Backblaze, Inc. (NASDAQ:BLZE) Q3 2023 Earnings Call Transcript

Backblaze, Inc. (NASDAQ:BLZE) Q3 2023 Earnings Call Transcript November 8, 2023

Backblaze, Inc. misses on earnings expectations. Reported EPS is $-0.44 EPS, expectations were $-0.22.

Operator: Good day and welcome to the Backblaze Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mimi Kong, Director of Investor Relations. Please go ahead.

Mimi Kong: Thank you. Good afternoon and welcome to Backblaze’s third quarter fiscal year 2023 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board and Frank Patchel, Chief Financial Officer. Today Backblaze will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from 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.

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These statements are subject to risk and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our Annual Report on Form 10-K and our other financial filings. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to, 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. Before I turn the call over to Gleb, I’d also like to mention that in the latter portion of our call, as in prior calls, we will be addressing questions from investors that we gathered through the Say Technologies platform. Thank you for joining us and I would now like to turn the call over to Gleb. Gleb?

Gleb Budman: Thank you Mimi, and welcome everyone to the call. We delivered a strong Q3. First, we believe that we’re at an inflection point with higher revenue growth expected in Q4 and 2024. Second, we’ve made great progress on our financial performance, particularly adjusted EBITDA and cash, as Frank will detail later. And third, our team continues to innovate on our storage cloud, delivering a dramatic increase in upload performance and making our B2 cloud storage up to 30% faster than Amazon Web Services storage offering, while continuing to be just one-fifth the price. Before Frank talks about the financials, I’d like to share some observations on the industry’s continued shift toward the open cloud. We hosted our third annual Tech Day a few weeks ago.

Thousands of IT administrators, developers, and other cloud architects attended Tech Day, which we co-presented with Coreweave, Fastly, and Snowflakes. The event demonstrated how B2 Cloud Storage works with other specialized providers to power a successful open cloud strategy. This strategy gives customers the power to break free from the constraints and high costs of traditional cloud providers. For AI use cases, we presented a session with Coreweave, a specialized cloud provider of large-scale GPU-accelerated workloads, to show how pairing our services supports AI workflows, which consume and generate data at an exponential rate. B2 cloud storage is an ideal cost-effective storage solution for AI workflows and processes, including the AI model, training, and inference data.

With Fastly, the presentation showcased how to secure edge workflows and serve up data from B2 cloud storage. And with Snowflake, we shared how their analytics platform efficiently works on data stored within B2, demonstrating how Backblaze’s interoperability allows users to put industry-leading platforms like Snowflake to work on data within our storage cloud. The thousands of technical decision-makers participating in Tech Day further confirms that customers are more and more interested in moving toward the open cloud, where they have the freedom to build the best solutions for their needs at a fraction of the cost. Turning to our growth strategy, we focus on making it easier for customers to adopt and grow on B2 cloud storage while continuing to expand the ecosystem of partners and resellers.

As we’ve discussed before, this strategy includes self-serve, sales-assisted, and partnership efforts, along with focusing on cultivating application storage use cases. I’ll touch on some highlights for each of these. For self-serve, we have completed overhauling our website infrastructure and have seen encouraging results with increased year-over-year growth in new customers. Our sales-assisted motion continues to add and grow larger customers. For example, one such large customer started with 400 terabytes of data earlier in the year and has since fully leaned in, increasing their data stored by 5x, which translates to over $100,000 in AR. This is a trend we see often, where customers start small and move more data to B2 once they realize the full extent of B2 cloud storage’s cost savings and ease of use.

Moving on to our partnership initiatives, we announced new and expanded partnerships with HYCU and Qencode. The HYCU partnership helps extend our reach within the multi-billion-dollar data protection as a service market. And the Qencode partnership adds an additional B2 cloud storage distribution point for media production customers. We also continue to make progress with our channel partner program. In Q3, we signed our largest multi-year B2 reserve deal with an upfront $1 million commitment. And finally, I’d like to share a developer story which highlights our ability to serve innovators in the AI space and illustrates how we continue to make headway within our application storage initiative. One of our joint customers with Coreweave is an application developer using AI to reinvent how 3D motion capture works.

