MADISON STRATEGIC SECTOR PREMIUM FUND The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. A discussion regarding our financial condition and results of operations for 2021 compared to 2020 is presented below. A discussion regarding our financial condition and results of operations for 2020 compared to 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 11, 2021 . Overview Datto is the leading global provider of security and cloud-based software solutions purpose-built for delivery through the managed service provider, or MSP, channel to small and medium businesses, or SMBs. We enable our more than 18,500 MSP partners to manage and grow their businesses serving the SMB information technology, or SMB IT, market. Our platform combines mission-critical cloud-based software, technologies and security solutions that MSPs sell to SMBs, business management software to help MSPs scale their own businesses, and marketing tools, content, training and industry-leading events that cultivate an empowered and highly engaged MSP partner community. MSPs represent the future of IT management for SMBs. Digital transformation is driving SMB adoption of modern software and technology, while regulatory and data protection requirements and proliferating security threats are increasing the complexity and risk of IT for SMBs. These trends have created an inflection point in SMB outsourcing to MSPs for IT management. MSPs are equipped with the IT resources and expertise SMBs lack, providing a single source to meet all of an SMB's IT needs. MSPs are trusted to select, procure, implement and manage software and technology stacks that support their SMB customers' business needs. The number of MSPs continues to grow, with approximately 132,000 MSPs providing this critical function to millions of SMBs worldwide. We are committed to the success of MSPs. It is the foundation of our strategy and culture. We empower our MSP partner channel, creating enormous sales and support leverage for us to efficiently address the large, but fragmented, SMB IT market. Our MSP-centric platform enables our partners to generate recurring revenue through the sale of our solutions to SMBs and to scale and effectively manage their own businesses. Our relationships are directly with our MSP partners. We are the leading pure-play vendor serving the MSP market, and believe our MSP-centric approach is highly differentiating as it aligns our mutual incentives, creates a motivated and engaged sales channel and reinforces our position as an integral component of our MSP partners' businesses. Our cloud-based platform provides Unified Continuity, Networking, Endpoint Management and Business Management software solutions. Our Unified Continuity offerings ensure the ongoing availability and security of mission-critical IT systems for SMBs in both private and public clouds. Datto's business continuity and disaster recovery, or BCDR, software enables rapid restoration of an SMB's full IT environment. Datto's SaaS Protection is a reliable, automated and secure backup and restoration product for data stored on cloud applications such as Microsoft 365 and Google Workspace. Datto Networking constitutes a suite of MSP-centric networking solutions sold through our MSP partners to easily deliver networking as a managed service. These solutions are simple for MSPs to deploy, configure and manage across their SMB customers through a single portal. Our Endpoint Management software allows MSPs to remotely manage, monitor and secure SMB endpoints. Business Management software provides critical operational tools to MSPs for efficient workflow management and delivery of end-to-end managed services. Our platform also includes a host of business development tools, training and content to help MSPs address the challenges of marketing and selling to SMB customers. During 2021 we launched two new cloud-based solutions - DCMA and SaaS Defense. DCMA is a comprehensive BCDR solution that protects MSPs and their clients' data in the public cloud in the event of malicious ransomware attacks, security breaches, and vendor outages. SaaS Defense is an advanced threat protection and spam-filtering solution that provides MSPs with patented technology to proactively detect and prevent malicious malware, phishing, and Business Email Compromise ("BEC") attacks that target Microsoft Exchange, OneDrive, SharePoint, and Teams. The product was built on technology obtained in Datto's acquisition ofIsrael -based cyber threat detection company BitDam in early 2021. 56
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Our Business ModelOur cloud-based solutions are purpose-built to address the needs of MSPs and to enable the end-to-end delivery of managed services to their SMB customers.
We generate substantially all our revenue from the sale of subscriptions to our cloud-based solutions and recognize revenue ratably over the subscription term. These contracts typically begin with a 1-year or 3-year term and auto-renew on a monthly or annual basis thereafter. For certain offerings, we enable our ongoing subscription services with an up-front sale of equipment or professional services, for which we recognize revenue at the time of delivery and performance. The majority of our partners pay on a monthly basis, regardless of term length, with some opting to make quarterly, annual or multi-year prepayments. Unified Continuity subscriptions are priced based on service tier, which is determined by data storage capacity and data retention period for our BCDR products, or by number of Microsoft 365 or Google Workspace employee accounts at the SMB domains that our MSP partners protect and data retention period for SaaS Protection+ offerings. Networking subscriptions are priced based on the volume and type of networking devices ordered. Endpoint Management subscriptions are priced per endpoint device at the SMB for our RMM software. Business Management subscriptions are priced based on the number of employees at an MSP that are able to utilize our PSA product. We employ a highly efficient land-and-expand sales strategy facilitated by offering products that are reliable, easy to adopt and that drive recurring revenue growth and margin efficiency for our MSP partners. We sell our solutions to MSPs primarily through our sales team, leveraging the reach of our MSP partners and providing them with self-service options to upgrade service tiers, add volume and purchase additional solutions. Our MSP partners often significantly increase usage from their initial purchase and expand their usage to other products on our platform. We also provide access to business development tools and content to help MSPs address the challenges of marketing and selling to SMB customers. We grow alongside our MSP partners as they deploy our solutions across their existing SMB customers, add new customers and upgrade service tiers. As ofDecember 31, 2021 , our ARR was$658.4 million and our revenue for the year endedDecember 31, 2021 was$618.7 million , of which approximately 93% was recurring subscription revenue. For the year endedDecember 31, 2021 , our net income was$51.4 million and our Adjusted EBITDA was$175.4 million . As ofDecember 31, 2020 , our ARR was$542.8 million and our revenue for the year endedDecember 31, 2020 , was$518.8 million , of which approximately 94% was recurring subscription revenue. For the year endedDecember 31, 2020 , our net income was$22.5 million and our Adjusted EBITDA was$150.5 million . Refer to our discussion of ARR in Key Performance Metrics and Adjusted EBITDA in Non-GAAP Financial Measures. Trends and Uncertainties Impact of COVID-19 While we have not incurred significant disruptions from the COVID-19 pandemic, there remains uncertainty relating to the ultimate impact of the pandemic on our business because of numerous global factors, including but not limited to, the severity of the disease, the duration of the pandemic, the reoccurrence or emergence of variants of the virus, the effectiveness and speed of vaccinations, actions taken by government authorities, the impact on our customers and suppliers, supply chain constraints, labor shortages, inflationary pressure and other factors. Specifically, we may experience impacts from customers deferring purchasing and activation decisions, reducing expenses and requesting extended payment terms or relief from payments. Our condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in our condensed consolidated financial statements include, but are not limited to, establishing allowances for doubtful accounts, assessing the recoverability of prepaid assets, including trade shows and other marketing events impacted by the pandemic, determining useful lives for finite-lived assets, assessing the recoverability of long-lived assets, determining the fair value of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets, valuing stock-based awards, recognizing revenue and the estimate for sales returns and upgrades, determining the amortization period for capitalized commissions and assessing the accounting treatment for commitments and contingencies. Management evaluates these estimates and assumptions on an ongoing basis and makes estimates based on historical experience and various other considerations that are believed to be reasonable. Actual results may differ from those estimates, including as a result of the COVID-19 pandemic. We will continue to evaluate the nature and extent of the impact of the pandemic on our business and our consolidated results of operations and financial condition.
