Backblaze, Inc. (NASDAQ:BLZE) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Good day, and welcome to the Backblaze Fourth Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to James Kisner, Vice President of Investor Relations. Please go ahead.
James Kisner: Thank you. Good afternoon, and welcome to Backblaze’s fourth quarter and fiscal year 2022 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 the call include forward-looking statements about our future financial results; use of our IPO proceeds; results from our new offerings; partnerships and sales and marketing initiatives; our ability to compete effectively; acquire new customers; and retain and expand our business with existing customers; hire and retain key personnel; and effectively manage our growth. These statements are subject to risks and uncertainties that could cause our 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 will 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 in number of customers.
Before I turn the call over to Gleb, I would 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 through the Say Technologies platform. I would now let to turn the call over to Gleb. Gleb.
Gleb Budman: Thank you, James, and thanks to all of you for joining us. At Backblaze, we are incredibly passionate about our mission to make it astonishingly easy to store, protect and use data. Given the ever-growing importance of data to businesses and consumers alike, and the high cost and complexity of traditional cloud providers, we are seeking to aggressively scale our B2 cloud storage business to provide an easier, more cost effective solution at a time when it is needed most, when businesses are feeling the pain of runaway cloud infrastructure costs. Today we have over 500,000 customers and have two cloud service offerings that operate on our storage cloud platform. First, our B2 cloud storage service provides developers, IT personnel, and others with cloud storage that is dramatically easier to use, and is one fifth the price of Amazon S3 and others.
Second, our computer backup service provides unlimited cloud backup for laptops and desktops for companies and individuals. While our computer backup business remains the larger of our two cloud service offerings at the moment, our strategy and increasing investments center around capitalizing on the approximately 100 billion total 2025 market opportunity for B2 cloud storage, based on projections from IDC and company analysis. 2022 was a pivotal year for us, and was our first complete year as a publicly traded company and we are proud of what we have accomplished. We launched new products, new go-to-market motions, established key partnerships, and set up additional key functions to operate as a well-run public company. For products, we launched our B2 reserve cloud replication, a New East Coast data center region, and more.
For go-to-market motions, not only did we scale our efficient self-serve motions, developer evangelism and partnership efforts, but we also created a new channel partner program sign new national resource and distributors, and landed the biggest customer order in our history, in our strategically important application storage category. And despite inflation recession fears and more, we grew total revenue over 25% year-on-year, group B2 over 45%, and B2 now makes up 41% of total revenue. Looking to the future, I’m especially excited about our role and position as a specialized cloud in supporting where the cloud is headed. Let me explain why, we believe the cloud has gone through three key phases. When we founded Backblaze in 2007, the cloud was in its infancy.
This was Phase 1. Most people weren’t clear what cloud computing was or even if it was going to take root. The question from most businesses was, what is the cloud? That question defined the first phase of public cloud services. Fast forward to 2016, almost 10-years later, and Amazon had nearly 50% market share of public cloud services more than Microsoft, Google, and IBM combined. Amazon AWS generated over 12 billion in revenue that year. This was Phase 2 of the public cloud. The cloud was undeniably a thing and businesses saw the value of it, but by cloud, most people thought of Amazon AWS. This brings us to today in the future. Phase 3. Phase 3 is defined by the open multi-cloud. Internet, consulting from Deloitte recently published their U.S. Future of Cloud Survey Report, and it clearly supports the notion that multi-cloud is now the norm.
Of the 500 senior cloud decision maker surveyed, 79% said they work with more than one cloud provider. Why? Businesses have internalized several key lessons about the cloud. First, the traditional cloud vendors are very expensive and attempt to lock customers in with egregious fees to retrieve their own data and use it. Second, specialized cloud providers like back boys offer best of breed services that are differentiated and valuable, in our case with dramatically lower cost, better ease of use, and free or low cost data transfer. Finally, there is a benefit from a resiliency standpoint of having one data held in more than one cloud. So in this third phase, what we are seeing is businesses clamoring for an open internet where customers are free to choose best of breed specialized cloud services, whether it is our partners, Fastly and Digital Ocean for networking and compute.
