Thank you for standing by. And at this time, I would like to welcome everyone to today's Backblaze fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Mimi Kong, Head of Investor Relations. Mimi, please go ahead.

Thank you. Good afternoon and welcome to Backblaze's fourth quarter in full year 2024 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Mark Sweetan, 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, the impact of our go-to-market transformation, sales and marketing initiatives, cost-saving initiatives, results from new features, the impact of price changes, 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 annual report on form 10k 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 file 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 gross customer retention rate arpu and adjusted free cash flows we'd also like to inform you that we will be participating in the oppenheimer emerging growth conference tomorrow on february 26 and the citizens jmp tech conference on march 3rd and 4th We hope to see you there. Thank you for joining us, and would now like to turn the call over to Gleb.

Thank you, Mimi, and welcome everyone to the call. Revenue grew 18% over the same period last year, and B2 Cloud Storage grew 22%. B2 Cloud Storage, our fastest-growing solution, is now over 50% of the business in Q4. And adjusted EBITDA margin came in at 14%, doubling over the same period last year. I'll talk more about the quarter in a moment, but first I wanted to take stock of where we've been and where we're going. In the last four years, we have more than doubled both the revenue and adjusted EBITDA margin. We transitioned from a company selling primarily to SMB customers through a self-serve model to one that also supports enterprises with a direct sales and partnership model. We also doubled our number of data regions and launched a host of innovations to provide customers and partners with more value. As we look to the next few years, we are focused on becoming a Rule of 40 company, delivering both growth and profitability, and continuing to build the leading storage cloud for the Cloud 2.0 era. Now, let's talk about our recent results. During our last earnings call, we shared two key initiatives, a go-to-market transformation focused on driving B2 growth, and our plan to be adjusted free cash flow positive by Q4. First, I'll share details about our go-to-market transformation, and then Mark will provide an update on our path to becoming adjusted free cash flow positive. I am pleased with the impressive of progress our team has made on our go-to-market transformation as we are already seeing strong early signs. ARR win rates were up significantly and sales productivity in Q4 doubled year over year, leading the team to meaningfully beat quota for the quarter and the full year, despite being behind quota when Jason, our new Chief Revenue Officer, arrived in July. Not only did we increase sales productivity across the sales team, but we also signed a significant expansion for an existing customer for over $1 million based on annual contract value. We had a record sales booking quarter, which was greater than the prior three quarters combined. B2 Cloud Storage had net new AR sequential growth of $5 million, a record outside of that driven by the price increase. These are excellent early signs that the go-to-market transformation is working. As a reminder, due to the nature of us being an as-a-service business, there is generally a lag before these leading indicators translate into revenue. However, we do believe that the low point in organic growth was behind us in Q3, and we are already seeing an acceleration in B2 growth. Mark will go into more details later on in the call. Now, how have we achieved these results and acceleration to date? We've done that through the three main focus areas we talked about last quarter. upskilling partnerships and sales plays first on upskilling the sales team jason is moving at lightning speed and has an outsized impact in a short period of time he has implemented robust training and a more rigorous and repeatable process to help ensure that the team is set up well to continue to move upmarket in the last few months we also hired steel sales leadership and additional experienced quota-carrying reps to increase sales capacity, along with a VP of demand generation to help fill the pipeline. Second, on the partnerships front, we are making significant headway. Last quarter, I spoke about the changes we made with our channel program. I'm happy to share that the average deal sizes of the leads coming in from the channel in Q4 has nearly doubled year over year. Next, I'd like to talk about how we are meaningfully uploading our alliance strategy. This program