Datto Holding Corp.
Q4 2020 Earnings Call Transcript

Published: 12 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Datto's Fourth Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ryan Burkart, Datto's Director of Investor Relations. Thank you, sir. Please go ahead.

[Ryan Burkart:]

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 Abbot, 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?

[Tim Weller:]

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 too specific strategic initiatives for 2021, including our recent acquisition of BitDam. 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.

[John Abbot:]

Thank you, Tim, and good afternoon, everyone. We're pleased to report strong fourth quarter and full year 2020 results. As I review our numbers today, 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 the strength of our operating model and focused execution. Fourth quarter recurring subscription revenue grew 16% year-over-year to $129 million and comprised 93% of our total revenue of $139 million in the quarter, exceeding our previous guidance. ARR at December 31 was $542.8 million, up 14% from $474.8 million a year ago, and importantly, increased $20 million sequentially, up from a $16 million increase in Q3 and then $8 million increase in Q2, continued evidence of the reacceleration of the business. We think of ARR growth as a leading indicator of subscription revenue growth. And the acceleration we're seeing in ARR will take a few quarters to impact revenue growth We ended the fourth quarter with more than 17,000 MSP partners, a net increase of 400 year-over-year, but slightly down sequentially. The small sequential decrease was driven by higher than normal churn of smaller MSPs that we believe were challenged more than most by the economic fallout of the pandemic. These churned MSPs averaged less than $9,000 of ARR, while our overall ARR per MSP expanded to nearly $32,000 at December 31, 2020, up from $28,600 the year before. Importantly, we added a strong cohort of new MSPs with more than 3,000 gross MSP additions in 2020, which was not far off from the levels we were adding prior to the pandemic. These new MSP partners typically start small and expand over time, helping to fuel future growth. We also grew the number of MSPs contributing over $100,000 in ARR to more than 1,100, up from 950 at year-end 2019. On another positive note, year-to-date in 2021, we've seen several hundred net new MSP editions. Our fourth quarter gross margins of 74% were up from 65% in Q4 2019, driven by an increase in the mix of higher-margin subscription revenue and from the operating leverage, we're realizing in our 24X7 support function and in the infrastructure supporting our Unified Continuity solutions. Fourth quarter operating expenses were $68.3 million, or 49.1% of revenue, a reduction of 712 basis points year-over-year. Within OpEx, sales and marketing expenses were $27.2 million, a slight decline from $30.6 million in Q4 2019. Research and development expenses were $18.5 million, an increase from $16.1 million in Q4 2019.

[Operator:]

Your first question comes from the line of Matt Hedberg with RBC Capital Markets.

[Matt Hedberg:]

Hi, guys, thanks for taking my questions. Congrats on the quarter. I guess, either for Tim or John, just thinking through your ability to add new MSPs, I think John, in your script, you noted that you started -- there was a strong start to the year with MSPs adds. Just sort of wondering how you think about the cadence post-COVID? Does it kind of revert back to kind of the trends you saw in 2019 or '18? Just -- maybe a little bit more perspective on that.

[Tim Weller:]

Yes, Matt. It's Tim. Thank you. I'll give you -- I'll make a comment and John welcome to jump into. We actually had good steady gross adds, John referenced the number 3,000, I think, good steady gross adds throughout last year. Obviously, COVID hits in Q2 and some of the lower end there came under some financial challenge, and by the end of the year, we kind of finished that cleanup. And nothing we're seeing, you know, we think Q4 will be the low there; in Q1, it will go up again. So I would say it's a macroeconomic effect that we feel pretty good about going into reopening.

[Matt Hedberg:]

Sure, okay. That's helpful. And then…

[John Abbot:]

.

[Matt Hedberg:]

Okay, thanks. Yes. No, thanks, John. And then I guess, you know, Tim, you talked about continuity for Azure apps which sounds like it's a nice addition. Maybe just wanted to get a little bit more sense -- maybe if you could just sort of double click on that and maybe a bit more on the timing there. It seems like a real interesting opportunity, especially for your installed base.

[Tim Weller:]

Yes, it definitely is. I think I would tell you it's for the installed base and as much as that's one of the elements you'd want to have before you lift and shift those servers into Azure, but clearly, for us, will also be represent a very nice net new opportunity where there are many Azure service already, of course, that we can go now address directly, all on the same platform. So that probably won't have much on timing, other than it's going really well. And we said we'd be in beta in Q2 with broader availability later this year. So probably about all, I want to say at the moment. But I think you have the basics of the opportunity and the scale of it.

