Backblaze, Inc. Q2 FY2024 Earnings Call

Good day, and welcome to the Backblaze Second Quarter 2024 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to hand the call to Mimi Kong, Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, and welcome to Backblaze's second quarter 2024 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Frank Patchel, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new features and offerings, the impact of price changes, partnerships and sales and marketing initiatives, our ability to compete effectively and manage our growth and our strategy to acquire new customers, and retain and expand our business with existing customers. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our quarterly report on Form 10-Q and our other financial filings. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will also be posted to our Investor Relations' page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR and gross customer retention. Thank you for joining us and I would now like to turn the call over to Gleb.

Thanks, Mimi. Good afternoon, everyone, and thank you for joining us today. We had a great second quarter with strong growth in both revenue and EBITDA, beating our guidance on both. Revenue grew 27% with 43% growth for B2 Cloud Storage. As you may have heard, various tech companies have talked about a difficult macro environment that was negatively impacting their business. However, we are not seeing that impact on our business. As our numbers show, we beat our Q2 guidance, guided strongly for Q3, and raised guidance for the year. So, let's talk about our business now. I'm going to start with three key areas of focus for us. First is our accelerated pace of innovation. In Q2, we continued to deliver new services that win us customers and open new markets with our launch of B2 Live Read. Second, we're growing our team in exciting ways. I'll tell you more about Jason Wakeam, our new Chief Revenue Officer; and Marc Suidan, our new CFO later in the call. Jason is well suited to help us accelerate our upmarket momentum and Marc to drive efficient growth. Finally, we are winning more deals with larger customers. I'll share stories from an AI company, an app developer, and an NFL team to explain how we're succeeding in our move upmarket. But for now, I'll quickly highlight that we grew the number of large customers we serve by 55% year-over-year. Now let me tell you more about each of these areas of focus. First, I'll begin with innovation. So why is innovation important? It helps us solve our customers' problems. It expands our strategic value to current and future customers, and it differentiates us in the market. In June, we launched B2 Live Read. This patent-pending cloud service lets customers access files while they're still being uploaded. Here's why this is really valuable for customers. Take, for example, a news reporter working in the field. If they want their in-house editors to work on the footage they're recording, like adding graphics or cutting something, the editors either need to be on-site to get direct access to the camera feed so they can edit it live or they need to pay for some expensive and complicated solutions to enable remote editing. With the live read, all of that goes away. The footage can start to be uploaded to Backblaze and producers anywhere in the world can start working with it before the upload is complete. No waiting, no complicated hardware or big price tags, no on-site producers necessary. We see a promising opportunity here. We innovated this technology, and we are the only company that offers it. We believe this functionality can help a broad set of customers, but we're initially focusing on media customers, such as broadcasters, event producers, and news outlets. We already have several industry leaders in media and entertainment, including Telestream, integrating live read into their products to bring this benefit to their customers. Whether it's live read or event notifications, which we announced last quarter or the integration we launched last month with Internet2, which gives large institutions easier and faster access to B2 cloud storage, or any of the numerous other innovations we've announced recently, we that drives customer value. Along with enhancing our products and services, we're also strengthening our team to take advantage of these opportunities. I'm excited to welcome Jason Wakeam as our Chief Revenue Officer. Jason has decades of experience building and guiding teams focused on helping customers with their data. He's led direct sales, channels, partnerships, and OEM groups at large tech companies, including HP and Microsoft and at growth-stage companies, Cloudera and SnapLogic. As CRO, he's bringing that experience to drive accelerated growth and upmarket momentum to Backblaze. As we mentioned on the last call, Nilay Patel, who previously served as our Vice President of Sales, will now lead our efforts on our AI opportunities. The great news is that the go-to-market teams are already generating significant momentum, especially when it comes to winning larger customers. At the end of the quarter, the number of customers contributing over $50,000 in ARR now stands at 115, a 55% increase over last year. Here's why these customers choose Backblaze. First, whether you look at our performance, reliability, security, or functionality, the strength of our platform and our continued innovation helps us win deals. Second, our support for open cloud solutions enables customers to build their businesses using the cloud services they prefer. And third, with free egress, no delete fees, no complex tiers, and pricing at just one-fifth the cost of traditional clouds, our total cost of ownership lets customers save a tremendous amount with which they can increase their margins or reinvest elsewhere in their business. Let me share a few examples of customers that chose Backblaze this quarter. In the AI space, companies have large volumes of data that they need to be able to store somewhere inexpensively, but that data has to be accessible immediately when it's needed. It also needs to be transferable without egress fees to a customer's desired GPU cloud. The characteristics of the Backblaze platform make it ideal for these AI use cases. A good illustration of this from Q2 is a company that uses AI to render 3D landscapes for major gaming franchises. They previously used both AWS and Azure but migrated all their data to Backblaze to simplify their storage platform, keep their data readily available, and decrease their storage spend by about $300,000 per year. We continue to win developer business also. In Q2, a photo storage and sharing app developer signed a $0.25 million ARR deal with us. When this developer is designing products and features, a major consideration is how the data is accessed. Because they were working within AWS storage tiers, they had to worry about retrieval fees, timing, and egress fees, which meant product decisions were driven by AWS's complicated pricing structure instead of by what customers wanted. With Backblaze's performance and pricing, they can now focus on building features that solve their customers' problems instead of AWS's data retrieval and pricing puzzles. In the media and entertainment space, you may remember that we shared the story of an NFL team that we won last quarter. In Q2, we won another $50,000 plus ARR deal with a different championship NFL team. This team had some footage in AWS, which had expensive retrieval fees and had other footage locked up in an older storage platform that used proprietary formats. They migrated to Backblaze and now have all their data in one easily accessible place that works seamlessly with their tools. Three last items before I hand off the call to Frank. First, I wanted to call out our recent inclusion in the Russell 2000 Index, which is another milestone in the company's growth. Second, as we announced in a press release just before the call, I'm happy to share that Marc Suidan will join Backblaze as our next CFO. Marc brings more than 20 years of financial and strategic leadership as a public company CFO and also as a senior partner at PricewaterhouseCoopers. His wealth of knowledge across tech from identifying growth opportunities to driving strategic initiatives is impressive, and we're all excited for Marc to help lead Backblaze forward. He will be officially starting on August 16. Finally, I want to give a special thanks to Frank ahead of his retirement. He built our finance team, led us through our IPO, and guided us successfully for the following 11 quarters. This is his last earnings call with us, and I'm grateful for all that we accomplished together. With that, I'll turn the call over to Frank.

