence that our timing is right to pursue the larger opportunities in front of us.
John will talk about our specific growth and profitability outlook for 2022, but rest assured that the incremental investment is going toward product and technology development and the highest areas of growth potential partner facing platforms to extend our leadership position with MSP and globalization to capture them.
Mass of White space, we see there.
On the journey to achieving our goal of surpassing $1 billion in revenue in 2024, and driving strong returns on capital in the process. We will also scale our back office to support this growth and beyond.
As we outlined in our recent Investor day in December balancing our investments in growth, we intend to be a solid rule of 40 company in the near term.
The underlying profitability of our business model is strong and as we grow in the long term, we expect to be a rule of 50 company and.
In summary, we are pleased to have delivered a strong year of revenue growth acceleration and key security and cloud product launches in 2021, we see great momentum across our business today and we're excited about the outlook for 2022 and beyond we remain well.
Well positioned to capitalize on the large and growing opportunity with our current product portfolio and roadmap and the deep trusted MSP relationships, we have built over many years.
Want to welcome our new emphasized teammates we have big dreams to build together finally, I want to thank everyone on the Dow team for all their hard work and all of our MSP partners for their continued support with that I will turn the call over to John .
Thank you Tim and good afternoon, everyone. We're pleased to report terrific fourth quarter and full year 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 fourth quarter results reflect.
Strength across all geographies and across our full suite of products and another quarter of accelerating revenue growth.
Fourth quarter recurring subscription revenue of $153 $2 million grew 19% over Q4 of last year, both as reported and on a constant currency basis subscription revenue comprised 93% of our total revenue which came in at 100.
$64 $3 million in the quarter, representing 18% year over year growth again as reported and on a constant currency basis strong operating results drove the outperformance relative to our guidance with currency, providing around 25 basis points of benefit which was less of a tailwind.
And then in prior quarters and less than we had forecasted.
<unk> at December 31 was $658 4 million.
Up 21% from a year ago, and nearly a $32 million increase sequentially and.
In a quarter with strong results across the board. This stands out as the most exceptional accomplishment by the team. It's the largest sequential quarterly increase ever for data, surpassing pre pandemic levels.
We ended the quarter with more than 18500 MSP partners, a net increase of 300 in the quarter and 15 104, 9% for the year.
We also grew the number of MSP is contributing over $100000.
<unk> to more than 1400, a 27% increase from a year ago.
Our sell through model continues to drive strong growth within our installed base of partners as they rollout and data solutions to more smbs, those smbs consume more data or add more seats and endpoints and they both adopt more downhole products, our fourth quarter gross margins remains.
Strong at 72, 5%, we saw some higher costs associated with new product launches and shipping expenses in the quarter, but for the full year gross margins increased to 74% from 73% in 2020.
Fourth quarter operating expenses were $88 million or 29% increase from Q4 2021 expenses, we're still artificially depressed because of the pandemic.
We continue to invest to drive revenue growth with a focus on security and cloud the majority of the increase in operating expenses in the quarter was driven by strong hiring in the back half of the year and some inflationary pressures on personnel costs.
Within Opex sales and marketing expenses were $37 million.
An increase of $9 9 million from Q4 2020, as a result of higher advertising and marketing expenses, including increased spending on events conferences and trade shows and higher personnel expenses, including increased sales commissions.
R&D expenses were $25 million, an increase of $6 $6 million from Q4, 2020, which underscores our continued investment in technology development and security.
G&A expenses were $23 4 million.
An increase of $2 9 million from Q4, 2020, primarily driven by increased expenses associated with being a public company and recruiting costs to support increased hiring levels in the back part of the year, which were partially offset by favorable bad debt expense as the company significantly improved its accounts.
Receivable aging profile.
And finally depreciation expense within operating expenses was $2 5 million compared to $2 $2 million in Q4 2020.
Operating income for the fourth quarter was $31 1 million compared to $34 million in Q4 2020.
Adjusted EBITDA for the quarter, which excludes stock based compensation restructuring costs and transaction related and other expenses was $39 8 million compared.
Compared to $40 8 million in Q4 2020, our adjusted EBITDA margins were 24%, reflecting continued hiring in the areas of security and cloud some normalization of travel and returned to office expense and higher costs associated with being a public company Capex.
Capex in the quarter was $15 1 million and free cash flow was $11 2 million our balance sheet remains very strong with no debt and approximately $220 million in cash at the end of the quarter.
Moving to our full year 2021 results total revenue grew 19% year over year to $618 $7 million and.
<unk> revenue also grew 19% year over year to $577 3 million.
Our full year 2021 revenue results reflect the benefit from foreign exchange rates of approximately 200 basis points.
We delivered full year adjusted EBITDA of $175 4 million.
An increase of 17% year over year.
Before we turn to guidance I wanted to highlight some changes to our guidance process and some reminders to think about as you're adjusting your models.
