Madison Strategic Sector Premium Fund (MSP) Q1 2021 Earnings Call Transcript

Madison Strategic Sector Premium Fund (MSP)
Q1 2021 Earnings Call
May 12, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Datto first-quarter 2021 earnings results conference call. [Operator instructions] And 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, director of investor relations. 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 first-quarter 2021 financial results. With me on the call today are Tim Weller, chief executive officer; and John Abbot, 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 second quarter ending June 30, 2021, and full year ending December 31, 2021.

As a result of a number of factors, actual results may differ materially from those projected in such statements. These factors are set forth in the earnings release that we issued today under the section captioned Forward-looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. The following statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.

In addition, 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 on our first-quarter 2021 earnings press release, which can be found on our investor relations website. A financial supplement and webcast of today's call are also available on our investor relations website.

I would also like to inform you that we will be participating in several investor conferences coming up in June, including the William Blair growth stock conference, the Evercore ISI TMT conference and the Bank of America global technology conference. Please reach out to me if you're interested in joining our schedule. 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 Q1 results and an improved outlook for 2021. I'll begin with a few highlights from the quarter, followed by comments on Datto Commerce, our latest product launch, and then I'll update you on two key themes for 2021, cloud and security. Finally, I'll turn the call over to John to discuss our financial results and guidance in more detail.

This year started on a strong note as momentum from Q4 carried into Q1 with total revenue growth of 16% and subscription revenue growth of 17% year over year. We saw strength across our entire product suite, led by continued rebounding of our BCDR products and strong growth in our SaaS protection and RMM products, driven by the powerful trends of digital transformation and cyber resilience. We ended the quarter with $573 million of ARR, which represents a higher sequential increase than in the previous quarter. We view this as a key leading indicator of revenue reacceleration.

In Q1, adjusted EBITDA was $47 million, and we generated more than $24 million of free cash flow, representing our fourth consecutive quarter of positive free cash flow. In addition, the number of MSP partners we serve grew to 17,300, up 300 from the end of 2020. As you know, we are the largest pure-play IT solutions provider to the MSP community, and we are dedicated to serving this channel every day in our sales and support motions and in creating technology, which is purpose-built for the managed service provider channel. We provide MSPs with mission-critical, sell-through solutions for their SMB customers, software tools to run their own businesses efficiently and a wealth of resources to grow their businesses and expand their margins.

We never go around in MSP to sell directly to their SMB customers. And that has established unique, highly aligned relationships that we have spent years building one by one. We are more than just another vendor to MSPs. We are their trusted partner.

No other company of our scale can deliver on that promise to MSPs, and it creates a major barrier to entry for potential competitors. Let me now briefly touch on our most recent product launch, Datto Commerce, into the North American market. Datto Commerce is a real-time quoting and procurement platform for MSPs that increases their efficiency and profitability. It simplifies how MSPs "sell and procure." With Datto Commerce, we followed our well-established playbook of how we entered networking, RMM, SaaS protection and security with small acquisitions of great teams and differentiated technology that we tailored for MSPs.

We purchased the commerce technology in the middle of 2020, and we operated it in Australia and New Zealand last year while adapting it to the unique demands of the North American market before commercially launching in April. Consistent with our open ecosystem philosophy, Datto Commerce will work on virtually any PSA or RMM platforms partners are using. And of course, it integrates seamlessly with Datto's PSA and RMM software. I should also give a shout out to the Datto PSA and RMM teams for landing in the upper-right quadrant of the Canalys research Point of View grid.

Meanwhile, Forrester Research recently concluded that the average payback period for Datto partners on an investment in our integrated solutions of unified continuity, PSA and RMM is less than six months with a very high ROI. Before I turn the call over to John to run through our financial results and outlook, I wanted to leave you with some thoughts on two key themes for 2021: cloud and security. Datto helps MSPs and their SMB clients in securing digital assets, both applications and data. We protect those assets, help manage those assets and validate that protection and help users to connect to those assets.

Protect, manage, connect, all our products work together in that common goal of securing digital assets. Let's talk about cloud. Our software services are cloud managed and delivered as SaaS applications. We operate our own exabyte-scale Datto Cloud that gives us the advantages of cost, flexibility and control.

Our partners and the SMB clients they serve are at various stages of their own cloud journeys but will operate, for the most part, in hybrid cloud environments for the foreseeable future. What we offer our partners is the ability to secure digital assets in a hybrid cloud world, no matter where data and applications live. We believe our ability to offer a unified predictable experience across disparate environment is important to our partners who, in many cases, manage digital assets that run on premises for high performance in private clouds, in M365 and Google Workspaces and sometimes in the public cloud. The next step for us in hybrid cloud protection is our Azure continuity product, which will give our partners, the public cloud workloads, the same highly reliable Datto continuity performance and robust security that they have come to trust from Datto.

