Madison Strategic Sector Premium Fund (MSP) Q4 2020 Earnings Call Transcript

Madison Strategic Sector Premium Fund (MSP)
Q4 2020 Earnings Call
Mar 11, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Datto's fourth-quarter 2020 earnings results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] 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 -- Director of Investor Relations

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 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 forward-looking 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 -- Chief Executive Officer

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 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. 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 data 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, their 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 our 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 through 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 road map 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 Technologies' Multisector 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 raised their production servers and their primary backup copies.

Of course, strong cybersecurity 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 started ring two 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 cyberattacks on several prominent companies and nations, Datto moved quickly to help the MSP community.

Within a matter of days, we created the Datto FireEye Countermeasure Scanner. The scanner uses 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 one 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 of weeks ago to address the Silver Sparrow malware threat to macOS. Now let's talk about ring three. This is about offering MSP's 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 road map 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 Datto is well positioned. We will continue to increase our investment in each area to expand our product offerings in 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 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?

John Abbot -- Chief Financial Officer

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 an $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 additions.

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 24/7 support function and in 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.

General and administrative expenses were $20.5 million, a decline from $21.8 million in Q4 2019 and now include public company costs. And finally, depreciation expense within operating expenses was $2.2 million compared to $2.5 million in Q4 2019. Operating income for the fourth quarter was $34 million or 24.5% of revenue compared to $11.3 million or 8.9% of revenue in Q4 2019. Adjusted EBITDA for the quarter, which excludes stock-based compensation, restructuring costs and transaction expenses, was $40.8 million compared to $17.1 million in Q4 2019.

In recalibrating our cost structure during COVID, we further expanded our adjusted EBITDA margins to 29.4%, a significant increase from 13.6% in Q4 2019. As we discussed on our last earnings call, we believe the adjusted EBITDA margins remain artificially high, reflecting certain expense reductions we implemented in Q2 and significantly lower expenses associated with reduced travel, events, marketing and office costs during COVID. As we continue investing in technology innovation to drive revenue growth, and commercial activity returns to more normal levels, these expenses will increase and margins will return to more normalized levels. Free cash flow in the quarter was positive $22.7 million compared to negative $5.8 million in Q4 2019.

And we ended the quarter with just over $170 million in cash. As a reminder, we completed our IPO in the fourth quarter with net proceeds of over $640 million, which we used to pay off our outstanding debt of $590 million, with the remaining proceeds added to our cash balance or used to cover other IPO transaction costs. We also entered into a new $200 million revolving credit facility, which remains undrawn and which provides us with tremendous flexibility to invest and grow the business. Additionally, the IPO triggered the vesting of certain employee options, which added approximately $23 million to our stock-based compensation expense in Q4.

The remaining value of those options will be expensed ratably at a more normal level as they continue vesting over subsequent quarters. Moving to our full year 2020 results. Total revenue grew 13% year over year to $518.8 million, and subscription revenue grew 18% year-over-year to $485.3 million. We delivered full year adjusted EBITDA of $150.5 million, an increase of 78% year over year.

Turning to guidance for the first quarter and full year 2021. The solid profitability and structural operating leverage in our business provides ample capacity for us to continue investing in technology innovation, go-to-market resources and scaling infrastructure to support and sustain our long-term growth and expand our leadership position in the market. Our 2021 guidance includes a modest amount of BitDam revenue in the second half of the year and the expected EBITDA dilution from the acquisition, along with the impact of the incremental investments in the important areas of cloud and security. The purchase price for BitDam was $46 million in cash, and we expect the acquisition will contribute meaningfully to revenue growth in 2022.

For the first quarter of 2021, revenue is expected to be in the range of $142 million to $144 million. Adjusted EBITDA is expected to be in the range of $45 million to $46 million. For the full year 2021, revenue is expected to be in the range of $582 million to $590 million. And adjusted EBITDA is expected to be in the range of $130 million to $135 million.