Macro-Economic or Industry Trends
We believe favorable industry trends will contribute to the growth of our business, including: increased adoption by SMBs of digital and cloud-based technologies; increasing complexity in IT, which impacts the ability of SMBs to evaluate, select and implement an optimal
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IT environment; increased exposure and vulnerability of SMBs to security and
regulatory risk, including as a result of cyberattacks; lack of SMB
sophistication to meet the expanding challenges of IT management; and the costs
of downtime or data loss that can be meaningful and continue to expand.
The customer base of our partners continues to expand, as evidenced by the
anticipated 13.4% increase in available market reported by
Key Factors Affecting Our PerformanceAddition of New MSPs
Our ability to attract new partners will depend on a number of factors, including the effectiveness of our pricing and products, offerings of our competitors, the effectiveness of our marketing efforts, and the growth of the MSP market. We believe there is substantial opportunity to increase our penetration among MSPs. We intend to drive new partner acquisition by continuing to invest significantly in sales and marketing to identify and engage prospective partners and to extend the awareness of our brand as a trusted partner to the MSP community. We believe our singular dedication to the MSP channel and our solutions that are purpose-built to meet the needs of MSPs differentiates us in the marketplace. We intend to continue to grow the number of sales representatives to qualify and close new partner opportunities. In addition, we intend to continue investing in marketing programs, events and content to drive brand awareness, generate leads and cultivate the broader MSP ecosystem. As ofDecember 31, 2021 , we had approximately 18,500 MSP partners, a net increase of approximately 1,500 sinceDecember 31, 2020 .
Sales Expansion Within Our Existing Partner Base
Our ability to expand sales within our existing partner base will depend on a number of factors, including their satisfaction with our solutions and support, competition, the effectiveness of the business development tools we provide to our partners and the ability of our partners to grow their sales. Our large base of partners represents a significant opportunity for further sales expansion. Once an MSP has become our partner, we aim to grow alongside them as they increase penetration of our solutions across their existing SMB partner base, attract additional SMB customers, upgrade service tiers and adopt additional Datto solutions. We have a strong track record of growth from our existing base as evidenced by our history of partner cohort expansion and our dollar-based net retention rate, which was 116% and 111% as ofDecember 31, 2021 and 2020, respectively. We intend to continue to invest in MSP self-service procurement tools to further enable a frictionless purchasing process, grow the number of sales representatives to facilitate increased partner adoption of our solutions and invest in enabling our partners' sales teams through our marketing automation platform, programs, content, training and certifications for MSPs. As ofDecember 31, 2021 , over 1,400 of our MSP partners contributed ARR of$100,000 or more, up from over 1,100 as ofDecember 31, 2020 . See "Key Performance Metrics" below for a definition of dollar-based net retention rate and ARR.
Innovation and Introduction of New Platform Solutions
Our continued growth is dependent upon our ability to sustain innovation in order to maintain a competitive advantage. We recognize that the pace of technological innovation is accelerating and that we need to continue to innovate to maintain our product differentiation. We continually invest in improving our existing solutions and creating new mission-critical solutions to anticipate the evolving IT demands of MSPs and their SMB customers. In addition, we evaluate strategic investments in businesses and technologies to drive product and market expansion. For example, inJanuary 2022 we acquired Infocyte, a threat detection and response company, extending Datto's security capabilities that protect, detect, and respond to cyber threats found within endpoints and cloud environments; inMarch 2021 , we acquiredBitDam Ltd. , anIsrael -based cyber threat detection company ("BitDam"), which served as the foundation of SaaS Defense; and inJuly 2020 we acquired Gluh Pty. Ltd., andKeystone Software Holdings Pty Ltd. , two affiliatedAustralia -based companies which offer a real-time quoting platform that enables MSPs to simplify the procurement of IT products and services for their end customers, which was the foundation of Datto Commerce.
Expansion of Our International Footprint
Our international growth in any region will depend on our ability to effectively
implement our business processes and go-to-market strategy, our ability to adapt
to market or cultural differences, the competitive landscape, the maturity and
growth trajectory of the MSP market and our brand awareness and perception. We
believe there is significant opportunity to expand internationally. For 2021 and
2020, our international revenue was approximately 30% and 27%, respectively, of
our total revenue, reflecting our investment in international markets. We intend
to continue to make significant investments in international markets,
particularly in EMEA and APAC. This may include investing in additional sales
and marketing personnel, localizing product offerings and marketing content, and
adding
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new data-center or office locations. Although these investments may adversely
affect our operating results in the near term, we believe they will contribute
to our long-term growth.
Key Performance Metrics
In addition to our GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
The number of MSP partners represents the number of MSPs with active subscriptions as of the end of the period. We use this number to assess our ability to attract and retain MSP partners and thereby grow our business. As ofDecember 31, 2021 , we had over 18,500 MSP partners, a net increase of approximately 1,500 sinceDecember 31, 2020 . Net changes in the number of our MSP partners are a result of the total new partners added during a period, largely based on our sales and marketing efforts, and the churn or reduction of existing partners during the period, which can be affected by the broader economic environment and factors such as the effects of COVID-19 on our partners' SMB end customers. As a result of our land-and-expand model, our revenue growth is driven principally by additional revenue from existing MSP partners. We view new MSP partner additions as a leading indicator of the health of the business, but the additions do not immediately drive material revenue growth in our reported results of operations.
Annual Run-Rate Revenue
We define annual run-rate revenue, or ARR, as the annualized value of all subscription agreements as of the end of a period. We calculate ARR by multiplying the monthly run-rate revenue for the last month of a period by 12. Monthly run-rate revenue is calculated by aggregating monthly subscription values during the final month of the reporting period from both long-term and month-to-month subscriptions. ARR only includes the annualized value of subscription contracts and excludes any one-time revenue for devices or professional services. ARR mitigates fluctuations resulting from seasonality and contract term. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts at the date used in calculating ARR may or may not be extended or renewed by our MSP partners.
The table below sets forth our ARR as of
As of December 31,
(in millions) 2021 2020 2019
ARR $ 658.4 $ 542.8 $ 474.8
ARR includes run-rate revenue values from month-to-month subscription contracts.
For the years ended December 31, 2021 , and 2020 approximately 40% and 42%,
respectively, of our ARR was derived from month-to-month contracts. The decrease
in percent of ARR from month-to-month contracts reflects our improvement in
securing more long-term contracts in the current year as the COVID-19 pandemic
slowed the addition of long-term contracts during 2020.
Our dollar-based gross retention rate as of December 31, 2021 , 2020 and 2019,
was approximately 89%, 88% and 88%, respectively. Our dollar-based gross
retention rate reflects ARR losses from subscription cancellations, reductions
in service levels or seat counts and non-renewals, and does not reflect any ARR
expansion. We calculate our dollar-based gross retention rate as of the period
end by starting with the ARR from the last day of the period one year prior, or
Prior Period ARR. We then deduct from the Prior Period ARR any (i) ARR attrition
from MSP partners who are no longer partners as of the last day of the period,
and (ii) ARR compression from MSP partners whose subscriptions are at a lower
value as of the last day of the period, or Remaining ARR. We then divide the
Remaining ARR by the Prior Period ARR to arrive at our dollar-based gross
retention rate, which is the percentage of ARR from all MSP partners as of the
year prior that is not lost to partner churn or subscription compression. Given
the meaningful percentage of our subscription revenue derived from
month-to-month contracts, the approximately 89% dollar-based gross retention
rate demonstrates that a large majority of our MSP partners continue to renew
their subscription contracts, whether on a month-to-month or longer term basis.