Our Azure product is on track for beta in Q2 and partner demand is very encouraging. We expect Azure to broaden our market opportunity for unified continuity and contribute to our ongoing reacceleration. I look forward to sharing more in coming quarters. Finally, let's talk about security.

Continuity, as we deliver it, fits squarely into any security framework because we're involved in application and data recoveries every week, many of which are a result of ransomware or other cyber attacks. Continuity used to be primarily providing protection against server crashes, Internet outages or the occasional natural disaster. Now it's defense against active cyber threats. I have always described continuity as the last line of defense of security.

With our launch of ransomware for RMM in Q4 and the acquisition of BitDam in Q1, we're accelerating our path into other areas of security beyond just recovery. With each new offering, we plan to bring MSPs strong margin opportunities as they protect their SMB clients and monetize security. The early evidence is good. Partner demand for our new ransomware detection and isolation feature for Datto RMM continues to grow with just under 500,000 end points now protected, almost double from 250,000 less than a quarter ago.

We're also helping our partners shape their cyber resilience road maps with thought leadership for MSPs in the form of content, webinars and events like our recent MSP tech day on cyber resilience. The event delivered a deep dive in the cybersecurity, business continuity and incident response to help MSPs and their SMB clients protect against growing cyber threats. Our leadership in security expands beyond our sponsored events to the international arena where Datto serves as a founding member of the Ransomware Task Force, a broad coalition of experts in industry, government, law enforcement and national organizations coming together in the fight against ransomware. The task force recently released its report at an event where the U.S.

Secretary of Homeland Security addressed an audience of U.S. policymakers and others with recommendations on how to confront this urgent national security risk for countries around the world. Our own CISO's participation shaped the task force guidance for MSPs and SMBs to recommend financial funding and support to help MSPs develop cyber resilience capabilities among other critical measures. Closer to home, we continue to make ever-increasing investments to ensure that our own infrastructure, practices and products are secured to the highest standards.

In summary, I couldn't be more pleased with our Q1 results and see good momentum across the business. We remain as committed as ever to our MSP partners and see many opportunities to help them grow their businesses with margin-enhancing sell-through products and to operate more efficiently with our PSA, Commerce and RMM products. Cloud and security have always been fundamental with Datto, and we'll continue to invest in these areas to abstract away their inherent complexity and turn them into growth and margin opportunities for our MSP partners. Thank you for your interest in Datto and the MSP story.

With that, I'll turn the call over to John to take you through our financial results and outlook. John?

John Abbot -- Chief Financial Officer

Thank you, Tim, and good afternoon, everyone. We're pleased to report strong first-quarter results. And 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 first-quarter results reflect strong execution from our team and continued momentum across our whole suite of products. First-quarter recurring subscription revenue was $135.6 million, up 17% year over year, which includes a benefit from favorable foreign exchange rates of approximately 3%. Subscription revenue comprised 94% of our total revenue of $144.9 million in the quarter, exceeding the high end of our previous guidance. ARR at March 31 was $572.5 million, up 15% from $498.4 million a year ago and importantly increased $30 million sequentially.

This included a benefit of approximately $4 million from our annual ARR currency exchange rate recalibration. Excluding this FX impact, ARR increased $26 million sequentially, up from $20 million in Q4 of 2020 and $16 million in Q3, providing continued evidence of the reacceleration of the business. We ended the first quarter with more than 17,300 MSP partners, a net increase of 600 year over year and an increase of 300 sequentially. We're encouraged by the return to growth in MSP partners in the first quarter and believe the increased churn associated with the pandemic is now largely behind us.

We also grew the number of MSPs contributing over $100,000 in ARR to more than 1,150, up from 1,000 a year ago. Our sell-through model continues to drive strong growth within our installed base of partners as they roll out Datto solutions to more SMBs, those SMBs consume more data or seats and they both adopt more Datto products. Our first-quarter gross margins of 75% were up from 71% in Q1 2020, driven by the operating leverage we're realizing in our 24/7 support function and increased efficiencies in the infrastructure supporting our software solutions. First-quarter operating expenses were $69.6 million, a slight reduction from Q1 last year, reflecting a lower cost structure during the pandemic.

Within opex, sales and marketing expenses were $29.6 million, a slight decline from $31.3 million in Q1 2020. R&D expenses were $17.6 million, an increase from $16.4 million in Q1 2020. G&A expenses were $20.2 million, an increase from $19.5 million in Q1 2020 and now include public company costs. And finally, depreciation expense within operating expenses was $2.1 million, compared to $2.5 million in Q1 2020.

Operating income for the first quarter was $39.4 million or 27% of revenue, compared to $18.6 million or 15% of revenue in Q1 2020. Adjusted EBITDA for the quarter, which excludes stock-based compensation, restructuring costs and transaction expenses, was $46.9 million, compared to $25 million in Q1 2020. In recalibrating our cost structure during COVID and as a result of ongoing efficiency initiatives, we expanded our adjusted EBITDA margins to 32%, a significant increase from 20% in Q1 2020. As we discussed on our last earnings call, we're investing in cloud and security to drive revenue growth.