Thank you, Gleb, and thanks, everyone, for joining us today. As a reminder, unless otherwise noted, I will be referring to non-GAAP metrics and the growth rates mentioned are year-on-year. We remain focused on two key metrics: revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q2 revenue totaled $31.3 million, above the high end of our guidance. This was driven by a faster-than-expected ramp-up in storage for new B2 deals signed in Q1, better-than-expected renewals and expansions from B2 Reserve, and lower churn from computer backup. This represents an increase of 27% year-over-year versus 19% the same period last year. B2 cloud storage revenue was $15.4 million, reflecting 43% growth. Computer backup revenue totaled $15.9 million, reflecting 15% growth. Turning now to our Net Revenue Retention, or NRR. Total company NRR increased to 114% from 110% a year ago, with B2 cloud storage at 126% and computer backup at 105%. Gross customer retention was 90% overall, with 89% for B2 cloud storage and 90% for computer backup. Moving down the P&L, both adjusted gross margin and GAAP gross margin reached all-time highs at 78% and 55%, respectively, up from 75% and 49% last year. This improvement was driven by the price increase and data center optimization. The GAAP gross margin also benefited from low capital additions, causing nearly identical depreciation expenses to Q1. This quarter marked our third consecutive adjusted EBITDA profit, this time rising to $2.7 million, or 9% of revenue. Results were a new high and a 16-point improvement over the same period last year. It also was a one-point beat to the top-end guidance, driven by the higher revenue performance and continued low operating expense growth, principally from prudent headcount management. Turning to the balance sheet, cash, investments, and restricted cash totaled $28.3 million at quarter end. Total cash usage for the first half was $5.1 million, an approximately 80% improvement from last year's first half. We continue to have strong confidence in our forecast for total cash of at least $20 million at year-end. Our improving total cash usage was impacted by a rise in accounts receivable, now at $1.8 million, a $1 million increase since the beginning of the year. This increase reflects our move-up market, as larger accounts are now billed with payment terms versus immediately collected by credit card. From the beginning of the year, cash was positively impacted by the increase in deferred revenue, stemming largely from computer backup customer renewals with one- or two-year terms paid for upfront. In the first half, deferred revenue increased $4 million, with Q1 at $3.2 million and Q2 moderating to $0.8 million. This fluctuation reflects the timing of customer renewals, which occur unevenly across the quarters and were in line with our expectations. Our finance lease liability, including long-term and short-term, decreased by $4.1 million since the beginning of the year. This reduction is due to leases concluding from our lease buildup three years ago, as well as fewer new leases required for new data center equipment purchases in Q2. Looking ahead, we expect third quarter revenue to be in the range of $32.4 million to $32.8 million. Continuing our trend of increasing adjusted EBITDA, third quarter margin is expected to be between 9% and 11%. For the year, we are raising our annual guidance and now expect total revenue between $126.5 million and $128.5 million, an increase from our prior guidance of $126 million to $128 million. We continue to see full-year growth for B2 at about 40%. We also now expect adjusted EBITDA to be in the range of 9% to 11%, an improvement over the prior guidance of 8% to 10%. To conclude, I'm very pleased with our Q2 performance and our increase in the outlook for the remainder of the year. Before I hand the call back to Gleb, I would like to take a moment to express my thanks. First, I want to thank Gleb and Backblaze for giving me this amazing opportunity. Thanks to our leadership team and Board members for being great partners over these past four years and to the entire Backblaze team for the incredible execution and teamwork. And now I'll turn the call back over to Gleb.