is now structured along a co-build, co-market, and co-sell strategy. To co-build, we are currently working on joint solutions with key technology partners. As examples, we're working with two partners to create a joint solution for AI-powered media workflows and with another partner to create a joint solution to support compute and storage needs around large AI data sets. Third, for sales plays, we are focusing on four key plays to drive repeatability and efficiency. These are application storage, IT backup, media and entertainment, and powered by Backblaze, which is our white label offering. Our marketing efforts are becoming more tightly aligned with these sales plays to ensure we have the right positioning, collateral, programs, and more to drive greater sales efficiency and market awareness. On market awareness, I'll note that we were recently recognized by G2, a popular software review site, as the best object storage solution for fastest implementation, ease of use, and high performance. Turning to our business highlights for the quarter, We continued to add a number of larger customers in a diverse range of industries. Just a quick sampling, we found a company that provides an application developer platform for over $100,000 in ARR. This customer chose Backblaze because they were looking for a cost-effective solution to archive data from their data warehouse. A large Japanese social media company committed to Backblaze for over $50,000 in ARR, recognizing that we were an affordable and hot archive solution for their content. And a digital music media company signed a deal for about $50,000 in ARR and is using Backblaze as their origin store for their streaming content. In addition to signing a number of larger customers our customers also continue to expand with us as an example in q4 three existing customers in the surveillance gaming and ai industries each expanded their usage to an additional hundred thousand dollars in ar run rate it's a pattern we've seen where customers often start small and lean in as they see the significant value our platform provides at scale and i'll highlight a customer who signed a significant expansion in Q4 for over $1 million in annual contract value. They chose our Powered by Backblaze offering, thus enabling them to offer cloud storage to their customers. Three things to note. First, our white label Powered by Backblaze solution launched in Q1 of last year. We've already signed a number of channel and technology partners to offer this innovative capability including this latest one million dollar plus acv deal this speaks to our ability to innovate and drive growth from our rmd investments second this customer chose backblaze in part because our platform's ability to deliver high performance and affordability a rare combination and for our free egress which was key to their business. And third, this demonstrates our continued progress in being able to move up market. Next, I'd like to address the seismic shift taking place in the AI industry. A few weeks ago, the major announcement of DeepSeq illustrated that AI innovation is happening rapidly and everywhere. Thus, it is increasingly clear that companies need flexible AI tech that can adapt to this dynamic environment and leverage data effectively. We believe that those who can freely flow their data to where innovation is happening, as they can with Backblaze, will be the best positioned to win in this evolving AI landscape. And those who are constrained by the walled gardens of the traditional cloud providers may struggle to keep pace. We believe this need for flexibility and data mobility is a big factor in why we're seeing such strong momentum in our AI customer segment. We now serve hundreds of AI customers. This has translated into nearly a ten-fold increase of data stored by these companies, with three out of our top ten customers, as of December 2024, now being AI companies. Because we focus on the storage layer, we are not burdened by the massive CapEx investments being made in GPUs, but we still benefit from AI tailwinds. wins recently another ai customer gave us a glowing endorsement and i quote we looked at all of the cloud providers you would expect backblaze delivered the right combination of price and usability and we didn't have to change anything on our site to make it work our opportunity at backblaze to power the ai revolution is exciting and i expect ai will be a major growth driver for many years to come finally 2025 is a pivotal year for backblaze as we expect to accelerate b2 revenue growth target being adjusted free cash flow positive in q4 move toward being a rural 40 company and continue to build the ideal cloud storage platform for the open cloud. Now, I will turn it over to Mark.