Based on our experience, we do not believe month-to-month contracts experience
significantly higher attrition than longer-term subscription contracts.
Dollar-Based Net Retention Rate
To evaluate the efficacy of our land-and-expand business model, we examine the
rate at which our partners increase their subscriptions for our solutions which
result in changes to ARR. Our dollar-based net retention rate measures our
ability to increase ARR
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across our existing partner base through expanded use of our platform, offset by MSP partners whose subscription contracts with us are not renewed or are renewed at a lower amount. We calculate our dollar-based net retention rate as of the end of a reporting period as a quotient of the following: •Denominator: ARR as of the last day of the prior year comparative reporting period. •Numerator: ARR as of the last day of the current reporting period from partners with associated ARR as of the last day of the prior year comparative reporting period. The quotient obtained from this calculation is our dollar-based net retention rate. We believe our ability to grow alongside our MSP partners as they deploy our solutions to more SMBs, and to cross-sell additional solutions, will continue to support our high dollar-based net retention rate.
As of
Because existing MSP partners drive the vast majority of our revenue growth in any given year, we believe our revenue growth is strongly correlated to our dollar-based net retention rate.
Components of Results of OperationsRevenue
We generate revenue primarily from fees received for subscriptions to our products and services, and also from the sale of BCDR and Networking devices and professional services associated with our Business Management offerings.
Subscription. We derive revenue primarily from security and cloud-based software
solutions sold on a recurring subscription basis. Subscription revenue is
recognized ratably over the subscription term after all revenue recognition
criteria have been met. We generally invoice subscription agreements monthly
over the subscription period. Subscription revenue for our Unified Continuity,
Networking and Endpoint Management solutions grows as the end-customers, managed
by our MSP partners, add new subscription products, upgrade the service tier of
their existing subscription products, increase the usage of their subscription
products or add more end-user devices managed by their MSP. Revenue from our
Business Management solutions increases with the addition of employees of our
MSP partners who require seat licenses and as MSPs purchase Datto Commerce
subscriptions.
Device. Our device revenue is derived from the sale of devices in conjunction
with subscription solutions. Device revenue includes the sale of BCDR and
Networking devices which enable us to deliver our BCDR and Networking services
to our MSP partners under a recurring subscription model. Revenue from devices
in our Unified Continuity solution primarily consists of the sale of our
proprietary data storage devices. Revenue from devices in our Networking
solution primarily consists of the sale of wireless access points, switches and
edge routers. We recognize revenue at the point in time when control of the
device has transferred to the MSP or upon activation of the related
subscription. Revenue from devices does not contribute significantly to overall
revenue related to our Unified Continuity solutions.
Professional services and other. We derive revenue from professional services
associated with our Business Management offerings. These implementation and
consulting services include configuration, database merging and data migration.
Our professional services are generally priced on a time and materials basis and
invoiced monthly, with revenue recognized as the services are performed, and we
frequently discount our services to drive adoption of our business management
offerings.
Cost of revenue
Subscription. Subscription cost of revenue consists of costs directly related to
our subscription services, including personnel costs associated with operating
our Datto Cloud infrastructure and customer support operations, hosting and data
center related costs, third-party software licenses and allocated facilities and
overhead costs associated with delivering these services.
Device. Device cost of revenue consists of hardware, manufacturing, shipping and
logistics, personnel costs and allocated facilities and overhead costs
associated with the purchase, production and delivery of our devices. Our BCDR
products rely on a mix of off-the-shelf hardware and custom designed hardware.
Our Networking devices generally consist of off-the-shelf hardware, although
some of our devices feature a unique industrial design.
Professional services and other. Professional services and other cost of revenue
consists primarily of personnel costs and allocated facilities and overhead
costs associated with delivering implementation and consulting services. Our
professional services
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Gross profit and gross margin
Gross profit, or revenue less cost of revenue, has been, and will continue to be, affected by various factors, including revenue fluctuations, the mix of revenue, the timing and amount of investments to expand our Datto Cloud infrastructure and launch new solutions, the use of third-party software licenses and stock-based compensation expense.
Operating expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses as well as depreciation, amortization of internally developed software and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, payroll taxes and stock-based compensation expense. Other significant components of operating expenses include professional fees, third-party software subscription costs, facilities and overhead costs, events and travel, marketing and promotion costs, payment processing fees and bad debt expense.
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs, costs for events and travel, costs of marketing and promotional activities, payment processing fees and allocated facilities and overhead costs. Sales and marketing expenses may fluctuate as a percentage of our revenue from period to period because of the timing and extent of marketing activities, trade shows, and events including DattoCon and MSP Technology Days, as well as the timing of amortization of sales commissions and stock-based compensation expense.
Research and development
Research and development expenses consist primarily of personnel costs, third-party professional fees and allocated facilities and overhead costs. Research and development expense may fluctuate as a percentage of our revenue from period to period because of the timing and extent of our investments in research and development activities, as well as the timing of stock-based compensation expense.
General and administrative
General and administrative expenses consist primarily of personnel costs across
the corporate functions of executive, finance, human resources, information
technology, internal operations and legal, as well as third-party professional
fees, bad debt expense, travel and costs for facilities. Following the
completion of our initial public offering ("IPO") we began incurring additional
general and administrative expenses as a result of operating as a publicly
listed company, including increased expenses for insurance, costs to comply with
the rules and regulations applicable to companies listed on a national
securities exchange, costs related to compliance and reporting obligations
pursuant to the rules and regulations of the SEC , expenses related to investor
relations, professional services fees, particularly for auditing, and increased
stock-based compensation expense.
Depreciation and amortization
Depreciation and amortization expenses in operating expenses consist of amortization of tradenames and partner relationship intangibles, depreciation of other property and equipment such as leasehold improvements, furniture and fixtures, and computer equipment, and amortization of internally developed software.
Other expense Interest expense Interest expense consists of interest payments on outstanding borrowings under our credit facilities, as well as commitment fees under our credit facilities and the amortization of debt issuance costs. In conjunction with our IPO inOctober 2020 , we repaid all amounts outstanding under our 2019 Credit Agreement. InOctober 2020 ,Datto, Inc. and certain direct and indirect wholly-owned subsidiaries of Datto, entered into the 2020 Credit Agreement with the lenders party thereto andMorgan Stanley Senior Funding, Inc. , as administrative agent, which provides a$200.0 million revolving credit facility. As ofDecember 31, 2021 , no amounts had been drawn under the 2020 Credit Agreement. See "Liquidity and Capital Resources-Credit Facilities" for additional details. 61
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Other (income) expense
Other (income) expense primarily consists of the net exchange (gains) or losses on foreign currency transactions and (gains) or losses on the disposal of assets.
Loss on extinguishment of debt
Loss on extinguishment of debt reflects the loss incurred in conjunction with the termination of our credit facilities in both 2020 and 2019. See "Liquidity and Capital Resources-Credit Facilities" for additional details.
(Benefit from) provision for income tax
(Benefit from) provision for income tax consists primarily of income taxes
related to
Stock-Based Compensation
The functional role of the holder determines the financial statement line item
within which stock-based compensation expense is recorded. Stock-based
compensation expense for awards which contained only a time-based vesting
condition was recorded in all periods presented. Stock-based compensation
expense for awards which contained both a time-based and a performance-based
vesting condition, which was the closing of an IPO, commenced during the fourth
quarter of 2020 as a result of our IPO. Additionally, in 2021 the Company issued
restricted stock units with performance-based vesting conditions in relation to
the acquisition of BitDam, for which stock-based compensation expense was
recorded based on the expected achievement of the performance targets.