And as commercial activity returns to prepandemic levels, we expect adjusted EBITDA margins will revert to levels in the low to mid 20% range. Free cash flow in the quarter was positive $24.5 million, compared to negative $15.2 million in Q1 2020. And we ended the quarter with just over $149 million in cash. Turning to guidance for the second 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 continues to include the impact of incremental investment in the important areas of cloud and security. For the second quarter of 2021, revenue is expected to be in the range of $146 million to $148 million. Adjusted EBITDA is expected to be in the range of $34 million to $35 million.

For the full-year 2021, we are raising our revenue guidance to a range of $594 million to $600 million, and we're also raising our adjusted EBITDA guidance to a range of $134 million to $138 million. Our Q2 revenue guidance represents year-over-year growth of 18% at the midpoint, inclusive of a 3% FX tailwind. And our full-year revenue guidance represents year-over-year growth of 15% at the midpoint, inclusive of the 2% FX tailwind. It's important to remember that Q2 2020 was our lowest revenue quarter last year as a result of COVID impact, making that an easier comparison this year.

We expect subscription revenue to account for over 90% 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%. For calculating EPS, we estimate approximately 170 million fully diluted shares for Q2 and 175 million fully diluted shares for the full year. In closing, we believe our Q1 results and 2021 guidance reflect the ongoing reacceleration of the business.

We're very excited about our momentum going into the rest of the year 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 Sanjit Singh with Morgan Stanley.

Sanjit Singh -- Morgan Stanley -- Analyst

Thanks for taking the questions. And first off, congrats to the team on a really great Q1. I think particularly impressive was the net new ARR performance this quarter, even if you sort of normalize for the FX benefit. So my question, Tim, is if you can speak to end-market demand and how that may have changed through that -- across the portfolio and during the quarter? And was there any sort of onetime items or benefits we should be thinking about that may have benefited Q1.

Tim Weller -- Chief Executive Officer

Yeah. Thank you. I will -- I'll ask John to noodle on whether there's some one time or it's other than what you said. I don't think so.

But it's always been a little tough for us. We can survey the base, of course. But when you have 17,000-plus partners dealing with hundreds of thousands of SMBs, for every story, you have a partner struggling to have one who's having a record year. So I think we just have a general sense across regions that reopening is occurring step by step, and we think that was the case here.

I can't point to any. For example, we have good breadth across the product lines in terms of growth. So it's not one breakout superstar, good international bouncing and good domestic. So I don't think I'd stick my neck out and say it was any one thing.

But clearly, the longer the pandemic goes on and work from home, in particular, SMBs need more and more on the technology front. And at the same time, we're optimistic we'll get additional reacceleration once MSPs are able to get out of their home case, so to speak, and start seeing more of their customers and maybe a little bit of that for our team as well. So wish I had something more specific there for you. But John, anything beyond what you said in the prepared remarks you want to add?

John Abbot -- Chief Financial Officer

Yeah. No extraordinary one-time items. The FX was the one point we wanted to call out. But even as you say, excluding the FX, it was a terrific quarter and a great increase in ARR.

It's really just a continuation of the reacceleration in the business that we've been seeing and that we've been talking about. And you heard Tim mention before that BCDR had a nice rebound in Q4, and that's continued. And we continue to see great strength in Datto Protection and RMM with great contributions from other products as well. So as Tim said, really across-the-board products, geographies continued momentum.

Sanjit Singh -- Morgan Stanley -- Analyst

I appreciate the context on both of those fronts. The next thing I want to hit was around security, one; and cloud, number two. And obviously, the country is going through another headline, pretty meaningful ransomware attack that has a lot of customers, frankly, looking for solutions. I wanted to get a sense, Tim, in terms of sort of meeting what is likely to be incremental demand on this front around ransomware attacks, how the security offering is positioned? I know BCDR kind of plays into that as well.

But in terms of your security efforts, are you in a position -- is the business in a position to help customers meet that challenge when it comes to ransomware?

Tim Weller -- Chief Executive Officer

Yeah. No question about it. And we highlighted -- I think signaled very strong our intentions on the last call. What a difference a year makes.

I think the headlines you and I read are sort of scary and that's being processed by SMBs as an increased willingness to pay some money for security beyond maybe the antivirus they've had in there for 15 years. So that's absolutely rippling through. And I think you're going to see MSPs now trying to figure out what's their full stack and starting to view themselves as basically security companies. If you can't protect your SMB, all the rest of the creature comforts and Zoom conference calls or whatever solutions you're providing start to not matter.