[Matt Hedberg:]

Excellent. Thank you very much.

[Tim Weller:]

Thanks, Matt.

[Operator:]

Your next question comes from the line of Saket Kalia with Barclays.

[Saket Kalia:]

Hey, guys. It's Saket from Barclays. Thanks for taking my questions here.

[Tim Weller:]

Hi, Saket.

[Saket Kalia:]

Hi, guys. Hey, Tim, maybe for you. I'd love to also kind of dig into the cloud and the cloud and security commentary a little bit. Maybe on cloud, you mentioned something interesting in your prepared remarks around maybe some economic differentiation around the Azure offering, and almost sounded like transparency in pricing. I was wondering if you could just dig into a little bit more around what that means, broad brushes, of course. And then on security, I was just wondering if you go one level deeper on what sort of products BitDam is offering that you think could be the most significant margin opportunities for your MSP customers. Does that make sense?

[Tim Weller:]

Yes. I'll take a shot at each of those. So on economics, I think the key is -- and you'll know this as well as anybody as a cloud analyst. When you move into a cloud, whether it's AWS, Azure, et cetera, you move from knowing the cost of your Dell server, your VMware -- you know, VMs on top of that server. When it's in your building, you can sort of put a box around those, CapEx and OpEx. And when you move over to a public cloud, you might have a hazardous gas on the way in, but you really don't have a big idea of what it's going to cost two years in, and then that becomes a running joke in the industry, what's your third month's bill. And it goes up, right, as you move more terabytes, you use more compute. And so I think one of the things that's caused some MSPs and their clients to be hesitant about the public cloud is some of those early horror stories. And obviously, others will tell you, hey, it's so much better. I can remove labor and there is obviously, a strong long-term trend toward the cloud. So, we're just entering in the fact that you have to not only solve the technical elements of that move, but you have to solve the economic elements as well. You have to be able to tell MSPs what do you think it's going to cost on day one and what you think it's going to cost three to five years in. And we've done a lot of studying of that. So I won't say more. I don't want to let the cat out of the bag so to speak. But anybody that tells you, hey, we've got a copy and paste technology and it just works great in Azure might work on the first day like that. But there is a lot of nuance that we've discovered and we think it's one of the reasons MSPs are moving maybe quite as quickly as they would have. So on your security question, you drilled right in on the crux of it. We look at the world in terms of MSP margin. And so I think I said initially, it feels like a very strong fit with our SaaS protection for M 365, Google Workspaces and that whole ecosystem. And you know what, I'll give an exact pricing. We've certainly worked back from what end-users and MSPs pay there in terms of dollars proceeds. And we'll price accordingly to make sure we have a very good margin for MSPs in that kind of a product set. They do address a wide spectrum of collaboration tools with the technology. It's pretty generally applicable and we'll have to sort of work through new applications as we get to that point. But initially, it's just getting focused in that SaaS protection, M 365, Google Workspace area where MSPs live and breadth today. So it's -- that will be job one. Hope that helps.

[Saket Kalia:]

Got it. Yes, that does. John, maybe for you, just on the financial side. How do you think about the interplay of ARR per MSP customer next year and growth in the customer base? And maybe as part of that, any comments that you'll be willing to make on just overall ARR growth, or any sort of visibility for next year on ARR?

[John Abbot:]

Sure. Thanks, Saket. As you've seen, our per MSP has expanded nicely here over time up to nearly 32,000 per MSP from 28.6,000 a year ago, and has been consistently expanding each quarter, even with some of the fluctuations in MSP count. And that obviously is reflecting the continued growth with some of our larger -- with our larger partners. It reflects MSPs adopting more Datto products, and it's also to some degree, a reflection of the churn of some of those smaller partners. And in general, we would expect this metric -- it would continue to expand in the future. But it's important to note that ironically, adding more MSPs can actually bring the average down because those new MSPs start small and grow their business with that over time. So arguably, if we had a blowout period for new MSPs, the metric ARR per MSP could even go the other way. We haven't seen that happen, but just the way the math works, it could happen that way given again that the new MSPs come in at a lower ARR. And we're not guiding on ARR but we'll point to our recent reacceleration and sort of continued reacceleration from Q2 to Q3 and in Q3 to Q4. And we obviously -- you can see in our guidance for Q1, we feel good about, and for the year, we feel good about the year. And only thing I would add, I guess, is we would expect a broader economic reopening. The stimulus package probably doesn't hurt, right, to provide a tailwind to the business.