Mark. Thank you, Gleb, and good afternoon, everybody. It's been a very busy six months since I joined the company where we've deployed numerous changes to position ourselves for higher growth and free cash flow profitability. We are executing on an aggressive agenda to drive change quickly. We launched a go-to-market transformation and a cost restructuring initiative, which are both showing good early results. We also successfully completed an oversubscribed secondary offering for $37 million in net proceeds in November of 2024. I want to note that while the company did not need additional capital to turn free cash flow positive, we felt it was prudent to execute a secondary offering to reinforce our liquidity and generally strengthen our balance sheet. Now let me share our results for the quarter. Q4 revenue was $33.8 million, representing 18% year-over-year growth and slightly ahead of the midpoint of our guidance. Computer backup revenue was $16.7 million, representing 13% year-over-year growth, primarily driven by price increase implemented in Q4 of 2023. B2 Cloud Storage revenue was $17.1 million, representing 22% year-over-year growth, primarily driven by by existing customer data expansion and new customer acquisition. I'd like to point out that in Q4, we fully labbed the B2 price increase. The strength of our B2 growth in Q4 is easier to see if we exclude the impact of the price increase from the prior period. Excluding the benefit of the price increase, third quarter organic B2 growth would have been approximately 19%, which we view as our low point of growth. Compared to our fourth quarter, growth was 22%, representing a 300 basis point sequential improvement. As Gleb noted, we expect that our go-to-market transformation should continue to accelerate B2 revenue growth throughout 2025, which I will comment on further in the guidance section. Our B2 ARR for Q4 is $70 million, representing a $5 million increase from Q3. And as Gleb mentioned, this is the largest organic sequential dollar increase for B2 since our IPO in 2021. This gives us further confidence in the early success of our go-to-market transformation given that ARR is a leading indicator of revenue. Net revenue retention or NRR for the total company was 116% compared to 109% last year. The year-over-year improvement mainly benefited from the price increase that we put in place in Q4 2023. The total customer retention was 90 percent in the quarter compared to 91 percent in the prior year our customer retention has remained consistent since going public in 2021. Overall company ARPU is 268 dollars up 18 percent year over year our B2 business continues to show strength with ARPU climbing to 645 dollars a 12 percent improvement over last year Moving down to the income statement, adjusted gross margin was 78% for the quarter, showing continued strength with the all-time high seen in Q3 of 2024. Adjusted EBITDA continues to improve at $4.6 million, or 14% of revenue for the quarter, driven by revenue growth and strong cost management. The Q4 adjusted EBITDA margin more than doubled from the prior year and represents and 800 basis points improvement q4 only partially benefited from the restructuring because the quarter included about half of the benefit on a run rate basis this further demonstrates that the operating leverage is efficiently working which is roughly 75 percent of our incremental revenue dollar flowing to the bottom line turning to the balance sheet we finished the quarter with 55 million dollars in cash and short-term investments. As a reminder, we raised $37 million in net proceeds in a secondary offering and paid off the line of credit in Q4, which had $4.7 million outstanding. Last year, we disclosed that we expected to end the year with at least $20 million of cash on hand. I am pleased to share that excluding the secondary offering and the line of credit payoff, we would have ended the year with $23 million in cash. After the successful secondary offering, we decided it was best to pay off and close the line of credit, which had relatively unfavorable terms. We did not see the merit of paying fees to maintain a line of credit with 100% cash restriction of borrowed money. I'd like to highlight that our liquidity as of Q4 has improved with our current ratio going above 1 for the first time since Q1 of 2023, or eight quarters ago. Additionally, we have significantly increased our equipment leasing credit lines and now have access to over $80 million in credit, which is more than double from the prior quarter. Our cash flow from operations for the year are $12.5 million, a dramatic improvement from cash usage of $7.4 million for the same period last year. This represents a $20 million improvement over the prior year in cash flow from operations. Our adjusted free cash flows for the full year were negative $20 million compared to negative $43 million last year, showing a significant improvement of $23 million, primarily as a result of revenue growth and cost-cutting initiatives. Free cash flow will continue to be a primary focus for us. Moving to guidance. We expect our 2025 full-year revenue to be in the range of $144 million to $146 million, and our Q1 revenues to be within the range of $34.1 to $34.5 million. As a reminder, the price increase which helped drive revenue growth last year has fully lapped with the exception of a small percent left on our computer backup business. In 2025, we expect to exit with B2 growing over 30%, a significant increase, and driven primarily by new customer acquisition and expansion of existing customers. We just posted our earnings presentation, which highlights our B2 quarterly outlook for 2025 driven by our go-to-market transformation. What you'll see is that B2 hit a low point of growth in Q3 of 2024 and accelerates from that point forward to over 30% by the end of 2025. Finally, we project adjusted EBITDA for the full year to be in the range of 16% to 18% and adjusted EBITDA guidance for Q1 to be in the range of 13% to 15%. We remain on track to exit Q4 of 2025 with adjusted EBITDA margin above 20% and we expect to be adjusted free cash flow positive in Q4 of 2025 as well. From there on, we expect the operating leverage will kick in to help us grow free cash flows in a sustainable way given our low variable cost. As we move to be a Rule of 40 company, we are laser-focused on executing our go-to-market strategy and increasing profitability to deliver on these results. In summary, we are very excited about the path ahead and the momentum that is already in place to create charge of value. And with that, let's take your questions. Operator.