With this customer’s SaaS offering, there’s no need for special environments, clothing or sensors. Creators can simply capture human movement and their AI translates it into usable 3D animation. But they needed a cloud storage provider that could scale with their ambitious growth plans while also providing free egress for them to easily migrate their data into Coreweave to run AI workloads and archive those results. After considering other traditional providers, they found that Backblaze could best serve their needs. This is a great example of how AI use cases require both powerful servers for processing large volumes of data as well as affordable, accessible object storage. Next, I’m excited to share a recent important innovation in our storage platform, which we call “shard stash” that led to a significant performance improvements for B2 cloud storage.

Small file uploads, which we define as upload smaller than one megabyte, make up the majority of upload activity for B2. For this type of upload, Backblaze is now up to 30% faster than Amazon S3. This breakthrough increases efficiency for customers and helps free up resources for other tasks. B2 cloud storage continues to be one fifth the cost of the traditional cloud providers while delivering more value to customers across our platform. Additionally, for computer backup, we launched version 9.0, which features improvements to performance and usability as well as a highly requested new local restore experience. As we announced in August, we’re looking forward to continued improvements with our advanced groups administration, which delivers features to free enterprise IT managers from the burden of complex and expensive endpoint workstation backup solutions.

Now, I’d like to share some of the feedback we received from the price changes and product upgrades we announced in August, which became effective in October. While it is still early, Churn was generally in line with our expectations. Our customers appreciate our continued investments in the platform and valued our recent upgrades and improvements to popular features, such as complimentary one year extended version history for our computer backup service, and three times free egress for B2 Cloud Storage. As we have shared previously, we believe an open cloud will serve customers best, and our free egress helps make that a reality. Following our announcement, we saw new customers engage with us directly because high egress fees charged by other providers are a major pain point for them.

Offering free egress cut through the noise and spoke to what customers really cared about, the freedom to choose best of breed solutions for how they want to store and use their data. And before I hand the call over to Frank, I’m excited to welcome Chris Opat, our new Senior Vice President of Cloud Operations to Backblaze. Chris is a customer-centric leader with over 25 years of industry experience in edge computing, data center management, and multi-cloud enablement. At companies like StackPass and CloudReach, Chris oversees the strategy and operations of our global cloud storage platform. Having already seen Chris’s impact on accelerating the deployment of the performance improvements I mentioned earlier, we’re all very excited to have him aboard.

Now, I’d like to turn the call over to Frank. Frank?

Frank Patchel: Thank you, Gleb, and thanks everyone for joining us today. Q3 was highlighted by surpassing the $100 million in ARR milestone. As Gleb mentioned, we also believe it is an important inflection point for the company. Next quarter, we expect to accelerate revenue growth, reduce cash usage by about half sequentially, and reach positive adjusted EBITDA, all of which I will discuss in further detail. Turning to our third quarter 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. I will provide some initial thoughts on 2024 later in this call, and full year 2024 guidance on our Q4 earnings call in February.

Our quarter three revenue totaled $25.3 million, an increase of 15%. B2 cloud storage revenue was $11.6 million, reflecting 31% growth. Computer backup revenue totaled $13.7 million, reflecting 4% growth. In Q3, B2 cloud storage represented 46% of total revenue. Turning to retention metrics, we track net revenue retention or NRR, and gross customer retention. Total company NRR was 108%, with B2 cloud storage at 120%, and computer backup at 100%. Gross customer retention was 91% overall, consistent with the prior year, with 90% for B2 cloud storage and 91% for computer backup. Working down the P&L, adjusted gross margin was 74%, down from 76% last year. Similar to prior quarters, the primary driver of the decrease in gross margin year-on-year is due to the costs associated with our new and expanded data centers.

This quarter, adjusted EBITDA loss of 841,000, or negative 3% of revenue, compared to a loss of $1.9 million, or negative 8% in quarter three of 2022. The beat was due to gains in operating efficiencies and to a lesser extent, some one-time gains. Turning to the balance sheet, cash, and short-term investments, including restricted cash, totaled $36 million at the end of Q3, 2023, versus $45 million at the end of Q2, 2023. Now I’d like to provide our outlook for Q4. Regarding our recent price increase, while still early, churn has generally been in line with our expectations, and we see the price change as a net positive for revenue, adjusted EBITDA, gross margin, and cash usage. For the fourth quarter, we expect revenue to be in the range of $27.9 million to $28.7 million.