[Saket Kalia:]

Absolutely. Very helpful, guys. Thanks very much.

[John Abbot:]

Thank you.

[Operator:]

Your next question comes from the line of Jason Ader with William Blair.

[Jason Ader:]

Hey, guys, thank you for the question. I wanted to first ask about BitDam. Thank you for the detail on the price paid. Could you give us a sense of the specific revenue contribution in 2021, and also the EBITDA impact from the deal?

[John Abbot:]

Yes. We didn't break out either of those. We try to give you a little color that it's a small number. This year, we're really factoring very little of that into the 2021 revenue and obviously, that would be later in the year anyway. And then -- but the EBITDA impact, right, we inherit all those expenses of the business day one, so the EBITDA impact is -- I don't want to characterize it may be in any way .

[Jason Ader:]

Is it $10 million or something like that? $10 million…

[John Abbot:]

Yes. I don't -- we're not really giving a number, but it's -- I'll say it's -- it's meaningful. It was worth mentioning, so.

[Jason Ader:]

How many people in the Company are coming over?

[John Abbot:]

We haven't put that out either, Jason.

[Jason Ader:]

Okay. And then, just on the -- comment on the year-to-date additions of the net new MSPs. I think you said several hundred net new MSPs. Tim, is that just a kind of economic impact there that things are starting to loosen up a little bit? Or was it more of a -- kind of internal focus and you guys said, you know what, Q4 was not what we wanted, or Q3 wasn't what we wanted. We need to really kind of double-down on adding new MSPs in Q1.

[Tim Weller:]

Yes. No, Jason, I'll just say what I said before. We've got a good steady machine for producing gross MSPs. There is lots of MSPs in the world and -- so you're bringing them on, obviously, in our model. We generally bring them on small and we grow them from there. And so if you want to attribute that higher churn to the pandemic, which I would in general economic, the growth engine is still there. As things get better on the churn side now going into reopening, we just see it growing. So no special programs on our end to drive that. I do think we're getting a little bit more global now every day. And so as that grows, maybe towards the back half, we might see some pickup there. But I don't think we're doing anything special. We're always interested in new MSPs and as many as we can get.

[Jason Ader:]

Okay.

[John Abbot:]

It's really been a -- Jason, it's really been a churn factor, right? The gross adds have held up remarkably well despite COVID, and it's really been churn. And as Tim said, as we ended the year, there -- it was I would say clean up, if you will, COVID-related economic environment-related and we're seeing that turn and feel good about the net positive movement now.

[Jason Ader:]

Great. And then, last quick one from me. John, for you, just on ARR down to around 111%, I think I saw, which -- is that a trailing 12-month number?

[John Abbot:]

It is. And so it's always backward-looking, so that's the right way to think about it. It's just like revenue growth we sort of been saying from the get-go that ARR is our leading indicator and that's what where we're seeing the early reacceleration and we continue to see it. I mean, it's not until we lap the COVID lows of Q2 that we're going to see things like subscription revenue growth and net retention start turning back the other way.

[Jason Ader:]

And where do you think NRR gets back to ultimately? I'm not trying to give you a specific timeframe, but what would you be happy with on NRR?

[John Abbot:]

Yes. I mean we don't see any reason why it wouldn't get back to historical levels, and that's certainly what we're aiming towards.

[Jason Ader:]

Got you. Okay. Thank you, guys. Have a good night.

[John Abbot:]

Great, thank you.

[Tim Weller:]

Thanks, Jason.

[Operator:]

Your next question comes from the line of Sanjit Singh with Morgan Stanley.

[Unidentified Analyst:]

Hi, everyone. This is Calvin on for Sanjit. Congrats on the quarter. I have two questions for you guys. So first is on solar storm. Can you give us a sense and overview on how the attacks have affected conversations with MSPs? Are MSPs more likely now to look at continuity solutions? And how large of an impact do you think the attacks will have on security awareness, an uptake of your new ransomware solutions, as well as the existing core product set?

