Backblaze Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to the Backblaze Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to James Kissner, Vice President of Investor Relations and Financial Planning. Please go ahead.

Speaker 1

Thank you. Good afternoon and welcome to Backblaze's Q2 fiscal year 2023 earnings call. On the call with me today are Glenn Budman, Co Founder, CEO and Chairperson of the Board and Frank Patchell, 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 offerings, partnerships in sales and marketing initiatives, our ability to compete effectively and manage our growth, our strategy to acquire new customers and retain and expand our business with existing customers and our efforts to hire and retain key personnel.

Speaker 1

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 10 ks and 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

Speaker 2

to update them except as required by law.

Speaker 1

Our discussion today will include non GAAP financial measures. These non GAAP measures should be considered in addition to, Not as a substitute for our GAAP results. Reconciliation of GAAP to non GAAP results will be found in our earnings release, which was furnished with our Form 8 ks 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 rate.

Speaker 1

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 gather into the Sage Technologies platform. This will be moderated by our new Director of Investor Relations, Mimi Khan. I would now like to turn the

Speaker 2

call over to Clive. Clive? Thank you, James, and thanks to all of you for joining us. We continued to execute on our growth strategy this quarter. Total company revenue grew 19% year on year with strong 39% year on year growth for B2 Cloud Storage and 7% growth for computer backup.

Speaker 2

I want to start with 2 business highlights. First, our increasing success in moving up market. I'm proud of our team for executing on larger customer deals for both computer backup And B2 cost storage. I'll go into the numbers in more detail later, but we're seeing success in moving up market both among paying customers and in our sales pipeline. 2nd, I'm happy to report that we are well on our way to our previously announced goal of approaching adjusted EBITDA breakeven in the 4th quarter.

Speaker 2

Frank will provide some insight on why we believe the company is well positioned to return to being cash flow positive without needing to access Equity Capital Markets. I'm excited by the cloud storage opportunity ahead by supporting customers in the direction they want to head with the cloud. As leading advocates for the value of an open cloud ecosystem where customers can use the combination of clouds best suited to their needs, We believe customers need to be able to store and use their data any way they see fit. Additional cloud service providers are walled gardens that charge customers egregious fees to move data out of their clouds. And yet customers' desire for best of breed solutions and the high prices of traditional cloud providers are driving customers toward an open cloud ecosystem being enabled by providers like Backblaze.

Speaker 2

And as these customers discover our ease of use, our openness to other technical platforms and our low price leadership, They tend to grow their usage and adoption of open cloud solutions as is evidenced in the customer story I'll share later. As a reminder, we have 2 cloud service offerings. The first is our computer backup business And the second is our B2 cloud storage service. I'd like to first give an update on our computer backup business. Computer backup is our more mature business, representing about 56% of revenue this quarter.

Speaker 2

While the majority of our investments have been focused on our B2 cloud storage service, computer backup continues to be a good business for us. In Q2, we closed our largest computer backup deal in company history with 1 of the most well known Social media companies in the world. This customer chose Backblaze to protect all of their employees' data because of the speed and ease of deployment of our solution. And as we worked with them, they gave our technical and support teams Special recognition for their outstanding service. We see a significant opportunity to address the needs of more businesses with our computer backup solution.

Speaker 2

For B2 cloud storage, we continue to execute on our growth strategy, which includes the following key elements. Number 1, Optimizing our self serve go to market motion 2, expanding our sales assisted go to market efforts 3, leveraging partnerships and 4, cultivating application storage use cases. Sure. With an entirely new back end that provides a giant step forward in our ability to rapidly test and improve the user experience and to ultimately drive higher conversion rates. Also on the self serve front, we launched a more targeted and personalized onboarding process To continue our focus on making it easy for customers to use Arcada, we're encouraged by the early results from this more intuitive customer onboarding experience.

Speaker 2

Moving on to our sales assisted efforts, the number of customers with ARR greater than $50,000 increased materially to 74 in Q2 versus 48 a year ago. We don't plan on sharing this statistic every quarter As it may be variable and does not necessarily meaningful on a quarter over quarter basis, but we believe there is a tremendous opportunity for back ways to move up market. We also began engagements with a number of large potential customers. While there's no guarantee that these As we all close, we are encouraged that more and more larger customers are bringing us into their consideration set. Now let's talk partnerships, the 3rd key element of the growth strategy I mentioned.