Thank you so much. And at this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Once again, star one. And in the interest of time, we ask that you please limit your questions to one primary question and one follow-up. And with that, we will pause just a moment to compile the Q&A roster. Okay. Looks like our first question today comes from the line of Jeff Van Rie with Craig Hallam,

capital group jeff please go ahead great thank you um hey guys so just a few for me on the on the partner front it sounds like you've got a lot of things changing any hard and fast like what are the key metrics you're monitoring for the year specifically any quantitative goals for for

partners in 25. hey jeff good to hear from you this is cleb so the uh on the on the partner side we have the two different parts of it we have the channel and then we have the alliances side of it On the channel, it's somewhat traditional style metrics. So we look at pipeline and then sales productivity. Sales productivity, when we measure it, it's average ARR closed one per person on the team. And so it flows through to the channel that way as well. On the alliances side, it's a little more nuanced. We're doing co-build, co-market, and co-sell. So what we're looking to do there is build up solutions that we jointly go to the market with and to solve specific customer problems.

Very helpful. And then just one last for me. When you look at the two subsegments, think of maybe a little further out. How do you see B2 over, say, a three to five year period and the same for computer backup in terms of growth rates? What do you envision? How do you see it playing out?

Yeah. Hi, Jeff. I mean, the way we see it is we should finish 2025. with B2 growing year over year at 30% plus. And then that should continue because it's a disruptive solution in a market that's already growing at 18, 19%. So we'll beat the market there. On the backup side, I mean, if you think about the backup side, I would say the first half of the year will grow because of the tailwinds from the price increase for multi-year contract. And afterwards, it'll pretty much follow the customer count that we have on the earnings release since the majority of it is consumers. So that would exit the year at minus 3%. So overall, it would be flashed for the year. The backup side, longer term, frankly, it's a good business, but it's more about the business side versus the consumer. The consumer is in a secular macro decline versus the business side is the growth opportunity. And since we're building the install base, there's good cross-selling opportunity between B2 in that overall backup solution.

Yeah. If I could sneak just one last in, gross margins. Mark, just how do you see them progressing as we go through the year?

Pretty stable. You know, that 78% we exited the year, which should be pretty stable into next year. We don't see any major changes in that adjusted gross margin.

Okay, great.

All right, thank you, Jeff. And our next call, or excuse me, next question comes from the line of Itai Kidron with Oppenheimer. Itai, please go ahead.

Thanks. I appreciate it. And great commentary, Gleb, on the business and Mark as well. Great stuff. Gleb, I wanted to dig into the AI commentary. It looks interesting. I guess maybe you can perhaps give us a little bit more color on the use cases within AI, meaning it's one thing to have a customer who is an ai customer but if the use cases that they're using it for are not actually levered towards what they're doing it's just another customer so help me help me understand in what way is their growth going to translate into