[Tim Weller:]

Hi, Calvin. It's Tim. It's a great question. I think you hit on it, right? Driving more demand for cyber resilience in our products is probably a fair way to characterize the output. Obviously, it demands more attention on security as a theme, which we were already in the mode of any way. Security for most companies like us is opportunity and risk. I think we mentioned in the script and direct response to that specific attack, we were able to quickly release some countermeasure scripts for both our MSPs within our RMM tool, as well as we just posted to the public domain and we did the same for the Silver Sparrow. And actually, I think either yesterday or today, we did the same for the recent Microsoft hacks as well. So it's something we're getting fairly well versed in. I think on a go-forward basis, we continue to focus inward on security to make sure we're at that level. And now with BitDam and RMM, we've started to talk about focusing outward. But I probably wouldn't comment much on whether it helped our pipelines a little bit or not. You never wish that kind of an event on another company. So just overall, very strong tailwinds for security, obviously. And I'm sure you're hearing that in other companies.

[Unidentified Analyst:]

Great. No, that makes a lot of sense. Thank you for that. And then on the second one on BitDam specifically. When you thought about the company and then the product set there, how did you assess the need in the marketplace and specifically on the ability for MSPs to ramp on it, get trained up? And how does this fit into the broader security strategy that you're pursuing there?

[Tim Weller:]

Yes. So that's a good question. We first and foremost want a great technology and a great team. And trust me, we have looked at dozens of security companies. There are other very interesting ones out there, so you have to kind of find that fit. We did. And I think when you get down to the products and protecting collaboration tools, you would expect that the kind of vectors there would be, as I said along the SaaS attach, that line of thinking, start with the M 365, Google, you'll see with our ransomware, we're driving into RMM, which is another, okay, kind of say vector of growth there, and it will be interesting to see if we can get some of that technology accelerating us there. And then the third piece is, obviously we run a cloud exabyte scale, and we have a lot of data there and that data needs protecting and we do that well today, but again in this world, you have to keep raising your perimeter wall. And the fourth one is data networking. We connect all of these things and that is evolving towards a software-defined networking world and you see a lot of traffic and it needs security. So as I said, it has broad applicability but watch for us in round one here to stay focused on kind of that SaaS vector of growth with their set of technologies.

[Unidentified Analyst:]

Awesome. Thank you, guys.

[John Abbot:]

Thank you.

[Operator:]

Your next question comes from the line of Keith Bachman with Bank of Montreal.

[Keith Bachman:]

Many thanks. Thank you for taking my question. Tim, I want to direct this to you and I want to go back to Azure Backup. And we had some conversations over the last 45 days with MSPs and even some of the customers, and detected more interest in migrating from on-prem to cloud, and then also more interested in Azure Backup as a potential solution. Most of the MSPs did mention that your solution wasn't out. And so I just wanted to ask you on, hey, how you're thinking about features and cooperation and cost? And what I mean by feature, you know, feature parity with what Azure Backup has. Is there any technology challenges that you're facing in delivering the solution, particularly from Microsoft in terms of being able to enable the Datto capabilities? And when you think about the margin, you mentioned that you would be competitive in pricing with Datto -- excuse me, with Azure. But how would that compete in terms of your on-prem solution that you're offering customers versus if they go to Azure and use you for backup? How does that -- is there a risk of kind of cannibalization of margins? I know that's a lot, but what I'm really trying to understand, are you at risk at losing share as more workloads goto Azure for your backup solution? And are you risk it all from a margin degradation point of view?

[Tim Weller:]

Yes, I think it's a great question, right? A year ago, I would not have been able to answer the question. I would have had all the same questions you have had. We've gone deep and understand the opportunity here. We actually think it's a great opportunity to gain share.

[Keith Bachman:]

Okay.