Speaker 2

For B2, partnerships are strategically important. Recall over 1 third of our B2 revenue is from customers We're using our joint solutions with partners. One recent example of a new joint solution with a partner is the announcement of Cloud Instant Business or CloudIBR by our partner Continuity Centers. They built Cloud IBR using Backblaze B2 as the storage cloud to pursue opportunities in the disaster recovery as a service market, which is forecast to be $23,500,000,000 in 2027. Now businesses of any size Can use this new cloud IVR service to get enterprise grade disaster recovery capabilities.

Speaker 2

Another important aspect supporting our partner and channel efforts is trade shows. This quarter, we exhibited at Beamon And NAB, major conferences for data backup and the media industry respectively. We are encouraged to see an almost threefold increase in pipeline from these shows as compared to last year. Finally, a recent win came through our partnership with technology partner Fastly, an edge cloud platform, which resulted in a petabyte scale deal with 1 of the world's largest video game companies. Together with the Fastly team, We were able to quickly satisfy this customer's requirements.

Speaker 2

This mutually beneficial arrangement with Fastly is a great example that provides a Better solution for the customer and creates opportunities for both open cloud companies. Moving on to the final key aspect of our growth strategy, application storage customers. Recall, we define application storage Customers as businesses that use Backblaze V2 as the infrastructure for their SaaS or Internet businesses. We've entirely rebuilt and launched a new developer documentation hub on our website to make it even easier for developers to build applications using our storage cloud. This revamped documentation hub makes many aspects of their onboarding easier, especially when working with our API.

Speaker 2

The new hub is already driving higher user traffic and we have plans for additional enhancements including more how to videos, API test environments and documentation. Making it easier for developers to onboard facilitates both self serve and sales assisted customers to adopt our storage cloud faster. As I mentioned earlier, I'd now like to share a customer Story that hits on why Backblaze's low cost leadership, open cloud partnership program and ease of use is compelling to SaaS and Internet businesses. A rapidly growing consumer video app startup received free AWS credits to start. Once those were used up, they found AWS pricing to be prohibitive for them to scale.

Speaker 2

It came to us because they recognized that we were dramatically cheaper than AWS and they were able to switch to Backvoice In just 2 weeks, in part because Backblaze provides Amazon S3 compatible APIs. The customer initially chose Backblaze for their archival data, but realized that Backblaze would also be ideal for all of their application data. And they migrated the rest of their data to us effectively doubling their storage with us. They also switched their network provider to reduce their infrastructure costs, which was enabled because we don't charge egress fees using our open cloud technology partners. This is just but one of many examples of how transformational the open cloud ecosystem is for our company's business model.

Speaker 2

Before handing the call over to Frank, I'd like to touch on 2 topics of note to investors. First, I'd like to talk about Backblaze's move to a single class share structure. On July 6, All outstanding Class B stock converted to Class A on a one to one basis. The elimination of the company's dual class share structure provides all shareholders equal voting rights and underscores Backlogs' commitment to good corporate governance and being a shareholder friendly company. And second, I'd like to share a personal update with respect to my selling of Back Boy shares, which is that I have canceled my 10b5-1 trading plan.

Speaker 2

I'll now turn the call over to Frank, who will review the financial results in more detail. Frank?

Speaker 3

Thank you, Gleb, and thanks everyone for joining us today. Turning to our Q2 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 2 key metrics, Revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q2 revenue totaled $24,600,000 an increase of 19%. Backblaze B2 contributed sales of $10,800,000 reflecting 39% growth.

Speaker 3

Computer backup revenue totaled $13,800,000 representing 7% growth. Please note that Included in this number is a one time catch up payment of approximately $200,000 from 1 customer that was received ahead of our estimates, which will not reoccur in quarter 3. In Q2, V2 Cloud Storage represented 44% of total revenue, continuing its upward trend. We're pleased by the continued strong growth as this highlights the resiliency and predictability of our business model and the appeal of our cost effective solutions for customers. Turning to retention metrics, We track gross customer retention and net revenue retention or NRR.