Twilio for messaging and communications. Stripe for billing or Backblaze for storage. We believe storage is a critical component of the tech stack. And in fact, I would argue data storage is probably the most critical because none of these other things would exist, if you don’t have data. This is evidenced by many trends, the most recent being the explosion of generative AI, which requires data storage for models and creates data at scale. The importance of data continues to increase every day. And for AI, having scalable, cost efficient data storage is an important enabler. This new phase of the cloud makes us very excited for our future and we see a runway of growth for many years to come. Focusing on 2023, businesses are feeling the pain of inflation in the choppy economic environment and are looking to reduce costs, while maintaining the quality of their services.
We believe that we are strongly positioned for such an environment as we can help businesses dramatically lower the cost of their infrastructure with cloud storage that is one-fifth the price of the traditional cloud providers. As evidence of our strong position, B2 grew 44% year-on-year in Q4, more than twice the growth rate of 20% for Amazon AWS. I will now focus on our current priorities and the recent developments that demonstrate our progress on these strategic imperatives. First, partnerships. As we have noted in the past, partnerships are a key part of our growth strategy. For B2, we know that at least one-third and likely significantly more of the data stored in B2 is coming to us as a result of partnerships. In 2023, we are investing to cultivate this important growth driver.
Photo by Jexo on Unsplash
We have two types of partners, technology partners and channel partners. Technology partners include what we previously called developer and alliance partners. This quarter, I would like to highlight two technology partners, Commvault and Telestream. Commvault is a well known backup and data services provider and their customers can use B2 as the cloud destination for their backups. Telestream provides a solution for organizations to handle media management. And their customers include 96% of the top U.S. broadcast station and groups and 82% of Fortune 100 companies. Those customers can now use B2 as the cloud destination for all that content. Turning to channel partnerships. We continue to scale this effort. As we have mentioned previously, our B2 Reserve prepaid storage offering is well suited for the channel.
While still a new offering for us, B2 Reserve revenue nearly tripled quarter-on-quarter in Q4 and we continue to be excited by and focusing investments on the combination of channel and feature reserve. Second, we are continuing to cultivate our relationships with developers for application storage use cases, which we define as customers that use B2 Cloud Storage as the storage infrastructure for their SaaS, e-commerce or other business. We continue to make progress on this front and I will share another recent customer for example in a minute. In Q4, we also held our Annual Technology Day with thousands of registrants and over 60% growth in attendance over the prior year. Finally, I want to talk about our self serve go-to-market motion. As many of you know, self serve was the primary means of acquiring our customers for many years and drive significant efficiency in our customer acquisition approach.
We have scaled the team focused on improving our self-serve funnel, and in January we have the best month of self-serve account creations in a year. While we have been historically successful in driving self-serve customers, we believe there is still significantly more opportunity to continue our success here and drive greater efficiency in our customer acquisition. Now I would like to share two new customers that highlight how B2 has helped drive their success. Let’s start with an application storage customer called Monument. Monument wanted to build an offering similar to Google Photos, but with a focus on privacy. They developed Monument Cloud, which uses advanced AI to build a cloud-based photo service built around their philosophy of privacy.
Monument considered AWS, but realized they’d ultimately lose money if they built the infrastructure for Monument Cloud on AWS. While they started using initially free credits from AWS to develop their AI model, they ultimately chose to build their cloud infrastructure, using three specialized cloud providers, one for compute, one for photo thumbnails, and back boys for their overall storage cloud. Having done that, Monument Cloud has quickly become the company’s flagship offering, drawing 25,000 active users. Second customer I would like to highlight is another example of how a multi-cloud solution can save businesses money. Deltics is a pioneer in providing retail data to its customers, such as Unilever. With an infrastructure built almost entirely around AWS, Deltics began to have concerns about the cost of using S3.
Deltics settled on using Amazon S3 for short term storage and moving long-term storage into back blades, which would reduce costs while keeping data accessible. Deltics believes that in 2023, they will have saved approximately $75,000 to $100,000 on their storage spend, thanks to leveraging backwards V2 and will continue to save into the future. Before I turn the call over to Frank, a final topic. We started the company 16 years ago, and it is now been over a year since the company went public, and over the past few years we have built out a great executive team. Recently, as one might naturally expect some of the founders and early employees of Backblaze have begun a smooth transition out of the company, each of them remains a part of the Backblaze family.