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the period indicated:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue:
Subscription $ 577,321 $ 485,326 $ 412,167
Device 37,832 30,202 44,052
Professional services and other 3,504 3,257 2,533
Total revenue 618,657 518,785 458,752
Cost of revenue:
Subscription(1) 90,162 84,463 82,066
Device(1) 47,415 37,607 53,933
Professional services and other(1) 6,059 6,244 5,563
Depreciation and amortization 32,712 21,890 15,745 Total cost of revenue 176,348 150,204 157,307 Gross profit 442,309 368,581 301,445 Operating expenses: Sales and marketing(1) 139,257 115,790 110,441 Research and development(1) 107,899 78,932 60,459 General and administrative(1) 106,478 85,668
73,903
Depreciation and amortization 26,471 27,223 27,417 Total operating expenses 380,105 307,613 272,220 Income from operations 62,204 60,968 29,225 Other expense: Interest expense 455 25,348 43,437 Loss on extinguishment of debt - 8,488 19,231 Other (income) expense, net 387 (3,428) 256 Total other expense 842 30,408 62,924 Income (loss) before income taxes 61,362 30,560
(33,699)
(Provision for) benefit from income tax (9,928) (8,062) 2,511 Net income (loss)$ 51,434 $ 22,498 $ (31,188)
(1)Includes stock-based compensation expense as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue-subscription $ 4,302 $ 4,092 $ 98
Cost of revenue-device 193 203 -
Cost of revenue-professional services and other 200 418 -
Selling and marketing 9,467 6,614 2,946
Research and development 23,419 13,590 3,510
General and administrative 11,328 8,543 5,661
Total stock-based compensation expense $ 48,909 $ 33,460 $ 12,215
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The following table sets forth our consolidated statements of operations data
expressed as a percentage of total revenue for the period indicated (percentages
may not foot as a result of rounding):
Year Ended December 31,
2021 2020 2019
Revenue:
Subscription 93.3 % 93.6 % 89.8 %
Device 6.1 % 5.8 % 9.6 %
Professional services and other 0.6 % 0.6 % 0.6 %
Total revenue 100.0 % 100.0 % 100.0 %
Cost of revenue:
Subscription 14.6 % 16.3 % 17.9 %
Device 7.7 % 7.2 % 11.8 %
Professional services and other 1.0 % 1.2 % 1.2 %
Depreciation and amortization 5.3 % 4.2 % 3.4 %
Total cost of revenue 28.5 % 29.0 % 34.3 %
Gross profit 71.5 % 71.0 % 65.7 %
Operating expenses:
Sales and marketing 22.5 % 22.3 % 24.1 %
Research and development 17.4 % 15.2 % 13.2 %
General and administrative 17.2 % 16.5 % 16.1 %
Depreciation and amortization 4.3 % 5.2 % 5.9 %
Total operating expenses 61.4 % 59.3 % 59.3 %
Income from operations 10.1 % 11.8 % 6.4 %
Other expense:
Interest expense 0.1 % 4.9 % 9.4 %
Loss on extinguishment of debt - % 1.6 % 4.2 %
Other (income) expense, net 0.1 % (0.7) % 0.1 %
Total other expense 0.1 % 5.9 % 13.7 %
Income (loss) before income taxes 9.9 % 5.9 % (7.3) %
(Provision for) benefit from income tax (1.6) % (1.6) % 0.5 %
Net income (loss) 8.3 % 4.3 % (6.8) %
Comparison of the Years Ended December 31, 2021 and 2020
Revenue
Year Ended December 31,
2021 2020 $ Change % Change
(in thousands)
Revenue:
Subscription $ 577,321 $ 485,326 $ 91,995 19.0 %
Device 37,832 30,202 7,630 25.3 %
Professional services and other 3,504 3,257 247 7.6 %
Total revenue $ 618,657 $ 518,785 $ 99,872 19.3 %
Subscription
Subscription revenue increased $92.0 million , or 19.0%, for 2021 compared to
2020, including a benefit from favorable foreign exchange rates of approximately
2%. The increase in subscription revenue was primarily driven by increased sales
of our Unified Continuity and Endpoint Management cloud-based offerings, as well
as increased sales of our Business Management and Networking cloud-based
offerings. Recurring subscription revenue accounted for 93% of total revenue for
2021 compared to 94% for 2020.
Device
Device revenue increased
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Professional services and other
Professional services and other revenue increased$0.2 million , or 7.6%, for 2021 compared to 2020. Cost of Revenue Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Cost of revenue: Subscription$ 90,162 $ 84,463 $ 5,699 6.7 % Device 47,415 37,607 9,808 26.1 % Professional services and other 6,059 6,244 (185) (3.0) % Depreciation and amortization 32,712 21,890 10,822 49.4 % Total cost of revenue$ 176,348 $ 150,204 $ 26,144 17.4 % Subscription Subscription cost of revenue increased$5.7 million , or 6.7%, for 2021 compared to 2020. The increase was primarily driven by additional costs to support the growth of our subscription offerings, including increased personnel costs and higher service costs to support the growth of our Datto Cloud, including costs related to the launch of our new SaaS Defense solution. We continued to realize increased efficiencies, as subscription cost of revenue as a percentage of subscription revenue declined from 17.4% in 2020 to 15.6% in 2021. Subscription cost of revenue reflects stock-based compensation expense of$4.3 million and$4.1 million for 2021 and 2020, respectively. In 2020, we recorded restructuring costs of$0.5 million related to our reduction in workforce in subscription cost of revenue. Device Device cost of revenue increased$9.8 million , or 26.1%, for 2021 compared to 2020, driven primarily by the 25.3% increase in device revenue and to a lesser extent the impact of increased shipping costs. Device cost of revenue reflects stock-based compensation expense of$0.2 million for each of 2021 and 2020.
Professional services and other
Professional services and other cost of revenue decreased$0.2 million , or 3.0% for 2021 compared to 2020. Professional services and other cost of revenue reflects stock-based compensation expense of$0.2 million and$0.4 million during 2021 and 2020, respectively. In 2020, we recorded restructuring costs of$0.1 million related to our reduction in workforce in professional services and other cost of revenue.
