BLZE - NASDAQ

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

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

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

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

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

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

Hey, guys great quarter, and Frank, congratulations and good luck. It's been a pleasure. So maybe I'll start with you, Frank, then if you can -- I appreciate the color around B2. I mean, it's clearly -- you're seeing extremely good traction over there. Is there a way for you to breakdown the upside into the components that you mentioned with respect to lower churn, better expansion activity? How do you think the breakdown of the upside, how would you allocate it between the different buckets?

Well, we've had -- as far as our upside to our guidance, Ittai?

Yes.

It actually with strength across a number of areas. The largest was the fact that our churn rate remains very good, and it was above our expectation, our forecast and budget. So I would say that's number one, and that's really referring to computer backup. And then the -- on the B2 side, B2 Reserve, which is our channel product has had excellent renewal rates above what we had originally thought. So that's partnering with our resellers, and they also have been renewing for more storage than they previously had. So that had a nice impact as well. And then the -- yes, the third part was just how quickly our major accounts are coming on to service, these are from the sales of quarter one, which were largely in the very end of the quarter, and they came on to service very quickly. So that was nice -- it was nice to see that as well.

Yes. Maybe on that last point, Gleb, maybe you can add some color on the move-up market. How do you think about -- when you look at the logos you're adding here now versus a year ago, how would you compare contrast either by vertical, company size, use case. Help me understand how this push-up market is translating into a different customer profile for you?

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

Got it. Maybe last one for me on the B2 line to read that you've talked about Gleb in your prepared remarks. First of all, how do you collect, what was the business model around is? If you could -- is this just more compute or more storage that's needed to power this or there's a special different pricing model for this? And then second, relating to this, you've talked about a certain few examples of certain verticals or use cases that will be interested. If you had to look at your customer base, how applicable or how broadly applicable is this capability to your base? What percent of your base you think would be highly interested in this?

We're excited about Live Read. It is new. It's -- we expect it to come out of preview mode and into GA by the end of this year. So it's still quite new. But it serves an important set of customer use cases, because it enables anyone who is working with large and growing files to take advantage of it. In terms of the verticals, we're starting with the broadcast and media focus, because it's the one that's most closely attributable to seeing value directly from this functionality. It is part of our overall strategy but innovation is a key goal for us, both because it provides value to customers and it differentiates us. And so Live Read is a good example of that. In terms of the business model, we charge for usage of Live Read. So we charge $15 per terabyte uploaded, and then the storage is at standard B2 list prices. So the nice thing with it is it provides unique and differentiated value to customers and at the same time, it's a higher-margin offering for Backblaze.

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

Thank you.

Thank you.

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

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

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

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

Yes. It's a good question because we've seen other customers or other companies talking about the macro challenges and the impact it's had on them. I think for us, we have not seen that. As you saw in the -- we beat our Q2, we guided strongly Q3, we guided up for the year. So we're not seeing the same things they're seeing. And I think that what we believe is that the reason for that is our customers are seeing strong product value from the product and platforms offering. They also get a strong TCO. And so in an environment where they may be concerned about the macro, they're actually potentially looking for ways to do more with less, which we enable them to do. And I would say that finally, there are other products and offerings that customers can choose to not invest behind but as long as they have data, they need to store it, they need to use it. It's not optional. So I think we are more insulated from any potential macro concerns.

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

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

That’s really helpful. Thank you.

Hi, Jason, this is Gleb. So I think, first of all, just the -- obviously, we're not guiding Q4 today. The -- in general, we expect B2 in Q3 to grow about 45%. And so that's for Q3, and we still feel good about the 40% growth rate for the year B2. The Q4 is the full lapse of the price increase from both B1 both computer backup and for B2. And so there is that piece of it. The -- in general, we've had a strong Q1, strong Q2. We've got a very strong Q3 in the full year. I think there's two things we're also just paying attention to. We have two transitions. One is the sales transition with Jason coming on board, and we're all enthusiastic about him and the ramping of the AEs, but we want to be cognizant of timing implications of that transition. And then the other is, were some of the larger pay-as-you-go customers One of the things we've been doing this year is starting to move some of them to committed contracts. We're doing that because it establishes longer-term relationships with them, more opportunity for longer-term upsells with them, more visibility and line of sight into revenue forecasting, but some of those are also at some discount as we put them on these longer-term committed contracts. So we're just being sensitive to those two transitions happening through the end of this year.