First we've decided to add guidance for subscription revenue and will be providing that going forward subscription revenue is already the vast majority of our total revenue and we manage the business to drive subscription revenue growth. So we believe it's appropriate to provide this level of transparency.
Second as you know over 30% of our revenues are international and these revenues are subject to currency fluctuations.
To help you understand and adjust for the currency assumptions in our guidance, we will be providing constant currency growth rates as part of our revenue guidance.
Finally, as a reminder, we typically see a saw tooth pattern in our growth were increases in our tend to build across each quarter and the year and then moved lower in the first quarter before building up again.
The impacts of the pandemic masked this seasonality in 2020 in 2021, but we expect a more normal seasonal pattern in 2022 and beyond.
Now turning to guidance for the first quarter and full year 2022.
For the first quarter total revenue is expected to be in the range of 168 to 169 million subs.
Subscription revenue is expected to be in the range of $158 million to $159 million and adjusted.
And EBITDA is expected to be in the range of $37 million to $38 million.
Our first quarter subscription revenue guidance represents year over year growth of 18% to 19% on a constant currency basis, and we're assuming about 150 basis points of currency headwinds in the quarter.
For the full year 2022 revenue is expected to be in the range of $720 million to $726 million.
Subscription revenue is expected to be in the range of $676 million to $682 million and adjusted EBITDA is expected to be in the range of 163% to $168 million.
Our full year subscription revenue guidance represents year over year growth of 18% to 19% on a constant currency basis adjusted for approximately 130 basis points of currency headwinds.
This strong revenue guidance represents continued acceleration in our top line and is consistent with the themes. Many of you heard at our Investor day.
We're on a path to 20% sustainable revenue growth and surpassing $1 billion of revenue in 2024.
Our EBITDA guidance is consistent with the message you've heard over the last several quarters and that we reiterated at our Investor day in.
In Q4 margins reached the low to mid 20% levels, we pointed to in prior calls and as reflected in our guidance. We expect margins will stay around this level before beginning to move up later in the year.
Some of you may be wondering about the impact of infill site on our financials and guidance first the total consideration paid for info site was approximately $44 million in cash.
The revenue impact embedded in our guidance is very small and the margin impact is just under one percentage point of dilution.
Of course as that business ramps in the coming years, we expect it will provide a nice lift to the revenue line and helped drive operating leverage for us.
Moving onto cash flows and the balance sheet. Once again for 2022 capital expenditures for the year 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.
For calculating EPS, we estimate approximately 169 million fully diluted shares for Q1, and 171 million fully diluted shares for the full year.
In closing, we believe our exceptional 2021 results in 2022 guidance reflect ongoing strength of the business and we're very excited about our momentum going into the year.
With that we'll open up the call for questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
In the interest of time, we do ask that you limit yourself to one question and one follow up thank you.
First question today comes from the line of <unk> Singh with Morgan Stanley . Your line is now open.
Hi, Thank you for taking the questions and congrats on the strong end to the year with the 'twenty one Cristina Erika that's really nice to see.
Sort of a macro level question just in terms of.
In terms of the spending environment, and how you're sort of in terms of putting together. The 2022 guidance what are the underlying assumptions that factor into your revenue guidance for the year in terms of the spending environment any sort of assumptions around the macro impacts from potentially inflation or higher interest rates.
That might impact or not impact the business from a high level perspective.
Yeah, Hey, Sanjay this is Tim and I'll ask John to make a couple of comments to us a little closer obviously the numbers but.
We haven't seen a lot of impact certainly on the revenue side, we haven't been the company. That's always quick to raise prices for example, but we haven't seen much price competition either in a couple of years. So I think thats, probably a positive macro trend. The demand side has been very good you can't think of anything in this environment that has sort of slowed that.
Down John mentioned, a couple of little challenges last year in the supply chain you might pay extra for express shipping things like that here and there and then we all know what the war for talent looks like in that that continues although.
You probably know better than me, but it feels like maybe some people that felt like that unlimited capital last year might be slowing down a bit it might start to think about long term business plans. So we're hopeful that maybe that's.
Sometimes slows down so we've factored in what we know and certainly nothing is happening right now that we haven't been dealing with for six to 12 months last year.
Yes, Tim the only thing I would add is because I think you were asking a little bit.
What we factored into our guidance.
<unk>.
Price is not historically been a lever for us.
To address rising.
Cost and we've not assumed any price increases too.
Address any inflationary pressures as Tim said, we certainly have seen some.
Pressure on personnel cost in.
The war for talent is real but until we've factored some.
Higher increases for that into our models for this year and therefore into our guidance.
On the supply chain side.
Maybe the short answer there is that we've built up some good levels of inventory and we feel like where we're moving to the other side of some of the pressures we felt there that led to some higher spending on shipping.
And so we.
We think that some of that should abate in the euro.