Depreciation and amortization
Depreciation and amortization related to cost of revenue increased$10.8 million for 2021 compared to 2020. The increase reflects higher depreciation expense in 2021 associated with the continued capital expenditures for our Datto Cloud infrastructure to support the growth in subscriptions and the increase in amortization of acquired intangible assets in 2021 as a result of recent acquisitions. Depreciation expense was$23.3 million and$16.9 million in 2021 and 2020, respectively, and amortization of intangible assets was$9.5 million and$5.0 million in 2021 and 2020, respectively. 65 --------------------------------------------------------------------------------
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Gross Profit and Gross Margin
Year Ended December 31,
2021 2020 $ Change % Change
(in thousands)
Gross profit:
Subscription $ 487,159 $ 400,863 $ 86,296 21.5 %
Device (9,583) (7,405) (2,178) 29.4 %
Professional services and other (2,555) (2,987) 432 (14.5) %
Depreciation and amortization (32,712) (21,890) (10,822) 49.4 %
Total gross profit $ 442,309 $ 368,581 $ 73,728 20.0 %
Gross margin:
Subscription 84.4 % 82.6 % 179 bps
Device (25.3) % (24.5) % (81) bps
Professional services and other (72.9) % (91.7) % 1,879 bps
Total gross margin 71.5 % 71.0 % 45 bps
Our gross profit increased $73.7 million , or 20.0%, and our gross margin
increased by 45 basis points for 2021 as compared to 2020, driven by the
increase in subscription gross profit and gross margin. The increase was
partially offset by higher depreciation and amortization expense, primarily as a
result of our investment in our Datto Cloud infrastructure and the amortization
of acquired intangible assets, and increased Device negative gross profit margin
in 2021 as compared to 2020. Subscription gross margin increased 179 basis
points for 2021 as compared to 2020 as a result of our revenue growth out pacing
the increased costs to provide our Unified Continuity solutions, although we did
incur additional costs in 2021 to launch our new SaaS Defense solution. Cost of
revenue reflects stock-based compensation expense of $4.7 million for each of
2021 and 2020. In 2020, we recorded restructuring costs of $0.6 million related
to our reduction in workforce in cost of revenue, including $0.5 million in
subscription cost of revenue and $0.1 million in professional services and other
cost of revenue.
Operating Expenses
Year Ended December 31,
2021 2020 $ Change % Change
(in thousands)
Operating expenses:
Sales and marketing $ 139,257 $ 115,790 $ 23,467 20.3 %
Research and development 107,899 78,932 28,967 36.7 %
General and administrative 106,478 85,668 20,810 24.3 %
Depreciation and amortization 26,471 27,223 (752) (2.8) %
Total operating expenses $ 380,105 $ 307,613 $ 72,492 23.6 %
As a percentage of total revenue
Sales and marketing 22.5 % 22.3 %
Research and development 17.4 % 15.2 %
General and administrative 17.2 % 16.5 %
Sales and marketing
Sales and marketing expense increased $23.5 million , or 20.3%, for 2021 compared
to 2020, driven by increased personnel costs to support the growth in our
business, including higher commission expense and increased stock-based
compensation expense of $2.9 million , partially offset by lower restructuring
costs. Marketing and promotional costs also increased during 2021 as compared to
2020, as we increased our marketing efforts in support of our launch of DCMA and
SaaS Defense, as well as marketing efforts in support of our other solutions.
Sales and marketing expense included $9.5 million and $6.6 million of
stock-based compensation expense for 2021 and 2020, respectively. In 2020, we
recorded $1.9 million of restructuring costs related to our reduction in
workforce in sales and marketing expense.
Research and development
Research and development expense increased$29.0 million , or 36.7%, for 2021 compared to 2020, primarily driven by increases in personnel costs, including increased stock-based compensation expense of$9.8 million and our continued investment in innovation and information security. Research and development expense included$23.4 million and$13.6 million of stock-based compensation expense 66
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for 2021 and 2020, respectively. In 2020, we recorded
General and administrative
General and administrative expense increased$20.8 million , or 24.3%, for 2021 compared to 2020, driven primarily by increased personnel costs, including increased stock-based compensation expense of$2.8 million , increased expenses related to being a publicly listed company, higher expenses to support increased levels of hiring, and transaction related and other expense. Partially offsetting these increases were a$5.8 million reduction in bad debt expense primarily as a result of improved collections activity. General and administrative expense included$11.3 million and$8.5 million of stock-based compensation expense for 2021 and 2020, respectively, and$5.2 million and$3.1 million of transaction related and other expense for 2021 and 2020, respectively. In 2020, we recorded$0.4 million of restructuring costs related to our reduction in workforce in general and administrative expense.
Depreciation and amortization
Depreciation and amortization expense related to operating expenses decreased$0.8 million , or 2.8% for 2021 compared to 2020. Amortization of intangible assets was$17.7 million in each of 2021 and 2020, and depreciation expense and amortization of internally developed software was$8.8 million and$9.5 million in 2021 and 2020, respectively.
Other Expenses
Interest expense
Interest expense decreased$24.9 million for 2021 compared to 2020 as a result of the repayment of all outstanding debt with the proceeds from our IPO in the fourth quarter of 2020. In conjunction with the IPO, we terminated our 2019 Credit Agreement and entered into the 2020 Credit Agreement. As ofDecember 31, 2021 no amounts were drawn under the 2020 Credit Agreement and we had no outstanding debt.
Loss on extinguishment of debt
A loss on extinguishment of debt of
Other (income) expense, net
Other (income) expense, net primarily relates to the impact of net exchange gains or losses on foreign currency balances, principally related to intercompany balances denominated in foreign currencies.
Provision for income taxes
We recorded a provision for income taxes of$9.9 million and$8.1 million for 2021 and 2020, respectively. The effective tax rate for 2021 and 2020 was 16.2% and 26.4%, respectively. The effective tax rate in 2021 reflects the favorable impact of an amendment to our 2018 and 2019 federal tax returns as a result of clarification of certain tax guidance, a change in tax law in the state ofConnecticut resulting in the ability to utilize additional research and development credits generated in prior years which impacted our valuation allowance, and research and development credits generated in the current year, partially offset by the impact of state income taxes and permanent differences for non-deductible expenses. The effective tax rate for 2020 reflects the unfavorable impact of permanent differences related to stock-based compensation for certain employees and the impact of state income taxes, partially offset by the favorable impact of research and development credits and foreign operations. 67
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Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principle
generally accepted in the United States ("GAAP"), we believe the non-GAAP
measures of Non-GAAP Gross Profit, Non-GAAP Income from Operations, Non-GAAP Net
Income and Adjusted EBITDA are useful in evaluating our operating performance.
We believe that non-GAAP financial information may be helpful to investors
because it provides consistency and comparability with past financial
performance and assists in comparisons with other companies, some of which use
similar non-GAAP information to supplement their GAAP results. The non-GAAP
financial information is presented for supplemental informational purposes only
and should not be considered a substitute for financial information presented in
accordance with GAAP, and may be different from similarly titled non-GAAP
measures used by other companies. A reconciliation is provided below for each
non-GAAP financial measure to the most directly comparable financial measure
stated in accordance with GAAP. Investors are encouraged to review the related
GAAP financial measures and the reconciliation of these non-GAAP financial
measures to their most directly comparable GAAP financial measures.