I think we've had good exposure here. You've heard me from the IPO on -- where we talk about security as the last line of defense. And -- excuse me, continuity as the last line of defense in a security strategy. I'll call that the recovery phase.

But by then, something bad has happened. And now in ransomware, we're finding out we can get on the front end of that on the prevention side. And so a couple of data points I'd give you. One is our kind of state of the industry report and the MSPs last year listed ransomware as the No.

1 problem facing MSPs. And that's before all the recent round of half a dozen visible attacks. I think the Homeland Security Secretary just warned of increasing ransomware risk to SMBs. And our own CISO -- we put out a release -- has joined as a founding member of the Ransomware Task Force.

They just put their report out, and it's just everywhere. And we're pleased to see that I think some government money is even going to be coming this way as well. So it's not just the SMBs. MSPs themselves have exposure.

And if you get your hands on their assets, then that can be weaponized. So it's basically in every conversation. I would leave it there, and we think we're in good shape to capitalize on it.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood Thanks, Tim, and congrats on the quarter.

Tim Weller -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Saket Kalia with Barclays.

Saket Kalia -- Barclays -- Analyst

Hey, guys. Thanks for taking my questions here. Hey, how you doing? Hey, Tim, maybe first for you. Maybe just dissecting one particular part of the ARR.

It was great to see the customer adds start to increase again, right, not just from last quarter where we had some pandemic-related churn, but even above the run rate that we saw through 2020. And so maybe the question is, how do you sort of feel anecdotally about the pipeline here for customer adds over the next couple of quarters?

Tim Weller -- Chief Executive Officer

Good. Thank you, Saket, and hello. I think we noted in the past couple of quarterly calls, but even I think when we first met you a year ago, gross MSP adds were solid throughout 2020. It's not been a gross adds question.

Pandemic comes along Q2, Q3. You see some disruption at the lower end of our base where some MSPs were struggling, and we tightened our credit policies, etc. So now that most of that is passed, we're seeing net MSP adds growing, and we would expect that dynamic in normal economy, normal markets to continue. There's still plenty of MSPs out there.

A lot of runway when you think about 125,000-plus MSPs globally. So we're optimistic on that front.

Saket Kalia -- Barclays -- Analyst

Got it. Got it. That makes a lot of sense. John, maybe for my follow-up for you.

Understanding you don't guide to net new ARR, is there anything you want to call out seasonally or -- I mean, you called out FX. Doesn't sound like there are any other anomalies that we should be thinking about. But just sort of broad brush, how should we sort of be thinking about modeling ARR or net new ARR kind of through the rest of 2021? Because you do have some easier comps and recovery and such. So any sort of color you could give on how we should think about ARR as the year sort of progresses?

John Abbot -- Chief Financial Officer

Yeah. No, it's a good question, Saket. Thanks. And historically, as you -- I think you may know, we actually had a sawtooth pattern with ARR climbing each quarter, Q1 through Q4 and then falling slightly again in Q1, but we're starting to grow again.

Obviously, this year, in Q1, we didn't follow that pattern. We had a very strong quarter. Even without the impact of FX, $26 million increase was the second-highest ARR increase ever. And we think that reflects the strong momentum we're seeing in our business.

As you said, we don't guide to ARR, but we've guided the higher revenue range in Q2 and for the full year. And obviously, ARR is a leading indicator of revenue, and we're focused on continuing to drive higher growth in ARR, which we view as that leading indicator and driver of the revenue growth. As you can imagine, that won't always come in a straight linear increase, but we do believe the overall trend will be up and consistent with our theme of reacceleration.

Saket Kalia -- Barclays -- Analyst

Very helpful, guys. Thanks again.

John Abbot -- Chief Financial Officer

Yeah. Thank you.

Operator

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

Matt Hedberg -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question, guys. Tim, I wanted to ask about Datto Commerce. You had a press release out on it earlier and you obviously referenced it in your script.

I know you don't talk specifically about pricing. That's up to the MSPs. But can you talk about the mechanism for pricing? How might an MSP price this relative to your other solutions?

Tim Weller -- Chief Executive Officer

Yeah. It's a great question, Matt. This is at the moment what I would describe in the sell-through category. So it's a subscription that they're buying to help them with a pain point in terms of just sheer time.

If you've got dozens or hundreds of customers and MSP, buying those laptops, buying them out, dealing with all of that, things are broken, getting that procurement function that we all have at larger companies, and has abstracted away from us, that's front and center for MSPs. It's noise at the help desk level and takes a lot of time. So we found this tool we acquired last year and put it into a platform now. It's in North America and Australia and New Zealand.

And effectively, it's a flat rate subscription price. So on the one hand, we think it's going to be a great revenue opportunity. On the other hand, it fits into our strategy of platforms for MSPs. In some cases, we give them some platforms, email platforms, other marketing, digital content.

