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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number 001-39637 
DATTO HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 81-3345706
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
101 Merritt 7
Norwalk,CT06851
(Address of principal executive offices)
(Zip Code)
888-995-1431
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading
Symbol(s)
 Name of each exchange
on which registered
Common Stock, $0.001 par value MSP The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒  No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer   Accelerated filer  
Non-accelerated filer    Smaller reporting company  
   Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes     No  ☒
At April 30, 2022, there were approximately 165,211,487 shares of the Registrant’s Common Stock outstanding (excluding treasury shares of 362,126).



TABLE OF CONTENTS
 
  Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
OTHER AVAILABLE INFORMATION
Please note that in addition to filing our periodic and current reports, we may announce material business and financial information to our investors using filings we make with the Securities and Exchange Commission (“SEC”), webcasts, press releases, conference calls, and our investor relations website which can be found at www.investors.datto.com. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We use these media, including our website, to communicate with our stockholders and the public about our company. It is possible that the information that we make available through these media may be deemed to be material information. We therefore encourage investors and others interested in our company to review all such media.
The information contained on the website referenced in this Quarterly Report on Form 10-Q is not incorporated by reference into this filing, and the website address is provided only as a reference.

2


PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
DATTO HOLDING CORP.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

3


DATTO HOLDING CORP.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
March 31,
2022
December 31,
2021
ASSETS
Current assets
Cash and cash equivalents$191,188 $221,421 
Restricted cash1,637 1,319 
Accounts receivable, net13,419 12,870 
Inventory43,913 34,901 
Prepaid expenses and other current assets44,490 39,456 
Total current assets294,647 309,967 
Property and equipment, net108,475 106,577 
Operating lease assets31,994 31,003 
Goodwill1,172,860 1,141,726 
Intangible assets, net292,568 287,605 
Other assets89,901 85,313 
Total assets$1,990,445 $1,962,191 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$15,227 $9,997 
Accrued expenses and other current liabilities56,125 59,553 
Deferred revenue20,274 20,356 
Total current liabilities91,626 89,906 
Deferred revenue, noncurrent3,293 3,341 
Deferred income taxes22,725 24,955 
Operating lease liabilities, noncurrent30,761 31,332 
Other long-term liabilities762 715 
Total liabilities149,167 150,249 
Commitments and contingencies (Note 8)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value; 50,000,000 authorized at March 31, 2022 and December 31, 2021; no shares issued or outstanding at March 31, 2022 or December 31, 2021
  
Common stock, $0.001 par value; 500,000,000 shares authorized at March 31, 2022 and December 31, 2021; 164,891,735 and 163,991,681 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively (inclusive of treasury stock)
165 164 
Additional paid-in capital1,852,073 1,829,957 
Treasury stock, at cost; 362,126 shares at March 31, 2022 and December 31, 2021
(3,621)(3,621)
Accumulated deficit(5,845)(13,792)
Accumulated other comprehensive income (loss)(1,494)(766)
Total stockholders’ equity1,841,278 1,811,942 
Total liabilities and stockholders’ equity$1,990,445 $1,962,191 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

DATTO HOLDING CORP.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
 
 Three Months Ended March 31,
 20222021
Revenue:
Subscription$160,513 $135,590 
Device9,516 8,385 
Professional services and other752 934 
Total revenue170,781 144,909 
Cost of revenue:
Subscription25,660 20,930 
Device12,608 9,498 
Professional services and other1,783 1,502 
Depreciation and amortization9,399 6,625 
Total cost of revenue49,450 38,555 
Gross profit121,331 106,354 
Operating expenses:
Sales and marketing39,862 31,926 
Research and development33,582 22,474 
General and administrative32,569 24,621 
Depreciation and amortization7,269 6,570 
Total operating expenses113,282 85,591 
Income from operations8,049 20,763 
Other (income) expense:
Interest expense122 102 
Other income, net(672)(19)
Total other (income) expense(550)83 
Income before income taxes8,599 20,680 
Provision for income taxes(652)(5,394)
Net income$7,947 $15,286 
Net income per share attributable to common stockholders:
Basic$0.05 $0.09 
Diluted$0.05 $0.09 
Weighted-average shares used in computing net income per share:
Basic164,081,628 161,066,404 
Diluted167,535,063 164,734,402 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

DATTO HOLDING CORP.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 Three Months Ended March 31,
 20222021
Net income$7,947 $15,286 
Other comprehensive income (loss):
Currency translation adjustment(728)(1,012)
Total comprehensive income$7,219 $14,274 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