[Tim Weller:]

Azure is a big world already, and anybody that's in there now, we are not addressing. Although I have heard -- we heard stories about MSPs hacking some solutions together. I suppose our existing solution would work in a crude way. But we're going to be there and there is going to be a lot of net new. Also, if people are on-prem today and moving to Azure, we have a high level of confidence in what we're going to deliver there technically. And so we think we can actually gain some share in the migration. And I think we're going to be fine on margin. You know, there is some economies of scale you get there as well. So, feeling like this is a net new opportunity for us, for sure, and we're racing to get there. We've been patient in as much as we want to deliver a Datto quality solution. And I'll walk you through a few points really because you said a lot of things. I try to catch them. Look, Microsoft has a backup option and candidly, they've offered a server backup product since the dawn of windows, so decades ago, right? There always Microsoft backup of some sort. I would call it more backup than true continuity. But it's table stakes to get customers into Azure. You can't say, hey, come to my cloud if there isn't some backup of some sort and the ecosystem hasn't built up in the early days enough. But there are several reasons we're confident we can win. First, from a technology perspective, we think we'll do more than their solution. With true continuity, all the functionality and we obviously need to have strong differentiation here. Secondly, it's interesting. We have a partnership with Microsoft, business relationship as do many. And you know, they have historically left backup continuity to channel partners as a value-added service. And we don't see a big reason why that would not be the case here. So you have to have a backup if you're Azure, any Microsoft product and even Google Cloud, any of the bigs. But a strong Datto Azure continuity solution is likely to bring thousands of MSPs and their entire end-user universe towards Azure versus other public clouds. So we think it will be symbiotic and be fine. I think the third thing to note is that we have a hybrid cloud solution. So the MSP is going to get a unified purchase management support and experience across all their workloads. And for many years an MSP that has hundreds of end users is going to be sitting there with application servers in the public cloud and private cloud, in their own data centers, on-premises. And they're going to be living in a multi-tenant environment that they do each day, and each of those servers going to be of different types in different locations. And the real key for us will be to unify that which you wouldn't do if you're Microsoft, that wouldn't make sense. So I think that last point is basically worth dwelling on in your mind a little bit. We don't see anybody winning with a seamless hybrid cloud solution. And in fact, where people have done Azure Backup to date, they generally built something very specific or they've done it through acquisition, and they don't really even have a common platform. So that's kind of how we're thinking about it Keith. And I hope I hit five or six questions along the way there.

[Keith Bachman:]

Right. And thank you for that comprehensive response. That was so terrific. And thank you for answering along the way.

[Tim Weller:]

And we know it's on your mind. Yes. We know it's on your mind. And like sort of a demo, that's probably the most I can tell you at this point. But we will ride your excitement through the year here.

[Keith Bachman:]

No, that's terrific. And just Tim, as you think about my follow-on question is -- and again, thank you for the comprehensive response. As you think about mix, how do you think about mix in terms of backup versus the other, in terms of your revenue profile 12 to 18 months from now versus where it is today? Do you see that changing meaningfully including recent M&A, or do you see it -- how do you see that mix unfolding?

[Tim Weller:]

Yes, it's a good question. I don't know that I want to put in a number on it, and John will kick me under the virtual table here. I think you know I remain fairly bullish on the continuity lines of business. Certainly, from their smaller scale, you would expect things like SaaS and networking and RMM to be able to grow faster on a percent basis. So you're just in a way debating a relative growth kind of thing.

[Keith Bachman:]

Yes.

[Tim Weller:]

And I think of a betting person would say, if we're doing acquisitions over the timeframe, you suggested they would be in newer cloud-focused, security-focused types of arrangements. So the mix will continue to shift but it's anybody's guess. And then if you want to call Azure in traditional continuity, then the race gets even more interesting, right because that's going to be a very big growth area, most likely.

[Keith Bachman:]

Okay. Well, thank you for the response. That's it for me. I'll see .

[Tim Weller:]

Great.

[Operator:]

Your next question comes from the line of Brad Sills with BofA Securities.

[Brad Sills:]

Great. Hey, guys, thanks for taking my question. I wanted to ask another way of asking, I guess the net revenue retention question. When you look out post-pandemic -- exiting the pandemic, are there any categories of expansion that perhaps may have been held back that you would think could see some acceleration? Obviously, the gross retention is the -- and churn that you mentioned is the main reason for the deceleration. It sounds like your visibility into reacceleration is good. So if you could just comment on where you think that cross-sell up-sell opportunity that may have been impacted could come back, any categories you call out?