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

I would say, we're cognizant of them.

All right. Thank you. Good luck, guys.

Thanks, Jason.

Thank you. And the next question comes from

Hi. This is Ethan Weidel calling in for

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

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

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

Got it. Thank you appreciate the color.

Operator, do we have any more questions from others?

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

Yeah. Great. Thanks for taking the questions. Congrats guys and great to see the margins ticking up, just looks great across the board. A couple for me, Gleb, maybe just start with the AI impacts. Can you give a little better -- a little more finely-tuned sense of the magnitude of the AI impacts? Or trajectory of those impacts? You referenced as a driver, just trying to get a sense of magnitude and trend?

Yes. So, I think I would say two things. One is that it's obviously a large opportunity in terms of just the market size, right? All the efforts that are happening out there are driving data creation, data usage, and those are things we fundamentally help with. So, I think that that's kind of the first part of it. And the related part of it is that companies are needing to use different GPU clouds for their AI use cases, and we are well-positioned to help them with that because you can store the data with us and then use the data in these different GPU clouds. And the example that I shared in the call earlier of the AI customer, they're saving $300,000 just by switching to us. So, that's a huge savings for their AI use cases. But also they're actually becoming more effective as an organization because they were being limited and constrained by their -- by not having enough GPU capacity for their needs at that moment and needing to use another provider. And this allows them to have diversity of GPU providers, while keeping their data somewhere that is accessible. So, I think we're really well-positioned to help customers with their AI use cases. The other thing that I'll mention is that a lot of the discussion right now that I've seen out in the industry is companies are ramping up CapEx dramatically to service the AI use cases and saying it's going to take years and years potentially to get a return on that. That's not the case for us because they're spending CapEx on GPU build-outs. We're not a GPU company. We're enabling AI use cases, including how and where they can use those GPU parts. So, we are not having the same CapEx requirements, while we do get the benefit of supporting those use cases.

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

Sure. So, when we started -- when we were going down the path originally, we were almost entirely self-serve. So, the selling motion at the time was people finding out about Backblaze through various different channels, showing up to the website and entering an email address and password, click and create accounts, trying it, entering a credit card and then starting to use the service. That was how 80% of the business existed at the time of IPO. It's still a significant driver of new business for us today, and we still -- and we've made investments and continue to optimize the self-serve part of the go-to-market motion. On top of that, then we layered a direct selling motion. Direct selling motion is people coming to the company either because they've heard about us through our blog, PR, events and other places or by our outbound SDRs reaching out to targeted verticals and targeted use case and bringing leads into the pipeline that the account executive team then works to close. We then layered on top of that a channel motion working with resellers, companies like CDW and others and in order to drive channel business. And then most recently, just earlier this year, last few months ago, we layered on Powered by, which was the a new technology that enabled us to make ourselves part of other people's offerings. So we talked about Edge Compute companies, Media and Transcoding companies and Cloud Service Providers that are starting to integrate B2 into their products as part of their go-to-market. So those are the ways that we've been going to market and the layering. And I believe that adjacent will continue to drive all of those sales-led ones, not the self-serve, but the sales-led ones. But the increasing efficiency and effectiveness and success of those motions as well as moving up to the larger sizes of the organizations that are taking us up on those motions.

Got it. Very helpful. Thanks so much.

Thank you, Jeff.

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

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

Yeah. As far as our cash, so we're really pleased, of course, that we have an 80% reduction in total cash usage for the first half of this year versus the first half of last year. We continue to project year-end cash balance at $20 million. And that we will be total cash usage breakeven by the middle of 2025 or second half of 2025. So -- and remember that we define total cash and total cash usage, its cash from operations, financing and investing. But shortly thereafter, in 2025, we also expect to be free cash flow positive as well.

Got it. Well thank you. Appreciate it.

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

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