DATTO HOLDING CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
 
 Common StockTreasury
Stock
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at January 1, 2022163,991,681 $164 $(3,621)$1,829,957 $(13,792)$(766)$1,811,942 
Stock-based compensation— — — 12,613 — — 12,613 
Shares issued upon exercise of stock options and vesting of restricted stock units739,176 1 — 6,242 — — 6,243 
ESPP share purchases160,878 — — 3,261 — — 3,261 
Other comprehensive loss— — — — — (728)(728)
Net income— — — — 7,947 — 7,947 
Balance at March 31, 2022164,891,735 $165 $(3,621)$1,852,073 $(5,845)$(1,494)$1,841,278 
 
 Common StockTreasury
Stock
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at January 1, 2021161,420,016 $161 $(3,621)$1,755,387 $(65,226)$1,767 $1,688,468 
Stock-based compensation— — — 11,511 — — 11,511 
Shares issued upon exercise of stock options and vesting of restricted stock units19,139 — — 117 — — 117 
Other comprehensive loss— — — — — (1,012)(1,012)
Net income— — — — 15,286 — 15,286 
Balance at March 31, 2021161,439,155 $161 $(3,621)$1,767,015 $(49,940)$755 $1,714,370 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7

DATTO HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Three Months Ended March 31,
 20222021
OPERATING ACTIVITIES
Net income$7,947 $15,286 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation8,862 7,461 
Amortization of acquired intangible assets7,806 5,734 
Amortization of debt issuance costs84 84 
Reserve for inventory obsolescence375 36 
Non-cash operating lease expense1,926 1,870 
Stock-based compensation12,613 11,511 
Provision for expected credit losses485 1,211 
Deferred income taxes(2,607)4,717 
Unrealized foreign exchange(298)(626)
Changes in operating assets and liabilities:
Accounts receivable(760)(160)
Inventory(9,399)(5,559)
Prepaid expenses and other current assets(4,951)(3,820)
Other assets(4,253)(4,083)
Accounts payable, accrued expenses and other(2,158)3,535 
Deferred revenue(602)(2,030)
Net cash provided by operating activities15,070 35,167 
INVESTING ACTIVITIES
Purchase of property and equipment(10,511)(10,681)
Acquisition of business, net of cash acquired(43,521)(45,486)
Net cash used in investing activities(54,032)(56,167)
FINANCING ACTIVITIES
Repayments of debt and capital leases(28)(28)
Capitalized transaction costs (414)
Proceeds from stock option exercises6,239 177 
Proceeds from employee stock purchase plan share purchases3,261  
Net cash provided by (used in) financing activities9,472 (265)
Effect of exchange rate changes on cash and cash equivalents (425)46 
Net decrease in cash and cash equivalents (29,915)(21,219)
Cash and cash equivalents and restricted cash, beginning of year222,740 170,413 
Cash and cash equivalents and restricted cash, end of period$192,825 $149,194 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents$191,188 $147,819 
Restricted cash$1,637 $1,375 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes$816 $226 
Cash paid for interest$93 $ 
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of property and equipment included in accounts payable$400 $271 
Unpaid initial public offering costs in total current liabilities$ $270 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8

DATTO HOLDING CORP.

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9

DATTO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.Description of Business, Basis of Presentation and Principles of Consolidation

Description of Business
Datto Holding Corp. (“Datto Holding”) provides security and cloud-based software solutions purpose-built for delivery through the managed service provider (“MSP”) channel to small and medium businesses (“SMB”). Unless the context otherwise indicates or requires, references to “Datto”, “we,” “us,” “our” and “the Company” shall refer to Datto Holding and its wholly-owned subsidiaries as a consolidated entity.

The Company’s platform enables its MSP partners to serve the SMB information technology market and includes mission-critical cloud-based software and technologies 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. The Company typically has no contractual relationship with the SMBs and considers its MSP partners to be the customers. By selling through the MSP channel, the Company is able to cost-effectively scale the reach of the Company’s solutions and support the global requirements of SMBs without a direct-to-SMB sales and support model.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), consistent in all material respects with those applied in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022 (the “Annual Report”). The condensed consolidated financial statements include the Company's accounts and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company's condensed consolidated financial statements are unaudited but include all adjustments of a normal recurring nature necessary for a fair presentation of the quarterly results. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for any other interim period or for any other future year. The Company's condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in the Annual Report.

Datto Holding owns 100% of Merritt Holdco, Inc. (“Merritt Holdco”), which owns 100% of Datto, Inc., the Company’s primary operating company. Datto Holding has no operations or significant assets or liabilities other than its investment in Merritt Holdco. Accordingly, Datto Holding is dependent upon distributions from Merritt Holdco to fund any activity, including the payment of dividends. All obligations under Datto’s 2020 Credit Agreement, as defined in Note 9. Debt, are guaranteed by Merritt Holdco and certain direct and indirect subsidiaries of Datto, Inc.

