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Datto Holding Corp. (NYSE:MSP)
Q3 2021 Earnings Call
Nov 10, 2021, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Datto third quarter 2021 earnings conference call. [Operator instructions] It is now my pleasure to turn today's call over to 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 third 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 fourth quarter 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 in our third 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 two investor conferences in the coming weeks, including the RBC Capital Markets Global Technology Conference and the Barclays TMT Conference. Please reach out to me if you're interested in joining our schedule. With that, I'll 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 Q3 results and to raise guidance again for 2021. I'll begin with a few highlights from the quarter, followed by an update on two significant product launches that we made in security and cloud, which solidify our leading position in providing cybersecurity solutions for our MSP partners. And finally, I'll turn the call over to John to discuss our financial results and guidance in more detail.
The third quarter was another record quarter for Datto. Subscription revenue growth was 20% year over year, reflecting another quarter of sequential acceleration. Our growth continues to be paced in percentage terms by Datto SaaS Protection and Datto RMM, both of which also have strong new security add-ons. Our business continuity and disaster recovery product, BCDR, for short, continues to reaccelerate with another sequential increase in new ARR.
Overall, all major products and geographies saw healthy growth. We ended the quarter with $627 million of ARR, up almost $29 million from Q2, and we added 400 net new MSPs in the quarter, bringing the total number of MSP partners we serve to 18,200. ARR per MSP also continued to increase, demonstrating the ongoing strength of our MSP cards. Overall, I'm delighted with the way our partner-facing teams executed in delivering another great quarter.
On the product side, in Q3, we launched two new significant offerings, SaaS Defense as a security add-on for our SaaS Protection Continuity product and Datto Continuity for Microsoft Azure, extending our flagship BCDR product into the public cloud, where Azure is far and away the most popular with MSPs. I'll give some additional details on each now. Let me start with SaaS Defense, our newest security product. This product addresses the No.
1 cybersecurity attack vector, which is email and related attachments. In fact, MSP's report that 64% of wrap somewhere attacks on their clients originate in Microsoft 365 inboxes. Our SaaS Defense solution has its foundations in our acquisition earlier this year of BitDam, an Israel-based company. We have run independent third-party testing of our proprietary technology against five of the most widely used email security solutions available today, and we come out in the top one or two on effectiveness and had the lowest false positive rate.
SaaS Defense even find zero threats. Following the acquisition, we worked diligently with our new team members to tailor the product for MSP delivery. According to data from the FBI, fishing has exploded as the No. 1 cybercrime, and it is aimed at theft of log-in and password credentials.
These stolen credentials are used by other cyber criminals to launch large coordinated ransomware attacks. SaaS Defense is based on a novel set of intellectual property that independent testing has shown to be best-in-class against sophisticated phishing and malware that target Microsoft 365 inboxes, OneDrive, SharePoint and Teams. It is a robust yet simple-to-use security solution that eliminates the need for additional MSP head count or in-depth security training. In addition, it is bundled with our SaaS Protection product, creating a strong margin opportunity for our MSP partners and a low friction purchasing motion.
The initial response to SaaS Defense has been outstanding as partners recognize the critical need for email security today and love that SaaS Defense is highly effective, easy to use and fit seamlessly with SaaS Protection. SaaS Defense is a first line of security defense like AV or firewalls, preventing malware from running. In the second line of defense is Datto Ransomware Detection for RMM, which is now deployed on over 1.4 million end points, up from over one million on our last call. Our solution addresses escalated situations where the attacker has actively bypassed the in-place antivirus or EDR solution and malware is running on servers or PCs under direct control of the attacker.
Without our Ransomware Detection, each of these events would likely end in ransomware or worse. So we are incredibly proud of each save over the past year, and there have been many. We intend to continue to expand our product offerings on the front lines of defense going forward. Now let's talk about the last line of security defense, which is recovery.
Our market-leading Continuity products have been the last line of defense and security for MSPs and their clients since day one. And the importance of bulletproof flexible recovery is only increasing as cyber-attacks become more common. As a leader in Continuity, we're now doing about 75,000 restores per month and growing. With our Cloud Deletion Defense, we have also performed over 400 complete saves for partners and their clients on the brink of total data loss over the past couple of years.
These are scenarios where cyber attacker locks a client's primary servers with ransomware, then actively erases all backup images, local and cloud, using stolen credentials. In each case, the immutable copies in Datto's Cloud save the day and prevented what could have been a business ending event for the end client. That brings me to the newest member of the Datto Continuity family, Datto Continuity for Microsoft Azure. We've brought MSPs and the investment community on the development journey all year.