Non-GAAP Gross Profit
Non-GAAP Gross Profit is a supplemental measure of operating performance that is not prepared in accordance with GAAP and that does not represent, and should not be considered as, an alternative to gross profit, as determined in accordance with GAAP. We define Non-GAAP Gross Profit as gross profit, adjusted for amortization of acquired intangible assets, stock-based compensation expense, and restructuring expense. We use Non-GAAP Gross Profit to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe Non-GAAP Gross Profit is a useful measure to us and to our investors to assist in evaluating our core operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metric eliminates the effects of variability of stock-based compensation expense and amortization of acquired technology intangible assets, which are non-cash expenses that may fluctuate for reasons unrelated to overall operating performance, as well as restructuring expense, which is infrequent in nature. While the amortization expense of acquired technology intangible assets is excluded from Non-GAAP Gross Profit, the revenue related to acquired technology intangible assets is reflected in Non-GAAP Gross Profit as these assets contribute to our revenue generation. Non-GAAP Gross Profit has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, Non-GAAP Gross Profit should not be considered as a replacement for gross profit, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Our presentation of Non-GAAP Gross Profit should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Non-GAAP Gross Profit. Non-GAAP Gross Profit is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Non-GAAP Gross Profit to gross profit, the most directly comparable GAAP measure, is as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Gross profit $ 442,309 $ 368,581 $ 301,445
Amortization of acquired intangible assets 9,451 5,023 4,700
Stock-based compensation expense 4,695 4,713 98
Restructuring expense(1) - 601 -
Non-GAAP Gross Profit $ 456,455 $ 378,918 $ 306,243 (1)Restructuring expense primarily relates to severance costs incurred in
connection with a reduction in workforce undertaken in Q2 2020 to align our cost
structure to expectations of potentially reduced revenue resulting from the
COVID-19 pandemic. Approximately
Non-GAAP Income from Operations
Non-GAAP Income from Operations is a supplemental measure of operating
performance that is not prepared in accordance with GAAP and that does not
represent, and should not be considered as, an alternative to income from
operations as determined in accordance with GAAP. We define Non-GAAP Income from
Operations as income from operations, adjusted for amortization of acquired
intangible assets, stock-based compensation, restructuring expense and
transaction related and other expense. We use Non-GAAP Income from Operations to
understand and evaluate our core operating performance and trends and to develop
short-term and long-term operating plans. We believe that Non-GAAP Income from
Operations facilitates comparison of our operating performance on a consistent
basis between periods, and when viewed in combination with our results prepared
in accordance with GAAP, helps provide a broader picture of factors and trends
affecting our results of operations. While the amortization expense of acquired
technology, partner
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relationships and tradenames is excluded from Non-GAAP Income from Operations, the revenue related to acquired technology, partner relationships and tradenames is reflected in Non-GAAP Income from Operations as these assets contribute to our revenue generation. Non-GAAP Income from Operations has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, Non-GAAP Income from Operations should not be considered as a replacement for operating income, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Our presentation of Non-GAAP Income from Operations should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Non-GAAP Income from Operations. Non-GAAP Income from Operations is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Non-GAAP Income from Operations to income from operations, the most directly comparable GAAP measure, is as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Income from operations $ 62,204 $ 60,968 $ 29,225
Amortization of acquired intangible assets 27,139 22,679 22,600
Stock-based compensation expense 48,909 33,460 12,215
Restructuring expense(1) - 3,835 -
Transaction related and other expense(2) 5,153 3,112 -
Non-GAAP Income from Operations $ 143,405 $ 124,054 $ 64,040
(1)Restructuring expense primarily relates to severance costs incurred in
connection with a reduction in workforce undertaken in Q2 2020 to align our cost
structure to expectations of potentially reduced revenue resulting from the
COVID-19 pandemic. Approximately $3.2 million and $0.6 million of restructuring
expense was recorded within operating expenses and cost of revenue,
respectively, for 2020.
(2)Transaction related and other expense consists of acquisition related costs,
litigation related charges or benefits and other unusual charges, as well as
costs incurred during the year ended December 31, 2020 to support our public
company readiness.
Non-GAAP Net Income
Non-GAAP Net Income is a supplemental measure of operating performance that is
not prepared in accordance with GAAP and that does not represent, and should not
be considered as, an alternative to net income (loss) as determined in
accordance with GAAP. We define Non-GAAP Net Income as net income (loss) before
income taxes, adjusted for loss on extinguishment of debt, amortization of
acquired intangible assets, stock-based compensation expense, restructuring
expense, and transaction related and other expense. The Company utilizes a
normalized non-GAAP tax rate to provide better consistency across the reporting
periods by eliminating the effects of non-recurring and period-specific items,
which can vary in size and frequency, and which are not necessarily indicative
of the Company's long-term operations. The normalized non-GAAP tax rate applied
to each period presented was 25%. We use Non-GAAP Net Income to understand and
evaluate our core operating performance and trends and to develop short-term and
long-term operating plans. We believe that Non-GAAP Net Income facilitates
comparison of our operating performance on a consistent basis between periods,
and when viewed in combination with our results prepared in accordance with
GAAP, helps provide a broader picture of factors and trends affecting our
results of operations. While the amortization expense of acquired technology,
partner relationships and tradenames is excluded from Non-GAAP Net Income, the
revenue related to acquired technology, partner relationships and tradenames is
reflected in Non-GAAP Net Income as these assets contribute to our revenue
generation. Non-GAAP Net Income has limitations as an analytical tool, and you
should not consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. Because of these limitations, Non-GAAP Net
Income should not be considered as a replacement for net income (loss), as
determined by GAAP, or as a measure of our profitability. We compensate for
these limitations by relying primarily on our GAAP results and using non-GAAP
measures only for supplemental purposes. Our presentation of Non-GAAP Net Income
should not be construed to imply that our future results will be unaffected by
the types of items excluded from the calculation of Non-GAAP Net Income.
Non-GAAP Net Income is not a presentation made in accordance with GAAP and the
use of the term may vary from other companies.
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A reconciliation of Non-GAAP Net Income to net income (loss), the most directly comparable GAAP measure, is as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
GAAP net income (loss) $ 51,434 $ 22,498 $ (31,188) GAAP provision for (benefit from) income taxes 9,928 8,062 (2,511)
GAAP income (loss) before income taxes 61,362
30,560 (33,699)
Loss on extinguishment of debt -
8,488 19,231
Amortization of acquired intangible assets 27,139
22,679 22,600
Stock-based compensation expense 48,909
33,460 12,215
Restructuring expense(1) - 3,835 - Transaction related and other expense(2) 5,153 3,112 - Non-GAAP provision for income taxes(3) (35,641) (25,534) (5,088) Non-GAAP Net Income$ 106,922 $ 76,600 $ 15,259 (1)Restructuring expense primarily relates to severance costs incurred in connection with a reduction in workforce undertaken in Q2 2020 to align our cost structure to expectations of potentially reduced revenue resulting from the COVID-19 pandemic. Approximately$3.2 million and$0.6 million of restructuring expense was recorded within operating expenses and cost of revenue, respectively, for 2020. (2)Transaction related and other expense consists of acquisition related costs, litigation related charges or benefits and other unusual charges, as well as costs incurred during the year endedDecember 31, 2020 to support our public company readiness. (3)The normalized non-GAAP tax rate applied to each period presented was 25%. The Company may adjust its non-GAAP tax rate as additional information becomes available or events occur which may materially affect this rate, including impacts from the rapidly evolving global tax environment, significant changes in our geographic mix, merger and acquisition activity, or changes in our business outlook. Adjusted EBITDA Adjusted EBITDA is a supplemental measure of operating performance monitored by management that is not defined under GAAP and that does not represent, and should not be considered as, an alternative to net income (loss), as determined by GAAP. We define Adjusted EBITDA as net income (loss) adjusted for interest and other expense, net, loss on extinguishment of debt, depreciation and amortization, (provision for) benefit from income taxes, stock-based compensation expense, restructuring expense and transaction related and other expense. We use Adjusted EBITDA to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, is as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net income (loss) $ 51,434 $ 22,498 $ (31,188)
Interest and other expense, net(1) 842 21,920 43,693
Loss on extinguishment of debt - 8,488 19,231
Depreciation and amortization 59,183 49,113 43,162
Provision for (benefit from) income taxes 9,928 8,062 (2,511)
Stock-based compensation expense 48,909 33,460 12,215
Restructuring expense(2) - 3,835 -
Transaction related and other expense(3) 5,153 3,112 -
Adjusted EBITDA $ 175,449 $ 150,488 $ 84,602 (1)Interest and other expense, net includes interest expense, net, foreign currency gains and losses and other expenses.