As of March 31, 2022, funds controlled by Vista Equity Partners (“Vista”) owned approximately 69.1% of the Company’s outstanding common stock, excluding treasury shares. As a result, the Company is a “controlled company” under New York Stock Exchange (“NYSE”) corporate governance rules. Sales to and purchases from as well as balances due to or from Vista and its portfolio companies as of and for the three months ended March 31, 2022 and 2021, respectively, were immaterial.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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 period. The Company bases its estimates on historical experience and also on assumptions that management believes are reasonable. Actual results could differ materially from those estimates because of risks and uncertainties, including uncertainty in the economic environment resulting from the continuing global impact of the COVID-19 pandemic.



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2.Significant Accounting Policies

Summary of Significant Accounting Policies

There have been no material changes to the Company's significant accounting policies as of and for the three months ended March 31, 2022, as compared to the significant accounting policies described in the Company's Annual Report. The following information updates certain disclosures in the Company's Annual Report.

Fair Value Measurements

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value of assets and liabilities into three broad levels as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date,
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly,
Level 3 – Unobservable inputs for the asset or liability.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs.

The Company's cash and cash equivalents as of March 31, 2022 include money market funds, which are valued using Level 1 inputs. The Company may also hold cash and cash equivalents in highly liquid pooled funds and has elected to apply the net asset value practical expedient provided by Accounting Standards Codification 820 – Fair Value Measurement to determine the fair value. As of March 31, 2022, the Company held $25.0 million of money market funds. The Company did not hold any money market funds as of December 31, 2021.

Accounts Receivable, Net of Allowance for Expected Credit Losses

Trade accounts receivable are recorded at the invoiced amount. Accounts receivable are presented net of an estimated allowance for expected credit losses. The Company maintains an allowance for expected credit losses as a reduction of trade accounts receivable’s amortized cost basis to present the net amount expected to be collected.

The following table summarizes the activity of the allowance for expected credit losses (in thousands):

 Amount
Balance as of December 31, 2021$1,918 
Provision for expected credit losses140 
Net reductions and other(6)
Balance as of March 31, 2022$2,052 

Unbilled accounts receivable are included in the accounts receivable balances and represent revenue earned, but the amount is not contractually billable as of the balance sheet date. The unbilled accounts receivable balance is principally invoiced within the following month. As of March 31, 2022 and December 31, 2021, unbilled accounts receivable, net was $2.0 million and $1.6 million, respectively.

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3.Revenue Recognition
Disaggregation of Revenue

The following tables disaggregate revenue by service and timing of recognition (in thousands):

 Three Months Ended March 31, 2022
 DeviceProfessional
Services
SubscriptionTotal
Timing of revenue recognition:
Recognized at a point in time$9,516 $ $ $9,516 
Recognized over time 752 160,513 161,265 
Total$9,516 $752 $160,513 $170,781 
 
 Three Months Ended March 31, 2021
 DeviceProfessional
Services
SubscriptionTotal
Timing of revenue recognition:
Recognized at a point in time$8,385 $ $ $8,385 
Recognized over time 934 135,590 136,524 
Total$8,385 $934 $135,590 $144,909 

The following table summarizes sales to customers by geography (in thousands):
 
 Three Months Ended March 31,
 20222021
United States$119,097 $102,042 
United Kingdom17,759 14,822 
Other international33,925 28,045 
Total$170,781 $144,909 

Revenue by geography is determined by the billing address for the customer.

Contract Balances

Contract assets represent amounts for which the Company has recognized revenue, generally for device sales or contracts which contain free subscription periods pursuant to its revenue recognition policy, for contracts that have not yet been fully invoiced to customers where there is a remaining performance obligation. Contract assets relate to contractual arrangements which contain both a subscription and a device, a free subscription period or a professional service performance obligation. Amounts are recorded as a current asset or a non-current asset based on the amounts anticipated to be billed within one year of the balance sheet date. Current contract assets, net of $13.5 million and $12.0 million were included in prepaid expenses and other current assets as of March 31, 2022 and December 31, 2021, respectively. Non-current contract assets, net of $11.5 million and $10.8 million were included in other assets as of March 31, 2022 and December 31, 2021, respectively.

Contract liabilities consist of customer payments in advance of revenue being recognized. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current and the remaining portion is recorded as deferred revenue, noncurrent on the condensed consolidated balance sheets. Deferred revenue as of March 31, 2022 and December 31, 2021 was $23.6 million (of which $3.3 million was classified as non-current) and $23.7 million (of which $3.3 million was classified as non-current), respectively.

The following table summarizes the activity of the Company's current and noncurrent deferred revenue balances for the three months ended March 31, 2022 and 2021 (in thousands):
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Three Months Ended March 31,
 20222021
Beginning balance$23,697 $27,085 
Deferred revenue recognized(8,483)(10,209)
Amounts deferred7,913 8,324 
Acquired with Infocyte442 
Foreign currency translation and other(2)61 
Ending balance$23,567 $25,261 

Contract Acquisition Costs

The Company capitalizes commission expenses paid to internal sales personnel for obtaining customer contracts, using a portfolio approach. Contract acquisition costs are included in other assets on the condensed consolidated balance sheets. Contract acquisition costs as of March 31, 2022 and December 31, 2021 were $66.7 million and $63.3 million, respectively.