Speaker 3

Gross customer retention was 91% overall with 90% for V2 Cloud Storage and 91% for computer backup. Total company NRR was 110% With V2 cloud storage at 121% and computer backup at 103%. Looking down the P and L, adjusted gross margin was 75%, down from 77% last But an improvement from 72% in quarter 1, 2023. The primary driver of the decrease in gross margin year on year is due to the costs associated with our new and expanded data centers, which we mentioned in Q1. Adjusted EBITDA was a loss of $1,800,000 or negative 7 percent of revenue compared to a loss of 1 $900,000 or a negative 9% in Q2 of 2022.

Speaker 3

Turning to the balance sheet, Cash and short term investments, including restricted cash, totaled $45,000,000 at the end of Q2 2023 versus $57,000,000 at the end of Q1 2023. Both Q1 and Q2 included significant expenditures for severance and other restructuring costs. We expect lower cash usage In Q3 and Q4, since these expenses have substantially concluded. I will elaborate more fully on the cash usage improvements momentarily. Now I'd like to provide our outlook for Q3.

Speaker 3

For the Q3, we expect revenue to be in the range of $25,000,000 to $25,400,000 We expect Q3 adjusted EBITDA margin between minus 8% to minus 4%. For the full year 2023, we are reiterating our full year revenue guidance of $98,000,000 to $102,000,000 We are improving our full year adjusted EBITDA guidance from the prior range of negative 10% to negative 6% to a new guidance range of minus 8.5 percent to minus 4.5 percent. Turning back to cash usage, we have several noteworthy improvements. While we do not guide to cash usage or generation specifically, There are several reasons why we feel comfortable in our cash position. First, our recent restructuring, which included reductions in staff, a consolidation of facilities and other savings totals over $6,000,000 in annual savings.

Speaker 3

2nd, in Q3 and Q4 2023, we will conclude the principal and interest payments amount of over $6,000,000 in capital expenditures plus interest previously established an extra buffer to safeguard against supply We continue to maintain sufficient buffers today, but no longer require elevated levels. Thirdly, due to both our software innovation and greater hardware efficiency from the manufacturers, Our capital expenditures for production equipment are lower both as a percentage of revenue and in total dollars year on year. For example, during the most recent 3 year period, capital expenditures as a percentage of revenue is expected to decline from 28% in 2021 to approximately 18% in 2023. This reduction is occurring despite the over multiple years. Finally, we remain on track to approach adjusted EBITDA breakeven in Q4 2023.

Speaker 3

This improvement stems from the areas already mentioned plus lower growth in headcount additions relative to 2022 when many departments stood up brand new teams that were critical to pursue our growth initiatives and support our new public company requirements. We believe this combination of restructuring savings, moderating growth in headcount and slower capital additions positions us well to reach cash flow breakeven without accessing Equity Capital Markets. I will now pass the call back to Gilev. Gilev?

Speaker 2

Thanks Frank. Finally, I would like to recognize the commitment and hard work Thank you, and good morning everyone. Thank you for joining us today. We're now ready to take questions from the sell side analysts on our call.

Operator

And our first question will come from Chad Bennett of Craig Hallum. Please go ahead.

Speaker 4

Great. Thanks for taking my question. Congrats on the quarter. So just, Gleb, maybe just talk about on the B2 Cloud side, A little bit I didn't hear much on the macro commentary, if there was any. And I think the past few quarters or a couple at least we've talked about Sales cycle shrinking and win rates improving, just kind of how that business performed relative to your expectations from a Bookings or ARR standpoint would be great.

Speaker 2

Yes. Thanks, Jeff, for the question. Good to hear from you. So maybe I'll start and then if Frank has anything to add to it. I think from the macro perspective, one of the things that we talked about in prior quarters is that The traditional cloud providers have been talking about the headwinds and challenges of customers looking to optimize their Spend with them, the customer is basically looking at it and saying, how can I provide the same value to my customers while decreasing my cost of infrastructure?