In this case, we thought there was a real revenue opportunity there and, obviously, it starts to put us in the flow of their purchasing cycles, connects perfectly back into Autotask PSA on our end, but it's also an open ecosystem tool that's consistent with our theme as a company and so connects into other PSAs as well. So think about it as kind of getting into the top of their workflow.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. It really seems super complementary and additive to your stack. I guess one more product question. Now that unified continuity is available on Azure, I'm curious, what did you learn from your beta testing to sort of -- what sort of feedback did you get? And it's probably hard to anticipate what the demand is going to be like for that.

But just sort of curious on maybe that aspect of kind of what you've learned.

Tim Weller -- Chief Executive Officer

Yeah. So first, let me just calibrate. On the last call, I said we'll go into beta in Q2. So gathering those names now we come out of alpha and into beta.

So the learnings we've had so far, though, we've been live with many partners now for months, I think, are around, obviously, first and foremost, technology. We want to make sure it's as bulletproof of a solution as our on premises, some private cloud solutions are. And I think our confidence there is high. Candidly, the second set of learnings is around what MSPs are struggling with in their move to Azure.

So you can find if you start dialing MSPs that have moved everything to Azure, loved it. You can find MSPs that are 75-25, 25-75. You can find MSPs that moved there and came back. And they just have a variety of technology, business process and economic challenges, right? Economic being interesting.

You don't quite know what your six-month Azure bill is going to look like because it goes up, not down. And so I think understanding their journeys as MSPs and the journeys of different workloads into the cloud has been very insightful for us. We've never thought there was going to be a magic quarter or magic year where kind of everything moves to the cloud. It's going to be this multiyear drawn out journey.

And our goal is to abstract away all of that for them so that their continuity solution is a little bit indifferent as to whether it's on prem, private cloud, Azure. And I think we're getting increasingly confident that's going to happen. We have these guys looking at screenshots. We're into the details of their texts and what have you.

So that's what the summer is about. There was a broader, much deeper beta that kind of get that less spit and polish on it.

Matt Hedberg -- RBC Capital Markets -- Analyst

Got it. Got it. Great to hear. Congrats on the reacceleration, guys,

Tim Weller -- Chief Executive Officer

Thank you.

Operator

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

Jason Ader -- William Blair -- Analyst

Yeah. Good afternoon. Tim, I was wondering how you thought that the emerging labor shortage -- I mean, I don't know if we have enough data to safely say there's a labor shortage. But I'm wondering if you thought about this and what impact it might have on SMB IT outsourcing as SMBs cannot get people?

Tim Weller -- Chief Executive Officer

It's a great question. I don't know if we've -- I mean, other than everybody, it's a war for talent. So everybody is facing the same thing. To me, the rise of the MSP and you and I talked about this even in the big thing piece you did last year.

The rise of the MSP is really around SMBs having trouble getting technology and the rise of Datto and other vendors serving MSPs as even MSPs are having trouble getting the right kind of technology talent. So it can't be helping SMBs. It has to be helping MSPs. I do think you see the strength we've got, for example, in SaaS Protection and RMM and some of our other cloud products.

The more you can kind of geo shift, so to speak, and bring the tech to you in terms of dashboards and other things, the more you can really pressure on that. But it's not a question we've asked as explicitly as you have, and I see the same signs you do. There's definitely a shortage and you can multiply that by some factor when you get an attack on security.

Jason Ader -- William Blair -- Analyst

And have you guys had -- have you been hiring? And have you had any difficulties hiring?

Tim Weller -- Chief Executive Officer

So far, so good. It's a battle, but we have a very large sourcing and recruiting team. And we've been hiring at a very good clip, and I think you'll see that in our quarterly numbers as we roll forward. So far, so good.

Obviously, we've had to maintain more geographic flexibility than we might have a year ago, but that's a thing for every tech company we know.

Jason Ader -- William Blair -- Analyst

OK. Great. And then one quick one for John. John, you said the FX adjustment in Q1 was $4 million.

What was it a year ago, in the Q1 of a year ago?

John Abbot -- Chief Financial Officer

Let me circle back to you. I think it was about -- yes, you missed a lot. I was ready to talk about Q4, and I was ready to talk about full year last year. I didn't have Q1 right in front of me.

It was a good bit less of an impact last year and quarter to last. I know that the pattern last year was a headwind in the first part of the year and then a tailwind at the end of the year. I want to say Q4 was a tailwind of about 1%. And for the full year, it was about 0.

So maybe that gives you a little bit of some kind of shape, I assume.

Jason Ader -- William Blair -- Analyst

Perfect. Thank you.

Operator

Your next question comes from the line of Koji Ikeda with Bank of America.

Koji Ikeda -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my question. Really nice quarter. Just I wanted to dig into a prior question on that commerce application and the pricing mechanism and maybe coming at it from a different angle, too.

When I look at the product set over here with this commerce, I see quote, sell and procure. And one of the first things that pops into my mind is invoices and payments. I guess, is that something that you guys think about as a potential monetization lever that you could add to this commerce platform?