So we were thrilled to officially launch it in September. Much like SaaS Defense, the early response from partners has been incredibly energizing. Datto Continuity for Microsoft Azure, or DCMA, for short, is comprehensive business continuity and disaster recovery solution that protects MSPs and their clients' Azure public cloud workloads, providing protection against malicious ransomware attacks, security breaches, server software problems and cloud outages. We recently announced our strategic partnership with Microsoft, which was key in our development efforts and features a strong co-marketing relationship on DCMA.
We believe Datto Continuity for Microsoft Azure is the most secure, highest-performing continuity solution in the Azure ecosystem. On top of all this, DCMA is fully integrated into the Datto platform so MSPs can manage and protect their clients live applications and data in Azure right alongside workloads in private clouds, on virtual machines or on premises, all from a single unified platform. Importantly, our DCMA product restores Azure virtual machine images in the Datto Cloud, which allows MSPs to get their clients' environments running quickly, even if Azure itself is experiencing a cloud outage. While it's early in the public cloud move for SMBs, worldwide end user spending on public cloud services is forecasted to grow more than 23% this year to greater than $330 billion according to Gartner.
This should prove to be a key growth area for MSPs and Datto for years to come as MSPs support their clients in the migration to Infrastructure as a Service, or IS. We are now in a position with a leading and differentiated solution to help our MSP partners on this journey. Lastly, I will note that applications and data are growing everywhere in the public cloud led by Azure, but also in private clouds, virtual machines and on-prem. We're seeing solid continuity growth in all arenas.
MSPs are also managing and protecting an increasing share of these SMB digital assets as they continue as an industry to eat into the $1.3 trillion of global SMB IT spend. MSPs are even pushing into co-managed services, partnering with IT departments in enterprise, government and EDU clients. Datto's market-leading comprehensive portfolio of Continuity solutions allows MSPs to protect digital assets wherever they live. So those were the two major new product announcements in Q3, but we continue to have releases every quarter and sometimes every month across our product portfolio, Continuity, RMM, SaaS, PSA and networking with a particular focus on security features in each.
Security continues to be at the core of everything we do at Datto. We highlighted this recently for MSP partners at our DattoCon event in early October. It was the largest event in our history, attracting more than 4,700 virtual attendees from 50 countries. Our primary message to the MSP community was that they are now on the front line in the global cybersecurity battle.
Cybercrime is now a $1 trillion annual drag on the global economy, and the attackers are increasingly finding SMBs to be attractive targets. As the primary provider of IT services for their clients, MSPs are now squarely in the security business. There are two strong implications that follow. First, MSPs will increasingly choose their vendors based on security as the #1 product attribute.
Going forward, trust in the security of their vendors will matter more than bells and whistles or costs. Second, MSPs have a massive opportunity in providing security solutions to protect their clients and to profit and grow from doing so. For each of these two, we believe we are strongly positioned to be a partner of choice with the best technology solutions in the cybersecurity battle. As a vendor, we anticipate a large return on the year's long investment we have made and will continue to make in internal security.
In fact, we announced the Datacom that we are the only RMM vendor to have passed a stringent security audit called BCM used by a consortium of leading technology and financial companies. We also pointed to a strong development pipeline on security products, which we will bring to market as sell-through offerings that MSPs can use to protect their SMB clients, while also finding good margin for themselves. My call to action for MSPs at DattoCon was to define their security stack immediately and improve it over time. Datto will help our partners secure themselves and their clients, both as a trusted advisor and with our innovative products.
We will benefit from differentiated reliable products, our scale and our persistent focus on security at our core. My DattoCon address, including demos with our engineers of some key security and cloud products, is posted in the Investor Relations section of our website. DattoCon also featured from our Chief Information Security Officer, MSP interviews and over 100 vendor sponsors, consistent with our open ecosystem approach. Building on the security themes from DattoCon, we will offer investors a deeper look into data in a few weeks at our first ever Investor Day on Thursday, December 9.
We have an exciting agenda planned that will give you a better understanding of our products and technology, our unique go-to-market approach with our MSP channel partners, our financial model and the incredible opportunities we see ahead in securing digital assets. We hope that you can join us. Look for registration information coming soon on our IR website. In summary, we are pleased to have delivered another record quarter and two significant new product launches that align with the MSP industry shift toward a security-first approach.
We see great momentum across our business today, and we're excited about our strong product cycle that will contribute to growth in 2022 and beyond. We remain well positioned to capitalize on the large and growing opportunity with our current product portfolio and road map and the deep trusted MSP relationships that we have built. Finally, I want to thank everyone on the global Datto team for all of your hard work and our MSP partners for their continued support. With that, I'll turn the call over to John.