Speaker 2

And obviously, a great way to do that is to switch to a lower cost provider like BackWaze. And so They've been seeing significant optimization challenges to their environment. And we have been on the one hand, there are of the headwinds in the past of customers just generally doing less industry wide, but on the other hand, we get to be the beneficiaries of Customers looking to optimize away from some of the traditional clouds. I think we're still seeing customers coming to us For those same reasons, right? Customers are continuing to try to optimize off of the traditional cloud providers and continuing to look for high value Choices and we're the beneficiaries of that.

Speaker 2

So we talked about close rates and close cycles in the past. We're not going to report on those quarter on quarter on quarter, but what I'll say is that they've been relatively consistent with what we've said in prior quarters, Even improving slightly. So I think we're going to think about kind of how that's looking overall.

Speaker 5

Okay.

Speaker 4

And then maybe a follow-up on B2 Cloud. Just any commentary on B2 Reserve bookings And in particular kind of performance through the channel there. And then I believe from a guidance standpoint, You guys have talked about B2 Cloud ARR growing 40% this year. Are you still comfortable with that growth rate?

Speaker 2

So let me touch on the B2 reserve and then I'll hand to Frank for the growth rate for B2. On B2 reserve, One of the things just for people who may not remember from prior calls, the reason we are excited about V2Reserve is that Yes. We see it as something that is good for customers, for the channel and for Backblaze. B2Reserve is the Packaged version, it's the fixed price version of our B2 offering. So, it's good for the customers because they have predictability, it's good for the channel because For them to sell that.

Speaker 2

And so, we launched that in roughly the middle of last year. So, V2Reserve is has Continued to grow strongly sequentially quarter on quarter. So we're seeing good traction with As we talked about last quarter it was $1,000,000 in ARR. So it's not a dominant portion of the business. It's not super material yet, But we are enthusiastic about the growth.

Speaker 2

And maybe Frank you can talk to the B2 growth numbers.

Speaker 3

Thank you, Glenn. Hi, Chad. So recall that B2 grew around 40% in quarter 1 And in quarter 2, and we expect a similar growth rate in quarter 4. But specifically in Quarter 3, we do see a 1 quarter dip in that V2 growth to around 30%. And this is due to certain headwinds, including softer data growth recently, some seasonality And it's really a tough comparison to the quarter 3 2022 due to that prior initial ramp Of our largest account ever.

Speaker 3

So but as I said, we expect that Q3 dip to be temporary and we believe B2 will accelerate Back to it's Q4 40% or above.

Speaker 4

Got it. And then maybe last one, if I may, for you Frank, probably. Just So that it appears to be you've took out $12,000,000 plus in annual costs out of the business. I guess a couple of questions. Does that annualized rate run rate start in Q3 here?

Speaker 4

And then secondly, can you provide us any color Into how that segmentation work looks on the P and L from a cost standpoint and where those costs came out of?

Speaker 3

Yes. The it's actually what's going on is that we've got costs that are moderating in many areas because Remember that in 2022, we stood up all of our new departments, right? And that was to we really pursued that Enormous potential for V2 in front of us and to be a public company. So what's happening right now is we're really moderating that growth Quite a bit. From a P and L standpoint, we do have savings across all the line items.

Speaker 3

So in the gross margin, for example, we have because we have lower lease costs, we're buying less Equipment for the reasons I stated, the depreciation does go down. We do have headcount that either reductions or Much slower growth in really all the areas. So it's really pretty widespread.

Speaker 4

And evenly spread, would you say, I mean, is there a way to think about magnitude of each line, Rough magnitude of the line items?

Speaker 3

Well, the facilities It goes into the G and A, but we have other moderating expenses there. And in the when in our restructurings, we reported that It was in sales and marketing areas that were not performing as well as we had hoped. So we did some moderation there.

Speaker 4

Okay. Good. I appreciate it. Nice job on the quarter. Good to see the reiteration of the guide also.

Speaker 2

Thank you.

Operator

The next question comes from Elle Neiver of Lake Street Capital Markets. Please go ahead.