Remaining Performance Obligations

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2022 were approximately $399.4 million, of which greater than 50% is anticipated to be recognized in the next twelve months, with substantially all revenue related to performance obligations to be recognized within thirty-six months. The amount excludes month-to-month contracts.

4.Inventory
Inventory, net of the reserves for obsolescence, consisted of the following (in thousands):
March 31,
2022
December 31,
2021
Purchased components and builds in process$36,967 $29,712 
Finished goods6,946 5,189 
Total inventory$43,913 $34,901 

5.Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
Estimated
Useful Life
(in Years)
March 31,
2022
December 31,
2021
Servers3-5$137,465 $127,710 
Leasehold improvements(a)31,613 31,450 
Computer equipment3-517,385 15,655 
Internally developed software317,135 15,109 
Furniture and fixtures56,272 6,263 
Purchased software31,233 1,178 
Vehicles5135 134 
Total property and equipment211,238 197,499 
Less: accumulated depreciation and amortization(102,763)(90,922)
Total property and equipment, net$108,475 $106,577 
(a) The shorter of the remaining lease term or useful life.

The Company capitalized $2.0 million and $1.3 million of internally developed software costs during the three months ended March 31, 2022 and 2021, respectively.

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Depreciation expense included in cost of revenue and operating expenses was $6.3 million and $2.6 million, respectively, for the three months ended March 31, 2022, and $5.3 million and $2.2 million, respectively, for the three months ended March 31, 2021.

6.Acquisitions

Infocyte Acquisition

In January 2022, the Company acquired threat detection and response company Infocyte, Inc. ("Infocyte"), extending Datto’s security capabilities that protect, detect, and respond to cyberthreats found within endpoints and cloud environments. The business combination was accounted for under the acquisition method of accounting. The consideration paid of approximately $43.5 million was allocated to the tangible and intangible assets acquired and liabilities assumed based on a preliminary assessment of the fair values as of the acquisition date, which is subject to adjustment over the measurement period. The preliminary allocation of the purchase consideration was as follows (in thousands):
Assets acquired
Other current and noncurrent assets$374  
Definite lived intangible assets12,700  
Goodwill31,071  
Total assets acquired$44,145 
Total liabilities assumed$624 
Purchase consideration, net of cash acquired$43,521  

The definite lived intangible assets consist of acquired developed technology of $10.5 million and partner relationships of $2.2 million. Goodwill resulting from the Infocyte acquisition is not expected to be deductible for tax purposes.
General and administrative expense within the condensed consolidated statements of operations includes $0.2 million of costs incurred in relation to the Infocyte acquisition in the three months ended March 31, 2022.
BitDam Acquisition
In March 2021, the Company acquired BitDam Ltd., an Israel-based cyber threat detection company (“BitDam”). The purchase consideration was approximately $45.5 million.

7.Goodwill and Intangible Assets, Net
Goodwill

The following table summarizes the activity of the Company's goodwill balance (in thousands):
 Amount
Balance at December 31, 2021$1,141,726 
Infocyte acquisition31,071 
Foreign currency translation63 
Balance at March 31, 2022$1,172,860 


Definite-Lived Intangible Assets

The following tables sets forth the gross carrying value and net carrying value of definite-lived intangible assets (in thousands):

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 March 31, 2022
 Gross Carrying ValueAccumulated
Amortization
Net
Carrying
Value
Weighted
Average
Remaining
Life
Technology$122,453 $(38,394)$84,059 8.1
Tradenames126,757 (28,789)97,968 15.6
Partner relationships174,510 (63,969)110,541 9.5
Total$423,720 $(131,152)$292,568 


 December 31, 2021
 Gross Carrying ValueAccumulated
Amortization
Net
Carrying
Value
Weighted
Average
Remaining
Life
Technology$111,876 $(35,227)$76,649 8.8
Tradenames126,757 (27,173)99,584 15.9
Partner relationships172,287 (60,915)111,372 9.9
Total$410,920 $(123,315)$287,605 

Amortization expense related to intangible assets included in cost of revenue and operating expenses was $3.1 million and $4.7 million, respectively, for the three months ended March 31, 2022, including $0.5 million and $0.2 million, respectively, resulting from the Infocyte acquisition. Amortization expense related to intangible assets included in cost of revenue and operating expenses was $1.3 million and $4.4 million, respectively, for the three months ended March 31, 2021.