Tim Weller -- Chief Executive Officer

Absolutely. There's a number of ways this could go. For us, job one is you have to build out the platform. You got to build out the MSPs and then you build out the platform in terms of connecting all the different vendors into that platform.

So there's a lot of plumbing work to do. Even before you get to the sell and procure part, which we're particularly good at, and we think we're very uniquely good at, the procure side of that, the quoting is what generates the volume. You think about being an MSP and the customers are calling or emailing, "Hey, I need to get X, Y, Z," or maybe you're calling them saying, "You need a new Dell server. Here is how it looks like." It's a big ticket item.

You're constantly having to send those quotes across, track those quotes, get the approvals. And so the tool starts at the very top of that funnel. But downstream, you're spot-on. There's a number of interesting ways to go with it.

So right now, we're sort of trying to build the base at the top of the funnel, so to speak.

Koji Ikeda -- Bank of America Merrill Lynch -- Analyst

Got it. Got it. That's very helpful. And I wanted to ask a question on the MSP tech day.

It sounds like this is the fourth tech day that you guys had. I guess any sort of feedback that you got from the MSP there? And maybe any sort of color from the number of attendees from this event versus maybe the prior events, either in an output or from a qualitative perspective?

Tim Weller -- Chief Executive Officer

Yeah. What was interesting about it for me is it was slightly lower attendance than continuity and RMM, the previous t wo that we've done. But given that at the time we only had just announced ransomware, we have very limited, specific security offerings that the number was much, much bigger than we could have imagined. So we've had our CISO and our team out there doing thought leadership on security for a couple of years with MSPs and was probably twice as large as our previous largest webinar.

I know the size of our webinars is comparable to anybody that's in the security business. So I think it represents, "Hey, Datto's been talking about security." Our concentric rings, model, protect Datto first and protect MSPs, then and only then get to revenue opportunities. We're in the concentric circle three now. Here comes Datto with some actual sell-through revenue opportunities for us, and we obviously announced the BitDam acquisition concurrent with that as well.

So it was meant to signal a new era with Datto, and we're going to try to get some revenue and margin into MSP's pockets as the security becomes more and more of a focus. That's the kind of color I could give you.

Koji Ikeda -- Bank of America Merrill Lynch -- Analyst

No, thank You. Very helpful. Thanks again. Nice quarter, guys.

Tim Weller -- Chief Executive Officer

Thank you, Koji.

Operator

Your next question comes from the line of Kirk Materne with Evercore ISI.

Kirk Materne -- Evercore ISI -- Analyst

Yes. Thanks, and I'll add my congrats or echo the congrats on the quarter. Tim, I was wondering if you could talk a little bit about some of the progress you're making at that sort of high end of your MSP customer base. Obviously, the economy is reopening.

That obviously helps on the sell-through business. But do you think within that sort of upper cohort or quartile, however you want to describe it, the MSPs paying you over $100,000 now a year, do you feel like you're taking share with them from a wallet perspective? And is there any particular product, in general, that you feel like you're doing better with those kind of bigger clients of yours or partners rather?

Tim Weller -- Chief Executive Officer

Yeah. It's a good question. I don't think they talk to us -- they all tend to play it a little close to the vest. So I don't think they talk to us about wallet share and where else they are.

We're obviously at an account level with the rep, have a good sense. The very largest ones tend to not be completely standardized. If they're serving hundreds of customers, they inherit when they inherit, whether it's networking, other continuity solutions. And so you're working your way through that from a penetration perspective.

Definitely, that piece of the base grows as faster, faster than the company, though. I mean, so you could definitely assume we're gaining overall share in that part of the base. And at the same time, it can be a little misleading. 100,000 sounds big, but you could imagine us moving upstream into $1 million-plus sort of accounts as time goes on, too.

So as we glue the product sets together, I do think people are starting to think about us in a different way with that number of big displacements, for example, up there where we beat a competitor and immediately get a couple of larger accounts, which is unusual. Mostly they start small, medium, and then we grow them. And I think we're feeling more confident in our ability to sort of execute a little bit upmarket. But otherwise, all the different segments have grown pretty nicely for us, and we still focus on the whole spectrum.

Kirk Materne -- Evercore ISI -- Analyst

OK. That's helpful. And John, you guys obviously have had a nice lift in gross margins. What should we think about on that front? I know, obviously, with people going back to the office, spending coming back, adjusted EBITDA, in general, is going to come back down a little bit.

But just how should we think about gross margins? Is there anything we should consider as the product mix maybe shifts a little bit as we go forward over the next year or two?

John Abbot -- Chief Financial Officer

Yeah. It's a good question, Kirk. Obviously, very good gross margins in the quarter, 75% non-GAAP versus 71% last year. And overall, we're pleased with the progress we've made on gross margins.

