Datto Holding Corp.

Ladies and gentlemen, thank you for standing by and welcome to DATO's fourth quarter 2020 earnings results 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. And if you should require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Mr. Ryan Burkhart, Datto's Director of Investor Relations. Thank you, sir. Please go ahead.

Ryan Burkhart Thank you, operator. Good afternoon, everyone, and thank you for joining us today to review Datto's fourth quarter and full year 2020 financial results. With me on the call today are Tim Weller, our Chief Executive Officer, and John Abbott, our 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 and full year ending March 31, 2021, and December 31, 2021, respectively. 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 only as of today and should not be relied upon as representing our views as of any subsequent date. In addition, Datto 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 fourth quarter and full year 2020 earnings press release, which can be found on our investor relations website. A 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. Tim?

Thank you, Ryan. And many thanks to everyone for joining us on the call this afternoon. We are excited to report strong fourth quarter results, capping off a milestone year for Datto. I'll start with a few highlights from the quarter and year. Then I'll discuss two specific strategic initiatives for 2021, including our recent acquisition of BitDem. And finally, I'll turn the call over to John to discuss our financial results and guidance in more detail. Our enthusiasm for the MSP opportunity has never been higher, as SMBs continue to accelerate their digital transformation. Last year introduced a new set of challenges for Datto and for the global economy. But despite those challenges, we grew full-year subscription revenue 18% year over year, expanded our cash flow margins, and deepened our strong global MSP partner relationships. Our performance is a testament to the demand for Datto's platform, the unique and symbiotic relationship we have with MSPs, and the power of our recurring revenue subscription model. We are well positioned to capitalize on the global opportunity in front of us, and the themes of cloud and security will be areas of focus for Datto as we deliver new solutions to our MSP partners in 2021. First, I'll touch on our strong fourth quarter results. We delivered another great quarter primarily by continued expansion from existing partners with newer MSPs beginning their journey of growth with Datto. We were particularly pleased to see new sales from our core BCDR business rebound nicely with continued strength in SaaS protection and Datto RMM as well. Subscription revenue for the quarter reached $129 million, an increase of 16% from Q4 2019, and total revenue was $139 million, exceeding our previous Q4 revenue guidance. We ended the quarter with $543 million of ARR, which represents an even higher sequential increase than in the previous quarter. We view this as a key leading indicator of revenue reacceleration. In Q4, adjusted EBITDA was $41 million, and we generated $23 million in free cash flow. This represented our third consecutive quarter of positive free cash flow. Before John fills in some details on the numbers for you, I'd like to describe progress on the two areas of highest strategic focus in 2021 for Datto, and probably for the MSP industry overall, and those are cloud and security. There are fundamental long-term shifts for all companies, and both have been in Datto's DNA since inception. All of our products have been cloud managed, for example, from day one. And a deep infusion of security is also common across our product set, which at their heart are about data protection and monitoring. In 2021, we will be more directly monetizing new products in these two areas. in cloud with continuity for application workloads in the public cloud and in security with new products to help MSPs protect their SMB clients. So let's first talk about cloud. As I said, Datto products are all cloud managed. In 2021, we will be launching our first continuity product for applications running in the public cloud, specifically Azure, which is the most relevant for our partners who largely run Windows-based servers. This new Azure Cloud Continuity product will follow on the success of SaaS Continuity, where we protect data in the cloud that is hosted in Microsoft 365 and Google Workspaces. We plan to take Azure into beta with a group of partners in Q2. Of course, we also protect laptops and desktops today directly to our Datto Cloud with our Cloud Continuity for PCs line of business as well. The advantages Datto will bring to Cloud Continuity are many. First, our MSPs trust us and our service model, and the same technology benefits they know will be there in the cloud. Second, our solutions will be hybrid cloud focused, so partners get a unified user experience, independent of whether their workloads are on premises, in private clouds, or in public clouds. This is critical in a multi-tenant deployment, where MSPs and clients have diverse workloads in many places. Third, copies of applications and data from every live environment are stored securely away from public cloud providers in our proprietary exabyte-scale Datto Cloud. And finally, the business model will be familiar and transparent as usual with Datto, which is something that has caused many MSPs and their clients to delay migrations to the public cloud. We will be solving both economic and technology challenges for our partners. The long-term continuity roadmap continues to be securing and protecting SMB applications