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(2)Restructuring expense primarily relates to severance costs incurred in
connection with a reduction in workforce undertaken in Q2 2020 to align our cost
structure to expectations of potentially reduced revenue resulting from the
COVID-19 pandemic. Approximately $3.2 million and $0.6 million of restructuring
expense was recorded within operating expenses and cost of revenue,
respectively, for 2020.
(3)Transaction related and other expense consists of acquisition related costs,
litigation related charges or benefits and other unusual charges, as well as
costs incurred during the year ended December 31, 2020 to support our public
company readiness.
Liquidity and Capital Resources
General
As of December 31, 2021 , our cash, including restricted cash, totaled
$222.7 million , as compared to $170.4 million as of December 31, 2020 . In
addition, as of each of December 31, 2021 and 2020, we had no debt outstanding
and $198.1 million of capacity under our 2020 Revolving Credit Agreement
(defined below). We believe our existing cash and cash equivalents, cash
provided by our ongoing operations and borrowing capacity under our 2020
Revolving Credit Facility will be sufficient to meet our working capital and
capital expenditure needs for at least the next 12 months.
Historically, as we invested in our organization and infrastructure to meet
increasing demand for our products and services and to drive our rapid growth,
we have financed our operations primarily through cash provided by our ongoing
operations, debt financing and more recently our IPO. During 2020, in response
to the spread of COVID-19 and its impacts on the world economy, we undertook
various measures to improve our liquidity position and better match our cost
structure to our revenue and cash generation activities, and we continue to
benefit from these measures. In addition, the COVID-19 pandemic continues to
cause a reduction of marketing, event and travel costs, as events are held
virtually and travel is limited. In the future we will continue to invest in our
organization and infrastructure and expect to resume hosting our world-class
partner events in-person when it is safe to do so, as we grow and innovate along
with our MSP partners.
Our future capital requirements will depend on several factors, including the
need to invest in our Datto Cloud infrastructure to support our subscription
revenue growth, the timing of cash receipts and payments, the timing and extent
of spending to support research and development, the pace of expansion of sales
and marketing activities, including in international markets, the level of
investment in back-office infrastructure, the cost to operate as a publicly
listed company and the amount of our outstanding indebtedness. In the future, we
may also enter into arrangements to acquire or invest in complementary
businesses, services and technologies, including intellectual property rights.
We may be required to seek additional equity or debt financing to meet our
future capital requirements. In the event additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us or at
all. If we are unable to raise additional capital or generate cash flows
necessary to fund the expansion of our operations and invest in new
technologies, this could reduce our ability to compete successfully and harm our
results of operations.
Credit Facilities
On October 23, 2020 , we closed our IPO which generated net proceeds, after
deducting the underwriters discount, of $641.6 million . Shortly after closing
the IPO, the Company utilized the IPO proceeds and $38.4 million of available
cash to repay the outstanding balances under the 2019 Credit Agreement of $590.2
million , pay $1.6 million of related accrued interest, and pay $1.2 million in
debt issuance costs for the 2020 Credit Agreement.
On October 23, 2020 , Datto, Inc. , as borrower (the "Borrower"), Merritt Holdco,
Inc. , Autotask Superior Holding, Inc. , Backupify, Inc. , Autotask Corporation ,
Open Mesh, Inc. and SoonR, Inc. , each a direct or indirect wholly-owned
subsidiary of Datto Holding Corp. , entered into the 2020 Credit Agreement with
the lenders party thereto and Morgan Stanley Senior Funding, Inc. , as
administrative agent. The 2020 Credit Agreement is guaranteed by Merritt Holdco,
Inc. , Autotask Superior Holding, Inc. , Backupify, Inc. , Open Mesh, Inc. ,
Autotask Corporation , and SoonR, Inc. (the "Guarantors," and, together with the
Borrower, the "Loan Parties") and is supported by a security interest in
substantially all of the Loan Parties' personal property and assets, subject to
customary exceptions.
The 2020 Credit Agreement provides for an initial $200.0 million in commitments
for revolving credit loans, which may be increased or decreased under specific
circumstances, with a $40.0 million letter of credit sublimit and a $100 million
alternative currency sublimit (the "2020 Revolving Credit Facility"). In
addition, the 2020 Credit Agreement provides for the ability of the Borrower to
request incremental term loan facilities. Borrowings pursuant to the 2020 Credit
Agreement may be used for working capital and other general corporate purposes,
including for acquisitions permitted under the 2020 Credit Agreement.
Borrowings under the 2020 Credit Agreement are scheduled to mature on
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representations or warranties, failure to observe or perform certain covenants,
cross-defaults, bankruptcy and insolvency-related events, certain judgments,
certain ERISA-related events, or a Change in Control (as defined in the 2020
Credit Agreement).
The 2020 Credit Agreement contains certain customary representations and
warranties and affirmative and negative covenants, including certain
restrictions on the ability of the Loan Parties and their Restricted
Subsidiaries (as defined in the 2020 Credit Agreement) to incur any additional
indebtedness or guarantee indebtedness of others, to create liens on properties
or assets, and to enter into certain asset and stock-based transactions. In
addition, under the terms of the 2020 Credit Agreement, the Borrower's First
Lien Net Leverage Ratio shall not be more than 4.00 to 1.00.
The interest rates applicable to the revolving borrowings under the 2020 Credit
Agreement, are, at the Borrower's option, either (i) a base rate, equal to the
greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5% or
(c) the Adjusted LIBO Rate for a one month Interest Period (each term as defined
in the 2020 Credit Agreement) plus 1%, or (ii) the Adjusted LIBO Rate equal to
the LIBO Rate for the applicable Interest Period, plus in the case of each of
clauses (i) and (ii), the Applicable Rate (as defined in the 2020 Credit
Agreement). The Applicable Rate (i) for base rate loans range from 0.25% to 1.0%
per annum and (ii) for LIBO Rate loans range from 1.25% to 2.0% per annum, in
each case, based on the Senior Secured Net Leverage Ratio (as defined in the
2020 Credit Agreement). The Borrower will pay a commitment fee during the term
of the 2020 Credit Agreement ranging from 0.20% to 0.35% per annum of the
average daily undrawn portion of the revolving commitments based on the Senior
Secured Net Leverage Ratio (as defined in the 2020 Credit Agreement).
Any borrowings under the 2020 Credit Agreement may be repaid, in whole or in
part, at any time and from time to time without premium or penalty other than
customary breakage costs, and any amounts repaid may be reborrowed. No mandatory
prepayments will be required other than when borrowings and letter of credit
usage exceed the aggregate commitment of all lenders.
The 2020 Revolving Credit Facility was undrawn as of each of December 31, 2021
and December 31, 2020 with the exception of $1.9 million of outstanding letters
of credit as of each date.
Contractual Commitments
The following table sets forth the estimated timing and amounts of our material
cash requirements from our contractual and other obligations as of December 31,
2021 :
Payments due by Period
Less than More than
Total 1 Year 1-3 years 3-5 Years 5 years
(in thousands)
Revolving credit facility-commitment fees(1)
76,619 28,606 35,179 12,834 -
Operating lease obligations(3) 43,956 10,175 19,183 9,059 5,539
Total $ 122,108 $ 39,181 $ 55,162 $ 22,226 $ 5,539
________________
(1)We are required to pay a commitment fee ranging from 0.20 to 0.35%, based on
the Company's leverage ratio, on the undrawn portion of the revolving credit
facility under the 2020 Credit Agreement. We have estimated the obligations
based on the facts and circumstances in place at December 31, 2021 .