We expect subscription revenue to continue to be in the low to mid-90% range of total revenue in 2021 and capital expenses to be in the high single-digit percentage range of revenue. As a reminder, for non-GAAP income taxes, we use an effective tax rate of 25%. And for calculating EPS, we estimate approximately 170 million fully diluted shares for Q1 and 175 million fully diluted shares for the full year. In closing, we believe our Q4 results and 2021 guidance reflect the ongoing reacceleration of the business.

We're very excited about the future and look forward to reporting on our progress in the quarters to come. With that, we'll open up the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Matt Hedberg with RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Analyst

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 there was a strong start to the year with MSP 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 -- Chief Executive Officer

Yes Matt, it's Tim. Thank you. I'll make a comment and, John, welcome to jump in, too. We actually had good, steady gross adds.

John referenced the number, 3,000. We had 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 think Q4 will be the low there. In Q1, it will go up again. So I would say it's a macroeconomic effect. We feel pretty good about going into reopening.

Matt Hedberg -- RBC Capital Markets -- Analyst

Sure, OK. That's helpful, OK. And then I guess 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 -- Chief Executive Officer

Yes, it definitely is. I would tell you it's for the installed base in 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, it will also 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 I probably won't add much on timing other than it's gone 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 scale of it.

Matt Hedberg -- RBC Capital Markets -- Analyst

Excellent. Thank you very much.

Tim Weller -- Chief Executive Officer

Thanks Matt.

Operator

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

Saket Kalia -- Barclays -- Analyst

Hey It's Saket from Barclays. Tim, maybe for you, I'd love to also kind of dig into 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 all that 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 could go one little 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 -- Chief Executive Officer

Yes, I'll take a shot at each of those. So on economics, I think and you'll know this, as well as anybody as a cloud analyst. When you move into a cloud whether it's AWS, Azure, etc., you move from knowing the cost of your Dell server, your VMware, 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 to hazard a guess on the way in, but you really don't have a big idea of what it's going to cost two years in. 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's obviously a strong long-term trend toward cloud. So we're just hinting at 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 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 copy-and-paste technology, and it just works straight in Azure." Might work on the first day like that, but there's a lot of nuance that we've discovered. And we think it's one of the reasons that MSPs aren't 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 with our SaaS protection, for M 365, Google Workspaces and that whole ecosystem. And without giving exact pricing, we've certainly worked back from what end users and MSPs pay there in terms of dollars per seats.

And we'll price accordingly to make sure we have 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 breathe today. So that will be job one. Hope that helps.

Saket Kalia -- Barclays -- Analyst

Got it. Yes, that does. 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 comment that you'd be willing to make on just overall ARR growth? Or any sort of visibility for next year on ARR?

John Abbot -- Chief Financial Officer

Sure. Thanks, Saket. As you've seen, our ARR per MSP has expanded nicely here over time, up to nearly 32,000 per MSP from 28,600 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 large -- 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 it would continue to expand in the future.

But it's important to note that ironically, adding more MSPs actually brings 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 coming 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 you can see in our guidance for Q1, and for the year, we feel good about the year. And the 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 -- Barclays -- Analyst

Absolutely. Very helpful guys. Thank you very much.

Operator

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

Jason Ader -- William Blair & Company -- Analyst

Hey guys. Thank you for the question. I wanted to first ask about BitDam. I 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 -- Chief Financial Officer

Yes, we didn't break out either of those. We tried 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. But the EBITDA impact, right, we inherit all those expenses of the business day one.

So the EBITDA impact, I don't want to characterize it maybe anyway to say it's meaningful.

Jason Ader -- William Blair & Company -- Analyst

That $10 million or something like that? $10 million you're not...

John Abbot -- Chief Financial Officer

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

Jason Ader -- William Blair & Company -- Analyst

How many people in the company are coming over?

John Abbot -- Chief Financial Officer

We haven't put that out either, Jason.

Jason Ader -- William Blair & Company -- Analyst

OK. OK. 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 an 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 -- Chief Executive Officer

Yes. No, Jason, I'll just say what I said before. We've got a good steady machine for producing gross MSPs. There's 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 gross 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 toward 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.