your growth that'll be helpful yeah thanks for the question it makes absolute sense is from many of these customers, we are very directly tied to their growth. We are their strategic vendor that enables them to succeed. So breaking down the AI data pipeline a little bit, we think of five different components of the AI pipeline that broadly depending on which customers are doing what. So there's data collection where they need to get data from all over the place, wherever that's coming from and store it somewhere there's data processing which is all the labeling tagging etc there's the model training where they take the data you bring it to some gpus and then train train to create a model there's inference where they run the actual applications and use the models to get insights and then there's monitoring of all the of all the systems so So we have customers who use it in each of these areas. Data collection is one of the largest areas that customers use it for. We have customers that are scraping data from across the Internet and using that for collection, for model training. They're using us as the destination for all of that data. We have customers who have large data sets that they've built up over years around photography, videography, et cetera, that they're using to train different models or sell for AI insights. We have customers who are using them for all of those kinds of data collection and storage components. The next part of it, which is data processing, we have customers that then take that data, use our storage and then free egress out to third-party and open source tools for data labeling. And so they use this for that piece of it. Model training is actually a significant one for us also. We don't do the GPUs themselves, but one of the things that you've probably heard often is companies are being limited on innovation on AI because of a limited access to GPU availability. And so what they're finding they need to do is get their data to a multi-cloud GPU tech stack. And so what they're using us for is keep all the data with us, then egress it to whichever GPU cloud has availability of the GPUs they need. And so they're building these multi-cloud GPU environments where we are the core starting point for their data pipeline. And then the For the inference side, we have lots of customers who run their actual application on Backblaze, where we are the storage for it, and then they're inferencing it through one of the places where they've either built their own model or where they use one of the open source models for the information. And then finally, on the monitoring side, obviously, they keep a lot of the log files with us. So for many of these customers, we are actually the core strategic location because, obviously, the AI thrives on the data itself.

That's very helpful.

What I want to add to that is, you know, we're obviously incredibly enthusiastic about the traction on the AI front. But I'd say we took a more prudent approach of what to incorporate into the rest of your outlook because it's a very nascent industry for us and everybody. um so us achieving you know the 30 percent by q4 of 2025 um you know we didn't bet on this continuing at this pace hopefully it does um and also frankly you know just to to be clear on what makes up the the numbers and the guide out there you know we did have a big you know a larger customer loss in q1 so that's not reflected in any of this but it's reflected in these growth numbers. So our new customer acquisition engine is hot and running. That's kind of pretty much

what it says. Yeah. And maybe just one other thing on your specific point, Itay, is one of our customers is actually, they're a billion-dollar construction company. So they're not at all an AI company. They've been using us for a while for data backup and cyber resilience. But what they have actually started talking to us now about is how do they evolve their business to take advantage of AI? And so the path that they're actually looking at doing with us is capturing all of the video footage from their construction sites that's captured by cameras, drones, and the rest, using that then to train models for understanding safety on their construction sites, tagging all of the hats, the jackets, the gloves, and all the other safety components that are part of the construction site requirements, and then using that as inference where they can look at new construction going up and making sure that the proper safety measures are being taken. So even companies that have nothing to do with AI in general are actually looking at expanding their use cases with us to include AI in them.

That's helpful. that's helpful and then mark on on your the acceleration and growth that you're anticipating on b2 through the year i guess help me it's a it's all the counterintuitive in a way right um help me understand and i understand that all the changes you made in go to market and the booking commentary was quite interesting but i guess what in your mind because it feels like you're kind of heading in the right direction here but what in your mind still needs to happen here for you to have very strong visibility uh into this and um because you know again it's it's uh it's not common to see this type of pattern through the year of acceleration uh and so i just kind of wanted to make sure i get my hands around what in your view you kind of already feel very good about and kind of have it in the pocket versus still needs to come for you to be able to

deliver to this? Yeah, no, that's fair. That's a good point, Itai, right? So what I would say is I think we're off to a really good start, right? Because in Q3, if you factor out the price increase, we grew 19% year over year in B2. So already you're seeing an improvement in Q4. So all these things we're talking about, record quarters and so on, are already flowing through there. I think this is all execution, right? I mean, we have like this incredibly healthy win rate. So it is about consistency of execution. We've doubled our sales capacity. So obviously, you got to ramp up the new people, train them the right way, make sure your pipelines align the right way in terms of how it generates, where it generates. So I think it boils down to continuing our execution and that's for the kind of what I call the direct sales model right I mean Gleb also spoke about the channel and the alliance I wouldn't say that's activated yet nor did we bake too much of that into these numbers right I see that more as a further

benefits flowing into 2026. Got it maybe last one on the computer backup just going back to the answer to the previous individual that you kind of commented on exiting the year to negative two or three percent i think you said on a year-over-year basis as the price increase fades away i i guess should we think about this business going forward not just 25 but for the foreseeable future as a declining business is there and and if that's the case why not take a more proactive approach on the price increases and just squeeze it more and more and more through the price increases. I'm just trying to think about, you know, the long-term longevity of this business.

