Title

Presentation

Operator: Good day and welcome to the Backblaze First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. James Kisner. Please go ahead, sir.

James Kisner : Thank you. Good afternoon and welcome to Backblaze’s first quarter fiscal year 2023 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 our new offerings, partnerships and sales and marketing initiatives, our ability to compete effectively, acquiring new customers and retain and expand our business with existing customers, hire and retain key personnel and effectively manage our growth. These statements are subject to risk 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 10-K 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 or gross customer retention.

Before I turn the call over to Gleb, I’d also like to mention that in the latter portion of our call, as in prior calls, we will be addressing questions from investors that we gathered through the Say Technologies platform. I would now like to turn the call over to Gleb. Gleb?

Gleb Budman : Thank you, James and thanks to all of you for joining us. We continue to execute on our growth strategy this quarter. Total company revenue grew 20% year-on-year, with strong 42% year-on-year growth for B2 Cloud Storage and solid 8% growth for Computer Backup. B2’s growth rate was more than 2.5 times that of Amazon AWS, which grew only 16% in the same period. Not only did we show strong growth, but as Frank will discuss in a moment, with our results and our expectation for continued EBITDA margin improvement in Q2, we remain committed to our goal to approach adjusted EBITDA breakeven in Q4. We believe businesses and developers are increasingly recognizing the benefits including significant cost-savings of abandoning or minimizing the use of the traditional cloud providers.

These providers aim to trap customers into an expensive walled garden and then charge them excessive fees to re-treatment use their data, as the leading specialized storage cloud not only do we provide customers tremendous savings by charging approximately one-fifth the price of these traditional cloud providers, but we also enable customers to build the best cloud stack for their business. We do that by providing customers the ability to store their data with Backblaze and connect it easily and often for free to other best of breed cloud providers. While the economic environment continues to face headwinds, we’re pleased that we can help our customers save money by switching from other expensive storage options. It’s also a very exciting time to run a business that benefits from data growth when applications like those based on general AI are growing explosively.

I’m excited to profile another one of our AI focused B2 customers later in this call. Our growth strategy to capitalize on our market opportunities includes the following key elements, number one, optimizing our Self-Serve go-to-market motion. Two, expanding our sales assisted go-to-market efforts. Three, leveraging partnerships and four cultivating application storage use cases. I’ll briefly touch on the progress we’re making on these elements of our strategy. Let’s start with Self-Serve. Recall from most of our company’s history, we’ve acquired customers primarily through our Self-Serve motion in which we attracted new customers to our website, with engaging content on our blog, educational material on our website and publicity driven media coverage.

These Self-Serve customers can quickly and easily sign-up for our service with just an email and credit card, which is a highly efficient means to acquire customers. We recently increased our focus on improving conversion of visitors to our website into paying customers, for example, we launched in-app messaging capabilities at the beginning of January to support guided Self-Serve. To date, we’ve seen an over 10% increase in user conversion from free to paid as a result. We have a road map of opportunities to improve the customer experience, which can increase both the number of customers signing-up and their usage of our offerings. Next, our sales assisted go-to-market efforts. To augment our Self-Serve marketing effort overtime we’ve also built-up a sales team dedicated to serving larger, potential customers and we’ve been investing in building out an outbound sales motion.

Early last year, we projected that it would take roughly a year before we begin to see results from our investments in outbound. We’re pleased to report that in Q1, our outbound team generated more pipeline in total and per salesperson than in any other quarter as we’ve honed our approach. Recall, we also mentioned last quarter that unlike many other firms, we were seeing shortened sales cycles and improving close rates. A quarter later, as we look at the larger deals upon which our sales team is focused, sales cycle shortened again and win rates or within a few percentage points of Q4’s high-rate. We believe this is yet another proof point that we are well-suited for an environment where businesses are tightening their belts. Now let’s talk about partnerships.

For B2, we know that at least 1/3 and likely significantly more of the data stored in B2 comes to it as a result of partnerships. We have two types of partners, channel partners and technology partners. We launched our channel partner program last year and it’s a strategic focus this year. As we mentioned previously, our B2 Reserve prepaid storage offering is well-suited for the channel. We were pleased to see B2 Reserve recently cross $1 million in ARR after roughly just one year in the marketplace. Partnerships are also key to enabling the open Internet we advocated for. A good example of this was our April announcement of an expanded partnership and co-marketing program with compete specialist, Vultr, one of our technology partners. This partnership enables more application storage customers to replace traditional cloud providers with our two best-of-breed platforms gaining benefits ranging from lower costs to data free from lock-in.

I will now provide one of our customers benefiting from this technology alliance, an AI company developing technology to analyze massive amounts of surveillance video to make it easily searchable for end-users. This company originally developed their application on Microsoft’s Azure platform. But felt locked-in by the walled garden approach to third-party tools and Azure’s painfully high pricing. By migrating to B2 Cloud Storage, they gained a flexibility to built their tech stack with the tools that works best for them, including Vultr for compute and reduce their spend without having to sacrifice performance. This is a great example of an application storage customer using Backblaze B2 and a data-intensive AI application. This example, along with the next few illustrate how we win customers from each of the traditional card providers by helping customers solve their problems and reduce their spend.

