Backblaze Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the Backblazes 4th Quarter and Fiscal Year 2023 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mimi Kang, Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Backblaze's 4th quarter 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 features and offerings and the impact of price changes, partnerships and sales and marketing initiatives, our ability to compete effectively and manage our growth and our strategy to acquire new customers and retain and expand our business with existing customers.

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 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.

Speaker 1

Reconciliation of GAAP non GAAP results may be found in our earnings release, which was furnished with our Form 8 ks 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, gross customer retention rate, number of customers and ARPU. 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 SAI Technologies platform. Thank you for joining us.

Speaker 1

And I would now like to turn the call over to Gleb.

Speaker 2

Thanks, Mimi, and thank you everyone for joining us today. We are very pleased with our Q4 results. We delivered new product features and accelerated revenue growth with B2 Cloud Storage having particularly strong growth of 47% year over year. We also demonstrated continued financial strength as we reached adjusted EBITDA profitability for the first time as a public company and dramatically reduced Cash usage. In addition, we are reiterating our forecast to exit this year with at least $20,000,000 of cash on hand.

Speaker 2

I want to take a moment to highlight some key results. 1st, we delivered significant innovations. 2nd, we've continued to move up in the mid market. Finally, we've accomplished this while dramatically improving our financial position. We've accelerated our overall growth rate to 25 percent in Q4, while at the same time improving our profitability and cash usage.

Speaker 2

We achieved adjusted EBITDA of 6%, beating the high end of our prior guidance of 3% and we used just 2 point 4 $1,000,000 less than we used in the prior quarter. These three achievements provide a strong foundation for the year ahead, Positioning us to take advantage of a shift we're seeing in the market. I want to take a moment to talk about that shift. We're seeing larger businesses come to us because they want to build using the cloud providers that best suit their needs instead of being forced to stay in the traditional closed cloud platforms. For some of these businesses, it's about unique functionality.

Speaker 2

They're able to optimize with specialized solutions fitted to their use case. For others, it's financial. They can achieve massive savings by migrating away from expensive and complex traditional cloud providers. And for some, it's about trust. The providers won't compete with them indirectly.

Speaker 2

These are some of the reasons companies are increasingly wanting to use best of breed providers in an open cloud ecosystem. Together with other cloud companies, we're well positioned to help drive that open cloud ecosystem, which is defined by interoperability, best of breed functionality, Affordability and the free movement of data. I want to share a great customer story that highlights the value companies are seeing with this open cloud approach. The customer is a media streaming service with over 22,000,000 global users. Their previous solution was built on top of AWS, which was constraining their growth due to technical limitations and excessive download fees.

Speaker 2

Download fees which are referred to as egress fees in our industry are one of the restraints the traditional cloud providers use to keep customers from leaving their platforms. Our commitment to free egress, our scalable and performance storage platform and our easy integration with CDN partners convinced this customer to switch to Backblaze B2. By switching to Backblaze, this customer was able to develop and deliver features to their end customers that the previous platform couldn't support. Even more impressively With Backblaze, they were able to save over $800,000 on egress a year. That's 8 $100,000 each year that they can invest back into their business, grow their customer base and in turn grow the data stored with Backblaze.

Speaker 2

Turning to innovation, we are focused on providing the performance and functionality businesses need to move away from legacy solutions. For over 16 years, the Backwoods team has excelled at innovating on cloud by finding greater performance and greater efficiency in hardware and software. In Q4, we launched Shard Stash for Back Boy's V2, which enables upload speeds up to 30% faster than Amazon S3. Also in Q4, we introduced free egress up to 3 times the amount of data stored for every B2 cloud storage customer, furthering our commitment to the open cloud. We are the only cloud storage provider of scale that is offering this to customers without hidden fees or gotchas.

Speaker 2

We believe Backblaze is uniquely positioned to be the de facto storage platform at the center of the open cloud as we support customers to use their data where and how they choose. We also recently launched computer backup enterprise control. This is a feature set that gives businesses greater administrative tools for an additional $2 per computer per month. With enterprise control, IT admins have the ability to meet their compliance requirements and easily manage backups for 100 or 1000 of computers. We're only a few weeks into availability, but we're encouraged by the early feedback we've received from customers.