This is a wider range than typical for our fourth quarter guidance, due to the price increase that just started and is rolling through quarter four. We expect Q4 adjusted EBITDA margin between a positive 1% and a positive 3%. Q4 is expected to be our first quarter of positive adjusted EBITDA as a public company. As an additional highlight, we also expect gross margin to trend up and cash usage to decrease by half sequentially due to revenue growth and the impact of the price increase, as well as further operational efficiencies. For the full year of 2023, we are raising the bottom end of our full year revenue guidance by $1.2 million to $101.2 million to $102 million. We are also improving our full year adjusted EBITDA guidance to a range of negative 6% to negative 4%.

We are still in the process of finalizing our 2024 budget, and we will provide our full 2024 guidance in February. However, we expect Q3 2023 to be the inflection point with revenue growth trending up in Q4 and in 2024. Additionally, we anticipate adjusted EBITDA will be positive for the full year next year as we continue to drive top and bottom line growth. I will now pass the call back to Gleb. Gleb?

Gleb Budman: Thanks, Frank. We had a strong Q3, expect to see higher revenue growth in Q4 and 2024, and are on track to be adjusted EBITDA positive in quarter four with dramatically lower cash usage. I want to extend a huge thank you to our team, both for delivering these financial results and for developing the storage performance innovation that is now enabling us to offer upload speeds up to 30% faster than AWS. These are major accomplishments to be proud of. Operator, we’re now ready to take questions on our call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thank you for taking the question. I wanted to see if maybe you could help us think about how the price increases could play out in 2024. And I appreciate you’re not ready to guide to 2024, but what might be helpful is if you could walk us through the timeline and impact when you’ve done price increases in the past. Thank you.

Gleb Budman: Sure. We’ve had two price increases in the past in our computer backup business. And the way that computer backup, the price increase rolls through, is that 75% of those customers are on one and two year contracts. So as they renew, the price increase phases in. And the same will be this time on that computer backup. There’ll be a continued phase in of the price increase. It started in October this year and will phase in across that period. On the computer backup side, on the B2 cloud storage side, this is the first time that we’re having a price increase. It’s for our pay-as-you-go customers. And all of those customers had their price increase become effective immediately in October. So that’s really how it will go. The B2 is already engaged, and the computer backup will phase in.

Simon Leopold: Great. And then the other thing I’m trying to get a better handle on is, if you’re providing the free egress, and I understand why that would be attractive to your customers, is there some way to help us understand the cost to you?

Gleb Budman: As Frank said, they have seen the price increase take effect. We do have customers that are using B2 Reserve and customers that aren’t committed contracts, and they do not have the price increase affect them.

Simon Leopold: Great. And then just as a quick follow-up, just trying to understand, if you’re allowing free egress, I assume that means you’re absorbing those costs, can you give us some sense of how to estimate the magnitude of the cost to you?

Gleb Budman: Well, yes. Remember, as far as egress, for all of our partner accounts, they had free egress already. So an egress is not immaterial. It’s certainly a cost of the business. But we think that going forward, the customers now get three times their storage amount in free egress. We think this is very important to the open cloud concept, and it’s really going to boost the business overall for that reason. So the upsides are much more positive than any limited downside in the cost. So it’s not immaterial, but it’s very absorbable.

Simon Leopold: Thank you very much.

Operator: Our next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron: Thanks, guys. Nice results. Let me follow up on Simon’s call. A question, I guess. Why do you feel free egress is even needed given the significant cost advantage you already deliver relative to AWS? Wouldn’t that by itself cover very quickly any egress cost that a customer would incur in transferring over?

Gleb Budman: Hey, Ittai, this is Gleb. Thank you for the question. So we believe that we provide, obviously, a tremendous amount of value to the customer simply because we provide a very easy-to-use storage platform, and that storage platform is one-fifth the price point of AWS for the storage. So that’s certainly strong material value to the customer. One of the things that we have found with egress is that customers can be confused at times about what egress is going to cost for them because they don’t necessarily know. It’s a little bit hard for them to sometimes predict. And because they are — because they’ve been burned by the egress fees on the traditional cloud providers, they just worry. So it’s a point of mental friction for them.