John Abbot -- Chief Financial Officer
Thank you, Tim, and good afternoon, everyone. We're pleased to report terrific third quarter results today, where we outperformed across the board. As I review our numbers, 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 third quarter results reflect great momentum across our suite of products and continued acceleration of our business. Third quarter recurring subscription revenue of $146.8 million, grew 20% from Q3 last year. Subscription revenue growth is now accelerated every quarter this year. Subscription revenue comprised 93% of our total revenue, which came in at $157.9 million in the quarter, representing 21% year-over-year growth, well above the high end of our previous guidance.
Our revenue results reflect the benefit from foreign exchange rates of approximately 1.5%. Strong operating results drove the upside to our guidance with currency providing less of a tailwind than we had forecasted. ARR at September 30 was $626.7 million, up 20% from $522.8 million a year ago and nearly a $29 million increase sequentially. We ended the quarter with more than 18,200 MSP partners, a net increase of 400 in the quarter, and we grew the number of MSPs contributing over $100,000 in ARR to more than 1,300, a 24% increase from 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 in seats and they both adopt more Datto products. Our third quarter gross margin of 73% was in line with the strong margin we saw in Q3 2020. Third quarter operating expenses were $80.1 million, a 40% increase from Q3 last year as we continue to invest with a focus on security and cloud to drive revenue growth. As a reminder, expenses reached a low point last year in Q3 when we saw the full quarter impact of the expense reductions we had implemented in response to the COVID crisis.
The vast majority of the increase in operating expenses this year was driven by personnel costs. Within opex, sales and marketing expenses were $32.8 million, an increase of $8.6 million from Q3 2020 as a result of expanded sales staffing levels as well as higher marketing and sales commission expenses. R&D expenses were $21.5 million, an increase of $6.8 million from Q3 2020, which underscores our continued investment in technology development and security. G&A expenses were $23.6 million, an increase of $8 million over Q3 last year, primarily driven by expenses associated with being a public company and recruiting costs related to increased hiring this year.
And finally, depreciation expense within operating expenses was $2.1 million compared to $2.4 million in Q3 2020. Operating income for the second quarter was $35.8 million compared to $39 million in Q3 2020. Adjusted EBITDA for the quarter, which excludes stock-based compensation, restructuring costs and transaction-related and other expenses, was $43.8 million compared to $45.8 million in Q3 2020. Our adjusted EBITDA margins were 28%, reflecting continued hiring in the areas of security and cloud some normalization of travel and return to office expense and costs associated with being a public company.
CapEx in the quarter was $11.7 million, and free cash flow was strong again at $20.3 million. Our balance sheet remains very strong with no debt and approximately $207 million in cash at the end of the quarter. Turning to guidance for the fourth quarter and full year. The increase in our 2021 guidance reflects our positive outlook for the continued acceleration of the business.
For the fourth quarter of 2021, revenue is expected to be in the range of $161 million to $163 million. Adjusted EBITDA is expected to be in the range of $38 million to $40 million. Our Q4 total revenue guidance represents year-over-year growth of 16.5% at the midpoint, including a 0.5 percentage point of FX tailwind. And we expect subscription revenue growth to be 17.5% at the midpoint.
For the full year 2021, we're raising our revenue guidance to a range of $615 million to $617 million. And we're also raising our adjusted EBITDA guidance to a range of $174 million to $176 million. Our full year revenue guidance represents year-over-year growth of approximately 18.5% at the midpoint, including a two percentage point FX tailwind. This is up meaningfully from our prior guidance for full year growth of 17.5%, which included a 2.5% FX tailwind.
We expect subscription revenue to account for over 93% of total revenue in 2021. Capital expenditures for the year are expected to be in the high single-digit percentage range of revenue. As a reminder, for non-GAAP income taxes, we used an effective tax rate of 25%. For calculating EPS, we estimate approximately 168 million fully diluted shares for Q4 and 167 million fully diluted shares for the full year.
In closing, we believe our Q3 results and 2021 guidance reflects the ongoing strength of the business. We're very excited about our momentum going into Q4 and look forward to talking more about our business and outlook at our upcoming Investor Day on December 9. 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. Your line is open.
Sanjit Singh -- Morgan Stanley -- Analyst
Thank you for taking the question. I guess, right off the top, congrats to the team for getting back to 20% ARR growth. You guys were a 20% grower before the pandemic and to hit that at this level is quite the achievement, which sort of leads to my next question, which is kind of bluntly, do you think you can sort of keep it up at these at these levels with the sort of major product cycle that you have that sort of set to be launched? And then with that, Tim, if it was another sort of enterprise company that doesn't have the channel model that you guys have, sometimes security slows down the sales cycle. And with this big push into security, I'm just trying to see what the impact on the sales cycle at Datto would be relative to a traditional sort of company selling to the enterprise?
Tim Weller -- Chief Executive Officer
OK. Great. Thanks, Sanjit. John is going to take a shot at the numbers, and I'll add something on security.