That's not a huge number but that's another sort of macro trend that we're seeing.
Super helpful. And then on the product side I, just wanted to get a sense of what some of the early uptake is on data continuity for Microsoft Azure in terms of.
No when do we expect that to start to become a potential driver for revenue and revenue contribution going into next year.
Yes, it's a good question overall, we're pleased obviously sort of 90 days in here. So I'm pleased with the launch so far.
I think we've become convinced now with so many commercial MSP and workloads in the cloud. So the team did their job getting the product right as the right product for the market and it was delivered on schedule. We have a very strong pipeline that's building.
Early adopters have given us a fair amount of feedback and it's not something you can use for a day and then tell us you've got to use it for a few months and we're gathering that and I think our overall product strategy, which has always been high efficacy meets maximum ease of use for MSP is I think the teams have nailed it on that on that front. So now.
It's just laps around the track this year and remember, it's a largely net new opportunity for US certainly in the early days, where we're sort of focused on finding msp's that may already be in Azure and.
No doubt also well so less less kind of migration going on the net new and so excitement remains high and give us a little time before we sort of have enough stability and metrics and conversions that attaches and things like that but.
But it's something we'll keep you posted on throughout the year Sandra.
I appreciate that.
Yes.
Youre welcome.
Your next question comes from the line of second Kalia with Barclays. Your line is now open.
Okay, Great, Hey, Tim Hey, John Hey, guys doing thanks for taking my questions here.
Great.
Hey, Tim maybe just to start with you.
Assuming out a little bit right like you talked a lot about security on the call and going back to analyst day, you sort of talked about the business in terms of sort of a mix from from newer products versus a mix for maybe some more mature products, let's say I guess the question is how do you sort of envision that mix in 2022.
And maybe maybe we just touched on one of them, but like what products do you think are going to be particularly impactful and that sort of newer product bucket. If you will does that makes sense.
Yes, it does.
I would tell you it's only been two months I would stick with that Investor day Slide I know the one youre thinking of where we broke down not only the product line sizes, but also growth I think we're pretty transparent there.
Our LTM numbers, but theres sort of reflect.
The run rates to a degree I think.
It's probably your best indicators of how the mix might shift of course faster growing lines become a bigger part of the mix that's sort of business 101, I guess for anybody.
Our flagship <unk> product is our largest and has been a mid teens grower I think one key message of that day from US was that we believe <unk> still has plenty of growth in its future.
Our data continuity for Microsoft Azure products should be an accelerant as it scales up its just going to take a little while before it can move the needle relative to the larger basically our core.
I think cyber attacks also fueled <unk>.
There's nothing that makes me believe your first dollar security shouldnt be on a strong recovery solution.
Then you look at a more mature product might be PSA. So a steady grower and we continue to see good potential there and we can we gave a little peek at that and then what you are referring to I'm, referring to in particular, SaaS RMM and the sort of security attachments that are now being rapidly introduced with them surely are going to remain the fastest.
Growth engines over the next couple of years, both because we are winning in the market.
The quarters, there was a strong unit growth in the base products, but also because of those security attachments and we started with ransomware detection. We've got SaaS defense now a number of new things coming this year that drives the dollars per end user or dollars per endpoint. So.
It would be hard to bet against those two is the fastest growing I think percentage wise and over a couple of years, even even dollar wise and then long term you know the trends as well as anybody securities a strong trend clouds, a strong trend those two overlap, which I think is going to get interesting and maybe a throw in new ventures, like commerce and networking and.
I think we've got a nice multi cylinder growth engine.
Got it that makes sense, John maybe for you.
As you kind of look at at 2022, and I realize we're not guiding to <unk>, but how do you sort of think about even just high level.
<unk> of growth.
Between sort of the number of Asps and that that AUR per MSP could that could that sort of mix to to the.
Equation be different than what we've historically seen or are look similar as we sort of put the pandemic kind of further and further in the rearview mirror.
Yes, Thanks Scott.
Think that picture is going to be fairly similar to what we've seen in the model.
And construct we laid out at Investor day, we talked about achieving our growth rate targets by a combination of growth in MSP accounts and growth in our per MSP, and we talked about a range of 5% to 10% growth in MSP.
Net new MSP, and 10% to 15% growth in <unk> per MSP, and we still think that.
That's really the model or the.
The next couple of years and those ranges are likely to hold.
And as you know in any given period, the vast majority of the growth coming from the existing MSP.
But adding those new MSP is does.
Add to the cohorts and provide growth longer term and we feel very good about continued feel very good about.
The gross additions in the new cohorts of MSP as we're bringing in.
Very helpful. Thanks, guys.
Thank you.
Your next question comes from the line of Kirk <unk> with Evercore. Your line is now open.
Thanks, very much and congrats guys on a great quarter.
Tim I was wondering if you could just follow up a little bit more on the earlier question just around installation.