Yeah, Itay, this is Gleb. Actually, let me touch on it for a second, then maybe Mark will add as well. So I think, you know, what Mark talked about is that the consumer side of that business is in a secular macro decline. We don't expect that specifically to change. on a significant portion of that computer backup business is also businesses using us for their computer backup, ransomware prevention, cyber resilience. And we do see opportunity there. And we are signing up customers. We launched that B1E functionality, the enterprise control in Q1 of last year. So we do see interest and engagement there, and we see some opportunity. It's not the core growth focus for us as a company, right? B2 is the primary core growth focus. Getting it back to 30% plus by end of year is where we're putting most of our energy. But there is some opportunity there. In terms of price increases and the like, we don't rule it out as we've talked about before. It's something that we think we have as an option. But at the same time, one of the things we do view it as is it's hundreds of thousands of customers worldwide who are fans of Backblades who refer customers to us and support us as a community. So we want to continue to make sure they feel like they're getting a great value, a great service, and continue to recommend this to others. Appreciate it. Thank you. Thank you, Dan.

Yes, thank you, Etan. And our next question comes from the line of Simon Leopold with Raymond James. Simon, please go ahead.

Thanks for taking the question. The first thing I wanted to ask about was trying to put the AI stored data in some context. Do you have a way of sizing what percent of the B2 stored data is coming from these AI use cases? And I guess where I'm coming from is I imagine these are relatively larger data sets and therefore maybe a higher proportion than historical, but just trying to get a way to get a sizing of this.

Yeah. Hey, Simon, that's a good question. This is Glenn. So one of the things we talked about is that the data has grown tenfold. And one of the things we mentioned is that they're now three of our top ten customers. So I would say that it's meaningful in terms of data growth for the organization. It's not massive as a percentage yet, because obviously it's a newer set compared to 17 years of being in business. But it is a fast-growing part of the business. In terms of the sizing per customer, it varies. We have lots of customers who are starting small with us. They're brand-new startups. And then we have customers who are already storing double digit petabytes as individual customers. So it's across the across the range. You know, certainly data is a very AI is a very data intensive segment. So it's something that, you know, we believe there's a lot of opportunity in. And when we look at some of these customers of ours that are storing double-digit petabytes, some of them are very new companies, right? So, you know, I talked a moment ago about this construction company that's looking at doing AI with us. You know, they're a billion-dollar revenue company. They've been around for 100 years, but they're just starting into the AI side of it. But a lot of these companies that are storing multiple petabytes with us started in the last year, two years, three years. And so we have lots and lots of these little companies that just started. I wouldn't be surprised if many of those end up becoming multi-petabyte customers within a year or two years.

Great. The other thing I wanted to ask about was in January, you had announced opening a new data center in Canada. And I'm hoping to get a little bit of context here because I've lost track of where and how many locations you have. So basically trying to understand, one, how material is the opening of a new data center? And the other question is, are you exposed to any foreign exchange risk, or do you price everywhere in dollars? Just a little bit of help understanding the international efforts.

Yeah, thanks, Simon. So I'll start, and then I'll let Mark touch on the currency component. So we have regions that customers can choose in the West Coast U.S., East Coast U.S., and Central Europe. So this is our fourth region that we've opened. Canada is the fourth. So it's fairly significant for us in terms of, you know, one out of four. It's brand new, like you said. It's just launched in January. One of the things that we did that was unique with this region is we did it in partnership with an anchor tenant and an anchor partner. And so as opposed to building a data center and hoping that they will come, we actually worked with a partner, signed up together, and then built a data center in partnership with them. So that de-risks the investment behind the new region. And it also created a playbook for us, effectively, of how we want to go about opening other regions in the future. So that's on that side of it. And then maybe Mark can talk a little bit about your other part of the question.