Speaker 2

I'm really proud of what our team has done, but I've been even more excited for what's next. Our team continually improves the performance of our and enhances our products to serve new use cases. For instance, while a number of AI companies are already succeeding with us and we're integrated with leading GPU Compute Providers. Our team is investing on that success. We continue to innovate on our storage architecture to better serve the increased demand and evolving workflows of AI related storage.

Speaker 2

We are also excited about the addition of David Ngo as our new Chief Product Officer. David is the former CTO of metallic at Commvault and brings over 25 years of experience in the data storage and protection industry. David is coming aboard to help lead the team to bring even greater innovation and strategic leadership for our customers and partners. So we've delivered significant innovation and set ourselves up for more. Next, I'd like to talk about moving up market.

Speaker 2

First, we continue to build our channel program. Working with our channel partners helps to both increase our velocity on smaller deals and to identify and close larger deals. A great example of the latter is a $100,000 plus deal that we closed in Q4. One of our channel partners identified an NFL team that was looking to update their approach to data storage. As many of you probably watched the Super Bowl last weekend, you can imagine the incredible amount of video and other data generated during professional football games.

Speaker 2

Working together with our channel partner, we helped this customer simplify and improve the way they work with all of that data. 2nd, on the partnership front, we just launched our new Powered by Backblaze program. Powered by lets businesses add B2 cloud storage to their product offerings without any of the hassle or complexity of managing cloud storage infrastructure. For example, early powered by customers include an edge compute platform provider and a transcoding cloud service provider. I'm excited for these types of partnerships because they help businesses expand their offerings, make it easy for their customers to get access to best of breed cloud storage and provide back blades with access to new distribution channels and customers.

Speaker 2

Finally, as I've discussed, we have been successfully winning deals with larger customers and we are delivering the features and the performance larger customers are looking for. As the company takes the next step toward winning these customers at scale, we're updating our sales approach accordingly, including growing headcount and adding new sales commission program. We will also be hiring a new SVP of Sales. Nilay Patel, our current VP of Sales helps build the go to market for B2 Cloud Storage from the ground up and led the efforts to open up the use cases we currently serve, Neil and I agreed that now is the right time to pass the baton as the company its path beyond $100,000,000 An executive search is underway during which Nelay will continue to lead the sales organization to surest move transition. Once the new Head of Sales is on board, Neele will turn his focus to our AI initiatives, which are aimed to help support customers in managing the explosive growth of AI data and its use cases.

Speaker 2

I'm very proud of what we've accomplished in 2023 by continuing to innovate, moving up market and enhancing our go to market approach, Backbloiz is in a great position to help our customers reap the full benefits of the open cloud. At the same time, we have dramatically improved our financial position as we accelerated revenue growth, achieved adjusted EBITDA profitability for the first time as a company and dramatically reduced cash usage. I'll pass the call to Frank now to review our financial results.

Speaker 3

Thank you, Gleb, and thanks everyone for joining us today. Turning to our Q4 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 Q4 revenue totaled 28,700,000 an increase of 25% year over year.

Speaker 3

B2 cloud storage revenue was $14,000,000 reflecting 47% growth. Computer backup revenue totaled $14,700,000 reflecting 10% growth. Quarter 4 represents the introduction of our pricing changes. The exact impact of the Q4 price increase cannot be determined for a number of reasons, including changes we made to the product offerings. However, we believe without the price increase, organic growth for both B2 cloud storage and computer backup would have been similar to quarter 3.

Speaker 3

As a result of the price adjustment, It is common to see an increase in customer churn. However, we did not see any incremental customer churn in quarter 3 at announcement or in quarter 4 at implementation. This is illustrated by our continued strong gross customer retention rate of 91% for the total company. We did see some incremental data and license reductions likely due to the price increase, which was expected. We believe our consistent and strong customer retention rate speaks to the value of our services and how offering these popular features of 3 times free egress and extended version history further differentiates us from our competition.

