Datto Holding Corp.

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the data fourth quarter 2021 earning results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 the star one. Thank you. Ryan Burkhart, Director of Investor Relations, you may begin your conference.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to review Datto's fourth quarter and full year 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 first quarter ending March 31st, 2022, and full year ending December 31st, 2022. As a result of a number of factors, actual results 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, 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. A 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. Tim?

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. followed by an update on our security journey, including our recent InfoSight acquisition. And then I will give you some insight into the key growth areas we are focused on for 2022. Finally, I'll turn the call over to John to discuss our financial results and guidance in more detail. The fourth quarter was another record quarter for Datto. Subscription revenue and ARR growth continued to accelerate, a pattern we saw throughout 2021. ARR growth was above 20%, and net new ARR in the quarter was a record $31.7 million. We continued to add new MSP partners and deepened our relationships with existing partners. The total number of MSPs we served grew nearly 9% year over year to 18,500, and ARR per MSP grew over 11%. Our top MSP relationships also expanded as we ended the quarter with more than 1,400 MSPs with over $100,000 in ARR, 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. Datto Solutions help our MSP partners secure their clients' digital assets, both applications and data. In sum, it was an excellent quarter overall and punctuated a great year for Datto. 2021 was a year of reacceleration following the headwinds of the pandemic in 2020. 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 sights remain on building to 20% sustainable growth. In 2021, MSPs 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 Datto, and we made significant progress in 2021, broadening our security capabilities to help MSPs and Datto address the large security opportunity In October, we launched ADDO SAS Defense, an application and email security add-on to our SAS protection product, and we have seen strong early adoption with revenue per seat roughly doubling for those who adopt SAS 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, SAS Defense and ransomware detection on endpoints, Our frontline defense products that give MSPs coverage across the vast majority of clients attack surfaces. We also built in the last line of security defense, our continuity offerings. In addition to our best-in-class business continuity disaster recovery solution for virtual machines across client locations and data centers, we launched Datto Continuity for Microsoft Azure, an 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 offering 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 MSPs. 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 are in the golden age of the MSP, and we see a large opportunity to help MSPs capture the generational shift that's happening now in SMB IT management. The secular trends of digital transformation, shift to cloud, remote work, tech labor shortage, and especially cybersecurity attacks are driving strong demand for MSPs, creating an amazing growth opportunity for both our MSP partners and for Datto. At our recent investor day, we laid out the case in four pieces for our path to 20% sustainable growth. First, the massive and expanding global MSP industry and our leading position within it. Second, our product portfolio to address the security needs of MSPs and their clients. Third, the many levers of growth in our unique sell-through business model. And fourth, the major international opportunity. In 2022, we see opportunities to drive growth across our entire product suite. We are the MSP channel leader in continuity, and we expect to build on this leadership position with sustained growth in our flagship BCDR product and through introducing MSPs to data continuity for Microsoft Azure, or DCMA for short. We continue to view DCMA as a net new opportunity to build business with all those MSPs globally who use Azure today and are not yet Datto partners. In the PSA market, we have a strong presence with our Autotask product, which continues to grow nicely, and we've recently introduced add-ons such as documentation and Datto Commerce for quoting and procurement to extend our MSP business management category. As we highlighted at our investor day, leading our overall acceleration in revenue growth are the Datto end-user and endpoint security platforms, SaaS Protection and RMM. This is a large and fast-growing market with tens of millions of users and often multiple endpoints per user. Our addressable market continues to grow as we add MSPs, those MSPs add clients, those clients add employees and endpoints, and we launch new products. These are the multiple levers of growth in our business model. So that's the growth theme. 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 zone security, protecting our systems, employees, and assets. Second, we invest in protecting our partners, helping MSPs secure themselves with our thought leadership, resources, and embedding security into the Datto products they rely on daily. Both Rings 1 and 2 produce only indirect revenue through high trust in our brand and solutions. In Ring 3 are the new Datto products, which provide MSPs a direct revenue and margin opportunity to sell through to their clients. In 2021, that meant SAS defense and ransomware detection for RMM. We got up to a fast start in 2022, further bolstering our cybersecurity leadership with the acquisition of cybersecurity company InfoSight, an innovator in endpoint detection and response, or EDR technologies, and in managed detection and response, or MDR services. Last year, we acquired Bitdam and integrated it into our SaaS protection platform before launching it as SaaS Defense. In analogous fashion, InfoSight's technologies will now be integrated with other new security technologies that our internal teams have been developing. And everything will be neatly packaged for launch later this year, well integrated within Datto RMM. with an eye toward further securing endpoints and increasing the dollars per endpoint we are able to command. The InfoSight team and technology augment Datto's capabilities within the critical protect, detect, and respond phases of the NIST security framework, particularly in endpoint security. All this in addition to core RMM in the identify stage and continuity in the recovery stage. Looking at the big picture, Datto has product offerings in every phase of the NIST framework, and 2022 will see us deepen and broaden our portfolio of security products, all integrated, built for ease of use by MSPs in 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've been patient over a multi-year period in building and acquiring our proprietary security components. This also means higher long-term margin potential for Datto and our MSPs. 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. It's this combination of high effectiveness and ease of management for MSPs 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 percent 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 potential 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 continue to affect a broader pivot to security products, investment will remain strong. Our solid unit economics, attractive gross margins, and positive free cash flow give 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 in the highest areas of growth potential. Partner facing platforms to extend our leadership position with MSPs and globalization to capture the massive 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. 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 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. I want to welcome our new InfoSight teammates. We have big dreams to build together. Finally, I want to thank everyone on the Datto team for all of their hard work and all of our MSP partners for their continued support. With that, I'll turn the call over to John.