I was just kind of curious with the MSP is how they sort of think about pricing increases given that they do have services and people costs are probably going up.
How do you think about sort of your pricing along those lines as well, obviously being an important part of their Cogs I was just kind of curious if you could maybe dive into that a little bit more maybe youre not seeing it yet, but I imagine it's something you guys are at least contemplating as we go into this year.
Yes, we have talked about tech labor shortage as being a driver for MSP and for businesses. So you start with SMB. They can't find the tech talent they need to hire an MSP. Then you look at MSP isn't having tech later labor shortage. They looked at a large scale vendors like data.
<unk>.
It would seem to me that the inflationary trend.
Also gets them so not only is it harder to higher tax it's more expensive to hire techs and so you think about something like continuity. We have a turnkey solution that is 100% focused on minimizing the msp's time.
And if you're a small shop when you start off spending every weekend restoring backup images and monitoring them in writing alerts. If you like writing code and babysitting servers, maybe that was fun. It becomes a lot less fun, if you're paying people and theyre looking for 20% pay raise this year and they're hard to find in the first place. So I think that kind of turn.
Key solutions that we offer should play well into that and I think that will be no more nowhere more apparent than in security, where you can buy a lots of security tools as you well know and you can stare at a lot of blinking Red lights in your operation Center, but what are you going to do with all of that data and where youre going to find those people. So I think it.
Kind of cuts both ways and I think in general that helps us with thinking about sandwich question on inflation that helps us weakened spread one person over a lot bigger revenue load, we can spread one server over a lot bigger revenue load and so I think the same way that some of the hyperscale or as Mike.
Benefit in other service lines. So I think we're going to benefit from this and.
That's helpful and then John one quick one for you and anything we should consider from a seasonality perspective on cost. This year just in terms of things that.
Maybe onetime in nature, and we should at least think about whether it's first half versus second half or how fast maybe costs from a travel perspective are coming back up.
Any color additional color on that would be appreciated. Thanks.
Yes, Kirk accident Thats a good question.
I think a couple of thoughts and these are a little bit on the margin but.
They have an impact.
<unk>.
<unk> is typically when were.
We're doing pay adjustments for folks and so we will often see that as a.
As a.
Quarter, where expenses will be going up more than than most quarters.
That's our biggest caused by far obviously our people cost.
And then Datacom, we're assuming we're going to be back in person and we're going to be hosting a datacom and right now we're assuming that's going to be in Q3. So I'd say Q2, and Q3 will feel a little bit of.
Any extra pressure on costs and then the other point about sort of return to normalcy return to travel returned to office is a tough one and we certainly.
Were played that very conservatively last year in our guidance.
But we're assuming that that's really started picking up EBIT in Q4, and you can see that in our margins and so we're assuming we're at.
At a little bit higher and steady pace on that front throughout the year.
Thanks, John .
Yes, Kirk I realize I didn't may not completely answer. Your question you talked about how we think about pricing increase and what have you.
You think about Microsoft which.
Has put through as you would well know a very large M 365 price increase in.
That's tougher and MSP in real time, if Microsoft's jamming you up in a particular month and you've got 612 18 months left on your contracts with your end user.
Among our many things we think we do well relationship wise, we don't surprise Msp's price increases to the degree we do them come through a new skus they come through and up sold attachments.
<unk>.
What have you I mean, they kind of know that our costs from a cogs perspective, or probably not really going up right at that scale. So it's something we do but we spend all day thinking about what's the impact on our partners.
Thanks, Dan that's helpful.
Your next.
<unk> comes from the line of Jason Ader with William Blair. Your line is now open.
Hey, this is Sebastian on for Jason. Thanks for taking the question I think we've answered a lot of the questions I had some maybe.
If I can just get a little bit more color around the info site acquisition. When you expect that product to be integrated into the data platform and sold as such and then maybe what are the advantages of bringing that kind of edr technology in house versus competitors that might be leveraging a third party.
<unk> like central one to fill that gap in their portfolio.
Yes, no it's a great question.
You won't be surprised to see remember, we talked about SaaS protection and RMM as our kind of two key.
Security platforms end user an end point, so think back a year ago Sebastian.
We bought <unk> as a security extension to SaaS protection, and we introduced that technology a little later in the year SaaS defense and we have some terrific bundling going on there.
That team stays active today in SaaS defense development, but they've also had impact on other security products and we've got a number of teams developing security technologies now along comes info site and you're going to see that included in the set of security extensions to RMM in the endpoint security arena emphasized actually bring.
Several relevant technologies and offerings and including an operational security team they are alive and market with.
With partners of their own and all of that is going to be incorporated into some new data security offerings in 'twenty two.
We won't pre announce anything but.
I don't think you'll have to wait that long either so so stay tuned and we'll keep you very updated but you should think about it is sort of very analogous in shape and timing to what we did with bit down becoming SaaS defense. It's something we've been studying now for well over a year.