John Abbot -- Chief Financial Officer
Yes. No, we were really happy to see ARR growth continue to accelerate. That certainly has been the plan and see it hit the 20% mark this quarter was great. Look, we won't draw a line in the here today, but you can see a clear trend in the constant currency revenue growth moving up from the low teens earlier this year to the high teens this quarter, and that's the acceleration we've been noting.
And you've also noted ARR is a leading indicator of future subscription revenue growth. The trend there is positive. And you've also heard us say that we feel very well positioned in the market to continue to drive increasing revenue growth and by implication ARR growth. So we think we're on a path and a trajectory that's very strong and feel very confident about it.
Tim Weller -- Chief Executive Officer
And Sanjit, this is Tim. I think the answer to your question on the security products is, if you think about our first couple of forays, SaaS Defense and Ransomware Detection, their attachments, their attaches to SaaS Protection, their attachments to RMM. And I would think those would be the two biggest factors you'd be looking for in early quarters here, both growing very rapidly, as we said in the opening remarks. And so would not expect any kind of slowdown in growth meant to be accelerators.
In terms of actual sales cycle because they're attached and largely digital, there's surely going to be some selling to the MSP initially, some benchmarking possibly against other solutions. But once you sell that first one and they like it, then remember, in our sell-through model, the MSPs do the selling. So I wouldn't expect it to be meaningfully different. And again, once an MSP is on, then it starts to become even more quick than typical for us.
Sanjit Singh -- Morgan Stanley -- Analyst
Makes perfect sense. And if I could sort of follow up with Azure Continuity, and I think you had a comment, Tim, in your script about partners being energized. And frankly, we heard the same thing a year ago, it seemed like partners were sort of -- especially your larger ones were sort of choppy at the bit for Datto to have a solution in sort of the public cloud backup use case. And as we think about the type of traction you can see, do you believe there's a bunch of pent-up demand that you can sort of satiate relatively quickly versus launching, let's say, a net new service in another category that you guys had previously had participated in?
Tim Weller -- Chief Executive Officer
Yes. So you're spot on. We brought the partner base along with us on the journey over the last year, alpha, beta, with a lot of feedback in effect designed by thought-leading partners. So yes, we think it's going to be much better than a brand-new surprise product.
We haven't hit in that. We've talked to all of you. The one caveat I would say is there's a number of elements of the value chain. So we start focused on partners who are already in Azure with primary workloads, at least in part, because we don't necessarily want to be the ones training partners how to go there.
It's not a completely turnkey. There's some work involved for them to move workloads and get operational in the public cloud, so to speak. There's some migration that has to occur. So I think for us in the first quarter, maybe first or second quarter of being live now, it's a product market fit question.
There's probably more handholding of the partners than there would be, say, in some of the security products because they have to kind of test the solution thoroughly here, right? This is very high stakes moving. I mean they come from a position of trust with Datto, but this is not one they're going to try on their favorite client on the very first day. So we'll check in each quarter, and I think we're very focused, as you would be, in a new product on early adopter metrics, usage, conversions, all those kind of things. And this will take care of itself over time once we have those early testimonials.
So there's definitely pent-up demand and incredible amount of opportunities in the pipeline now.
Sanjit Singh -- Morgan Stanley -- Analyst
Understood. I appreciate it. Thank you.
Operator
Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is open.
Matt Swanson -- RBC Capital Markets -- Analyst
Yes. Thank you so much. This is Matt Swanson on for Matt. If I could just maybe follow up on to question.
looking at the security products, can you just kind of go over what you've learned or what your MSP partners have learned from cross-selling ransomware that they can pull over to SaaS Defense? And maybe what that tells you about how quickly we could see the initial adoption? You mentioned kind of the ease of use of going into these new solutions from the existing.
Tim Weller -- Chief Executive Officer
Yes. I think it's too early to draw strong conclusions. In fact, one focus now is for us to market some of the success we've had in both of those products in terms of stopping attacks, right? SaaS Defense, I described as a first line of defense. So this is seeing all the thousands of emails coming into your inboxes and trying to block anything from getting going.
Our Ransomware Detection, second line of defense, something is already up and running, and it's bypassed all the other front lines, antivirus, EDR, things you've put in. And so we're definitely gathering a lot of telemetry. We're understanding everything from which environments, which AVs, which EDRs, which email filters are working well together, which ones are working well on their own. So you're on the right thread, but I would say it's too early for us to be in deep conversations with partners, they're still trying to figure out their full stacks.
I think 2022 will be the year of standardizing MSP security stacks. And I alluded to that in my Datto and I think we'll be beating the drum on that all year long.
Matt Swanson -- RBC Capital Markets -- Analyst
That's super helpful. And then, John, again, great to see the ARR growth. But it seems like adjusted EBITDA might have been the biggest outperformer for the quarter and as well as in the guidance. Could you just talk to us a little bit more about how you're thinking about balancing growth and profitability next year, especially with the presumption that there's going to be some return in costs as you alluded to?