And I think that does, on the one hand, reflect the underlying strength of the business model, and the great work the team has done in driving operating leverage, both in the 24/7 support team and delivering increased efficiencies in the infrastructure that supports all our software solutions. And -- but we're approaching long-term target levels today that we've talked about, right? And so as we do, I think there are a couple of things to keep in mind. One, new products have the potential to average in some slightly lower margin at least out of the box than we're seeing on the more mature products. But on the other hand, as we move to more products that don't require devices, that's obviously going to continue to be beneficial to margins.

And as you point out, certain expenses related to COVID, that remain low, like travel events, office expenses. Not a lot of that is up in the cost of revenue, but there is a little bit. So hopefully, that helps some.

Kirk Materne -- Evercore ISI -- Analyst

That great. Thanks, guys. Congrats on the quarter.

Tim Weller -- Chief Executive Officer

Thanks.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Many thanks. Tim, I wanted to direct the first question to you on the backup opportunity that you see in front of you. First, a clarification.

When do you think there will be GA? And then the real question is, how do you frame the growth potential? I know a previous question surrounded pricing. I was just wondering how much is Microsoft's pricing of its own solution. How much do you think about that in terms of how you price your offering? And the second part of that is, how do you think about the growth potential here in terms of workloads migrating from on premise to Azure over, say, the next two years? I'm just trying to understand how -- what the growth potential here might be? And then I have a follow-up for Tim -- for John, if I could.

Tim Weller -- Chief Executive Officer

Yeah. Thanks, Keith. It's a great question. We think of it right now as a large new net demand opportunity for us in terms of MSPs and end clients that are in Azure and not being well served, right? Microsoft has kind of a lower-end, what I'll call, backup solution.

You check the box. You have to do something if we move into Azure. And then they've got a little higher end, more complete solution. Our general goal is to be functionally well above that solution and price-wise make it sort of competitive, right? So that the MSP knows they're getting a premium product, as they always do, from Datto.

It's not a discount. But again, they tie it back into how they manage their on-premise business and all their other loads, whether it's in their data center or regional data center, Rackspace, etc. So it becomes this hybrid cloud protection solution. We obviously then add one thing that Microsoft wouldn't, which is we have a Datto Cloud.

It's a multi-cloud replication and not storing all your eggs in one basket, is anywhere from desirable for MSPs to even mandated in some cases that everything can't be in one cloud. So I would think of it initially as large net new demand, right? It's not going to be our MO to run into the market on the first day and say, OK, safe to come into the Azure waters. Everybody rush over there. I do think as we get operating experience on and we do expect to be partners of Microsoft and we would be very happy to help people.

And I think a really top-end continuity solution will absolutely help some of the larger and more sophisticated MSPs go to Azure faster. So we and Microsoft both think it's net new demand on the migration front, too.

Keith Bachman -- BMO Capital Markets -- Analyst

OK, OK. And then just any comments on GA. And maybe I'll sneak in my question to John, if I could, at the same time. John, just a clarification is I just wondered what the FX was that was embedded in the guidance.

I looked at the last transcript, and I didn't see any comments on what the expectations were for FX in either Q1 or the calendar year '21. And if there's now 2 points of FX, that's about $10 million of new revenue, which is about the same amount as the guide raised. But if you could just clarify, perhaps I missed it, but I didn't see any comments. So if you could just clarify the 2 points that you're now expecting in '21 versus what you'd previously been expecting?

Tim Weller -- Chief Executive Officer

So Keith, on the GA question, we've just said second half, I think part of the timing and answer will be related to how the beta goes and what we hear. And we definitely don't want to launch something that we don't think is really robust and at the Datto quality. So I think the other thing is it's a bit of a continuum, right? The beta starts and expands. It expands in early adopter.

We'll definitely signal you when it's commercial availability and ready to buy retail off the shelf. But for right now, I'll probably just stick with sometime later this year. John?

John Abbot -- Chief Financial Officer

Yeah. Keith, fair question. We didn't really -- we did not talk about FX impact last quarter in the guidance that we -- our guidance -- and our current guidance absolutely did reflect an assumption on FX, and it did assume a tailwind from FX in that guidance. But I would say our increase in the guidance is predominantly driven by strong operating momentum in the business, not a big change in the FX view.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Thank you, John.

John Abbot -- Chief Financial Officer

Yeah.

Operator

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

Tim Weller -- Chief Executive Officer

Hey, Gregg. Did we lose him?

Gregg Moskowitz -- Mizuho Securities -- Analyst

Hey, Tim, sorry, I was on mute. The 2020 Zoom coming back to me, so -- but congrats as well on a very good quarter. So my first question, Tim, is just on Datto Commerce. Initially, I know it's designed as a sell-to product.

And my question is, do you have interest in extending this to a sell-through product? And if so, how difficult would that be from an engineering perspective?