The Company's acquired intangible assets are amortized over periods ranging from 2 to 20 years, depending on their estimated useful lives. As of March 31, 2022, estimated amortization expense for intangible assets is as follows (in thousands): 

Periods Ended December 31,
Remainder of 2022$23,621 
202331,345 
202430,242 
202529,792 
202625,921 
Thereafter151,647 
$292,568 

8.Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company believes there is no litigation or other liabilities for loss contingencies pending, individually or in the aggregate, that could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

9.Debt

On October 23, 2020, Datto, Inc., as borrower (the “Borrower”), and certain direct and indirect wholly-owned subsidiaries of Datto, entered into a credit agreement with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent (the "2020 Credit Agreement"). The 2020 Credit Agreement is guaranteed by certain direct and indirect subsidiaries of Datto (the “Guarantors,” and, together with the Borrower, the “Loan Parties”)
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and is supported by a security interest in substantially all of the Loan Parties’ personal property and assets, subject to customary exceptions, as defined in the 2020 Credit Agreement.

The Company has a $200.0 million revolving credit loan under its 2020 Credit Agreement. As of March 31, 2022, the Company was in compliance with all applicable covenants. As of March 31, 2022 and December 31, 2021, the 2020 Credit Agreement was undrawn, with the exception of $1.9 million of outstanding letters of credit.

10.Stock-Based Compensation

The Company has equity awards outstanding under the Datto Holding Corp. Omnibus Incentive Plan (the “2020 Plan”), the 2017 Stock Option Plan (the “2017 Datto Plan”), and the Autotask Superior Holdings 2013 Stock Option Plan (the “Autotask Plan”). Equity award activity under these plans is summarized below.

Stock Options

The following table summarizes stock option activity related to all plans during the three months ended March 31, 2022 (in thousands, except share and per share amounts):
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
Options outstanding at December 31, 20217,055,006 $10.80 7.1$109,720 
Options exercised(568,481)$10.81 
Options forfeited & expired(69,932)$11.27 
Options outstanding at March 31, 20226,416,593 $10.79 6.6$102,208 
Options vested and exercisable at March 31, 20224,306,236 $10.26 6.2$70,887 

Options outstanding at March 31, 2022 include 80,000 issued under the 2020 Plan, 6,086,041 issued under the 2017 Datto Plan, and 250,552 issued under the Autotask Plan.

The total fair value of stock options that vested during three months ended March 31, 2022 and 2021 was $4.7 million and $8.1 million, respectively.

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 was $8.1 million and $0.3 million, respectively.

As of March 31, 2022, unrecognized compensation expense related to outstanding stock options was $16.8 million, which is expected to be recognized over the remaining weighted average term of 1.6 years.

Restricted Stock Units

The following table summarizes RSU activity during the three months ended March 31, 2022:

 Number of
Shares
Weighted Average
Grant Date Fair Value
 
RSUs outstanding at December 31, 20214,185,843$25.71  
RSUs granted1,150,872$24.70 
RSUs vested(170,783)$25.69 
RSUs forfeited(201,153)$25.72 
RSUs outstanding at March 31, 20224,964,779$25.48  

All RSUs outstanding at March 31, 2022 were issued under the 2020 Plan.

While the majority of RSUs vest over a four-year period, the Company also issued RSUs with performance-based vesting conditions in connection with the acquisitions of BitDam in 2021 and Infocyte in 2022, for which stock-based compensation expense is being recorded based on the expected achievement of the performance targets. As of
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March 31, 2022, unrecognized compensation expense related to all outstanding RSUs was $109.4 million, which is expected to be recognized over the remaining weighted average term of 3.2 years.

Shares Available for Future Grants

The following table summarizes the shares available for future grants under the 2020 Plan:
 Shares Available for
Future Grant
Balance at December 31, 202124,380,324 
Annual authorization increase8,199,584 
Awards granted(1,150,872)
Awards forfeited or expired201,241 
Balance at March 31, 202231,630,277 

Datto 2021 Employee Stock Purchase Plan

The Datto Holding Corp. 2021 Employee Stock Purchase Plan (“ESPP”) provides employees with the option to purchase Datto common stock at a purchase price equal to 85% of the fair market value of Datto common stock on the first or last day of the offering period, whichever is lower, subject to certain plan provisions and tax regulations. As of March 31, 2022, 4,700,580 shares were available for issuance under the ESPP.

Approximately 160,878 shares were issued in January 2022 for total consideration of $3.3 million, which was accumulated over the offering period through employee payroll withholdings. The amount of withholdings from employees held by the Company as of March 31, 2022 and December 31, 2021, were $1.7 million and $3.2 million, respectively, which are included in accrued expenses and other current liabilities within the condensed consolidated balance sheets.

The fair value of shares issued under the ESPP is estimated on the grant date using the Black-Scholes option pricing model. As of March 31, 2022, unrecognized compensation expense related to the ESPP was $0.8 million, which is expected to be recognized over the remaining weighted average term of 0.3 years.
Stock-Based Compensation Expense
Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
 Three Months Ended March 31,
 20222021
Cost of revenue—subscription$1,020 $1,228 
Cost of revenue—device36 62 
Cost of revenue—professional services and other66 103 
Sales and marketing2,588 2,295 
Research and development6,174 4,874 
General and administrative2,729 2,949 
Total stock-based compensation expense$12,613 $11,511 

The table reflects stock-based compensation expense based upon the functional role of the holder.