John Abbot -- Chief Financial Officer
Yes, it's a great question and observation because that is a balance that is tough to strike in a pandemic when there's a big chunk of your expense base, it's difficult to predict. But growth is, by far, our one priority. And so that's definitely the focus, and we're investing to drive that top line growth, and you're seeing that roll through here quarter-after-quarter. The piece of the expense -- forecasted expense increase that's much harder to predict is the part that's associated with return to work, return to normal travel.
DattoCon ended up being a virtual event, not a live event in Q4 -- in Q3. So there's a lot of expense in that return to normal sort of pace of activity, travel, office expense, all of that. So just been happening a little more slowly than we had original forecast had projected. The other thing I would say is that the revenue outperformance is flowing through at a very high flow-through rate, and that's helping to drive our performance on EBITDA as well.
Matt Swanson -- RBC Capital Markets -- Analyst
Thank you for the time.
Operator
Your next question comes from the line of Jason Ader with William Blair. Your line is open.
Unknown speaker
Hi everyone. This is Billy on for Jason Nader. Tim, maybe for you, from a competitive standpoint, we've been hearing from several data protection vendors in recent quarters one who have historically focused on the enterprise market who view the MSP channel as a strategic area of focus and a potential growth opportunity. So on the one hand, the interest from them in this market kind of validates the opportunity you guys have been pursuing since inception.
On the other hand, there's potential for extra competition. So as the leaders in the space, what are you seeing from a competitive standpoint? And what do you expect to see on that front?
Tim Weller -- Chief Executive Officer
Yes. This is an area that we've been in for well over a decade. There's always competition. We could list off 25, 30 names that have come and gone.
It's a very large TAM. So it sustains many players. We've made the point many times it's very hard to do both direct and channel well. So we don't spend as much time worrying about large direct selling organizations, particularly enterprise-focused ones who say, "Hey, channel is going to be important this year." That means a junior person is going to get a target that's 8% of their total revenue, and it's very hard.
MSPs, remember, they have long memories and they want vendors that are in the channel on a permanent basis, not dabbling and definitely not ever contacting their end clients. And then you can go on social media and find this all day long. And Datto makes that representation of promise. We're also very good at what we do.
I agree with what you said, it continues to be validating for the space. it's large. If anything, you're starting to see MSPs enter co-managed business and take on some government EDU and enterprise business, we'll always stick with the MSPs, but there's sort of opportunity that flows in both directions. When you think about why we win, we save the MSP time, we're highly secure, we have those long-term trusted partnerships and our tech is purpose-built for MSPs, not converted direct enterprise CIO features, but purpose-built for MSPs.
And lastly, we leave them a great margin opportunity, which is so key to them really becoming your channel partner, right? That is the sales team. It's not selling to them. And that's what's so hard to break in the mentality when you come from enterprise. So as you said, it's validating for the space and when we feel OK, not any real shift in the market.
Unknown speaker
Got it. And if I could sneak a second one in. When you look at news head plans, everyone's obviously talking about the labor shortage and challenges in acquiring talent. I know this is something you kind of touched on at DattoCon now.
But can you talk about the impact of labor shortage on MSPs in your business? And I guess there's multiple facets to that. So first, be curious how the labor shortages impacting MSPs and their end customers? I'd imagine it would be a significant tailwind to MSP demand. But second, also be curious for shortage is impacting your ability to hire talent at Datto?
Tim Weller -- Chief Executive Officer
Yes, there's three levels really, right? The SMB is definitely struggling to find tech talent, all talent. You've seen minimum wage prices going up even in terms of labor costs. That means they don't hire the tech talent. They're searching for MSPs at the same time when they're squeezed on tech and need more and more and more, and they're getting increasingly concerned about security.
You ripple that up one level, the MSP finds roll your own tech solutions to be less interesting than they did a couple of years ago because even if they're mentality as I'll take care of this myself, who's myself, the owner, operator? As you scale your MSP, you need more turnkey solutions and that's what's leading to Datto. And then third, as you said, it has been a challenging market for talent. But some combination of being a leader, being at scale, being public and working on very cool technical problems has allowed us to basically fill the seats this year. We've had a great year on talent, and our momentum is good there.
So I won't tell you that our talent acquisition team isn't working harder than ever. It's definitely the same market for everybody, but we've gotten what we need. And we think the net of all of those layers is a flow of opportunity toward us.
Unknown speaker
Perfect. Thanks Tim. Really appreciate it.
Operator
Your next question comes from the line of Edward Magi with Berenberg Capital. Your line is open.