And on behalf of all the employees of back boys, I want to say a big thank you to each of them for their contributions and we all wish them well in their future endeavors. I will now turn the call over to Frank Patchel, who can review the financial results of the quarter in more detail. Frank.
Frank Patchel: Thank you, Gleb, and thanks everyone for joining us today. Before turning to Q4, I will comment on our 2022 achievements. In our first year after our IPO, we continue to build out the systems, people and processes to run a successful public company. We have executed well despite a turbulent financial market and record inflation, risks of recession and a tight labor market while focusing on the approximately 100 billion market opportunity and successfully growing B2 over 40%, roughly twice the rate of the broader public cloud market, we are actively managing expenses and intend to be approaching adjusted EBITDA breakeven in Q4 of 2023. 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 two key metrics, revenue growth, and adjusted EBITDA, which is defined in our earnings release. Our Q4 revenue totaled 22.9 million, an increase of 23%. Backblaze B2 contributed sales of 9.5 million, reflecting 44% growth. Computer backup revenue total 13.3 million, reflecting 11% growth. In quarter four, B2 cloud storage represented 41% of total revenue, continuing its upward trend. Computer backup continued to benefit from the price increase we implemented in quarter three 2021. Recall the amount of growth on the computer backup business driven by pricing has been diminishing since we are past the one-year anniversary of the increase, and we see little benefit in 2023. Turning to retention metrics, we track net revenue retention or NRR and gross customer retention.
Total company NRR was 113% an increase of two points year-over-year with B2 cloud storage at 122% and computer backup at 108%. Gross customer retention was 91% overall consistent with the prior year with 90% for both B2 cloud storage and computer backups. As part of our year-end numbers, we have also disclosed customer count and annual average revenue for customer as of December 31, 2022. We share these metrics once per year. Our paid customers increased to 506,000 up from 493,000 in quarter four 2021. The number of customers were B2 grew to 87,000 from 74,000 one year ago. The number of customers for computer backup totaled 436,000, up from 433,000 in Q4 2021. Now turning to the annual average revenue per customer or ARPU for the entire company, it increased to $181 versus $153 in quarter four2021.
B2 Cloud storage ARPU grew to $437 versus $360 one year ago, and computer backup ARPU was $124 up from $113 one year ago. We have shared the number of customers this year, but because this metric does not fully reflect how we bill for services is becoming less meaningful as an indicator of our business in the future. Working down the P&L, adjusted gross margin with 75% consistent year-on-year. We do not guide gross margin explicitly, but we continue to see adjusted gross margin in the mid-70s in the near term. Adjusted EBITDA was a loss of $2.5 million or minus 11% of revenue compared to a loss of 1.3 million or minus 7% in Q4 of 2021. Year-over-year, the lower adjusted EBITDA margin reflects planned expenses from higher investments, primarily in sales and marketing and R&D, as we continue to pursue the large market potential for B2 cloud storage.
On a GAAP basis, we also had a one time, $1.5 million settlement payment to resolve a dispute in connection with the holders of the 2021 safe investment. Turning to the balance sheet, cash and short-term investments, including restricted cash, totaled $70 million as of December 31, 2022 versus $80 million as of the end of Q3 2022. Q4 cash usage included approximately $1 million of non-recurring indirect tax payments. Now I would like to provide our outlook for Q1. For the first quarter, we expect revenue to be in a range of $23.1 million to $23.5 million. We expect Q1 adjusted EBITDA margin of minus 15% to minus 11%. Note, our EBITDA fluctuates on a quarterly basis as expenses are typically seasonally high in quarter one. We expect our quarter one 2023 basic share count of approximately 33.5 million to 35.5 million.
Also for Q1 and Q2 GAAP results, we anticipate one-time costs due to reductions in force, other terminations and restructuring expenses. From a cash standpoint, these costs will approximate $4 million with the majority likely occurring in quarter one. Turning to our full year 2023, we expect revenue of $98 million to $102 million and an adjusted EBITDA margin of minus 10% to minus 6%. We are targeting to approach adjusted EBITDA breakeven in quarter four of this year. I will now pass the call back to Gleb.
Gleb Budman: Thank you, Frank. Operator, we are now ready to take questions from analysts.
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