11.Income Taxes
The Company incurred a provision for income taxes of $0.7 million and $5.4 million for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 was 7.6%, reflecting the favorable impact of taxes in certain foreign jurisdictions, including the benefit of the release of valuation allowances, a favorable impact of U.S. state income taxes resulting from a change in tax law, and the tax benefit related to employee stock option exercises.
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12.Net Income per Share
Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share attributable to common stockholders is calculated by giving effect to all potential shares of common stock, including the Company's outstanding stock options, common stock related to unvested RSUs, and the estimated number of shares to be issued under the ESPP based upon the enrollment and stock price as of March 31, 2022, to the extent such potential shares are dilutive. For the purpose of computing diluted earnings per share, options with a performance-based vesting condition are considered contingently issuable, and such contingent shares are included in the denominator for computing diluted net income per share only once the performance condition is met, and only to the extent such options are dilutive. The calculation of basic and diluted income per share is as follows (in thousands, except share and per share amounts):
 Three Months Ended March 31,
 20222021
Numerator:
Net income attributable to common stockholders$7,947 $15,286 
Denominator:
Weighted-average shares used in computing net income per share attributable to common stockholders
Basic164,081,628 161,066,404 
Total dilutive effect of outstanding equity awards including the ESPP3,453,435 3,667,998 
Diluted167,535,063 164,734,402 
Net income per share attributable to common stockholders
Basic$0.05 $0.09 
Diluted$0.05 $0.09 

For the three month periods ended March 31, 2022 and 2021 there were 508,923 and 634,330, respectively, of weighted-average outstanding options and RSUs that were excluded from the computation of diluted net income per share attributable to common stockholders for the period presented because including them would have been antidilutive.

13.Subsequent Events

On April 11, 2022, Datto entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Knockout Parent Inc., a Delaware corporation and a wholly owned subsidiary of Kaseya Inc. (“Kaseya”), and certain other parties, providing for the acquisition of the Company by Kaseya, subject to the terms and conditions set forth therein (the “Merger”). Under, and subject to, the terms of the Merger Agreement, Datto stockholders will have the right to receive $35.50 per share in cash, without interest. The Board of Directors of the Company has unanimously approved the Merger Agreement and the transactions contemplated thereby and the necessary stockholder approval has been duly executed and delivered, adopting and approving the Merger Agreement and the transactions contemplated thereby. The obligations of the parties to complete the proposed Merger are subject to customary closing conditions, including, among others, the receipt of applicable regulatory approvals. The proposed Merger is expected to close during the second half of 2022.






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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or other events. For example, all statements we make relating to the proposed Merger with Kaseya, our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