Thanks, Frank. I want to take a moment to thank our whole team for working together to build Backblaze and to serve our customers. I also want to thank our investors and customers for putting their trust in us. We're excited to see many of you at the Oppenheimer conference next week and Lake Street Conference in September. And with that, I'd like to open it up for questions.

Yes. Thank you. We will now begin the question-and-answer session. And today's first question comes from Ittai Kidron with Oppenheimer & Co.

Hey, great quarter, Frank. Congratulations and good luck. It's been a pleasure. Frank, can you shed some light on B2? It seems like you’re experiencing impressive traction. Could you break down the increase into the components you mentioned, such as lower churn and improved expansion activity? How do you view the distribution of the upside among these different factors?

We've experienced positive results in several areas according to our guidance. The primary reason is our impressive churn rate, which exceeded our expectations and forecasts. This is particularly relevant for our computer backup services. Additionally, our B2 Reserve channel product has achieved excellent renewal rates that were better than we anticipated, thanks to our partnerships with resellers who are also renewing for more storage than before. Lastly, we've seen our major accounts transition to service quickly, particularly from the sales made in the last quarter, which was encouraging to observe.

Yes. Gleb, could you provide some insight on the move-up market? How do you view the logos you are adding now compared to a year ago? Please compare and contrast by vertical, company size, and use case. I would like to understand how this transition into the move-up market is affecting your customer profile.

Yes. Thanks, Ittai. So I think one way, I would say, to look at it is. When we went public, we were almost entirely a self-serve driven company with an ARPU that was just slightly over $100 and we now have 115 customers paying us over $50,000 each. So that's a dramatic difference from the way the company looked just a couple of years ago. The team that we assembled. We hired up the mid-market enterprise focused AE team in the first and second quarters. We expect that team to be fully ramped by the end of this year. And we've got Jason joining us as an experienced CRO to lead that upmarket momentum. So I think we've materially shifted what the company looks like in terms of the customer adoption from the public time and also for the go forward.