Speaker 3

Turning to our net revenue retention or NRR. Total company NRR was 109% with B2 Cloud Storage at 122% and Computer Back up at 100%, which have all improved over the prior quarter. Working down the P and L, adjusted gross margin increased about 300 basis points sequentially to 77%, which was primarily due to the price increase across our products and to a lesser extent the higher utilization of prior data center expansions. This quarter, adjusted EBITDA was a positive $1,600,000 or 6% of revenue and beat the high end of our prior guidance of 3%. This favorably compares to a loss of $2,500,000 or negative 11% in quarter 4 of 2022.

Speaker 3

And as Gleb mentioned, This is the first time we have reached adjusted EBITDA profitability as a public company. This was the result of a significantly growing revenue with a limited increase in operating expenses. The beat itself benefited from higher revenue due to lower than expected churn and headcount related Turning to the balance sheet. Cash and short term investments, including restricted cash, totaled $33,400,000 at the end of Q4 2023 versus $35,800,000 at the end of Q3 2023. Our cash usage for the quarter came in at $2,400,000 which represents a significant reduction of over 70% from $9,000,000 of usage in quarter 3.

Speaker 3

Moving on to our guidance. For the Q1, we expect to be in the range of $29,600,000 to $30,000,000 We expect Q1 adjusted EBITDA margin between 4% 6%, reflecting continued strong performance in a quarter which is typically a high quarter for expenses due to payroll taxes and other compensation related expenses. For the full year 2024, revenue guidance is $126,000,000 to $128,000,000 with the midpoint reflecting 25% year over year growth. The full year adjusted EBITDA guidance range is 8% to 10%. Because of our confidence in this guidance, we have narrowed the range for revenue and adjusted EBITDA.

Speaker 3

For year end 2024, we project having at least $20,000,000 in cash. This cash forecast includes principal lease payments on capital leases of about 15% of revenue. We also anticipate about $2,400,000 in ESPP proceeds and an additional amount from employees exercising stock options. For reference, we received $1,300,000 from stock option proceeds in quarter 4. Looking beyond 2024, we continue to forecast cash flow breakeven by mid-twenty 25.

Speaker 3

I will now pass the call back to

Speaker 2

Gilead. Thanks, Frank. In summary, the team has done an excellent job delivering product innovation, driving revenue growth and achieving adjusted EBITDA profitability. We are uniquely positioned to capture the massive market opportunity ahead and execute on our mission to help customers leverage the open cloud ecosystem. Operator, we're now ready to take questions on our call.

Operator

We will now begin the question and answer session. Our first question comes from Chad Bennett with Craig Hallum. Please go ahead.

Speaker 4

Hey, hello. Thanks for taking my questions. Great job on the quarter. I mean, the EBITDA number was phenomenal. Good to see that leverage playing out.

Speaker 4

Just in terms of Frank, I know you talked about really minimal to non existent uptick in churn as a result of the price increases to date. Just thinking about the first blush at the fiscal 2024 guide, are you Expecting that to change or anything directionally there on churn on either side of the business. And then With respect to the 2 segments, is there any difference in kind of growth rates that you're factoring in those two segments relative to what you just did in Q4 for fiscal 2024?

Speaker 3

Hi, Chad. Thanks for the question. Let me address the churn first. We were pleasantly surprised and very pleased with the churn rate because you would think when you have a price increase that you would have had some increase in churn. And retention was exactly the same as in the prior Q3.

Speaker 3

And we had expected to have some increase at announcement, which we didn't see and some increase at implementation, which we didn't have. So that was very good. So we Now have over 4 months of experience with it and with January over 5. So we're not expecting any increase in that churn rate. So we think the customer retention will remain at that very high company 91%, certainly in that range.

Speaker 3

But we did have, if you look at The data and license reductions that we did see, We did have a relatively small reduction there of about 1% to 2%.

Speaker 2

Got it.

Speaker 4

And then just in terms of the 2 segments, Frank, and how you're thinking about that relative to 4th quarter growth rates?