uncertainties associated with the proposed Merger with Kaseya;
the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
the inability to complete the proposed Merger due to the failure to satisfy conditions to completion of the proposed Merger, including the receipt of applicable approvals and clearances by government authorities;
risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger;
the effect of the announcement of the proposed Merger on our relationships with our customers, operating results and business generally;
the risk that the proposed Merger will not be consummated in a timely manner or at all;
the costs of the proposed Merger if the proposed Merger is not consummated;
restrictions imposed on our business during the pendency of the proposed Merger;
potential litigation instituted against us or our directors challenging the proposed Merger;
our ability to recruit, retain and develop key employees and management personnel, including in light of the proposed Merger;
the continuing impacts on our operations and financial condition from the effects of the COVID-19 pandemic;
our ability to effectively compete;
fluctuations in our operating results;
our ability to sustain cash flows and profitability;
our ability to attract new managed service provider (“MSP”) partners;
our ability to sell additional products and subscriptions to our MSP partners;
the recognition of revenue from our subscription offerings;
the strength of the small and medium businesses (“SMB”) information technology (“IT”) market;
our ability to manage the ongoing growth of our business;
the risks associated with our current and future international operations, including the risks of expansion into new international markets;
the impact of volatility in the global economy; including heightened inflation, rising interest rates and the effects from the war in Ukraine;
the ability of our MSP partners to sell our products;
possible data losses or breaches experienced by MSP partners or their SMB customers using our products or solutions;
the risks associated with defects or vulnerabilities in our or our third-parties’ software, solutions, infrastructure and hardware;
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the impact of natural disasters, health pandemics, terrorism or other catastrophic events;
the impact of changes in SMBs’ IT needs and our ability to adapt our offerings;
our ongoing ability to utilize the application programming interfaces of products such as Microsoft 365 and Google Workspace;
our ability to realize benefits from our investment in research and development activities;
the impact of any manufacturing and logistics delays or pricing fluctuations relating to our manufacturing partners;
our ability to effectively manage our supply chain and inventory;
our dependence on a limited number of manufacturers for certain components of our products;
our ability to provide high quality technical support and the extent to which our MSP partners are able to provide satisfactory technical support to their SMB customers;
the risks related to our use of open source software in certain of our products and subscription offerings; 
our ability to meet our contractual commitments related to response time and service level, and the quality of professional services we provide;
the risks associated with indemnity provisions in some of our agreements;
the risks and uncertainties associated with our limited operating history;
the risks associated with past and future business acquisitions;
our ability to make expenditures in order to support additional growth;
the risk of negative publicity, legal liability or other expenditures which could result from the material stored on our servers;
the effects of interruptions or delays in services provided by our data centers or other third parties;
our reliance on technology and intellectual property licensed from other parties;
our ability to integrate our products with other operating systems, software applications, platforms and hardware;
the impact of claims by others that we infringe upon their proprietary technology or other rights;
the potential adverse impact of legal proceedings;
the risks associated with our indemnification obligations and the limitations of our director and officer liability insurance;
our ability to protect and enforce our intellectual property rights;
the ability of our MSP partners to access high-speed internet and the continued reliability of the internet infrastructure;
our ability to sustain market recognition of and loyalty to our brand;
our ability to maintain our corporate culture;
the impact of foreign currency exchange rate fluctuations;
the impact of fluctuations in interest rates;
we previously identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations;
our ability to develop and maintain proper and effective internal control over financial reporting;
the impact of changes in financial accounting standards or practices;
the accuracy of the estimates and judgments relating to our critical accounting policies;
the impact of tax consequences related to our domestic and international operations;
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the impact of changes in tax laws or regulations affecting us or our partners;
our ability to comply with governmental export controls and economic sanctions laws in connection with our international operations;
our ability to comply with legal requirements, contractual obligations and industry standards relating to security, data protection and privacy;
our ability to comply with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”);
our ability to comply with the Foreign Corrupt Practices Act (“FCPA”) and similar laws associated with our activities outside of the United States;
our ability to comply with the other government laws and regulations applicable to our business; and
other factors disclosed in the section entitled “Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 23, 2022.

We derive many of our forward-looking statements from our operating plans and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 23, 2022. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.

We caution you that the risks and uncertainties referenced above that may cause actual results to differ materially from those that we expected may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this filing are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 23, 2022. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause or contribute to these differences include, but are not limited to, those identified in this Quarterly Report and in our Form 10-K, particularly those discussed in the sections entitled “Risk Factors” and “Forward-Looking Statements.”

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 19,200 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 offerings include 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. Lastly, Datto's 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 2022, we acquired threat detection and response company Infocyte, extending Datto’s security capabilities that protect, detect, and respond to cyberthreats found within endpoints and cloud environments. During late 2021 we launched two new cloud-based solutions - Datto Continuity for Microsoft Azure ("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 and their SMB customers 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 of Israel-based cyber threat detection company BitDam in early 2021.

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Merger Transaction

On April 11, 2022, Datto entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Knockout Parent Inc., a Delaware corporation and a wholly owned subsidiary of Kaseya Inc. (“Kaseya”), and certain other parties, providing for the acquisition of the Company by Kaseya, subject to the terms and conditions set forth therein (the “Merger”). Under, and subject to, the terms of the Merger Agreement, Datto stockholders will have the right to receive $35.50 per share in cash, without interest. The Board of Directors of the Company has unanimously approved the Merger Agreement and the transactions contemplated thereby and the necessary stockholder approval has been duly executed and delivered, adopting and approving the Merger Agreement and the transactions contemplated thereby. The obligations of the parties to complete the proposed Merger are subject to customary closing conditions, including, among others, the receipt of applicable regulatory approvals. The proposed Merger is expected to close during the second half of 2022.

Our Business Model

Our 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.

Subscriptions for our BCDR products are priced based on service tier, which is determined by data storage capacity and data retention period. Subscriptions for Datto SaaS Protection and Datto SaaS Defense (together, SaaS Protection+) are priced based on the number of Microsoft 365 or Google Workspace employee accounts at the SMB domains that our MSP partners protect and data retention period. Networking subscriptions are priced based on the volume and type of networking solutions ordered. Endpoint Management subscriptions are priced per endpoint device at the SMB. 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, benefiting from the reach of our MSP partners for our sell-through products, and provide them with self-service options to upgrade service tiers, add additional units 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 of March 31, 2022, our annual run-rate revenue, or ARR, was $689.3 million, and our revenue for the three months ended March 31, 2022 was $170.8 million, of which approximately 94% was recurring subscription revenue. For the three months ended March 31, 2022, our net income was $7.9 million and our Adjusted EBITDA was $39.5 million.