[John Abbot:]

Yes. I mean I think it's a -- I'll take a first pass and Tim certainly can add. I mean I -- you heard Tim say BCDR already, we feel in -- at least fourth quarter, we felt some rebounding, which was very healthy, and will be a positive to net retention. But you look through that, it's obviously any particular industry verticals that may have been hit particularly badly in the pandemic that are rebounding and where our MSP partners have exposure, or new perspective MSP partners had exposure where we'll obviously, benefit from that. So that's one sort of angle to look at it. The other is as you hear us talking about adding -- layering in security products, opportunities in networking, growth across any of those vectors, will also provide growth and support to higher net retention numbers and drive that that sell-through and cross-sell activity.

[Brad Sills:]

Thanks so much, John. And then one more if I may. Just any commentary you would make on the PSA solution? How is that cross-sell opportunity -- how is that cross-sell activity trending? And maybe just a reminder as to kind of how penetrated it is? And where the opportunity is from here? Thank you.

[Tim Weller:]

Hey, Brad, this is Tim. The PSA is a little different than the other products in the following sense it's what I would call kind of a base platform product and as much as an MSP uses it to run their business, right, ticketing, CRM, some of their employee transactions, things like that. And -- so there is less share shift there. We actually in Q2 talked about PSA was one of the first there to get a hit in the pandemic in terms of some of the smaller MSPs dropping some seat count. It's a way to kind of tighten their belts. That seat count came back in Q3, and Q3, Q4, actually had a very good trend for us in PSA. But I wouldn't think about that one as much of this massive displacement of competitors as much as net new demand. We've brought a lot of features there. We have added some documentation with some people upsell and we've sort of built-in and a couple of other dimensions as well. So you know, the focus is on stickiness and then winning net new MSPs. And it's -- there is a few platforms out there for PSA. There is two big ones were one or the two. And I think we feel quite a bit better about that today than say we would have a year ago. That was the one that was more challenging. But it not only contributes to growth but again it helps with stickiness. It helps kind of lockdown the partners that are on that platform.

[Brad Sills:]

That's great. Thanks so much, Tim, appreciate it.

[Tim Weller:]

Yes. You're welcome.

[John Abbot:]

Brad, thank you.

[Operator:]

Your next question comes from the line of Fred Havemeyer with Macquarie.

[Fred Havemeyer:]

Hey, thank you for taking the question. Stepping back with BitDam, it appears that you acquired not only a company with interesting technology but also a robust and qualified engineering team with extensive cybersecurity experience. So I'm curious with the inclusion of the BitDam team into Datto, how do you expect that this could help your product portfolio evolve and potentially advance our product roadmap?

[Tim Weller:]

Yes. Hey, Fred, this is Tim. I'd go back to my three concentric rings. We've got a very strong internal security team and that has offensive and defensive capabilities, compliance, new technology and so -- and some sense, we're feeling good there pre-BitDam. But never hurts to have more smart security folks on. I think ring-two has always been about MSPs and thought leadership. The exciting part now is that we're in ring three for the first time in the last 90 days, now ransomware and BitDam. And so this is a start-up team in some sense. They've been together for years and they have many, many more ideas than they could have instantiated as a start-up. The real key is actually depth not breadth around one year, right? We need to get this integrated into our core platforms, get it into the hands of MSPs and get them producing margin as fast as possible, that's going to require a nice narrowing of their focus. But then we can start to broaden from there. And you know it's not lost on us that it's based in Israel and there is a great amount of security technology talent over there as well, so we'll be adding people hopefully going forward. So, really an accelerant in several dimensions for our ambitions in security, which we took our time and we're confident we found the best, and a great cultural fit on top of that, which is so important in a merger.

[Fred Havemeyer:]

Yes, thank you. I think you hit on -- partly on my follow-up question around this. But I'm curious with the acquisition of an Israeli company, could this also be a start of a longer-term Israeli or let's say overseas high-quality engineering effort as well having say access to top-tier talent in countries such as Israel?

[Tim Weller:]

Yes. It's -- look, it's a global war for talent, so Israel becomes another attractive spot for us. We have a meaningful team in London, and the surrounds we have technology development teams in Denmark. I think I'm losing track. I think we have five or six countries already, where we have developers. So absolutely among the many benefits is a clear base of operations for technology in a market that's got a great talent pool, so.

[Fred Havemeyer:]

Thank you.

[John Abbot:]

Thanks, Fred.

[Tim Weller:]

Welcome.

[Operator:]

Your next question comes from the line of Gregg Moskowitz with Mizuho.