Speaker 3

Yes. So as far as our growth rates go, we think our growth rate without the price increase Kind of mirrored what was going on in quarter 3. So we were very pleased to see that growth rate of B2 at the high 30% range in organic and 40% or better with the price increase and we're expecting that through fiscal year 'twenty four. And then the same on the computer backup, that organic side was in the low single digits and with the price increase, We're in the low double digits and that's how we're projecting it forward in 2024.

Speaker 4

Got it. Thank you. And then maybe one follow-up, if I could, for Gleb. You highlighted a few times, Gleb, on the call that The increase in deal sizes you're seeing and moving up, I think you characterize it more into the mid market. I guess, is there just you cited a couple of very interesting wins.

Speaker 4

But can you just speak to whether it's B2 reserve Pipeline growth or maybe it's actually additional use cases you're seeing in the mid market that maybe you weren't seeing a year or 2 ago, kind of any characterization of the magnitude of improvement or demand you're seeing from the mid market?

Speaker 2

Yes. Thanks for the question, Chad. And by the way, maybe just to say, because I think Frank was talking about the growth rates of the businesses and And it said high 30. And so I think just to make sure that came across through the audio, which is it's 30% being a high number, not a high 30s, organic growth rate. So just to make sure that was heard correctly.

Speaker 2

We are still very excited about the fact that in 2024, we're seeing around 40 growth for V2, which I think is obviously a very strong growth rate. In terms of the upmarket movement, So we're seeing upmarket movement in various ways. We're seeing that in backup customers. We're seeing that in application storage We're seeing that in media and Tandem customers in general, we're seeing more upmarket movement. The application storage customers and committed Tract that we're seeing in particular are some of the areas where we're seeing upmarket traction.

Speaker 2

These are customers that typically are on one of the traditional clouds. They've gotten to some scale and they want to move off and do that for a combination of savings on the storage often egress is an important component for them, because they're using other cloud providers like CDNs or compute providers and they need the data to be able to exit from the storage and not be charged an arm LA for that. So the example I gave on the call a few minutes ago around the customer that saved $800,000 that's an application developer. It's a media streaming company, but it's location, storage use case. And that's probably where we're seeing some more of the larger deal type traction.

Speaker 2

Got it. Thanks much. Nice job again. Thanks for the questions.

Operator

The next question comes from Jason Ader with William Blair. Please go ahead.

Speaker 5

Yes. Thank you. Hey, guys. First question for me is just for the media streaming use case that you just talked about. How are you finding these customers, Glad, are they coming to you?

Speaker 5

Is it part of the some of the investments you've made in salespeople? Just give us a sense for how you're landing some of these upmarket customers.

Speaker 2

Yes. Thanks for the question, Jason. So media and entertainment is a market use case that we started looking at a while ago because media companies have large volumes of data, video footage, photos, music And they typically have workflows around those that benefit significantly from cloud storage as the way that that data flows. So we have media and entertainment customers that do their backups and archives with us. We also have media and entertainment companies that do their workflows with us where it used to be, especially pre COVID times, that they would all sit in one place and do their production work together in an office, That has become much more distributed, which means you need access to all that media flow all that media assets in a cloud environment so that they can access the data regardless of where they are.

Speaker 2

And some of them are also taking that next step and actually doing using our cloud storage offering. So we see it as an evolution for them. The first most basic level is the backups and archives, then it's a more active archive use case where they archive the data, but then they're pulling from it, then actually developing the media production, leveraging our workflows and then finally doing distribution. And so terms of where we're finding them, a lot of them continue to come to us through the same methods that we attract all of our customers, which is A combination of content and community, the blogs that we publish, which has millions of readers around it, a lot of those also end up being media entertainment customers. But we've also layered on Marketing motions, including events.

Speaker 2

So we have we present that media events such as NAB in Las Vegas. We've been at other media events in New York and Amsterdam and other places. So that layers on top of that. And then the channel effort that we've been investing in is also a good partner for us where They have relationships with media companies. They find out that they need help.