Edward Magi -- Berenberg Bank -- Analyst
Thanks for the question guys. Congrats on excellent quarter. My first question relates to the comments made on Continuity for Azure. Can you talk about the market opportunity here? And how this product opens you up to an entirely new market of MSPs and SMBs with public cloud workloads that you possibly could not have addressed previously? Thanks.
Tim Weller -- Chief Executive Officer
Yes. I mean you answer the question there. We have not had an Azure solution. We think it's early.
But that said, there are surely some new MSPs that started in recent years that might have chosen to start in Azure. And there are surely some existing MSPs of ours who either took on clients that were already in Azure or they're down the road now of experimenting and starting to move some workloads to Azure. So while we overall think it's a new-ish market for SMBs and MSPs, we also see this as largely a net new opportunity for us. Now of course, we can also defend against anybody else who might have their eyes on our partner and client base and might have thought were vulnerable with Azure.
So there's a defense development, too. But largely at it's going to be a net new and very similar go-to-market, very similar unified dashboard, everything. It's a way to sort of just think about a different set of workloads. So it's expanded our market.
Edward Magi -- Berenberg Bank -- Analyst
Very helpful, very exciting. My second one here, we know that Datto was clearly broadcasted this focus on security as a key for growth. Are you far more than the platform beyond proactive and reactive defense? Is there anything you want to add with regard to other product areas that may align with business management tools for MSPs, including automation, payment and procure or any other solution areas?
Tim Weller -- Chief Executive Officer
Yes, it's interesting. We have framed everything for the better part of the year around the NIS framework in the different stages, and we've been signaling first, second last line of defense and trying to signal where our products are going for MSPs. But you're absolutely right. The minute you start moving your workloads into clouds, moving them to multi-location and now on a pandemic, moving them home, you're in this ultimate remote work environment.
And so Datto Networking, I think, is finally something people say, I understand why Datto went there. If the endpoints are scattered all over the world, you have to have strong networking. That has a strong security component. You won't be surprised to learn.
And then you hit on business management, we don't always think about that as security, but everything we've just described is certainly coming through a ticketing system that's sitting in our PSA tool, managing all those assets, you think about the first stage and this framework is around identity and discovery of assets. So the PSA is still playing. Commerce is still playing very, very well. It doesn't fit as well in what people think about as traditional security software.
But everything we do starts with security and asks how can we elevate our game there.
Edward Magi -- Berenberg Bank -- Analyst
Great.
Operator
Your next question comes from the line of Kirk Materne with Evercore ISI. Your line is open.
Unknown speaker
Yes. Thanks very much. This is Peter Burkly on for Kirk. Just for I mean, you guys obviously had another strong quarter of net new MSP adds.
So just hoping to unpack that a little bit, like how much is this related to the continued reopening of the economy as SMBs continue to look to digitize their turning to you versus are you seeing some of these newer security offerings, granted there very early and they're add-on products, not stand-alone? But are you seeing that security maybe pull in some net new MSPs that was the silver bullet that they were missing previously?
Tim Weller -- Chief Executive Officer
Yes, Peter, great question. We feel very good about the net adds in the quarter and really every quarter this year been we feel like we've returned to levels of growth in MSP net adds that are important for the future growth of the business. And so obviously, the net adds or net of the gross adds and the churn, churn last year was a little bit higher. That was what took the net adds down lower and churn obviously, this year has abated.
On your question of sort of what's bringing in the MSPs, it's actually an interesting question. If you think back even three or four years ago, new MSPs were coming in as BCDR partners, right? And our land and expand strategy as we get in with a product, MSPs join Datto at a fairly low ARR per MSP and then standardize on Datto product and spread that across their SMB customer base. And so that was the picture three or four years ago. Today, with the expansion of our suite of products, we're seeing a number of other products being that lead product that brings the MSP in the door.
And so you're touching on an important point that I think is only helping us in that marketplace to build new alliances with MSP partners.
Unknown speaker
Thanks so much.
Operator
Your next question is from Keith Bachman with BMO. Your line is open.
Unknown speaker
Hi. This is Adam Hollis on for Keith. So first, congrats on the quarter. But so first, I wanted to ask about the BitDam acquisition contribution to your Q4 revenue guide? And then secondarily, how should we think about that revenue contribution of BitDam now SaaS Defense as we look toward FY '22?
Tim Weller -- Chief Executive Officer
Sure, Adam. Good question, fair question. We're very little contribution to revenue in Q4, right? We just launched the SaaS Defense product, bookings starting to ramp, but we'll have very little impact on the revenue in Q4. And next year will still be fairly early days, but you've heard Tim talk about the sales motion there is an attached to SaaS Protection, which is our highest velocity sales product.
And so we're excited about the potential and the opportunity there. And again, still very early days to predict exactly what that trajectory will be, but we feel very good about it. And obviously, next year, we'll start to have an impact on the revenue numbers.
