Datto Holding Corp.

ladies and gentlemen thank you for standing by and welcome to the data second quarter 2021 earnings results at this time all participants are in a lesson only mode later we'll welcome back a question and answer session and instructions will follow at that time if anyone should require assistance during the conference please press star zero on your national telephone as a reminder this conference call is being recorded i would like to turn the conference over to your host mr ryan burkhardt director of investor relations please go ahead

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today to review Datto's second quarter 2021 financial results. With me on the call today are Tim Weller, Chief Executive Officer, and John Abbott, Chief Financial Officer. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our third quarter ending September 30th 2021 and full year ending December 31st, 2021. As a result of a number of factors, actual results may differ materially from those projected in such statements. These factors are set forth in the earnings release that we issued today under the section captioned forward-looking statements. And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. 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, 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 second quarter 2021 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. I would also like to inform you that we will be participating in several investor conferences in coming weeks, including the BMO Technology Summit, the Jefferies Software Conference, and the Citi Technology 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. Tim?

Thank you, Ryan. And many thanks to everyone for joining us on this call this afternoon. We're excited to report strong Q2 results and to raise guidance again for 2021. I'll begin with a few highlights from the quarter, followed by an update on security, the central theme for us and for MSPs in 2021. Then I'll update you on progress in the cloud. And finally, I'll turn the call over to John to discuss our financial results and guidance in more detail. The second quarter was one of the strongest quarters in our history, as the momentum we've seen recently accelerated in Q2. Subscription revenue growth was 21% year over year. We continue to benefit from a currency tailwind, but even in constant currency, the year-over-year revenue growth was up 250 basis points from the Q1 equivalent number. So we're pleased with the continued acceleration. This is our highest growth rate since the start of the pandemic, and of course, now off a higher base. Once again, we saw strength across products, led in absolute magnitude by the continued rebound in our flagship BCDR product, which was great to see, and by sustained high growth rates in SAS protection and RMM. We ended the quarter with $598 million of ARR, which represents another strong sequential increase and is a key leading indicator of revenue growth. In Q2, adjusted EBITDA was $45 million, and we generated more than $22 million of free cash flow, representing our fifth consecutive quarter of positive free cash flow. In addition, we added 500 net new MSPs in the quarter, up from 300 new additions in Q1, bringing the total number of MSP partners we served to 17,800. Overall, I'm proud of the way our team executed in delivering a great quarter. now let me shift to a few industry comments it's a good time to be an msp digital transformation and cyber security are the top strategic priorities for many small and medium businesses smbs around the world driving strong demand for managed services and the outlook is bright based on our annual state of the msp survey msps expect these two trends to continue to drive revenue growth for years to come Most MSPs are reporting optimism about 2021 and the future. But the challenges are also growing for MSPs, and chief among them is an increase in cybersecurity attacks, which represent both opportunity and risk for MSPs and their clients. These days, rarely a week goes by without another high-profile security breach in the news. This environment creates opportunities for MSPs in the form of growing their revenue from being a trusted security provider for their SMB clients. And it creates risks for MSPs because they themselves are increasingly under attack, particularly if their own tools, such as RMM or internal scripts, are vulnerable to being weaponized to use against their clients in cyber attacks. And of course, if their SMBs get successfully attacked and cannot recover, then the entire MSP relationship is at risk. At a more practical level, there is a challenge for MSPs that they simply cannot keep up with the fast-moving global security threat actors and evolving attack vectors. Some visible recent events have crystallized this for the MSP industry. In the next 12 to 24 months, we'll see them rethinking their technology stacks and vendor choices. The vast majority of MSPs now provide managed security services in one form or another. That's why security has been at our core for years, and I want to revisit our three concentric wings model for security, securing data, securing our MSP partners, and helping those partners in securing their SMB clients. Ring one in the center and of highest priority is securing data. Here, our investment is high and rising continuously. Our security effort isn't new. The core of our team has been in place for years, and we work every day to infuse the principles into our culture. Strong cybersecurity involves not only people and technology, but also processes, training, and auditing that are dynamic over time. We're deeply committed to making security everyone's priority at Datto, and it's ingrained in our culture. From company-wide training to the software development process itself to pen testing to more training, security is a way of life at Datto. We believe that our well-funded, ongoing, and proactive approach to security is critical to our long-term success. Ring two is securing our MSP partners, where we offer thought leadership for MSPs in the form of content, webinars, live events, and even direct interaction with our security team. A great example of this is the partner security forum that we recently hosted, immediately following a well-publicized global ransomware attack that severely impacted MSPs. While the attack did not impact Datto or our products adversely, we held this forum to personally engage