Speaker 2

They want to transition off of LTO, off of on premise systems or sometimes off of the traditional legacy clouds and they bring those deals to us and then we work with them to support those

Speaker 5

Great, great. That's helpful. And then just second quick question For you, Glad, is when you talk about Backblaze or B2 being used for some of the AI related use cases, I guess I always thought that AI required flash storage just because of the need for speed, especially on the inferencing side. So can you just talk to whether it's just kind of A misperception on my part.

Speaker 2

Yes, it's a good question. And obviously, AI has a lot of different of it. And we've published including on our blog, we published some of the work that companies use with AI. There's the development of the training models, which starts with a lot of data and then The workflow is to run multiple, multiple durations at high speeds on that data to build the model. That generally requires very high performance storage closely located to the compute.

Speaker 2

That's not the optimal use case for us, at least up to date. But a lot of the other workflows are actually really good fits. And so the workflow types that we've seen customers follow is where they will often upload information, sometimes it's from Sometimes it's from existing assets they have, sometimes it's from systems that are generating data. That data flows into Backblaze. It's stored in B2.

Speaker 2

Then they use our combination of free egress and partnerships with other GPU clouds to send the data to those locations for processing and then that processed data then gets put back into Backwave V2 for a combination of 1 being served up as part of the application itself to customers and 2 for longer term retention around backups and archive of that AI data. We also have some customers that use this as the original place where they store the data before it gets used for model training. So there are some use cases for which Object storage in the cloud is a great fit and some for which it's not, but it's a tremendous amount of data that is being generated out there for AI. And we think that we're we think AI is still definitely in the early innings of the opportunities that we all have help there.

Speaker 5

Got you. All right. Thanks.

Speaker 2

Good luck. Thank you.

Operator

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

Speaker 6

Hi, guys. This is Victor Chew in for Simon Maple. I just want to follow-up on that AI question. Did you guys say that you have some AI kind of specific functions and initiatives kind of in the works or Were you just mentioning that the use cases currently for AI? I'm just want to elaborate on specifically your exposure to AI and kind of what your AI solutions kind of focus features are?

Speaker 2

Yes. Thanks for the question, Victor. So this is Glenn. So the short answer is yes to both. If you look back at some of what we did in the last year, the first part of it is making sure that We have a durable high performance available storage platform that's affordable is a key component of providing value to customers who want to service their AI data needs, Right.

Speaker 2

So fundamentally making sure that we're providing them a top tier storage platform for all of that AI data that is that needs to be stored somewhere, to be delivered to other locations and needs to be delivered to customers. So we've been investing behind that platform. And in Q4, we built or launched Shard Stash, which will be a higher performance way of for V2 to work, which is a helpful piece of continuing to add value to that problem. So that's kind of step 1. Step 2 is making sure that we're supporting our customers in understanding how to run these different workflows and how to use Object Cloud Storage as part of that.

Speaker 2

And so we've been working on, like I mentioned on our blog, there are stories and case studies around the different workflows and how to use them and understanding that landscape better. The 3rd thing is partnerships. We mentioned that we partnered with CoreWeave, we partnered with Vultur. So we have these GPU PU clouds that we partner with and we make it easy for customers to move their data between us and them as part of it is that, as I mentioned, our Head of Sales, once we hire a new Head of Sales, he's going to be focusing His entire area of focus on our AI initiatives, which includes both the go to market things, some of which I talked about, but also the product platform side. And David Ngo, who's our new Chief Product Officer, is also looking at the product roadmap opportunities to help customers.

Speaker 2

At core, there's a tremendous amount of data getting generated. There's a lot of use cases around that. Just providing a really robust platform for all that data, we believe is the most important job 1, but then we do see opportunity to help customers in additional ways beyond that.

Speaker 6

Great. That's very helpful. And I guess I just have one more kind of general industry question. More recently, we've heard commentary from a number of cloud providers who have kind of noted an industry wide trend around cloud cost optimization and kind of increased scrutiny around public cloud spending from their entire customer base. So, just kind of curious if you've observed any similar dynamics and if not, why do you think that's the case?