Speaker 6

Hey, this is Elle on for Eric Martinuzzi. I'm hoping you could talk a bit more about your expectations on IT Spending going into 2024 and what sort of feedback you've received from your channel partners?

Speaker 2

Hi, Al. Thanks for the question. So by IT spending, I assume general kind of customer spend on IT infrastructure. I'd say, we're certainly not guiding 2024 yet. And I don't know that we have A tremendous amount of visibility into what customers are expecting to spend in 2024.

Speaker 2

I think we've seen some of the traditional cloud providers and some of our peers talking about That they expect customers to continue to be focused on optimization for the near term and And possibly slightly longer term future. So just from kind of the industry data that we're seeing, it seems like This trend of customers continuing to look for where to find value, so that they can provide the services That they want to provide to their customers, while continuing to look for spend optimization, doesn't seem to have quite stopped yet. I think in the AWS announced that their growth still slowed to 12% Year on year and I think that was still driven in large part by customers continuing to look to optimize their infrastructure. And so it seems like That has not yet stopped. And so we as they continue to look to optimize, we'll continue to look to help them.

Speaker 6

Great. Thank you. And then last question, could you just touch on gross margin a bit more and go into detail on Q2 and what you're expecting for the rest of 2023?

Speaker 3

Yes. We always are expecting I'll do non GAAP. We're always expecting the non GAAP gross margin to be in the mid-seventy percent range. What happened was we were lower than that in quarter 1. We were at 70 2.

Speaker 3

And the reason that we bounced back up in quarter 2 is that we had cessation of a lot of duplicate expenses as we are moving into our larger data centers. And then we opened up new data There's a lot of one time costs in setting them up, kind of across the board. And once we had all of that behind us, Which was in quarter 2, we had that nice bounce up again. So as we look at the gross margins going forward, We do feel that they're going to be quite they're going to be in that range, continuing because we do invest all the time in the data centers, But we don't have this large increase in either the number of data centers or expansion.

Speaker 2

Great. Thank you.

Operator

The next question comes from Erik Suppiger of JMP Securities. Please go ahead.

Speaker 7

Yes. Thanks for taking the questions. First off, just curious, any update on what your hiring plans are for the rest The year and where you expect headcount to be over the at least where did you end with headcount in Q2? And then you had talked about your Growth year over year growth going down to 30% Q3 and then back to 40% in Q4. What is the biggest factor for Q3 the tough comp?

Speaker 7

Or what gives you the confidence that we will See the growth rate recover.

Speaker 3

Okay. On headcount, we haven't provided quarterly headcount, But what we did provide was this, last year we grew headcount by 45% for the reasons that I stated earlier with Our first public year and we needed to stand up groups to go after this enormous opportunity that we have. Now what we said also is It's really moderating where we're filling in here and there for programs and our headcount is and then we did have a reduction in staff. So our headcount Remains low. It has a very modest uptick for the rest of the year.

Speaker 3

And that's one of the reasons that we're so quickly heading to It's been a breakeven. As far as our confidence on what is causing That one time dip, it is for the reasons that we said. They're pretty equal. I would say the when you have your fastest And largest when you have your largest account start as fast as they did in quarter 2, they grew the entire quarter and were at their peak within 1 quarter. That does make a difficult comp, because they're so large.

Speaker 3

We had said before they're $1,000,000 account annualized. And the other factors are there as well. So but when we look at quarter 4, we have much more optimism Of the 40%, but it's really returning back to where we've been.

Speaker 7

Okay. Then lastly, have you seen any Change from AWS from a pricing perspective.

Speaker 2

This is Buck. We haven't I mean, I think that from a competitive landscape We still see a number of customers moving over to us from AWS. We shared another one on the call. This time, I think in the last quarter we shared one coming from Amazon, one coming from Google, one coming from Azure and we continue to see Moving from those both from the for the pricing reason directly that we're about 1 5th of their price point, but also because Of our open ecosystem, the free egress that we provide to our technology partners is something that a lot of our customers appreciate as well as the ease of use Of the service.

Speaker 7

All right. Very good. Thank you.

Speaker 2

Thanks, Eric.

Operator

The next question comes from Simon Leopold of Raymond James. Please go ahead.