Yeah, Simon, what I would say is there's no meaningful exposure to foreign currency risk. The expenses that are in Canadian on the lower side and the billings, the majority of our Canadian billings would be in USD. so minimal risk there and then also whenever we open a region like we did in Canada we'll also really make sure there's an anchor client to get started off with that way you know the call it the sunk cost or the fixed cost to set up that first data center is quickly recovered by an initial client and then from there we scale pretty quickly so I'd say there's no there's no major exposures on the FX side for Canada thank you thanks Simon all right thank you Simon

and our next question comes from the line of Jason Adder with WB Jason please go ahead

yeah thank you um good afternoon guys uh just wanted to ask first uh maybe for you Gleb. We've seen kind of a nice resurgence in the backup software market and this theme of cyber resilience and ransomware protection. The backup market is growing now double digits after growing for as long as I can remember in the kind of mid-single digits. And I'm just wondering, have you seen that resurgence in the software market impact or benefit backblaze as kind of

a target for backups? Yeah, it's a good question, Jason. I think we've seen some additional interest in the business side of computer backup. And so, you know, as we talked about a few minutes ago, the consumer side is in a long-term secular decline, but we see opportunity on the business side. Ransomware obviously is becoming, you know, has been for a while and is continuing to become a larger and larger risk factor for companies it's often a board level conversation it's a you know the number one risk that companies often talk about and backup while it's uh it's not very hot as a as a term is really the the best form of protection against ransomware for companies and so we believe that that is an opportunity for us it is an opportunity for us especially with larger organizations. The go-to-market transformation is heavily focused on our B2 side of the business, but it is also looking at how do we support larger organizations with our computer backup offering. And I do think that there is opportunity there, especially around messaging to some of the cyber resilience side of the need. Sorry if the question was confusing. I

I actually meant B2 Cloud as a backup target. So in other words, folks like Veeam and Commvault and others that are selling backup software, obviously the customer needs a target where to store the backups. So I was just wondering is B2 Cloud seen the use case of backup kind of percolate because of this secular trend in the market in acceleration and backup software growth.

I see. I misunderstood your question. Thanks for clarifying. So it is one of, you know, backup and cyber resilience on B2 is and has been one of our core areas of focus. So we talked about sales plays, and the sales plays that we are focused on are application storage, which includes all the application items, including AI, IT backup and cyber resilience, media and entertainment and our white label powered by solution so it is one of our core for sales plays and it is absolutely a significant area that has been and continues to be a growth

area for us okay great and then um one last one for me uh and also for you glab when we think about the competitive landscape like at the time of the ipo um there wasn't much competition i would say like in terms of a smb oriented cloud storage uh platform i mean you had like wasabi and and a couple other small guys but um and i know you were partnering you know very closely with with folks like digital ocean and cloud for can you just kind of update us on where the competitive landscape sits today are you seeing more competition than you did at the time of the ipo or less or about

the same? You know, it's a funny question, actually, because I remember at the time of the IPO, a lot of the conversation was, you know, how are you entering and competing into a space where some of the world's largest companies are currently in there, right? With Amazon and Google and Microsoft, isn't that the most competitive market you could possibly play in? So in some ways, I would say in a way that the market has not evolved that much competitively because Amazon, Google, and Microsoft were there. Amazon, Google, and Microsoft are still there. Having said that, I think one of the things that has happened also since then is companies have broadly realized that cloud storage is an incredibly important component of the tech stack. And for a variety of reasons, having that data with Amazon or Google or Microsoft is not necessarily the best choice. And so various other companies have started offering some kind of storage, including a variety of our partners, right? So Cloudflare is a partner of ours. They were a partner of ours. Pre-IPO, they launched a storage offering. DigitalOcean did. Vulture did. You know, OVH. I mean, there's a variety of other companies that have their own storage offerings. Many of these are still partners of ours because companies who want best of breed provider for storage, someone who's very scalable, high performance, very affordable, designed for the open cloud, you know, these are the customers choose Backblaze for that. And so our partners still want to support their customers with those kinds of requirements.

All right. Thank you. Good luck.

Thank you.

Thanks, Jason. And our next question comes from the line of Maxwell Michaelis with Lake Street Capital Markets. Maxwell, please go ahead.