Speaker 2

So I think that we are different in that with a lot of the traditional clouds and we've certainly seen that As well and we've seen the impacts on them from that. With a lot of the traditional clouds, They have their offerings are priced highly high priced and they've often been it's been complicated and confusing to understand for the customers what is using to understand for the customers what is what they're paying for. And so we've heard from many customers That they were surprised by their cloud bills. They were unsure where the dollars were going and what they were spending on. And So I think that one of the differences is Backlight has always been transparent.

Speaker 2

We've always made it easy to understand what you're paying for and we've always been very affordable in our price point. So I think that effectively our customers have always been optimized as part of that. And so I think as a result, we're not subject to some of the same trends that they're seeing. Now as Frank mentioned, we did see a 1% to 2% incremental reduction in licenses and data in Q4, 4, which we believe is largely attributed to the price increase execution that we did.

Speaker 3

And this is Frank. I would add

Speaker 2

one item. That's very helpful.

Speaker 3

Yes, this is Frank. I would add one item. Of course, this greater scrutiny and attention data storage costs benefits us because we have such a good value play in the market. So we really appreciate that attention and that commentary.

Speaker 2

Great. Thank you.

Operator

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

Speaker 7

Yes. Thanks for taking the question. First off, do you have a sense for what portion of your install of your customer base is On the new pricing, I believe you have a mixture of month to month customers and annual contract customers. And I'm just curious how much of it is was on that month to month. And then secondly, for these larger customers, Are they typically customers that are on the likes of AWS or Azure?

Speaker 7

And then they're moving off completely, they're moving off, if they're doing AI applications, they're moving those off completely. Or are they just migrating their storage off of those hyperscalers?

Speaker 3

Hi, Eric. This is Frank. I'll take the first part of the Who's on the new pricing? So on our B2 side, the group that is on it is the pay as you go customers. The rest of our client base are on committed contracts or they're the B2 Reserve Group, which pay in advance.

Speaker 3

So they were unaffected by the price increase. But they all went on immediately. So that pay as you go group, it was immediately affected at beginning of the quarter. The as far as the computer backup group, 25% of them approximately are monthly and they immediately had the increase. And then 75 percent are either 1 year or 2 year and they are graduating in upon renewal.

Speaker 2

And then Eric, to your other question about for the upmarket customers and the Ziplub, are you asking whether they're fully migrating off of the traditional cloud providers or whether they're moving their data up. And I will say it is a mix of both. We've actually seen both types. So One scenario that we've seen is customers who have Don't have a 1000000 different things they're doing inside of the traditional cloud and really they need a handful of significant important services, storage being obviously one of them, often it's storage, compute and networking. And so they'll use us for storage.

Speaker 2

They'll use companies like Cloudflare, Fastly, Bunny for networking and they'll use someone like a or Vultura or DigitalOcean for the compute and they'll migrate fully out of there and go full on open cloud, get have freedom of the data as part of their stack. We've also seen the other side where they continue to leverage the traditional products for some of their other services, but they use us for storage. One customer, I'll give you an example. They actually kept their storage in AWS, but they added Backblaze and they actually made us the default and they were able to increase their durability that way, but they then also decreased their bill by half overall because they were paying so much for getting the data out of Amazon to their preferred network provider that by switching to us, they were able to save enough money to add us and still cut their bill, the whole entire infrastructure So we see both. It kind of depends on what they're trying to do with their infrastructure.

Speaker 7

So as you move up market, is this going to create more for you to work with your the Bandwidth Alliance and to strengthen that partnership?

Speaker 2

Yes, I think so, in part because we're in the up market, we're doing more of a consultative discussion with these customers. And so as you know, we have a large self serve business and those customers are doing what they choose to do and many of them are moving off of the traditional cloud providers also, but they're doing that without having conversations with it. With the upmarket ones, we're having more of the discussion of what makes sense in a strategic sense for you, customer as you go forward in your future and how do you want that infrastructure to work for you long term?

Speaker 7

Very good. Thank you.