Speaker 5

Great. Thanks for taking the question. I wanted to see if maybe you could help us understand the sensitivity of your cost of goods sold to Essentially, the cost in data centers and really the question sort of rooted in the view that data center space is scarce 2 year or 2 years ago, cost of electricity has gone way up and your gross margins have been pretty stable. So I'm trying to get an understanding of Sort of how that's affected you and how you think about that within the cost of goods sold? Thanks.

Speaker 3

Yes, you're right, Eric. The data centers have been and their expenses have been stable in the sense that we haven't been as affected By what you're doing and by what you're saying. The data centers, when we actually remember they're closed sites And we only contract for what we believe we will use and if we need more we can do that. So we're in contracted rates with the major Providers and we so therefore can anticipate what our costs will be in the future. As to the power, We did anticipate electricity.

Speaker 3

We did anticipate large increases, not as large as what we saw in Europe, but Europe is a smaller data And so, we've been comfortable in being able to forecast it and absorb those costs.

Speaker 5

Great. And just as a quick follow-up, sort of rough math suggests that your operating expenses Should be maybe just south of $19,000,000 in the next quarter. So you're just putting a number to it would be helpful. I think everybody's Should have asked that question in a couple of different fashions, maybe just south of 2019 makes sense to what you're expecting?

Speaker 3

What we've said before is that we really expect quarter on quarter expenses to be relatively flat. They're not exactly flat because we have programs that are in some quarters and out of others, but I think you can continue to see that. What you saw on quarter 1 to quarter 2 was only a 1% increase in OpEx expense. So that's been our trend.

Speaker 5

Great. Thanks for taking the questions.

Operator

The next question comes from Zach Cummins of B. Riley Securities. Please go ahead.

Speaker 8

Hi, good afternoon. Thanks for taking my questions.

Speaker 4

Gleb, I just wanted

Speaker 8

to ask you about the prospects of moving up market. As you're thinking about Getting involved with larger customers, I mean, what's the primary channel that you believe that is going to be getting you toward Those larger customers, is it really the outbound channel or through strategic partners?

Speaker 2

Yes. Thanks for the question, Zach. So one of the things we said At the IPO was that while we're focused on the mid market, we our platform can be can support any size of customer. And so The first part of that is, I'm excited that we're seeing larger customers wanting to use the platform and we're successfully winning those deals and Having them be happy satisfied customers on our platform. In terms of where do we find them from, Our outbound sales team that we stood up with some of the proceeds from the IPO has started generating pipeline and bringing in some of those deals.

Speaker 2

So we're seeing a healthy pipeline of which larger deals are an important part of that pipeline. But we're also seeing deals coming for us that come to us inbound. And this is I think a function of The blog and the content marketing that we have invested into over the years And some of those customers, they read about us, they learn about us and then they come to us Directly. So we see it from both. I would say that we expect that we will Beginning some from channel, we mentioned one that came through our technology partner Fastly.

Speaker 2

We think that our partners benefit From working with us, so the fastest example is any customer that works with 1 of the Edge compute providers, they need to have data and that data needs to be stored somewhere. If that data is locked up inside of 1 of the traditional cloud providers, It makes it expensive and difficult for the customer to use those other best of breed edge cloud providers. And so It's in the customer's best interest. It's in our partner's best interest to have them move their data to us. And so We had that win from Fastly that they brought to us and we expect to see more deals coming from technology partners As part of the ecosystem bringing deals to us, some from the channel, we're already seeing pipeline from outbound and we're already seeing inbound deals as well.

Operator

This concludes our question and answer session. I would like to turn the conference over to Mimi Kong, Director of Investor Relations.

Speaker 9

Thank you, Andrea. I want to thank all the analysts for joining the call today and thank you for all your questions. Next, we will answer questions submitted by retail investors on the SAI Technologies The first question I have is for both, Glenn and Frank. What is management's plan to become a more profitable company?