[Gregg Moskowitz:]

Okay, thanks very much. So I know there was an earlier question on solar storm, but I actually wanted to ask about the recent Microsoft Exchange on-premise server breach. Tim, do you think that the nature of this breach will accelerate the shift to cloud for MSPs? And then also what impact, if any, do you think that this might have on Datto's business going forward?

[Tim Weller:]

Yes. It's obviously emerging and we literally just released the scripts for it which is pretty crazy because it's usually like a one or two-person, a couple here to do it. So we've got the heroes. I don't know how fundamental it is Gregg for the following reasons. To me, the Exchange servers have been moving for years now, and then you would have the numbers more than I. I think what's -- what sticks in my mind Datto kind of a year and a half ago, we had Kevin Mitnick on the main stage, a famous hacker from back in my day. And he went into somebody's O 365 email box and showed us ransomware. Click on the wrong email, lock up every email of in the box. So, just because you move into the cloud, that doesn't mean security is not an issue. And I think that's going to be very exciting and interesting for MSPs. It's a totally new way of doing business. And we talk about investing in cloud, investing in security, they are synergistic. So I think people are almost numb to the pain. There are so many of these techs coming out. But we've heard very little in the last week on this when. The solar storm caught a little more attention I think from MSPs. But let's just say they're in a different place this year than they were a year ago. Both -- they're feeling overwhelmed, but I think they're starting to say, hey, there is some real revenue opportunity and SMBs should be paying a lot more money than they used to for security. So that's kind of how I would cast it at this moment.

[Gregg Moskowitz:]

Right, got it. Thanks, Tim. And then John, are you able to expand just a bit on what assumptions around SMB recovery are embedded in your 2021 revenue guidance? Thanks.

[John Abbot:]

Sure. We don't have a tie -- our guidance tied to a specific sort of macroeconomic model. But we absolutely assume that second half of the year, that certainly there is a broader reopening, and both from a revenue standpoint and an expense standpoint, we see the impacts of that.

[Gregg Moskowitz:]

Okay, great. Thank you.

[John Abbot:]

Sure.

[Tim Weller:]

Thanks, Gregg.

[Operator:]

Your last question comes from the line of Brent Thill with Jefferies.

[Unidentified Analyst:]

Hey, guys, this is Joe on for Brent. Really appreciate the question. I may have missed it but can you quantify what the gross renewal rate is in the quarter? I think it was 84% in 2Q and 88% last year. Just curious what it was this quarter.

[John Abbot:]

Sure. This quarter was 88%, so the 84% was really the low in the year.

[Unidentified Analyst:]

Awesome. That's fantastic to hear and that will help all retention rates going forward. And then just…

[John Abbot:]

Yes. And that's dollar based, obviously not…

[Unidentified Analyst:]

Yes. Yes, dollar-based so got those clear. And then just -- clearly, growth is a priority for you guys and you've been clear that you're moving PaaS, you know, work from home savings, and you're investing a lot in products. Maybe could you just talk a little bit more about the investments on the go-to-market side given you don't have a traditional sales model? And where you're spending there?

[Tim Weller:]

Yes. I could take a shot of just qualitative and John you may have said a number or two in the past, you want to reiterate. But you're right, it's not a traditional model, so throwing 100 quota-bearing reps at something may or may not speed it up. The MSP base is who do -- the ones who do the selling for us. That said, we've talked about moving more global, more international, so there is hiring going on there. You would expect that we'll be adding expertise in security, cloud, some of the newer things we roll out over time. I know John has a word for it, matching the functions or something, so that, you know, things like product marketing and what have you for security, cloud -- you know, sales engineers, security cloud. So I don't think it's anything unusual. John, you may have some more color on that?

[John Abbot:]

No, just a little. It's may not be just adding salespeople, for example, right? It's -- there is a lot in our sales and marketing umbrella that's -- and a lot of it is geared towards enabling our MSP partners who effectively an extension of our sales team, so.

[Unidentified Analyst:]

That's helpful. Thanks, guys.

[Operator:]

I would now like to turn the call back over to Tim Weller for any closing remarks.

[Tim Weller:]

Well, thank you all again for joining the call. We very much appreciate your interest in Datto. We're really excited about the outlook for 2021. And I'm sure many of you like me are excited about summer maybe getting outdoors . So, we look forward to speaking with you again very soon. Take care.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.