Operator

The next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Speaker 8

Yes. Good quarter and outlook. I was curious to know on the 2024 view, where do you

Speaker 3

This is Frank. We are previously saying that our before that our gross margin was going to be the mid-seventy percent range. And now we're very comfortable to say it's going to be in the upper 70% range non GAAP. So we're seeing that as about approximately a 4 percentage point improvement and about half of that is attributed to the price increase.

Speaker 8

Got you. And then I did see a decline in the computer backup customers As of year end, you were down to $431,745 versus $436,080. So what is the explanation there?

Speaker 2

Yes. Thanks for the question. This is Blub. So first of all, as Frank mentioned earlier, I think We saw a 1% to 2% license usage decline in quarter. So The number that you're talking about is the customer number, which stayed consistent at that high gross customer retention rate.

Speaker 2

What I will say is that, That number in general is something that we're looking at whether it's a relevant metric going forward into the future because it's so heavily influenced by the number of consumer customers on that product line, whereas we are increasingly focused on going into servicing businesses and in particular more upmarket businesses. And so you can imagine that number is driven by one consumer customer is treated the same as one customer that pays us 6 figures. Yes,

Speaker 8

I get it. That's where

Speaker 2

I would tell you.

Speaker 8

It sounds like just especially given the guide, it's Not all customers are created equal.

Speaker 2

Exactly. Yes. And as we mentioned that we just launched Enterprise Control, which is a functionality to to help the larger customers, manage all of their licenses and computers. Again, not relevant for an individual consumer customer and individual consumers are what drives the pure number of customers metric.

Speaker 8

Got it. Thanks for taking my

Speaker 2

questions. Thank you.

Operator

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

Speaker 2

Yes. Hi. Good afternoon, Gleb and Frank. Congrats on the quarter and

Speaker 9

the guide. Just a few questions for me. Gleb, You were talking about initiatives of moving up market and potentially changing some of the commission structure for some of your salespeople. So can you talk about maybe potential changes as you move up market and any sort of incremental investments you need to make outside of the leadership change that's ongoing right now?

Speaker 2

Yes. So we've been taking steps down this path. So you probably remember, when we went public, We were 80% of all of our business was from self serve. And we had talked about how the sales assisted customers were larger and we were it was a somewhat nascent emotion for us, but we were seeing larger deals and customers liking that service that we provide. And so we said we were going to be using some of the proceeds to stand up a sales team and start putting more focus behind the sales effort.

Speaker 2

So some of the things that we've done over that time was we stood up an SDR team, which is an outbound team. We Staffed up some of the sales team in terms of SDRs, BDRs, account executives, solutions engineers and built out that team. We've also divided the groups up into territories. We've changed some of the way that we structure and guide leads through the funnel to them and some of the sales operations aspects of it, Introducing B2Reserve and the ability to sell committed contracts were 2 important steps that allowed us to actually have the sales team sell as opposed to only assist in a self serve type motion. And then adding the channel motion helped the sales team as well.

Speaker 2

So those are a number of changes we've been making over the last 2 years to help enable the sales teams to sell to organizations and sell to large organizations. We're looking for the new Head of Sales. In addition to that, we are We have a number of open recs on the sales team for senior account execs to sell to those larger organizations. We have the commission program that we talked about. And so these are just some of the things that we have done and some of the things that we are doing as part of continuing to move up market.

Speaker 2

And there are things around the other organizations, marketing, customer support, Cloud operations and others are also being supportive in that kind of entire company focus of moving up market.

Speaker 9

Understood. And final question for me is just around cash usage. Nice to see the reaffirmed $20,000,000 target at the end of this upcoming year. Frank, aside from the improved profitability in the business, I Can you walk me through just some of the other key inputs in terms of expectations for CapEx and some of your principal payments for capital lease obligations?

Speaker 3

Sure. On the CapEx side, for example, we're expecting to incur about $16,000,000 to $18,000,000 of new equipment there. And if you recall, That is slightly less than what I had been saying previously at the $18,000,000 to $20,000,000 range. And the reason for very similar to what we spent at the midpoint this year. And the reason that that is flat and or slightly declining is that we're still using up the pandemic buffer when we built up additional equipment during the pandemic time.