Got it. For my last question regarding the B2 line, you've mentioned Gleb in your prepared remarks. First, can you explain how you collect data and what the business model is around that? Is this just a matter of needing more compute or storage, or is there a different pricing model involved? Secondly, you've given a few examples of verticals or use cases that would be interested. How applicable is this capability to your customer base? What percentage of your customers do you think would be very interested in this?

We are enthusiastic about Live Read, which is still new and expected to transition from preview mode to general availability by the end of this year. This feature is crucial for customers working with large and growing files. We are initially focusing on the broadcast and media sectors since they can directly see the value of this functionality. This initiative aligns with our overall strategy, with innovation being a key objective. It not only offers value to our customers but also sets us apart from competitors. Live Read exemplifies this approach. Regarding the business model, we charge $15 for each terabyte uploaded, with storage priced at standard B2 list rates. This model gives us the opportunity to provide unique and differentiated value to our customers while also being a higher-margin offering for Backblaze.

Got it. Excellent. Thank you, guys. Good luck.

Thank you.

Thank you.

Thank you. And the next question comes from Simon Leopold with Raymond James.

Hi, guys. This is Victor Chiu in for Simon Leopold. I just wanted to follow up on that last question. For the Live Read, how did you guys identify this specific function as an opportunity? Is this something that existing customers have inquired about previously or something that you recognized as a common need that would be an opportunity for you? I guess kind of how did you guys identify this opportunity to develop this opportunity.

Yes. Thanks, Victor. I'll say that we identified in probably the ideal way that this comes about, right, which is our team talks to customers and prospects all the time. A lot of times when the customers are prospects – sometimes they'll ask for a specific feature of functionality, but oftentimes, our team is trying to get in tune with what challenges they are struggling within their businesses without them necessarily being able to offer a direct solution. And that was the case with Live Read. Our team was talking with some customers and understanding what they're struggling with, and they were talking about their challenges with having to wait until files were fully uploaded into the cloud with any solution that we're using before they could work with them or having to have on-premises equipment to deal with it. And so as our team started talking about the customer challenge in ways it could potentially be solved they came up with this innovation of being able to actually enable customers to start leveraging the files while they were uploading in the cloud without waiting for it to be completed. So it was the best approach of coming up with a unique solution.

Okay. That's helpful. And I know you guys have noted that Backblaze is fairly resilient to the broader base macro headwinds that typically have a much more material impact on your competitors. Does this still hold true for periods where we could see more severe contractions, especially given the heightened churn over the last couple of weeks?

Yes, that's a good question. We've heard from other companies discussing macro challenges and their impacts. However, we haven't experienced that. As you noticed, we exceeded our Q2 expectations, provided a strong guidance for Q3, and raised our projections for the year. We're not encountering the same issues. We believe this is because our customers recognize significant value from our products and platforms, and they benefit from a strong total cost of ownership. In a challenging macro environment, they may seek ways to accomplish more with fewer resources, and we support that. Additionally, while there are other products customers could choose not to invest in, having data necessitates storage and usage; it's essential. Therefore, we feel more insulated from potential macro concerns.

Okay. That's helpful. And you haven't observed any changes in demand trends so far?

I think as you've seen from the results in the guidance, I would say no. And moreover, we layer on top of that our execution. So in Q2, our sales team actually beat our internal forecasts for closed one deals and that was with still newer AE team and with Jason not even having been on board yet. So we're enthusiastic about being able to leverage that team fully ramped with Jason on board.

That’s really helpful. Thank you.

Thank you. And the next question comes from Jason Ader with WB.

Hi, guys. Thank you. Congrats to you, Frank, on your retirement. I wanted to talk a little bit about the second half and just kind of the breakdown of the business in the second half. First and foremost, given the 40% B2 guidance that you gave for the year, that imputes a growth rate in the computer backup business of around 13%. And I just want to make sure my math is correct there. And you had originally said single-digit growth in computer backup this year. So what changed?