And I guess you ask one last question just about in house.
It's always been data is DNA in general to.
Either build or buy small technology companies or build our own tech, but to own and control our proprietary tech we get the customized and tailored for MSP, we get to really focus on efficacy as I described and it wont be surprised that the long term target margin potential is meaningfully higher.
It's harder to differentiate in and get margin and deepen the relationships. If if youre primarily reselling. So we're completing up very strong pivot to a full security company and this is a key point for us on that line.
Great. Thank you.
Your next question comes from the line of Brad <unk> with Macquarie. Your line is now open.
Okay. Thank you first I wanted to hit I think on the cyber security side of things here in.
Specifically I saw that you rolled out quite quickly RMM based.
Elution for the log for Jay exploit that was out there. So I just wanted to ask you know generally.
How have your MSP partners been approaching.
Their entire ecosystem and their approach to cyber security in the wake of that log for Jay attack and what did you don't get it was quick rollout of the mitigation for such like a critical cyber security incident do for your awareness in the cyber security marketplace. Among your partners.
Hey, Fred I think I caught all that you're a little quiet at the beginning but.
That's not the first one you are well aware of the kinds of breaches threats et cetera. So long for Jay was definitely a biggie first you run around and take care of your own house, which we did quickly we've got a terrific team.
Secondly, we immediately go to that second rig I talk about which is get to MSP as thought leadership. It is accruing to our brand. We have I think have I'll have permission. After a couple of years of doing this we immediately think about what content do we need to get out there proactively what do we need Webinars. In addition to that what can we do scripting wise within <unk>.
<unk>.
To help people if not within data where RMM broader world. We've had a few of these I seem to recall silver Sparrow, we put out just public domain tools were never in that context trying to create direct revenue opportunities. We are building our brand thought leadership helped msp's as time goes on though again it goes back to that inflation question and shortage of talent question.
It's hard for them that was a multi week effort for most msp's, maybe still ongoing versus large enterprise like ourselves and are within a within a week or so you sort of know your exposure you plug the holes in it.
They're going to look to consolidate vendors over time and.
Find more of that that help I can tell you from just the social media threads lots of MSP or otherwise pretty sophisticated take a few days just the process. The question, where do I have to go look what am I doing where the scripts et cetera. So we love we don't love those events with our citizen add on but we love those events in terms of our ability to help and I think as.
You noted continue to connect to our brand I think we've had over 3500 downloads of just that script alone and Thats 3500 people that are touching up to a very directly.
Really you don't have to actually sell where the sales rep at that point years for your product is selling itself.
Okay. Thank you for that context.
Touching on our rather hitting on social media here.
It is interesting to see them.
As soon as the pain that was expressed by MSP uses theyre talking with each other regarding the changes to Microsoft's pricing.
Change Dot org petition that was trying to push back on it.
So what effect I don't know that said.
It's clear that it's putting pressure on MSP. So I would just like to ask from your perspective and data as perspective.
Any of the conversations changed with how MSP or thinking about budgeting in the future or how they are approaching.
And we're just.
Working with their own end clients and does any of that flow through into demand for data or any sort of demand conversations that youre, having now that these price changes have gone into effect.
Yes, that's a great question. It is an active conversation again because of Msp's FTAA or pass that through our <unk> piece of that and that not only changed price they changed some t's and c's and how your contracts. So big shuffle, Microsoft has their strategic reasons I'm old enough to know that they are very capable of viewing.
<unk> strategic position in a particular product line and taking price wherever they need to so not completely surprising I think its interesting for us and a couple of dimensions. One were very much in their ecosystem. There are partners of ours.
An MSP to now look at some of our solutions as cheaper on a percentage basis that can look at our Ts and CS and find that reminded again that we're very partner friendly in that context, but I don't think it changes their need for.
Protection defense, all the different kinds of things that live.
As adjacencies in our Microsoft ecosystem that we sell so.
Unless you are ready to call a broad move away from Microsoft 365, which is overwhelmingly the largest within MSP ecosystems.
But at the same time our protection.
And Google Workspaces today, our SaaS defense, we know how to do that for Google Workspace. In fact, <unk> was working working pretty close to launch on that before we acquired them, but Microsoft really the lion's share of what Msp's do so it's something we watch carefully because of.
Our close connection to Microsoft, but it's you mentioned all the different kinds of things that wasn't there fine or stay with MSP is from a brand perspective and those are the kinds of things we think about very carefully.
Yes, certainly not based on all the angry posts on social media about Microsoft So thank you for the clarification.
Youre welcome.
Your next question comes from the line of Matt Hedberg with RBC capital markets. Your line is now open.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking our questions.
It's a really nice to see the <unk> accelerate in the quarter here and the year over year growth rates.
And with net new IRR really accelerating through the year I guess.
Could you expand on the saw tooth pattern to <unk> growth that you highlighted on the prepared remarks as you mentioned, we havent really had a non cold a quarter.