The first is an eSports solutions company that works with top-tier video game brands like Fortnite, Halo and Call of Duty to provide a range of event services including production, broadcast and tournament and program design. Their high-volume of production generates massive amounts of data that needs to be processed, shared and stored on behalf of their customers. With Google Cloud platform, costs were cutting into their margin and they were experiencing failures during big events. By migrating to Backblaze, they were able to do not just reduce costs and increase reliability, but also significantly increase the productivity of their distributed workforce. Their data is where they need it, when they need it and at a dramatically reduced storage cloud compared to Google.

Our last example is the school and one of the fastest-growing K to 12 public school districts in Washington State, that was paying exorbitant amounts to archive data in Amazon S3. They considered Amazon’s cold storage solution Glacier, but uncertainty around retrieval fees and delays, give a pause. They went with B2 saving 75% and they are delighted by the predictability of their go. So three customer wins, one from each of the traditional cloud providers. These examples demonstrate the breadth of customers and applications that can benefit from B2 and the strength of our product on ease-of-use, affordability, performance and reliability. I’ll now turn the call over to Frank Patchel, who can review the financial results of the quarter in more detail.

Frank?

Francis Patchel : Thank you, Gleb and thanks everyone for joining us today. Turning to our Q1 financial results, 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 Q1 revenue totaled $23.4 million, an increase of 20%. Backblaze B2 contributed sales of $10 million, reflecting 42% growth. Computer Backup revenue totaled $13.4 million, reflecting 8% growth. Note, these segment figures now include $0.2 million of revenue from Physical Media that was previously disclosed separately, that is now allocated to the business line with which it is associated.

Physical Media is associated with restoration and data capture and is easily allocated to each service. In Q1, B2 Cloud Storage represented 43% of total revenue, continuing its upward trend. We’re pleased to be able to deliver continued strong growth in a challenging economic environment. This highlights the resiliency and predictability of our business model, as well as the appeal of our cost-effective solutions for customers. Turning to retention metrics, we track net revenue retention or NRR and gross customer retention. Total company NRR was 111%, with B2 Cloud Storage at 125% and Computer Backup at 106%. Gross customer retention was 91% overall, consistent with prior year with 90% for both B2 Cloud Storage and Computer Backup. Working down the P&L, adjusted gross margin was 72% down from 76% year-on year.

In quarter one, we had increased data centre costs due in-part to data center expansion, a planned migration between data centers and a higher than anticipated increase in power costs. While we do not guide gross margin explicitly, we expect Q1 gross margin to be the low-point for the year and for it to trend back into the mid 70s for the balance of the year. Adjusted EBITDA was a loss of $2.9 million or negative 12% of revenue, compared to a loss of $3 million or minus 15% in Q1 of 2021. Year-over-year the better adjusted EBITA margin reflects the slight leverage on sales and marketing and R&D as our revenue growth outpaces our expense growth. On a GAAP basis, we also had one-time charges of $2.5 million for workforce reduction and related severance charges.

Turning to the balance sheet, cash and short-term investments including restricted cash totaled $57 million as of March 31st, 2023 versus $70 million as of the end of Q4 2022. In addition to the $2.5 million of workforce reduction costs mentioned a moment ago, cash usage also included $1.5 million for an unrelated legal settlement. We expect further one-time employee separation cash costs of approximately $1 million in quarter two. Investors should also know that our primary banking relationship is with City National Bank, a subsidiary of Royal Bank of Canada, one of the largest and well-capitalized banks in the world and we have no known exposure to any of the banks that have faltered recently. Now I’d like to provide our outlook for quarter two.

For the second quarter, we expect revenue to be in the range of $24.1 million to $24.5 million. We expect quarter two adjusted EBITA margin of minus 11% to minus 7%. At the midpoint, this is an over 3 percentage point improvement quarter-on-quarter, reflecting our commitment to approach EBITDA breakeven by Q4. We expect Q2 2023 basic share count of approximately 34.5 million to 36.5 million. Turning to the full-year 2023, we are reaffirming our prior outlook for revenue of $98 million to $102 million and in adjusted EBITDA margin of minus 10% to minus 6%. I will now pass the call back to Gleb. Gleb?

Gleb Budman : Thanks, Frank and thank you to the entire Backblaze team for executing so well in an environment that has proven challenging for many of our competitors and peers. As you just heard from Frank, we are focused on continued growth and returning to adjusted EBITDA profitability. Operator, we’re now ready to take questions from the sell-side analysts on our call.

Operator: [Operator Instructions] Your first question will come from Simon Leopold with Raymond James.

Operator: The next question will come from Chad Bennett with Craig-Hallum Capital.

Operator: The next question will come from Erik Suppiger with JMP Securities.

Operator: The next question will come from Zach Cummins with B. Riley Securities.

Operator: Your next question will come from Jason Ader with William Blair.

Operator: The next question will come from Maxwell Michaelis with Lake Street Capital Markets.

James Kisner : All right. Thanks, Gleb and Frank for those thoughtful answers. We’re heading off to web for closing comments. I’d like to mention a few investor events we’ve got planned for Q2. They include, first, the Oppenheimer Virtual Emerging Growth Conference on May 11 later this week. We’re having investor meetings hosted by Sencos in London on June 12. We’re attending the Cantor Fitzgerald cybersecurity and infrastructure software conference in New York City on June 14. And we also have investor meetings hosted by Craig-Hallum in New York City on June 15. All right. Back to you, Gleb.

Gleb Budman : Well, thank you, James and thanks for everybody for joining us today. We look forward to talking again in just a few short months. Operator, you may now end the call.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.