(2)We have unconditional purchase obligations that primarily consist of
commitments related to our co-located data centers, telecommunication,
networking, subscription and consulting services.
(3)Our operating lease obligations consist primarily of office space,
warehousing and certain co-located data center contracts.
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Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing, and financing activities for the periods indicated.
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by operating activities
11,235
Net cash used in investing activities
18,505 Operating Activities For 2021, net cash provided by operating activities was$125.4 million , which resulted from net income of$51.4 million , adjusted for non-cash charges of$119.8 million and net cash outflow of$45.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expenses of$59.2 million , stock-based compensation expense of$48.9 million , non-cash operating lease expense of$7.3 million and an increase in deferred income taxes of$4.9 million . The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in inventory of$21.2 million , as we have increased purchases to guard against possible supply chain disruptions resulting from the COVID-19 pandemic, an increase in other assets of$19.6 million primarily driven by an increase in deferred contract acquisition costs, as well as an increase in prepaid expenses and other current assets of$11.5 million , primarily driven by increased contract assets, net and inventory deposits, partially offset by an increase in accounts payable, accrued expenses and other of$8.4 million primarily resulting from the timing of payments. In 2021, we paid$2.9 million of social security tax which we elected to defer in 2020 as provided in the CARES Act. For 2020, net cash provided by operating activities was$108.7 million , which resulted from net income of$22.5 million , adjusted for non-cash charges of$106.8 million and net cash outflow of$20.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expenses of$49.1 million , stock-based compensation expense of$33.5 million , loss on extinguishment of debt of$8.5 million and an increase in deferred income taxes of$7.8 million . The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in other assets of$13.0 million primarily driven by an increase in deferred contract acquisition costs, as well as an increase in prepaid expenses and other current assets of$7.5 million , primarily driven by the payment of insurance as a result of becoming a public company. We also elected to defer payment of our obligation for social security tax for the remainder of 2020 as provided in the CARES Act, resulting in a reduction in cash outflows of$5.8 million during 2020.
Investing Activities
For 2021, net cash used in investing activities was$92.7 million , including capital expenditures of$47.2 million , primarily related to our investment in servers for our Datto Cloud infrastructure to support our overall subscription growth as well as investments in the development of our cloud-based platforms to serve our partners. We also purchased computer equipment to support our increased workforce. In addition, we used$45.5 million , net of cash acquired, for the acquisition of BitDam. For 2020, net cash used in investing activities was$44.8 million , primarily resulting from investment in servers for our Datto Cloud infrastructure to support our overall subscription growth as well as investments in the development of our cloud-based platforms to serve our partners. In addition, we incurred expenses for leasehold improvements and furniture and fixtures to expand and update certain offices and purchased computer equipment to support our workforce and global expansion. InJuly 2020 , we acquired two affiliated Australian entities,Gluh Pty Ltd andKeystone Software Holdings Pty Ltd , which offer a tool for MSPs to quote, sell and procure IT goods and services. The amount paid was approximately$4.4 million , reflecting the purchase price of$4.0 million and certain closing adjustments.
Financing Activities
For 2021, net cash provided by financing activities was
For 2020, net cash provided by financing activities was$75.7 million , primarily reflecting proceeds from our IPO, net of the underwriting discount, of$641.6 million , proceeds in the first quarter of 2020 of$32.1 million from our revolving credit facility, as we drew down the balance given the uncertainty in the global economy as a result of the COVID-19 pandemic, and proceeds from the 73 -------------------------------------------------------------------------------- Table of Contents exercise of stock options of$3.2 million . These cash proceeds were partially offset by debt repayments of$594.7 million as a result of our IPO, including$590.2 million to repay all outstanding balances under our 2019 Credit Agreement, payment of IPO costs of$5.3 million , and payment of debt issuance costs of$1.2 million for our 2020 Credit Agreement. Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify MSP partners, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheet, consolidated statement of operations and comprehensive loss or consolidated statement of cash flows. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. Critical Accounting Estimates Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K. The preparation of our consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. Our critical accounting estimates are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting estimates is essential when reviewing our consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with theFinancial Accounting Standards Board's Accounting Standards Codification Topic 606. We generate revenue from fees received for subscriptions, support and related services, and from the sale of devices. We recognize revenue related to contracts with partners when we transfer promised goods or services to partners in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This is determined by following a five-step process which includes (1) identifying the contract with a partner, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price and (5) recognizing revenue when or as we satisfy a performance obligation. We identify performance obligations in a contract based on the goods and services that will be transferred to the partner that are identifiable or distinct from other promises in the contract. If not considered distinct, the promised goods or services are combined with other goods or services and accounted for as a combined performance obligation. Determining the distinct performance obligations in a contract requires judgment. Our performance obligations primarily include subscription services, including warranties, unspecified upgrades or enhancements to our hosted SaaS offerings, delivery of devices and training. We believe that our technical support, warranties and unspecified upgrades or enhancements performance obligations each have the same pattern of transfer to the partner and are therefore accounted for as a single distinct performance obligation. We allocate the transaction price of the contract to each distinct performance obligation on a relative standalone selling price basis. Estimating standalone selling prices for our performance obligations requires judgment and is based on multiple factors including, but not limited to, observable cost data, industry margin studies, historical selling prices, internal pricing policies and pricing practices in different regions and through different sales channels and internal cost structure. We review the standalone selling price for our performance obligations periodically and update them, if needed, to ensure that the methodology utilized reflects our current pricing practices.
Contract Acquisition Costs
We capitalize commission expenses that are incremental to obtaining customer
contracts, using a portfolio approach. These contract acquisition costs are
deferred and recorded in other assets on our consolidated balance sheets. We
make judgments in determining the amount of costs to be expensed in the period,
including amounts which are expensed as incurred, which is the approach if the
expected period of benefit is less than one year, and amounts which are
capitalized and expensed over future periods, which is the approach if the
expected period of benefit is beyond one year. The period of benefit often
extends beyond the contract term, as we only pay a commission on the initial
contract term and not upon renewal of the contract. We have determined that the
expected period of benefit is
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five years based on evaluation of a number of factors, including customer attrition rates, weighted average useful lives of our partner relationship and developed technology intangible assets, and market factors, including the overall competitive environment and the technology life utilized by competitors. Contract acquisition costs which are capitalized are amortized as a component of sales and marketing expense in our consolidated statements of operations.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax assets represent amounts available to reduce income taxes payable in future periods. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe they will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent cumulative loss experience and expectations of future earnings, the carry-forward periods available for tax reporting purposes, and other relevant factors. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits are recognized from such positions based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within income tax expense. Business Combinations We account for business combinations by assigning the total consideration transferred to the fair value of acquired assets and liabilities. We record goodwill based on the excess of the purchase price for acquisitions over the fair value of the net assets acquired. Determining the fair value of assets and liabilities assumed requires management to make significant estimates and assumptions. In determining the fair value of an acquired intangible asset we generally based our valuation on available historical information, future expectations, market data, and management's reasonable assumptions. While we use our best estimates and assumptions as part of the purchase price allocation, our estimates are inherently uncertain and subject to refinement.
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and accounting pronouncements issued but not yet adopted, see Note 2. Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
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