Any any better way to think of the cadence of that soft too through the year.
Yes.
Saw tooth pattern really is.
Think about the change in our in each quarter.
Builds over the course of the year. So that Q4 is typically our strongest quarter and then when.
When you flip over the year end of Q1.
There's historically been seasonality in a dip in that change in <unk> and then you start building back up again.
And.
Yeah.
Overall growth trend, obviously to higher levels ultimately, but.
There is.
The seasonality.
Okay.
Right. Thanks, and then just thinking about guidance for the first quarter and full year that you provided.
Thanks for the additional disclosures I guess it looks like growth as reported is expected to be kind of consistent.
Through the year, but theres more FX headwind to the full year than the first quarter, maybe what are some of the expected growth drivers coming online through the year, what enables that consistent kind of as reported growth despite incremental FX headwinds.
Sure I mean, it's I.
I would point to a couple of things one the product mix that Tim talked about earlier right. Those those key drivers of our growth will continue to be the core engines of the growth RMM in SaaS.
And the attaches to those over time, we'll add more and more to the growth.
And as we've discussed is of course.
Existing MSP that are going to drive growth more in the near term.
Dan.
Then.
Adding new MSP, but those components will play a part.
Plenty of product across the year.
And we've added very healthy growth.
Cohort of Sps I think.
We talked about last year.
Very strong recovery in actually consistent.
The.
Addition of cohorts of new Msp's, even during the pandemic so.
We feel like we have.
A lot of room to run with those.
Growing the IRR per MSP with those existing <unk>.
Thank you.
Your next question comes from the line of Edward <unk> with Baron capital.
Well now open side.
Thanks, taking my question and congrats on a strong finish to 2021.
You can ask questions I'd asked about the ranges for our premise being net new on the speed growth our checks keep pointing to for further consolidation of the MSP level would you say this was a key factor in selecting these ranges.
From the analyst day, even though they've been fairly consistent with recent term and is there anything further you'd like to share regarding MSP consolidation in the future.
Yes. This is Tim.
I'll take a shot at it because I think it's probably more qualitative than quantitative we do see MSP consolidation.
We tend to be beneficiaries of that were a little larger more premium provider, we tend to serve larger MSP. So.
The net buyers in that.
I think you do see occasionally to data msp's merge and I think youre on the right point there that would.
Give you a higher average for MSP given that you double the MSP and at a lower MSP count, but thats still probably not.
A big enough material effect to two.
Disorder really label at this point and are something that we forecast so I think.
John gave you those ranges previously the five to 10 and 10% to 15 and I'm sure a big factor in what we see of consolidation at this point.
We'd like to think that if we are net beneficiaries of that the 18000, plus MSP you might get another 100 of them just from acquisition and we don't get to count them, but we get all of their clients.
Absolutely great to hear that's helpful. And then another question here.
Mobilization was a theme that stuck out will be more in this quarter than in previous I'm curious if you see M&A as a vector drive international expansion and in general, but I think it would be helpful to double click on the strategy for international expansion and how that might have changed from previous years.
So I would say no to consolidation I don't see the data of fill in country or fill in a region that looks so easy. We're in enough places. We think we know what we're doing we tend to be targeted will pick a country try to go in I think in some countries you may see different structures. So you may have a two tiered.
Distribution, where we're working through a distributor who has been working with the MSP in some countries you might see fewer msp's that are larger than others, you might see more MSP, they're smaller we've talked a little bit about that but.
We're certainly aware of those dynamics were in enough countries now.
And every major theater and then of course, some msp's will sort of go cross country lines it tends to be more rare but.
Certainly in Europe , and a couple of places like that I think youll start to see maybe some msp's themselves emerging into more multi regional kinds of kinds of players and we'd be focused on getting them. So I don't have a one size fits all there are scale helps because we've seen a little bit of everything.
Great exciting to see how it plays out over the next few years that's it for me. Thanks.
Thank you.
Your next question comes from the line of Nahal chalk sheet with Northland Capital markets. Your line is now open.
Alright, Thank you and Mike Congrats as well.
<unk> <unk> above the high end of my favorite expectations and I'm sorry in the toilet.
Great.
So.
As he is going to be coming up against much tougher incremental air pumps, starting this march quarter.
What needs to happen.
To get to basically an incremental.
36 million per quarter or support a 20 plus percent Arab growth in the back.
Past calendar 'twenty two.
Yes, Hi, its John go ahead go ahead John .
Yes, and I'll take a shot Tim and then certainly jump in but it takes a few things one I would point to the growth engines, we've highlighted and we've had.
You've seen acceleration in the growth of.
I would call the products, we have on the truck. We've just launched a couple of new products obviously.
<unk>.
The CMA in SaaS defense as those start to build some momentum over the course of the year they'll ultimately.
The adding to growth.