Unknown speaker
OK. Got it. That's helpful. Thank you.
That's it for me.
Operator
Your next question comes from the line of Greg Moskowitz with Mizuho. Your line is open.
Unknown speaker
Hi. Thanks. This is actually Matt on for Greg. So now that you have a productized multiple security offerings, have you given any thought as to where that bundling makes sense?
Tim Weller -- Chief Executive Officer
Without a doubt. And if you think about our first two here, Ransomware Detections bundled in with RMM and SaaS Defense is bundled them with SaaS Protection. But I think you would first expect us to extend those bundles. But again, in my earlier comments, I said we would definitely be looking at a more complete Datto security stack.
We're an open ecosystem company. We may have some other components in there, but yes, bundling will be important to the degree that it adds time savings and efficiency, convenience and in particular, efficacy for MSPs. That's the lens we use. But I would think there'll be some very interesting bundles ahead.
Unknown speaker
Great. And how is your Autotask PSA business this quarter?
Tim Weller -- Chief Executive Officer
John, I don't know if you want to add anything on that? Just Autotask PSA growth.
John Abbot -- Chief Financial Officer
Yes. I mean, we really had this quarter, contributions across the board, all products, all geographies were really strong. So we don't call out specific numbers for individual products, but good growth across the board.
Unknown speaker
All right. Thank you very much.
Operator
Your next question comes from the line of Nehal Chokshi with Northland Capital Markets. Your line is open.
Nehal Chokshi -- Northland Securities --Analyst
Yes. Thank you and congrats on acceleration to 20% year-over-year growth on the ARR. The 200 basis points there, what was the biggest driver of the acceleration between, let's say, gross retention, MSP growth upsell and new MSP customers?
John Abbot -- Chief Financial Officer
Yes. Nehal, thanks for the question. Our business model, the real driver is the sell-through, right? And so while the net new MSP additions are planning seeds for the longer-term growth, it's that sell-through motion that's the real driver. And so it's the expansion with existing MSPs, the ARR per MSP growth that really drives it sort of in the current periods.
And as I said earlier, we were seeing -- we saw strength across all products, all geographies on that front. So...
Nehal Chokshi -- Northland Securities --Analyst
Got it. Great. Thank you. And then what's the rationale for guiding to a 200 basis point deceleration in subscription revenue in the September, December quarter?
John Abbot -- Chief Financial Officer
Sorry, do you mind saying that one more time?
Nehal Chokshi -- Northland Securities --Analyst
What's the rationale for why you guys are guiding for a deceleration in the year-over-year ago with subscription revenue? So just post to 20%, and you're guiding to 17.5% for the December quarter. What's the rationale behind this deceleration?
John Abbot -- Chief Financial Officer
Yes. It's really about a constant currency view, right? On a constant currency basis, we see the business continuing to accelerate. It's just currency adjustments.
Nehal Chokshi -- Northland Securities --Analyst
OK. So just to be clear, what was the currency adjustment for subscription revenue in the September quarter then?
John Abbot -- Chief Financial Officer
In Q3, currency adjustment was 1.5%.
Nehal Chokshi -- Northland Securities --Analyst
Got it. OK. Understood. And then just for further clarity, June quarter, what was the tailwind on subscription revenue then?
John Abbot -- Chief Financial Officer
I've got that here, hold on. Q2 tailwind that was the peak, 4%. Q1, it was 3%.
Nehal Chokshi -- Northland Securities --Analyst
OK. Great. Yes. Thank you very much.
Congratulations.
Operator
Your next question is from Saket Kalia with Barclays. Your line is open.
Saket Kalia -- Barclays -- Analyst
Awesome. Hi guys. Thanks for taking my questions and squeezing me in. John, maybe just to start with you.
And I think you touched on this a little bit in the prior question. But that ARR per customer actually accelerated year on year off of not an easy comp, I would argue. And I know that ARR per customer can be a loaded metric. But can you just touch on what you think is driving that? I guess what I'm maybe seeing is you're not just adding more MSPs, but getting more ARR generation out of them.
Maybe you could just touch on that dynamic a little bit?
John Abbot -- Chief Financial Officer
Sure. Well, the new MSPs we add will come in at a much lower ARR per MSP, right? And so I mean you could see a quarter if we had huge MSP additions where the ARR per MSP in total could come down, but that probably be a good problem to have. But the existing MSPs, that increase, it really reflects the recovery in our net revenue retention that we've talked about as well. You may remember pre-pandemic, that was at 119%.
We talked about that it was going to bottom out at Q4 and Q4-Q1 time period, which it did. We reported 111% in Q4. And each quarter since then, it's been marching steadily back upwards toward those pre-pandemic levels. So it really is that growth with those existing MSPs, selling them additional products, then selling more Datto solutions across their SMB base and obviously expanding their SMB customer base, which we work hand-in-hand with them to do.