Tim Weller -- Chief Executive Officer

Yeah. It's a good question. And by the way, I've been on mute for my last 2 town halls, so first 30 seconds, so it happens to everybody. In front of 1,800 employees, it's not great, but you got to feature it.

So Datto Commerce, I think, as a platform is currently envisioned as absolutely going to stay sell to. Is it possible down the road that MSPs say, "Hey, we have larger clients kind of co-managed situations, they'd like to quote. Maybe you're serving an IT staff." It's possible. You see occasionally RMM get extended a little bit like that.

PSA get extended a little bit like that. But now you're into the enterprise realm and you're really competing with a whole bunch of different platforms that are much more tailored. So I would think about it as a sell to. That said, we've called RMM a quasi sell-through in as much as once you give it to an MSP and get them up and running.

When they add new clients, they add new seats and, therefore, in a way, they are selling it through, even though they probably just put it into their base fee. So they're getting paid by using great RMM to all. And I think the same thing happens here, right, as they go streamline the purchasing flows of their clients, there's no question that shores up their base fee. It's just -- I'm not sure in the first year or two, that there's a line item on the client's field that says Datto Commerce marked up or something.

It's probably more in that base package. And then there are other things in that base package too, including just the MSP's time. So we would tend to call it sell to, but it's probably in that category of quasi sell-through.

Gregg Moskowitz -- Mizuho Securities -- Analyst

OK. That makes a lot of sense. And then just for John. I apologize if I missed it.

Did you make any comments? Or if not, I guess, can you provide any color around NRR or dollar-based gross retention?

John Abbot -- Chief Financial Officer

Sure. Gregg, yes, we didn't talk about NRRs. As we've said, net revenue retention is a metric that we'll report on an annual basis. It's a lagging indicator.

You may recall that it was 111% as of the end of 2020, and we've talked about how that, like other lagging indicators, revenue, growth, really would -- during the year last year were declining and would bottom out in Q4 last year, Q1 this year before they started turning back up because we had to lap the Q2 lows -- COVID Q2 lows of last year. And so we believe that we've passed the low point and we're starting to move back up at this point.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Great. Perfect. Thank you.

John Abbot -- Chief Financial Officer

Yeah.

Operator

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

Joe Gallo -- Jefferies -- Analyst

Hey, guys. It's Joe on for Brent. Really appreciate the question. Just wanted to double-click into the international markets.

It looks like that area grew almost three times as fast as domestically. Was there anything to call out there?

Tim Weller -- Chief Executive Officer

I wouldn't say -- go ahead, John.

John Abbot -- Chief Financial Officer

I mean, one thing -- I was actually looking at that right before the call because I thought that might come up, looking for my notes. But it was -- remember, all the FX impact would be in that international segment. So while that growth ballpark out of your 30%, that FX impact would have a greater impact on that smaller number than it does on the total. So that's the only thing I would highlight for you.

It's still growing very nicely and growing faster than the U.S., but a bigger tailwind from the FX.

Joe Gallo -- Jefferies -- Analyst

OK. That's helpful. And then guidance implies a healthy decel in the second half of the year, which I assume is a mix of FX and conservatism. But can you help provide some guardrails on how to think about subscription and devices and devices revenue will be a headwind throughout the year?

John Abbot -- Chief Financial Officer

Sorry. You mean if device revenue will be a headwind?

Joe Gallo -- Jefferies -- Analyst

Yeah. Just the implied mix as we move throughout the year, right?

John Abbot -- Chief Financial Officer

Yeah. I mean I think we still would expect subscription revenue to be well north of 90% of the mix. And as we think about the back half of the year, we're optimistic. And I think we all expect the environment to continue to improve, and we expect our core BCDR business to continue to improve and grow.

And obviously, we have strong momentum in SaaS Protection and RMM. I think we pointed out currency will be, at least in our guidance, expected to be a little bit less of a tailwind in the second half than the first half, as you pointed out.

Joe Gallo -- Jefferies -- Analyst

Awesome. Thanks, guys. Congrats on the quarter.

John Abbot -- Chief Financial Officer

Thank you, Joe.

Operator

And there are no further questions at this time. I'll now turn it back over to Ryan Burkart for any closing remarks.

Ryan Burkart -- Director of Investor Relations

Thanks, everyone, for joining the call today. We really appreciate your interest in Datto, and we look forward to speaking with everyone again soon. Thanks all.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Ryan Burkart -- Director of Investor Relations

Tim Weller -- Chief Executive Officer

John Abbot -- Chief Financial Officer

Sanjit Singh -- Morgan Stanley -- Analyst

Saket Kalia -- Barclays -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Jason Ader -- William Blair -- Analyst

Koji Ikeda -- Bank of America Merrill Lynch -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Gregg Moskowitz -- Mizuho Securities -- Analyst

Joe Gallo -- Jefferies -- Analyst

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