Do you see the impulse site acquisition.
We're looking ahead to that for that to start layering in.
In future quarters, you know more like Dan might help later this year that could help in future years, and then obviously, we remain very focused on.
<unk>.
On keeping churn under control so we spend as much.
Effort and energy thinking about how to maintain our MSP customer base, how to keep them happy how to keep them in the ecosystem.
And.
Lot of focus on the reliability and security of the product set.
So that.
We keep churn down.
And I guess the last thing I would I would add is we just were talking about international and.
International expansion and that's that's absolutely part of the equation as well I think this year, we're laying a little bit more of the groundwork for that but.
Certainly as we get near the end of the year and into next year.
There is a component there.
Tim did you have anything to add before I go into my follow up question.
Oh, yes.
Okay.
And then.
Can you give us some sense as far as how.
How does the C D R.
Contributing to our growth relative to the PSA RMM piece and then the security piece as well.
Yes, I don't think were going to go into in the product mix more than more than we did at investor day or.
Or what we've given on the call. So we know you're anxious for it and we will get we will give some check and color from time to time on it.
And the only thing I'd add.
Highlights.
What we've said is that.
We did see nice recovery in our core continuity in in the year last year and that.
That was definitely a.
Big part of the mix all year long so.
Got it okay. Thank you very much.
Mhm.
Your next question comes from the line of Mike Seacoast would need Ham <unk> company. Your line is now open.
Hey, guys. Thanks for getting me on for the Q&A here.
First question going to John but if I'm looking at the gross margins.
This quarter, you had called out maybe some higher costs from these these newer product launches and shipping expenses, but as we're looking forward from here is it fair to assume that we've kind of bottomed here should we expect.
I guess additional pressures as those newer product launches continue to build scale.
And then any comments on the on the shipping expenses would be helpful.
Second part of that question. Then we would also look at the Opex I know that you guys have spoken to the additional investments you're making in product and tech and laying the groundwork for international but just wanted to help.
I guess with broad strokes here, we've heard from other companies that with the return to work post Covid.
Experiencing anywhere from like a 2% to 3% cost headwind when it turns to operating margins system. This return to normal and potentially another <unk>.
Point of headwinds come.
Coming from wage inflation is that a fair way to think about how you guys are going through this year or is it.
Either heavier or lighter than what you guys are thinking anything that would be beneficial.
Sure a lot in there I'll try to address first on the gross margins.
We've.
I think we're in a range right now thats, probably a reasonable range going forward to your point about <unk>.
New product launches and the cost ramping there.
And.
So I think we feel good about that on the shipping cost feel like we're getting to the back end of that I'll highlight a couple of things one we built up as you can see it.
Nice inventory, we've gone from probably two months of inventory to six months.
We feel.
Less of a need to expedite shipping to make sure that we.
We always have.
Goods on hand.
And so we feel like we're probably moving to the back side of some of the the excessive shipping costs.
So I guess, that's really what I would say on gross margin on Opex I think the best way to to guide you. There is to think about the overall EBITDA margins that are expressed in our guidance.
Bind with with some of the other comments we've made.
Without a doubt.
We feel and see the world Tallo, we're feeling some inflationary pressures.
Personnel costs and factoring in a little bit higher.
Increases in our personnel costs.
Year over year. In addition to continued robust hiring and investment in the business, but all of that is reflected in the <unk>.
EBITDA margins that we're showing which.
You sort of look at Q4 end.
And the guidance, we have for Q1 and the rest of the year you can see that we're essentially holding at these levels or margins and that over the course of the year.
We would expect those margins to start moving up the last thing I would add is.
Debt and you may have caught this already but the info site acquisition.
Is.
Impacting margins by nearly a percentage point of dilution over the course of the year and that acquisition closed in January so it's really a full year impact.
That's very helpful. Thank you for that and then just one quick follow up for Tim I know, we've spoken about info side a lot on this call and I really appreciate the color.
As we're thinking about the acquisition strategy and I appreciate that.
Commentary on owning the IP and taking ownership for the richer margins in hand, but at the same time.
Understand that there is a balancing when I think about some of them.
The different moving parts for from an investment profile perspective for maintaining a very robust edr solution.
Can you kind of help us.
Thinks through your your M&A strategy on that front, especially as I'm sure that you guys are continuing to look at other candidates out there in the market.
That would be helpful.
Yes.
I think as I referred to in my prepared remarks, we've got.
Good play now in every stage of the NIST framework and it's a question of integrating them, making sure they're easy to use.
Sure.
Test our solution is quite a bit so.
I think we've always sort of found our spot I won't call it mid market, but with MSP and are well above.
Cheaper solutions were never the price leader, but stopping well short of all the complexity of that enterprise players get pulled into so I don't know if thats.
I'll cover the saddle point in mathematics or were there some kind of optimization going on and we just have an instinct for where to be there in terms of high performance, but easy to use it's really the founding principle of the company. If I go back five years ago and listened to the founders pitch to me and so I think we feel like we are on a good road to doing that.