As of March 31, 2021, our ARR was $572.5 million and our revenue for the three months ended March 31, 2021, was $144.9 million, of which approximately 94% was recurring subscription revenue. For the three months ended March 31, 2021, our net income was $15.3 million and our Adjusted EBITDA was $46.9 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 impact on our customers and suppliers, supply chain constraints, labor shortages, inflationary pressure and other factors.
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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

As discussed below, we believe continued favorable industry trends will contribute to the growth of our business, including: i) increased adoption by SMBs of digital and cloud-based technologies; ii) increasing complexity in IT, which impacts the ability of SMBs to evaluate, select and implement an optimal IT environment; iii) increased exposure and vulnerability of SMBs to security and regulatory risk, including cyberattacks; iv) lack of SMB sophistication to meet the expanding challenges of IT management; v) the continued trend of remote work, vi) educational organizations and governmental agencies using MSPs to provide IT services, and vii) the meaningful and increasing costs of downtime or data loss. The customer base of our partners continues to expand as a result of these trends and as evidenced by the anticipated 13.4% increase in available market reported by Frost & Sullivan during 2021.

Key Performance Metrics

In addition to our financial information presented in accordance with generally accepted accounting principles in the United States, or GAAP, 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 operating and strategic decisions.

MSP Partners

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 of March 31, 2022, we had approximately 19,200 MSP partners, a net increase of approximately 700 since December 31, 2021. 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
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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 March 31, 2022 and 2021:

As of March 31,
20222021$ Change% Change
 (dollars in millions)
ARR$689.3 $572.5 $116.8 20.4 %

Components of Results of Operations
Revenue

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 as 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 our MSP partners add more end customers and as the end-customers of 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 as we sell subscriptions to new and existing MSP partners who did not have our PSA solution and as our MSP partners with PSA subscriptions add employees who require seat licenses and as MSPs purchase Datto Commerce subscriptions.
 
Device. 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 and Endpoint 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 and Endpoint 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, personnel, shipping and logistics costs, as well as 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 implementations aim to ensure higher software utilization and positive customer satisfaction, in order to drive greater upsell opportunity and lower churn over time.

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Depreciation and amortization. Depreciation and amortization cost of revenue consists of depreciation of our Datto Cloud infrastructure and amortization of our acquired technology intangible assets.
 
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, provision for expected credit losses expense, travel expenses and costs for facilities. General and administrative expenses also include costs 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, and professional services fees, particularly related to audit services and compliance with the Sarbanes-Oxley Act.

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 (Income) expense

Interest expense

Interest expense consists of commitment fees under our credit facilities and the amortization of debt issuance costs, and to the extent we have outstanding borrowings, interest payments under our credit facilities. Our 2020 Credit Agreement provides a $200.0 million revolving credit facility. As of March 31, 2022, no amounts had been drawn under the 2020 Credit Agreement. See “Liquidity and Capital Resources—Credit Facilities” for additional details.

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Other (income) expense

Other (income) expense primarily consists of the net exchange (gains) or losses on foreign currency transactions, (gains) or losses from our money market funds and (gains) or losses on the disposal of assets.

Provision for income tax
Provision for income tax consists primarily of income taxes related to U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business.

Stock-Based Compensation

The functional role of the holder determines the financial statement line item within which stock-based compensation expense is recorded.

Condensed Consolidated Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods indicated:
 Three Months Ended March 31,
 20222021
 (in thousands)
Revenue:
Subscription$160,513 $135,590 
Device9,516 8,385 
Professional services and other752 934 
Total revenue170,781 144,909 
Cost of revenue:
Subscription (1)
25,660 20,930 
Device (1)
12,608 9,498 
Professional services and other (1)
1,783 1,502 
Depreciation and amortization9,399 6,625 
Total cost of revenue49,450 38,555 
Gross profit121,331 106,354 
Operating expenses:
Sales and marketing (1)
39,862 31,926 
Research and development (1)
33,582 22,474 
General and administrative (1)
32,569 24,621 
Depreciation and amortization7,269 6,570 
Total operating expenses113,282 85,591 
Income from operations8,049 20,763 
Other (income) expense: 
Interest expense122 102 
Other income, net(672)(19)
Total other (income) expense(550)83 
Income before income taxes8,599 20,680 
Provision for income taxes(652)(5,394)
Net income$7,947 $15,286 

(1)Includes stock-based compensation expense as follows:
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 Three Months Ended March 31,
 20222021
 (in thousands)
Cost of revenue—subscription$1,020 $1,228 
Cost of revenue—device36 62 
Cost of revenue—professional services and other66 103 
Sales and marketing2,588 2,295 
Research and development6,174 4,874 
General and administrative2,729 2,949 
Total$12,613 $11,511 
The following table sets forth our condensed 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):
 
 Three Months Ended March 31,
 20222021
Revenue:
Subscription94.0 %93.6 %
Device5.6 %5.8 %
Professional services and other0.4 %0.6