John Abbot -- Chief Financial Officer

It's really been a churn factor really. 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, it was I would say, cleanup, 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 -- William Blair & Company -- Analyst

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

John Abbot -- Chief Financial Officer

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've sort of been saying from the get-go that ARR is our leading indicator.

And that's where we were seeing the early reacceleration, and we continue to see it. And 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 -- William Blair & Company -- Analyst

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

John Abbot -- Chief Financial Officer

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 toward.

Jason Ader -- William Blair & Company -- Analyst

OK. Thank you guys. Good night.

John Abbot -- Chief Financial Officer

Thank you.

Operator

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

Unknown speaker

Hi everyone. This is Calvin on for Sanjit. Congrats on the quarter. I have two questions for you guys.

So first is on SolarStorm. 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 and uptake of your new ransomware solutions as well as the existing core product set?

Tim Weller -- Chief Executive Officer

Calvin, it's Tim. It's a great question. I think you hit on it right. Driving more demand for cyber resilience and 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 anyway. Security for most tech companies like us is opportunity and risk. And I think we mentioned in the script, in 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 the public domain. And we did the same for the Silver Sparrow.

And actually, I think 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 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.

Unknown speaker

Right. No, that makes a lot of sense. And then on the second one on BitDam specifically, when you thought about the company and 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 -- Chief Executive Officer

Yes. So it's a good question. We, first and foremost, want a great technology and a great team. And trust me, we've 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 of 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 kind of, say, vector of growth there. And it'd 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 Datto networking. We connect all of these things, and that is evolving toward a software-defined networking world. 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 our set of technologies.

Unknown speaker

Awesome. Thank you guys.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Many thanks. Thanks for taking the question. Tim, I want to direct this to you, and I want to go back to Azure backup. And we've 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 the cloud and then also more interest in Azure backup as a potential solution.

Most of the MSPs did mention that your solution wasn't PoW. And so I just wanted to ask you on a, how you're thinking about features and cooperation and cost. And what I mean by feature, feature parity with what Azure backup has. Is there any technology challenges that you're facing and 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 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? Is there a risk of kind of cannibalization on margins? I know that's a lot. But what I'm really trying to understand, are you at risk of losing share as more workloads go to Azure for your backup solution? And are you at risk at all from a margin degradation point of view?

Tim Weller -- Chief Executive Officer

Yes, 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.

Azure is a big world already. And anybody that's in there now, we are not addressing. Although I have heard weird 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's going to be a lot of net new. Also if people are on-prem today 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.

There's some economies of scale you get there as well. So feeling like this is 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 tried to catch them.

Look, Microsoft has a backup option. And candidly, they've offered a server backup product since the dawn of Windows decades ago, right? There's 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 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, any 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 toward 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, 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, in private cloud and 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 can be of different types and different locations. And the real key for us will be to unify that which you wouldn't do if you were 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've 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 of your six questions along the way there.

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

Keith Bachman -- BMO Capital Markets -- Analyst

No, that's terrific. And just, Tim, as you think about my follow-up question is 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 how do you see that mix unfolding?

Tim Weller -- Chief Executive Officer

Yes, it's a good question. I don't know that I want to put a number on it. John will kick me under the virtual table here. I think 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. And I think a betting person would say if we're doing acquisitions over the time frame 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 count Azure and traditional continuity, then the race gets even more interesting, right, because that's going to be a very big growth area, most likely.

Operator

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

Brad Sills -- Bank of America Merrill Lynch -- Analyst

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 and the 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/upsell opportunity that may have been impacted could come back? Any categories you'd call out?

John Abbot -- Chief Financial Officer

Yes. I mean I'll take a first pass, and Tim certainly can add. I mean you heard Tim say BCDR already. At least fourth quarter, we felt some rebounding, which was very healthy and will be a positive to net retention.

But if 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 prospective MSP partners have 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 sell-through and cross-sell activity.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

And then one more, if I may. Just any commentary you'd make on the PSA solution. How's that cross-sell opportunity? How does 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.