and data anytime and increasingly anywhere, in clouds and on-premises, on virtual machines and physical machines, servers and PCs. Now let me turn to security. As COVID has accelerated digital transformation and remote work, cyber attacks have also proliferated, leaving enterprises and SMBs increasingly vulnerable. To address this trend, we've developed a model best visualized in three concentric rings, securing Datto, securing our MSP partners, and helping those partners in securing their SMB clients. The inner ring one is Datto. We continue to invest heavily in technology and the best information security team in the industry, which leads our efforts to secure our infrastructure, practices, and products to the highest standards. Datto's Chief Information Security Officer was recently invited to join the Institute for Security and Technology's multi-sector ransomware task force in the fight against cybercrime. Ransomware continues to be the most critical problem SMBs and MSPs face today. In fact, 95% of MSPs report that their own businesses are increasingly being targeted by attacks, and 70% of MSPs report ransomware as the most common malware threat to SMBs. both according to Datto's annual ransomware report survey. Let me give you two simple examples of how Datto has been a security company throughout its lifetime. One is continuity, where many urgent restorations of backup images are as a result of primary servers being locked by ransomware. Another example is RMM, where patch management and system monitoring are fundamental to the protection of endpoints. We recover and restore applications and data for victims of cybersecurity attacks and downtime events thousands of times a year. In many cases, even after attacker has locked or erased their production servers and their primary backup copies. of course strong cyber security involves not only technology but also people processes training and auditing and these need to be dynamic over time experts increasingly recognize that an attacker will breach any network eventually and it's important to be able to respond in real time and operate your business and systems while remediating a well-funded ongoing and proactive approach to security is what's most important here we call it cyber resilience So that's ring one, protect Datto. Ring two is protecting our partners. MSPs and their SMB clients also need cyber resilience, as I described it, not just the old world with a collection of point solutions like antivirus or firewalls. Cyber resilience is a living, breathing security mindset, and it costs real money. This means risks and opportunities for MSPs. We start in Ring 2 with thought leadership for MSPs in the form of content, webinars, live events, and even direct interaction with our security team. But we also take action and offer tangible technology help. In response to the Q4 cyber attacks on several prominent companies and nations, Datto moved quickly to help the MSP community. Within a matter of days, we created the Datto FireEye Countermeasures Scanner. The scanner used the signatures that FireEye released to the public, and we provided detection scripts to MSPs, whether or not they were a Datto customer. This one release resulted in over a million scans and many malicious detections within Datto's partner systems. Continuing this proactive approach, we released similar scanners to the MSP community a couple weeks ago to address the Silver Sparrow malware threat to macOS. Now let's talk about Ring 3. This is about offering MSPs new products with margin opportunities to help them protect their SMB clients. While we have always been in security, this marks the beginning of us offering specific products or features that allow MSPs to grow while selling security with Datto. Our first entry here was ransomware detection and isolation for Datto RMM, which we launched in December and which has now been deployed on over 250,000 machines in just the first 90 days. We've seen numerous verified saves from ransomware where our product isolated, identified, isolated, and prevented the spread of the infection. Our second foray is this week's Bitdam acquisition. Bitdam's technology protects cloud-based applications from ransomware, malware, and phishing attacks. We are thrilled to welcome Bitdam's elite team of security experts to Datto as we continue to shape the cyber resilience roadmap for MSPs. We are starting the process of integrating their cutting-edge technology into our platform. Starting later this year, Bitdam Solutions will be offered to our 17,000 MSPs to help secure the millions of SMBs that they serve. In summary, security and cloud are complex by nature, but we will make them simple and turn them into growth and margin opportunities for our partners. We continue to believe both opportunities are enormous and feel data was well-positioned. We will continue to increase our investment in each area to expand our product offerings and addressable market, which we believe will drive strong partner retention and boost long-term revenue growth. John will give you the specific guidance, but you will see that our 2021 adjusted EBITDA margins reflect the impact of the BITDAM acquisition and the increasing investment in security and cloud as previewed on our last call. In closing, 2020 was a milestone year. We are thrilled with the progress we've made throughout the year, culminating with our IPO in October. Our strong fourth quarter and full year results and a good early start to this year, as you can see in our Q1 guidance, position us well for growth in 2021 and beyond. I'll now turn the call over to John to go through the financials in more detail. John?