And so with our goal of making it easy for customers and our goal of really driving the open cloud movement where customers get to choose where they want to keep their data, how they want to use it, we wanted to make that easy. Like Frank said, it’s not the egress, the revenue that we collected was not immaterial, but was certainly not very significant because one, we already offered completely free egress through our partners, companies like Fastly and Cloudflare and Vulture [Ph] and others. And we’re providing up to 3x on any egress today. So it’s not a huge financial impact for us, but it is, we believe, a huge benefit to customers in kind of how they think about the open cloud.

Ittai Kidron: When you make that available, you require them to sign multi-year tractual obligations or one can be month to month and have you pay for egress?

Gleb Budman: So this doesn’t change the requirement for how we work with the customers. The customers can still sign up for pay as you go. They can still purchase B2 Reserve and they can still sign a committed contract with us for a longer period of time. So the free egress doesn’t change with that. Now, what we do offer is a universal data migration, which is where we cover the cost of egress to get the data out from the traditional cloud providers, to get the data out from Amazon or Azure or Google Cloud. And if we’re providing the customer the ability to do that, then we do ask for a one-year commitment on their data to us. But in terms of free egress from Backblaze up to 3x, there’s no requirement for them to sign a contract for that.

Ittai Kidron: Okay, and regarding the price of B2, what percent of your B2 revenue is pay as you go versus contracted ahead of time?

Gleb Budman: It’s about majority currently.

Ittai Kidron: Majority, okay. And when you talk about being the fifth, the cost of AWS, is that before the price increase or after? Am I assuming you’re becoming a quarter rather than the fifth, the price of AWS after this price increase?

Gleb Budman: No we believe that we’re still approximately one-fifth the price point today. AWS has a variety of different costs with transaction fees and everything else as well, all of which are added costs and added complexity. So we believe that we’re still approximately one-fifth of the price point.

Ittai Kidron: Okay, and then last one for me, Gleb, just from a big picture standpoint, macro-wise, can you talk about how your pipeline is looking like, backlog looking like, average deal size looking like, and also closing rates, help me understand from an execution standpoint, where you stand on that front, appreciate it.

Gleb Budman: Sure, absolutely. So we talked in the prior quarters about how the pipelines, the close rates were good, the timelines were good, that we weren’t seeing those get longer or worse, whereas others had seen that. What we’re seeing now is in line with our prior quarters, so I think quite strong. And the pipeline itself is the largest pipeline that we’ve ever had at the company. So feeling pretty good about where things stand from a macro for us.

Ittai Kidron: Can you just clarify that, bill from? It’s naturally as the company grows from quarter to quarter, you’re going to have the biggest backlog, but maybe you can talk about the growth of the backlog, number one, and number two, the quality, how mature is it for you?

Gleb Budman: Yes, so what can I say about that? I think that the pipeline is the biggest that we’ve had at the company, and it is bigger. The pipeline has accelerated more than the growth of the company. So it has actually grown relative to the company, not just in sheer dollars. And I think from the conversations that we’ve had with the sales team, they still feel good about the deals in there. Obviously, like what we call the deals, that they have the different stages that they are marked through, but in terms of the quality based on the stages that they’re at. But in terms of the quality based on the stages that they’re at the pipeline has grown for each of the stages.

Ittai Kidron: Excellent. Great. Good stuff. Thank you guys. Appreciate it. Good luck.

Gleb Budman: Thanks.

Operator: Your next question comes from Chad Bennett with Craig-Hallum. Please go ahead.

Chad Bennett: Great. Thanks for taking my questions. So just on kind of price increase impact at least how you’re looking at mix in the fourth quarter here between the B2 side and computer backup. Obviously you see more immediate impact on the B2 side of the price increase with pay as you go. So should we expect the mix, revenue mix of B2 to increase in the fourth quarter? Is that a fair way to think about it?