Saket Kalia -- Barclays -- Analyst
Got it. Got it. That's very helpful. Tim, maybe for you, and apologies if this question was asked earlier.
But on the Datto Azure product, understanding that it's still very early, how do you sort of think about the ARR impact there, maybe comparing it to BCDR? And I realize that, that may very well be apples and oranges. But is there a way that you think about sort of, I don't know, per workload or per MSP type of ARR per customer for Azure versus traditional BCDR is it a higher-value product? Is it lower value? Is it similar?
Tim Weller -- Chief Executive Officer
Yes. I know what you're grasping at. We're maybe five, six weeks into this thing. So a little early to draw a trend line, but we thought deeply about this and more importantly, interviewed 100 plus partners on this.
The opening line is very similar. There's no reason to think a workload that's on-premise or a virtual machine and an MSP data center looks meaningfully different in Azure. Certainly, the value the MSP is willing to pay to protect that workload will be similar. I think there are some cases that are dependent on ratios of data, applications, performance parameters that might make it a little higher, a little lower.
So I don't think you're getting complete apples-to-apples on a SKU basis. But we became much more optimistic earlier this year. And I reported this, I think, on our Q1 call that the opportunity out of per workload per client per MSP basis, as you described, is not lower that we actually are not afraid of migrations, for example. And then what we think is going to be very interesting is Azure should be more efficient for MSPs, and we think it's a fantastic sandbox for product innovation.
And so we just need to be careful to not get ahead of ourselves, right? Day one, it's all about getting that first 100, 1,000, 5,000, you're trying to really get the MSP base built, get them comfortable using it to all their net new Azure just automatically comes to us. And we achieved that with our on-premise and virtual data center solutions. We have so many MSPs now. You saw that 100,000-plus ARR count with so many MSPs that have just standardized on Datto.
And I think that, to me, is the goal of 2022 is just get that army of sellers that has standardized on a continuity from Microsoft Azure. So that's how we're thinking about it, right? And so what's the ARR opportunity there? The same or bigger, and it will just keep shifting toward that cloud as time goes on.
Saket Kalia -- Barclays -- Analyst
Thanks guys.
Operator
[Operator instructions] Your next question comes from Fred Havemeyer with Macquarie. Your line is open.
Fred Havemeyer -- Macquarie -- Analyst
Hi guys. It's Fred. I wanted to ask, in the past, we've talked about how MSPs are a chatty group of customers in a pretty tight community. And it seems like many MSPs have been chatting about some of the shortcomings of some other products that they've been using in the marketplace.
I wanted to ask, generally, of those net new MSPs that you're seeing coming on to Datto's platform this year, where have they been coming from exactly? Are they wins from competitors primarily? Are you addressing more white space in the market? And just any sort of context you can offer around all this would be very helpful. Thank you.
Tim Weller -- Chief Executive Officer
Yes. I think it's a little different in each product. We've been fairly unimpeachable on performance in Continuity for many years. So I think there is always a question of, are they ready to pay for the very best turnkey solution? As I said, the labor shortage probably helps us.
So that might be a little bit organic net new where they might have been rolling their own solution. Certainly, as people move upmarket, they come off of lower end, backup-only products and come into our sort of world. We're absolutely taking share in RMM. And I've said before, we're probably No.
4 or No. 5, somewhere in there on ARM, but have definitely been taking share for several years from a couple of the larger players. And I think that's going to be true in a couple of our other faster-growing product lines as well. So it's definitely not a zero-sum game, though every one of these markets is growing.
And I think on the back of the pandemic now has kind of reaccelerated as you sort of get into the details. So...
Fred Havemeyer -- Macquarie -- Analyst
I appreciate it. Thank you.
Operator
There are no further questions at this time. I will turn the call back over to Mr. Tim Weller.
Tim Weller -- Chief Executive Officer
Well, great. We're at the top of the hour. Thank you all for your interest for the great questions, and we hope to see a large number of you at our Investor Day in just about a month. Watch the IR website for details.
Take care.
Operator
[Operator signoff]
Duration: 68 minutes
Call participants:
Ryan Burkart -- Director of Investor Relations
Tim Weller -- Chief Executive Officer
John Abbot -- Chief Financial Officer
Sanjit Singh -- Morgan Stanley -- Analyst
Matt Swanson -- RBC Capital Markets -- Analyst
Unknown speaker
Edward Magi -- Berenberg Bank -- Analyst
Nehal Chokshi -- Northland Securities --Analyst
Saket Kalia -- Barclays -- Analyst
Fred Havemeyer -- Macquarie -- Analyst
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Datto Holding Corp. (MSP) Q3 2021 Earnings Call Transcript - Motley Fool
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