Speaker 2

So in terms of becoming a more profitable company, there's 2 obvious pieces to that. We're going to grow revenue and we're going to moderate expenses. On the growing revenue side of it, we talked about the 4 pillars that we're focused on with our growth initiatives, which is Optimizing our self serve motion, which makes it very efficient for customers to sign up, scaling our sales assisted With deals like the ones that we talked about over $50,000 that we're seeing traction with and the $1,000,000 deal that we signed last year and the largest computer backup deal that we just announced this quarter. So that's on the sales assistance side. On the partnerships So I'd expand both with technology partners and channel.

Speaker 2

And then the last one being the application storage use case where We help customers as a strategic part of their infrastructure. So investing behind the growth Of the company, so that we grow revenue and then moderating on the expense side. And maybe Frank, you can touch on the moderating on the expense side.

Speaker 3

Yes. We're continuing to drive efficiency and it's through the disciplined headcount additions. And as Glyp said, we're really investing in projects with solid returns. We measure everything. So we can see which ones are Doing the best where more investments should be and which ones we should pull back on because we're not as happy with those returns.

Speaker 3

And the other important thing is that we're on track to approaching adjusted EBITDA breakeven in that 4th quarter.

Speaker 9

Now next question is for you, Glenn. What are some future projects for the company?

Speaker 2

So future projects, I assume also includes future products. So we have a long history of Improving our services, adding value to customers, we don't disclose our product roadmap for competitive reasons. But you can look back at some of the things that we have done. So for example, we opened the East Coast data region for customers to be able to choose that. We added cloud replication, which enabled customers to store their data in multiple regions by turning on that functionality.

Speaker 2

We launched Your Reserve, which we talked about a little bit earlier during the Q and A, a partner API, which helps our partners make it easier for them to integrate our service into their product offerings, Extended version history for our computer backup customers. So we've done a lot of things to help customers store their data, protect their data and also use their data. That's where we continue to invest in. We also are working with our partners on enabling solution sets. So the solution set that we talked about with our partner continuity centers for disaster recovery is an example of that as well as Some of the other services that we've done with our edge compute partners.

Speaker 2

So overall, I think you can look back at some of the roadmap items that we Have shipped as examples of things that are on our roadmap to ship.

Speaker 9

And, Gleb, what do you view as Backblaze's competitive advantage over

Speaker 2

So in terms of distinct and unique, so first of all, we are dramatically easier to use. And I know a lot of people say that I know a lot of technology companies in particular say that. And one of the things that we've seen is customers that sign up with us and then later come back and say, Oh my God, it was so easy to use your services. And the conversations I've had with some of them Well, yes, we've said that it was easy. And but the response I often get is, I know you said it was easy.

Speaker 2

Everybody says their But yours actually was. And I think a lot of times ease of use is an underrated benefit. An analyst found that our customers save 92% of their time by being because we're so much easier to use. Apple has built a $1,000,000,000,000 company by focusing on making products easy to use. So I think ease of use is one very key Differentiator for us, we're also dramatically less expensive than other providers and We are supporting the open cloud ecosystem and we do that by making it easy and inexpensive for customers To use their data in the way they see fit, to use it with other edge compute providers, with other AI services, with other Compute providers, etcetera.

Speaker 2

So by enabling them to have that open ecosystem of data, we make it so that it's Easier for them to build their business the way they want to build it. So much easier to use, much less expensive and supporting the Open Ecosystem.

Speaker 9

And this next investor would like to know where do you see growth opportunities in the coming year?

Speaker 2

So growth opportunities in the coming year, I mean, we're pursuing this $50,000,000,000 market by 2027. So there are many opportunities. I think that we talked about the growth initiatives that we're pursuing. We also highlighted that We're seeing momentum and investing behind going after larger customers in the mid market. And so I see that As an interesting opportunity for us, B2 Reserve, which we talked a little bit about it earlier on this call, it's Not a very large part of B2, but it is a rapidly growing part of B2.

Speaker 2

And on the computer backup side, We have helped both individuals and businesses for a long time. We're continuing to see More businesses specifically come to us looking for us to help them protect

Speaker 9

Now this next shareholder asks, How will I benefit with the other shareholders putting my faith and money with your company? I've been optimistically happy and supportive to date. Why should I continue down this path?