Could you repeat the percentage you mentioned, Jason?

Yes. I believe you mentioned in the script that you anticipate 40% growth in B2. Based on that, I calculated that the growth in the computer backup segment would be in the low double digits, as opposed to the single-digit growth you initially projected for the year.

Okay. So the 40% is correct. And then what's happening in the end of the year, remember is that we lapped our price increases. So that's the kind of difference.

Yes, but I'm trying to understand why you expect to grow faster than your initial guidance regarding computer backup.

Okay. Yes. That has been happening. The reason for that is that in our budgets and forecasts, we had expected a higher churn rate given our price increase last year. And remember that we have customers constantly renewing. That's going to happen over a two-year period. But what we've actually experienced is a very solid retention rate above our expectations, and that has caused our growth to be a little bit higher.

Okay. So it's basically better renewals, less churn.

Yes.

For Q4, the projected growth rate is approximately 17% year-over-year, which is significantly lower than your guidance and the performance seen in the first half of the year. I would like to understand if there is anything unusual in the year-over-year comparison. Was there a one-time factor in Q4 of 2023 that makes this comparison more challenging?

Hi Jason, this is Gleb. We are not providing guidance for Q4 today. However, we anticipate B2 will grow approximately 45% in Q3 and we remain optimistic about achieving a 40% annual growth rate for B2. Q4 will reflect the full impact of the price increase for both B1 computer backup and B2. Overall, we've experienced strong performance in Q1 and Q2, and we expect a robust Q3 for the full year. There are a couple of transitions we are monitoring: first, the sales transition with Jason joining us, which we are excited about, along with the ramp-up of the sales team, though we want to be mindful of the timing implications of this transition. Second, we are moving some of our larger pay-as-you-go customers to committed contracts this year. This strategy is intended to foster longer-term relationships, create more upselling opportunities, and improve revenue forecasting visibility, although some of these contracts offer discounts. We're being careful and attentive to these transitions as we approach the end of the year.

Got you. Okay. So then just Q4, you're not guiding specifically to Q4, but you're trying to be, let's call it, conservative just based on some of these factors.

I would say we're cognizant of them.

All right. Thank you. Good luck, guys.

Thanks, Jason.

Thank you. And the next question comes from Zach Cummins with B. Riley Securities.

Hi. This is Ethan Weidel calling in for Zach. Thanks for taking my questions. And congrats, Frank, on your retirement. So you mentioned that you're seeing the same headwinds that are out there for other companies. But are you seeing any incremental changes in churn?

It varies slightly lower. You can see in our gross customer retention but it's above our original budget and above our updated forecast. So it's there, but we're just very pleased that it's been a lesser driver for us.

Got it. That makes sense. And then secondly, could you maybe elaborate a little bit on your new CRO hire? And maybe how Jason clicks in with your longer-term growth aspirations?

Yes. This is Gleb. So I'm very excited about him joining. He brings with him an upmarket set of experiences, which is where we're and where we've been headed. So he brings that expertise with him. He also is really unique in having direct sales channels, partnerships, and OEM experience. So which are the different ways that we go to market. So he brings all that expertise with him and the combination of being at larger organizations like HP and Microsoft and seeing how to move large-scale revenue momentum. But also in SnapLogic being in more nimble companies and getting them ramped quickly. I think our great sense of experiences that he brings to us and he's only been on board for a brief moment here, but he's already been having an impact as we've seen in the organization in terms of structuring, planning, and driving that effectiveness. So I'm very excited about having him on board.

Got it. Thank you. Appreciate the color.

Yes, we do. Jeff Van Rhee with Craig-Hallum Capital Group.

Thank you for answering the questions. Congratulations, everyone, and it's fantastic to see the margins improving; everything looks great overall. I have a couple of questions for you, Gleb. Firstly, could you provide a more detailed understanding of the effects of AI? Specifically, I am interested in the scale of these impacts and their trends, as you mentioned that AI is a significant driver.