with our partners, reinforce security best practices, and share details about our own policies and practices. Over 2,000 partners attended the forum and had their questions answered by our most senior security and engineering leaders. In addition, for this specific global attack, we released an agent detection monitor designed to identify compromised devices similar to the technology we offered to MSPs in the wake of other recent attacks. This combination of partner engagement and security, both in a time of crisis and day-to-day, along with technology we create in near real-time, helps our partners become more secure and is what Ring 2 is all about. That brings us to ring three, which is about MSPs securing their SMB clients using Datto technology products and making a good margin while doing so. The new products we have on this front are the Datto RMM ransomware detection and isolation product that was launched last December and a soon-to-be-launched product based on the technology we acquired in our purchase of BitDem. And let's not forget our core continuity products, which are the backbone of any comprehensive cyber resilience strategy. I want to touch on each of these briefly. Gatto RMM ransomware detection and isolation is aimed at stopping the spread of infection by identifying and isolating hosts that have been infected. This product has proven to be very effective blocking a high volume of ransomware attacks each week and has seen incredible traction with new and existing partners since its release late last year. We are committed to ensuring our partners are well protected against malicious activity and to deliver on that promise in light of recent new threats, we decided to offer ransomware detection for all Datto RMM partners at no additional cost to the base RMM product for the next six months. We think this is the right thing to do for our partners in these challenging times, and we are confident that it will drive even stronger product adoption over the long term. With this offer, we recently surpassed a significant milestone in our ransomware detection, which is now deployed at over 1 million endpoints, doubling from the 500,000 we reported on our last earnings call. This is a testament to the growing threat of ransomware within the MSP community. I have to give a shout-out to our RMM team for listening to our partners, innovating, and delivering a product that is sorely needed in the market. In addition to ransomware detection, we continue to be on track to launch a new email and collaboration security product soon. The product is based on the BitNAMM technology we acquired earlier this year, and it is tailored for our MSP partners. We are on track with the launch plan, and it couldn't come at a better time for partners. While this product, Datto RMM, ransomware detection and isolation, and other new security products we are developing are all on the front lines of defense, our continuity solutions, including BCDR and SaaS protection, continue to play a critical role as the last lines of defense, enabling true cyber resilience. Experts increasingly recognize that a well-funded and determined attacker could breach any network eventually, and it's important to be able to respond in real time and operate your business while simultaneously remediating the security breach. This is why the explosion of ransomware is a key driver for continuity overall. Datto Continuity allows our partners and their SMB clients to operate on Datto platforms while they eradicate the threat on their primary systems. We also recover and restore applications and data for victims of cybersecurity attacks thousands of times a year. In many cases, even after the attackers have locked or erased primary production servers and the associated backup images. So with data continuity, MSPs can help their clients operate through a ransomware attack and restore their data to any point in time as if the ransomware attack never occurred. That's ring three, and we're just getting started. Look for us to develop new products and features that allow MSPs to grow by selling security with Datto, and we'll integrate these technologies into a strong security stack. Now let's talk about the cloud. Every Datto product was born in the cloud. We are cloud native, as opposed to having started life selling perpetual software licenses for on-premises operation, and then later lifting and shifting to cloud-hosted. Our cloud-native approach, being in the cloud since inception, has strong implications for our partners in terms of high security and reliability. Consider Datto RMM. It was built on best-of-breed AWS platform tools and leverages both our own and Amazon security. It's scaled quickly from nothing to millions of endpoints. It's entirely cloud-managed for an MSP who themselves might have tens of thousands of client endpoints. Datto SaaS protection is the same, operating seamlessly between a client's Microsoft 365 or Google Workspace cloud instance and the Datto cloud. Our new email and collaboration security product is also entirely cloud-based. Our Autotask PSA was born in the cloud and never deployed on-premises. And finally, our flagship continuity product. Here again, it's cloud-managed, but of course, for performance and bandwidth reasons, most partners prefer to deploy our service both locally on our high-end Intel servers and within the Datto Cloud so they can virtualize machines and recover and restore applications in more flexible ways. With the upcoming launch of Datto Continuity for Microsoft Azure, MSPs will get data security and reliability with client applications that are entirely in Azure, all with a simple user interface they know and trust. Data continuity for Microsoft Azure is just wrapping up a successful beta program and is on track to begin commercial deployment with early adopters soon, with general availability later this year. In summary, we are pleased with our first half results and the strong momentum we have across our business today. Looking ahead, we're excited about the new product launches in security and cloud planned for the second half of 2021. We remain well positioned to capitalize on the large and growing opportunity to help our MSP partners manage, protect, and connect their SMB clients, applications, and data in an increasingly digital world. Finally, I want to thank everyone on the DATO team for all of their hard work and our MSP partners for their continued support.