Speaker 2

So first of all, I appreciate all investors and shareholders investing and having faith in us and Giving us the runway to execute on our growth initiatives. Certainly, I also hope A bit, as Charles said, some of you may choose to become customers, which will both help the growth of the company and also hopefully help you as well. From the investor side specifically, since the time we went public, we entered into A market which was facing inflation, recession fears, interest rate hikes. And despite that, we executed as we said, we have been building the company in a stable and predictable fashion. We executed on our growth initiatives.

Speaker 2

We grew revenue double digits year on year in every quarter since we went public. We're approaching adjusted EBITDA breakeven, which is a key milestone on our path to profitability. And as Frank talked about, we I've taken action on improving our cash flow trajectory as well. Recently, we also eliminated the dual class share structure that we had, which Now it gives all shareholders equal voting rights. And we saw that as a good step for corporate governance and also just being a shareholder friendly company.

Speaker 2

So I think we've executed well and we're taking actions to be supportive to shareholders overall.

Speaker 9

The next question is a little bit more technical. What strategies are in place to ensure privacy of stored data?

Speaker 2

So privacy and security of data are actually both critically important for us. We have a Chief Information Security Officer with a staff in place. That team works every day to ensure privacy And that team also has throughout the organization other partners that work with them across the company ensure the security and privacy of data, we encrypt data in transit. We offer various levels of encryption at rest. We use 3rd parties to attempt to find vulnerabilities in our systems.

Speaker 2

Overall, we have a robust Security and privacy program with physical, digital and policy safeguards. We recently completed our SOC 2 Audit, so overall we're taking a host of actions and have the teams in place to protect customer Customer Data Privacy and Security.

Speaker 9

This next investor asks, your competitors have raised prices. Are you considering the same? Should you?

Speaker 2

So we certainly believe that we're an excellent value. As we talked about, We're seeing many customers leaving the traditional clouds to continue providing high value to their customers While reducing their infrastructure costs, we believe we're a great value in the current market and we are always

Speaker 9

Now this next question is very topical. Is Backblaze going to use AI for future growth?

Speaker 2

So AI is certainly something that's Top of mind, it's very exciting time to run a business that benefits from data growth, when there are new applications Constantly that are generating data, certainly generative AI is growing explosively. We are Starting to use and looking at additional ways to improve productivity inside of the company using AI. And on the AI front, our customers are using AI. We have Dozens of AI customers that are through our sales assisted motion alone. And you may remember, Our sales of customers are about 20 times larger than our self serve customers.

Speaker 2

So There's certainly a lot of growth being generated by in data by AI use cases And we're excited about the opportunities to leverage that for the growth of Backlinks Gold.

Speaker 9

Next question. How are you encouraging employees to seek more responsibilities and leadership roles? Now this investor also notes, I believe this promotes staff to self promote the company and in part create positive culture and increase ROI.

Speaker 2

So I love the question in part because we all agree with the sentiment, right, which is That, at the end of the day, the people make the company and that happy and successful people in the company, lead to happy and Our culture is very important to us. We certainly believe in promoting from within. I think we have Some data points that show that we've been supportive on this front. We were recognized by Great Places to Work. We were recognized for a 2023 Diversity We would recognize by Fortune's Best Workplaces in the Bay Area.

Speaker 2

Our turnover continues to be low And we continue to regularly reevaluate how we can help ensure that our employees are happy and successful As part of the company and hopefully then also are excited about promoting Backblaze To the customers, their friends, their other partners, etcetera.

Speaker 9

I didn't give you a rest, Glad. You did a marathon of questions. Next question will be for Frank. So how has the management Managed or limited possible exchange rate fluctuations?

Speaker 3

It's a good question because we do have customers in 175 countries, But we don't have large foreign currency risk. And the reason for that is that our customers pay us in U. S. Dollars. And then as we look at our expense side, we just don't have a lot of international expenses.

Speaker 3

We have some for our international data centers, we have international taxes, Overall, the foreign currency risk for us is very low.

Speaker 9

And that concludes the portion of questions from SAI Technologies. Andrea?

Operator

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

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Earnings Conference Call
Backblaze Q2 2023
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