Speaker 3

So we're still using that in our data centers, which will be largely done after quarter 1. And then on the innovation side where our engineers are continuously improving the platform, one of the areas that We expect to get a benefit in this year, especially is in faster deletes. So anytime you can delete data quicker, you could store new data on the same hard drive. So that's driving some of that. The other so that's on the CapEx side.

Speaker 3

And then you had also asked on the leasing side. And what's really driving that part If you look at our total leases, you would notice that the total amount of leases long and short term together is actually declining. So what's basically happening is that we have a larger fall off in leases that we have new leases being added. And it's for the same two reasons. The pandemic leases are falling off because a lot of them came on 3 years ago and they continue to fall off very quickly now.

Speaker 3

And the new leases that we're adding for the new CapEx are just not as great as what's falling off. So that's why we're getting a kind of a again a flat to slightly declining payment pace on those So leases. Are there underwrite? No,

Speaker 9

I think that answers all of it.

Speaker 2

Yes.

Speaker 3

Thank you, Sam. Thanks for the question. Sure.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mimi Kong.

Speaker 1

Thank you.

Speaker 10

At this time, I'd like

Speaker 1

to go over some of the questions submitted to us from SAE Technologies. Looks like we might be able to get one in. And this one's for you, Gleb. Last year, Microsoft made a change to how OneDrive syncs files, resulting in Backblaze no longer being able to backup folders such as docs, desktop, PIKs when they are set to backup sync. Carbonite has M365 backup option.

Speaker 1

What is Backblaze's solution given how popular OneDrive sync is? And another part of that question is, What would the cost and share price implications for launch a similar but improved equivalent to Microsoft and other leading backup and storage program speed?

Speaker 2

Okay. So I think the way that that question sounds like Microsoft did something To be clear, that's not what happened. So, what Microsoft did was Customers keep files on their computer and what OneDrive did was it enabled customers to put some of their files in the cloud and not on the computer. So our computer backup service is designed to protect all of the data on your laptop or desktop. And we So we back up everything that is on your laptop or desktop.

Speaker 2

We back up everything that's on your external hard drives. We do that for consumers. We do that for businesses. If the data does not exist on your computer because it's in the cloud, our computer backup service does not protect that data. And so So I'll say 2 things on that front.

Speaker 2

One is that we are very focused on continuing to grow We think it's a good growth business. It's grown every single quarter since the start of this company and we aim to continue to provide value to our customers with that service. The customers that we are focused on trying to add more functionality and features to especially on the business side and the enterprise control functionality that we added is an example of that. But we're very much listening to customers and seeing what else they want from us with that offering. The other thing that I will say is that with our B2 cloud storage, we serve a variety of use cases, Backing up SaaS applications, data that's in other cloud services, Data that's in Microsoft Office 365 and OneDrive are things that our customers absolutely do.

Speaker 2

They do that with B2 as the cloud storage destination and leveraging our partners for the different use cases. So Some of those use cases are served by partners of ours like Veeam and Veritas and Commvault and others where they take care of the software side of backing up those different file types and applications and customers can then put that data into B2 and have that be the destination. So I would say we currently service those use cases. We service them along with our partners.

Speaker 1

And then this would probably be the last question for today. But what is the single most impactful strategy over the next couple of quarters?

Speaker 2

So I'm not sure if I would call it a single most impactful, but as we talked about moving up market is certainly a key component for us, Along with the channel efforts that we're doing, the innovation that we've done and continue to do is something that we believe will provide a lot of value customers and deliver growth for us. And then we believe this trend of the open cloud is the key step. So in terms of impactful strategies, those are the key things that we're leaning into. The other one obviously is, We've talked about AI at some level. We are selling effectively the picks and shovels of the AI age.

Speaker 2

And I think that that is going to be a significant long term opportunity for us. All right.

Speaker 1

And that's it for those questions. I'm going to hand the call back to Glenn.

Speaker 2

Thank you, Mimi. Thank you everybody for the questions. Thank you to our investors that ask questions

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Earnings Conference Call
Backblaze Q4 2023
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