Hey, guys. Congrats on the quarter. Was wondering if you could share potentially a growth rate of customers with over 50,000 in ARR for the year. I think you had shared like a number related to that in Q2, I believe it was like 55%. Was curious what that was for the year. And I guess for follow up, I mean, what does that B2 guide insinuate for the growth of customers with over 50,000 in ARR for 2025. Thanks. Yeah, hi, Maxwell. This is Mark. We didn't

disclose it this quarter, but what I would say is the momentum on that front has been really good. I mean, we talked about moving up market, and what's interesting is, you know, we're obviously winning quite a few 50,000 above, but there's also, we're on our third deal now that's kind of in that million plus range or right around a million. So it's been really positive where we're going and where we're headed. And that growth rate assumes ongoing momentum on that front.

All right. Thanks, guys. Thanks, Max. All right. Thank you. And our final question

today comes from the line of Zach Cummins with E-Riley Security. Zach, please go ahead.

Hi there. Ethan Whitehall calling in for Zach Cummins. Thanks for taking my questions. Sounds. When you speak to your four kind of key sales plays, it sounds like maybe powered by back plays is core to your upmarket strategy. I was sort of wondering to what extent the other

three are. Yeah, it's a good question. So what I would say, first of all, is all four are core to our upmarket strategy. They have a slightly different approach in terms of what we're offering to the customers. But our application storage customers are getting bigger. Our IT backup customers are getting bigger media entertainment customers are getting bigger the powered by deals are bigger because they are integrated into their other platforms but frankly all four of them are larger organizations so if you think about the you know we talked on about the you know that we gave a sample of customers that you know two of them which did 50k AR one which did 100k AR all of those were application storage customers the on the call we talked about the customers that each expanded by over 100k as from existing customers those are application storage customers so i would say you know all four are are meaningful um and and strategic to our

upmarket momentum got it that's helpful thanks um and then as you uh aim for a nice ramp up for for b2 in um the coming year are there any other cost levers that you can pull uh for margins besides those that you spoke to last quarter?

Zach, are you referring to gross margin or operating margin or free cash flows?

Yeah, more operating margin, but anything that you can speak to?

Yeah, I mean, on the, listen, our operating leverage is 75 cents on the dollar, right? So our OPEX will roughly be kind of in line, dollar for dollar in 2025 what it was in 2024 so we're holding the line because we did that whole zero-based budgeting exercise where we've been able to redeploy investments into sales capacity and that's allowing us to to fund all that growth and while holding you know the opex line there so that should create some really good operating leverage and that's what will get us to be free cash flow positive right around q4 of 25. now in terms of additional cost opportunities i would tell you the culture that's always been at this company and that we're instilling is you know always scrutinize and rethink everything anything that's available that we could do more efficiently we're always going to look to do so this is not just a one-time exercise that we just did it's

kind of the ongoing part of our culture going forward. Understood. Well, I appreciate the

extra color. Thank you. All right. Thank you, Zach. And that does conclude our Q&A session today. And with that, I will now turn the call back over to Gleb for closing remarks. Gleb.

Thank you. I appreciate it. You know, I think we're really excited about the financial side of where we're headed, getting B2 to be over 30% growth in Q4 of this year, getting our adjusted EBITDA to be over 20% in Q4, getting to free cash flow positive, both on an adjusted EBITDA and adjusted basis for free cash flow. Those are, I think, meaningful financial improvements to the way we have the company. We're excited about our opportunity that we're seeing with AI and the product innovations, the go-to-market transformation progress that we're making, and our general path to Rule 40. So I want to thank everyone for joining us today. I want to extend a special thanks to the Backwise team. The changes and improvements we've made on the go-to-market front and on our platform is no small feat. In addition, while the cost-cutting we did in Q4 was hard, our employees have done an amazing job embracing the changes. I'm proud of the team's commitment to drive innovation in storage for our customers and partners and I believe will create significant shareholder value as a result. Thank you for joining us on the call. We'll see you

next quarter. Thanks, Cleb, and ladies and gentlemen, that concludes today's call. Once again, you may disconnect. Have a great day, everyone.