Tim Weller -- Chief Executive Officer

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 in 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's less share shift there.

We actually, in Q2, talked about PSA was one of the first areas to get 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 was a very good trend for us in PSA.

But I wouldn't think about that one as much as this massive displacement of competitors, as much as kind of net new demand. We've brought a lot of features there. We've added some documentation, which some people upsell, but we've sort of built it in, in a couple of other dimensions as well. So the focus is on stickiness and then winning net new MSPs.

And there's a few platforms out there for PSA. There are two big ones. We're one of the two. 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 lock down the partners that are on that platform.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks so much Tim I appreciate it. Yes. You're welcome.

Operator

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

Fred Havemeyer -- Macquarie Group -- Analyst

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 your product road map?

Tim Weller -- Chief Executive Officer

Hey Fred, this is Tim. I'd go back to my three concentric rings. We've got a very strong internal security team that has offensive/defensive capabilities, compliance, new technology. And so in some sense, we're feeling good there pre-BitDam, but it 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 it's not lost on us that it's based in Israel, and there's a great amount of security technology talent over there as well. So we'd 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 -- Macquarie Group -- Analyst

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 the 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 -- Chief Executive Officer

Yes, 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 -- Macquarie Group -- Analyst

Thank you.

Tim Weller -- Chief Executive Officer

Thanks Fred.

Fred Havemeyer -- Macquarie Group -- Analyst

Welcome.

Operator

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

Gregg Moskowitz -- Mizuho Securities -- Analyst

OK. Thanks very much. So I know there was an earlier question on SolarStorm, 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 -- Chief Executive Officer

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 of all-nighters 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 sticks in my mind, DattoCon one and a half years 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 in the box. So just because you move into the cloud, it 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.

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 attacks coming out.

But we've heard very little in the last week on this one. The SolarStorm 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 feeling overwhelmed, but I think they're starting to say, hey, there's 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 -- Mizuho Securities -- Analyst

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

John Abbot -- Chief Financial Officer

Sure. We don't have our guidance tied to a specific sort of macroeconomic model. But we absolutely assumed that second half of the year, that surely there's a broader reopening. Both from a revenue standpoint and an expense standpoint, we see the impacts of that.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Great. Thank you. That is great.

Operator

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

Unknown speaker

Hey guys. This is Joe on for Brent. 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 -- Chief Financial Officer

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

Unknown speaker

Awesome. That's fantastic to hear, and that will help all retention rates going forward.

John Abbot -- Chief Financial Officer

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

Unknown speaker

Yes, it's dollar-based. Yes, got that. That was clear. And then just clearly growth is a priority for you guys.

And you've been clear that you're moving past work-from-home savings and you're investing a lot in product. 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 -- Chief Executive Officer

Yes, I could take a shot at 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 the ones that do the selling for us. That said, we've talked about moving more global, more international. So there's hiring going on there.

You would expect that we'd be adding expertise in security cloud, some of the newer things we roll out over time. And John has a word for it, matching the functions or something, so that things like product marketing and what have you, for security, cloud, sales engineers, security cloud. So I don't think it's anything unusual. John, you may have some more color on that.

John Abbot -- Chief Financial Officer

No. Just it may not be just adding salespeople, for example, right? There's a lot in our sales and marketing umbrella and a lot of it is geared toward enabling our MSP partner, who, effectively an extension of our sales team, so.

Unknown speaker

That's helpful.

Operator

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

Tim Weller -- Chief Executive Officer

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

[Operator signoff]

Duration: 59 minutes

Call participants:

Ryan Burkart -- Director of Investor Relations

Tim Weller -- Chief Executive Officer

John Abbot -- Chief Financial Officer

Matt Hedberg -- RBC Capital Markets -- Analyst

Saket Kalia -- Barclays -- Analyst

Jason Ader -- William Blair & Company -- Analyst

Unknown speaker

Keith Bachman -- BMO Capital Markets -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Fred Havemeyer -- Macquarie Group -- Analyst

Gregg Moskowitz -- Mizuho Securities -- Analyst

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