Security overall, and I don't think endpoint security is going to be any different there. So we don't feel a strong need to have to buy five more things to do something.
That will be very very effective even a ransomware detection, which was built in house.
And in a fairly short order before launch and we've now extended quite a bit it's catchy.
Catches is pretty amazing and it's catching that sitting behind other AAV and some edr solutions that are household brands.
That's a really exhilarating and MSP see that so.
I understand the nature of the question, but I think this is always how we've how we've rolled so we're not opposed to any kind of resale. We just tend not to do it we're certainly not opposed to licensing components. If they if they are interested in and it was not a not made here mentality kind of thing, but I do think that proprietary tech allows you to control the environment control the solution the experience for the partner.
And of course get better margin at the end of the day.
Understood. Thank you very much for the color guys I appreciate it.
Alright, I think we might have one or two more in the queue I realized we're past the top of the hour, but let's let's try to get a couple in real quick if there is one or two more operator.
Definitely your next question comes from the line of Koji Ikeda with Bank of America. Your line is now open.
Hi, Laurie law.
Thank you Laurie and Paul Cullen Joel Thanks, a lot.
So just wanted to follow up on the margin question.
One is that how is that international expansion, having an impact.
Margin.
And then just.
Pointing out a couple of things.
While market fashion, the new product side.
Site.
And what about what is the major driver.
Thank you.
Okay.
Okay.
And you wanted to think about internationalization well in the second I missed the second part I'm sorry.
Yes, just the major drivers for the margin expansion there of copper content comments on that just wondering what other what other.
That's one.
Of margin expansion.
Yeah that was the question Okay sure.
Nationalization I think.
And sort of the global.
Expansion.
Absolutely.
The short term.
<unk> depress margins right and so.
That's an investment when we talked about investing in growth that's an area, where we definitely are investing.
Just like a new product launch and a lot of ways right moving into a new country. The expenses are going to precede the revenue typically.
That that is all factored into the guidance that we provided.
And so that will that's part of the program that we have planned for the year and again, we're laying a lot of the groundwork this year.
And so then when you think about what are the drivers ultimately of expanding margins over time, it's really the the back end of those J curves right till you start you have a lot of expense upfront that ramps both orders and revenue.
Revenue starts ramping.
And if you have the right unit economics in the light right model, which we feel like we do then those revenues are going to grow much faster than the expenses and we're going to benefit from that.
Over time, it's about the position we're in.
The model we have.
And you think about the number of products, we have sort of still a fairly early stage in that J curve.
It's exciting to think about them.
The ramp that will benefit from there.
Yeah Yeah.
Great. Thank you bye.
Thank you Laura Thank you.
Your last question operator.
Your last question today comes from the line of Brent Thill with Jefferies. Your line is now open.
Hey, guys you have Joe on for Brent I. Appreciate the question. It was a really good quarter for large customers. Thank you added 100, 100, K customers versus 50 that past few were there any commonalities with those larger expansion and did that drive the gross renewal rate higher.
None.
Yes.
That's a good question I don't know that there's any commonality.
Do you see those large customers are typically customers who've been with data for quite some time I mean the profiles.
Generally are pretty consistent that.
MSP start small with us and grow over time.
And so very unlikely to churn typically have standardized on <unk>.
One or more maybe even three or four data products, but and extending that across their their base I think we're doing a better job of qualifying and prioritizing.
Our focus on.
On MSP and have a propensity to grow and maybe we're starting to see the fruits of some of that effort flowing through.
And yes without a doubt I mean, it's all part of the mix right the improvement in net M. R. R.
Certainly has helped by.
Those those large and growing MSP partners that we have.
Okay, and then any sense of how security did relative to that 40% growth number you gave at the analyst day, and if I can sneak in one quick one is the constant currency impact on EBITDA the same as revenue.
Yes.
I think the first one.
Youre talking about sort of the mix of the growth mix that youre, not really going to break that out I think.
The way we've characterized it as that.
Sort of the proportionate mix of drivers of growth that we shared in December .
We sit here in February are really not very different.
It takes time, you know year or more before that Nick starts moving meaningfully.
On.
And then the other question was constant currency or much.
Much less impact on EBITDA than on revenue.
So.
Okay.
Natural buffer on the expense side, so the EBITDA is.
Impacted much less in revenue.
Thanks.
Great.
Thank you.
Concludes our Q&A today, Tim Weller I'll turn the call back over to you.
Okay, well, thanks, everybody for joining us we decided to go a little past the top of the hour given that it was year end and so much happened and we appreciate your continued interest in <unk>.
Again, thanks for thanks for joining we're going to we're going to go back to work.
This concludes today's conference call. Thank you for attending you may now disconnect.
Okay.
Yes.
[music].
Okay.