Datto Holding Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Datto Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Kelsey Turcotte of the Blue Shirt Group. Thank you. Please go ahead.

Thank you, Operator. Good afternoon. Thank you for joining us today to review DATO's third quarter 2020 financial results. With me on the call today are Tim Weller, Chief Executive Officer, John Abbott, Chief Financial Officer, and Matt Kess, SVP of Finance. All three will be available to take questions after our prepared remarks. 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 fourth quarter and full year ending December 31, 2020. As a result of a number of factors, actual results may differ materially from those projected in such statements. These factors are set forth in the earnings release that we issued today under the section captioned forward-looking statements. And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. The following statements reflect our views as of today and should not be relied upon as representing our views as of any subsequent date. In addition, DATO 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. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our third quarter 2020 earnings press release, which can be found at www.datto.com in the investor relations section. Also, please note that a financial supplement and webcast of today's call are available on our website in the investor relations section. With that, I'll turn the call over to our Chief Executive Officer, Tim Weller. Tim?

Thank you, Kelsey, and many thanks to everyone for joining us on the call this afternoon. We're excited to report our initial quarter as a public company. I want to extend special thanks to our managed service provider partners, the MSPs around the world, for your confidence in our Datto team, and for your round-the-clock efforts keeping small and medium businesses, the SMBs, online and connected with technology during this pandemic. I would also like to thank the Datto team for their hard work and support during the IPO process. We are excited about this next step in our company's journey. I'll start this afternoon with a few highlights from the quarter. Then, because it is our first earnings call, I want to take some time to share the Datto story and our operating philosophy. Finally, I'll turn the call over to John Abbott, our CFO, to discuss our financial results and guidance in more detail. We reported a very strong third quarter. driven by expansion from existing partners and by the addition of new MSP partners, which now total more than 17,200 worldwide. Subscription revenue for the quarter reached $123 million, an increase of 17% from prior year Q3 2019, and represented approximately 94% of the $131 million of total revenue in Q3. ARR, an important indicator of future subscription revenue growth, also grew 17% year-over-year to $523 million. Adjusted EBITDA reached $46 million in the quarter, and we generated $44 million in free cash flow, representing the second consecutive quarter of positive free cash flow in the company's recent history. Looking forward, we believe ARR The market opportunity ahead of us remains very attractive, and we intend to continue ramping up our investments in technology innovation and growth while prudently managing our expense structure. Turning to the Datto story, we are the largest pure play IT solutions provider to the MSP community. Our mission is to build the highest quality products, provide best-in-class service, and enable our MSP partners to effectively, efficiently, and profitably serve their small and medium business clients. The Datto brand means MSP, hence our ticker symbol, and we wake up every morning serving this channel every day in our sales and support motions and in creating technology which is purpose-built for MSPs. We call our over 17,000 MSPs partners, not customers, and we promise to never go around an MSP to sell directly to their SMB end users. That pledge has established a bond that we have spent years building brick by brick and makes us more than just another vendor to MSPs. We are their trusted partner. No other company of our scale can deliver on that promise to MSPs, and it creates a major barrier to entry for our competitors. managed services are a large and growing market with more than 125 000 msps worldwide in fact smbs spent about 137 billion dollars with msps in 2019 and that's growing about four times faster than the overall smb it market as msps serve their smb customers they face their own set of challenges So Datto prioritizes products that are reliable, easy to deploy, and centrally managed, all in an effort to save MSPs time and protect and enhance their relationships with their customers. To that end, we offer 24-7 support and provide the MSPs tools, resources, and content they need to grow their business. Our integrated cloud management platform is purpose-built to empower MSPs and serving SMBs. Datto is a creator of core technology and not a reseller. Our technology continuously protects digital assets, both applications and data, and provides secure access, monitoring, and management for those applications and data. We help MSPs minimize business downtime for their SMBs, and we are the last line of defense when firewalls are breached, data is lost, or servers fail. The majority of our cloud-based solutions are those that MSPs sell through to their end-user SMB customers, helping our MSP partners grow their revenue and profit. These mission-critical products include our flagship unified continuity line and our newer networking line. We also help MSPs manage their own businesses efficiently with our business management products that we sell to MSPs. And finally, we provide a full range of free enablement resources to our partners that helps them in marketing to, selling, and supporting their SMB customers. This drives revenue and profit growth for our partners and for Datto. Our MSP-centric business model efficiently unlocks the large but highly fragmented SMB IT market for Datto. We deploy a land and expand go-to-market strategy executed by our sales team. One Datto sales rep can cover dozens of MSP partners who can then reach thousands of SMBs. Each MSP drives revenue growth for themselves and for Datto as they deploy our products and sell them through to their existing SMB customers. and then add new SMB customers, leveraging our sales enablement resources. These customers can then expand usage with us and adopt additional Datto features and new products. In this matter, we grow our share wallet with each MSP partner. Their success is our success. This is an incredibly efficient sales model that provides leverage in the business and can buffer us from both economic and SMB volatility. We did not want to tell our story without mentioning the pandemic. Our MSP partners have proven to be very resilient during this period, given their position as trusted advisors delivering mission-critical solutions to their SMB customers. As MSPs support their customers' transition to remote work, they've been adopting DATOS SaaS protection and remote monitoring management, or RMM for short, solutions at a record pace. We see MSPs effectively adapting, and longer term, we expect SMB digital transformation to be an irreversible tailwind for MSPs, as SMBs embrace more new technologies and do not fully revert back to offline models. Our level of engagement with MSPs has never been higher. We've introduced Datto's first-ever series of virtual MSP technology days, where thousands of MSPs joined us as we cultivated the MSP ecosystem with thought leadership, education, and peer interaction, and previewed cutting-edge technologies geared for this channel. And finally, we were proud to be recognized by CRN as a winner of the 2020 CRN Annual Report Card Awards in the Data Protection and Managed Services Software category. The award voted on by more than 3,000 solution providers in North America underscores our commitment to the MSP community and our willingness to go the extra mile to deliver best-in-class products and program offerings. Since our founding over a decade ago, our sole focus has been to build an MSP-centric culture that keeps these partners at the core of everything we do. Our success at achieving this objective is a direct result of the hard work of our talented team, of which I'm incredibly proud to be a part. This is an exciting time to be at Datto. Looking ahead, we recognize that our IPO is just one step on the journey of our company. And while we are excited to have achieved this milestone, we have much more to do. We look forward to a strong close to the year and to speaking with many of you during the quarter. Now, I will turn the call over to John.