I believe there are two key points to highlight. First, the market presents a significant opportunity, especially with the ongoing efforts that drive data creation and usage, which we fundamentally support. Second, companies are increasingly utilizing various GPU clouds for their AI applications, and we are strategically positioned to assist them. They can store their data with us and leverage it across these different GPU environments. For instance, one of our AI customers is saving $300,000 by switching to our services, which is a substantial saving for their AI needs. Additionally, they are becoming more effective as they were previously limited by inadequate GPU capacity from another provider. Our solution allows them to access a variety of GPU providers while keeping their data easily accessible with us. I believe we are exceptionally well-prepared to assist customers with their AI applications. It's also worth mentioning that many companies in the industry are significantly increasing their capital expenditures to support AI initiatives, often indicating it may take a long time to see returns on this investment. However, this does not apply to us, as they are focusing their expenditures on GPU infrastructure. We are not a GPU company; we facilitate AI applications by enabling how and where those GPUs can be utilized, thus we do not share the same capital expenditure demands while still benefiting from supporting those applications.

Great. That's helpful. And back to Jason Wakeam joining the company. You touched on his skills, but I wonder if it could get you to kind of come at it maybe from a different direction. And just talk about what the B2 selling motion is now. And broadly speaking, what do you envision it to be in 12 months?

Sure. When we first started, our approach was primarily self-serve. Customers would discover Backblaze through various channels, visit our website, enter their email and password, create accounts, try the service, provide their credit card information, and start using it. At the time of our IPO, this accounted for 80% of our business, and it remains an important source of new business today. We have continued to invest in and optimize the self-serve aspect of our go-to-market strategy. In addition to this, we introduced a direct selling motion, where potential customers learn about us through our blog, public relations, events, and other avenues, or through outreach by our sales development representatives targeting specific verticals. Leads generated in this manner are then worked on by our account executive team to close deals. We also developed a channel sales strategy, collaborating with resellers like CDW to drive channel business. Most recently, we launched a technology called Powered by, which allows us to integrate our services into other companies' offerings. We’ve seen interest from Edge Compute firms, Media and Transcoding companies, and Cloud Service Providers incorporating our solutions into their products. These combined strategies illustrate how we've approached the market. Jason will focus on enhancing the sales-led initiatives, which are distinct from self-serve, while also improving the overall effectiveness and efficiency of these strategies. We are also expanding into larger organizations that are engaging with these sales-led efforts.

Got it. Very helpful. Thanks so much.

Thank you, Jeff.

Thank you. And your next question comes from Mark Hagen with Lake Street Capital Markets.

Hi guys. Congratulations, Frank. So just was wondering, looking at 2025, we're kind of looking we're expecting sort of cash flow positive mid-2025 and then with the addition of adjacent and any changes that may happen there or new sales hires. I'm just wondering if there's any change to that or if that's still kind of your thoughts there.

We are very pleased to report an 80% reduction in total cash usage for the first half of this year compared to the same period last year. We continue to project our year-end cash balance to be around $20 million, and we aim to reach breakeven on total cash usage by mid-2025, or the second half of that year. It's important to note that our definition of total cash and total cash usage includes cash from operations, financing, and investing activities. Additionally, we anticipate becoming free cash flow positive shortly after that in 2025.

Got it. Well thank you. Appreciate it.

Thank you. And that does conclude the question-and-answer session. I would like to return the floor to Gleb Budman for any closing comments.

So I want to say thanks for helping us for these past years. And I want to thank all of you for joining us on this call. I also want to send a big thank you to everybody at Backblaze for the work that they put into building the company and supporting us in supporting our customers and finally to thank our investors and customers for putting your trust into us. We are excited to also see many of you at the Oppenheimer conference next week and Lake Street Conference in September. So with that, I'd like to say thank you, operator. And we can close the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.