Gleb Budman: Not necessarily. We’re looking at still the overall churn, right. So because we’ve never had a B2 price increase although to date for one month it looks fine. So, and the second thing is that the computer backup price increases higher than the B2, right. So when we’re looking at it what we’re seeing right now is about the same, but overall remember that B2 with a growth rate — we’re using the growth rates from this quarter it was growing at 31% and computer backup was growing at 4%. So and B2 is already 46% of the total business So long-term B2 is overtaking as the dominant product quickly.

Chad Bennett: I guess maybe to ask, so I think the way you talked about it pre price increase last quarter, is B2 ARR growth would be in the low 30s this quarter, but accelerate up to 40% in the December quarter. Is that still the kind of ballpark we should think about?

Gleb Budman: Yes 40s we felt.

Chad Bennett: 40s. Okay. I just wanted to make sure we’re still on track with that and then and then in terms of as much as is I can kind of directionally think about. At the midpoint of your fourth quarter revenue guidance range, you reaccelerate, from 15% this quarter to call it, Maybe 23%, 24% year-over-year in the fourth quarter here. When we think about next year, I assume you’re talking about next year accelerating beyond that fourth quarter growth rate. Is that how you think about it?

Gleb Budman: The so — you’re right about the midpoint so we see that midpoint growth rate at around 24% in our quarter for and we are seeing growth rate similar to that going forward as we enter 2024.

Chad Bennett: Okay, so it is just in terms of the price increase on B2, it doesn’t sound like again small data set and timeline, but it doesn’t sound like you’re seeing increased churn. It — I don’t know if you’ve seen anything in terms of data use usage or data growth changes, whether it’s because of B2 to the price increase or not, but I’m just conceptually thinking about effectively a 20% price increase and if you believe that business ex a price increase could grow 35%, 40% next year, is there is there anything changing in terms of your assumptions of growth kind of non price increase on that part of the business? If you understand what I’m asking.

Gleb Budman: I think so the — so we always look at growth in new revenue coming from new customers amplification which is growth in current customers and then we have our price increase. So those are the three factors and this pushes a churn in there. And so because our churn so far appears fine our churn assumptions the other areas of growth are as expected.

Chad Bennett: So data growth or new logo growth you aren’t seeing any deceleration is what you’re saying?

Gleb Budman: Correct.

Chad Bennett: Okay, and then last one for me if I could, so I think this might be related to the very large B2 reserve deal you talked about on the call, but your long-term deferred REVs, I think, effectively almost doubled sequentially. Is that related to that deal? It was about almost a $4 million sequential increase, or were there more B2 reserve deals, kind of multiyear deals, on top of that? Thanks.

Gleb Budman: It’s the — that single deal is the largest reason for the increase, and then the — there are other…

Chad Bennett: What was that? Hello? Hello? Did you hear me?

Gleb Budman: Yes, you cut out at the other…

Chad Bennett: There were other deals, I assume you said?

Gleb Budman: Yes. Yes. Yes. Okay. But that was the largest.

Chad Bennett: Okay. Great. That’s great to hear. Okay. Thanks. Nice job, again, on the quarter, guys.

Gleb Budman: Thank you.

Operator: Our next question comes from Erik Suppinger with JMP Securities. Please go ahead.

Erik Suppinger: Yes. Thanks for taking the question, and congrats on a good quarter. So, one, you said that the churn is about what you had expected. Can you give us any sense for whether you were expecting a change or how much you think it does change, from what you’ve seen so far? And then, two, can you remind us what your performance was relative to AWS before you made the enhancement? Were you at parity and now you’re 30% faster? Or where — what was the relative change, and do you think that you’re going to continue to improve your relative performance to the S3 performance?

Gleb Budman: So, Erik, this is Gleb. On the performance side of it, we really focused on measuring our performance versus Amazon once we had ChartSlash [Ph] put in place. So, we think we were probably a little bit on the slower side before, and now we’re quite a bit faster than they are at this point. In terms of can we continue to innovate further down the performance side, the answer is yes. We have components in the roadmap to do more of that. We’ll see whether — to what extent those continue to, make the scale of those improvements, but we do have items that we see as possibilities for us to continue to drive further performance improvements. And then on the other question that you had, I believe — you faded out for a second, but I believe it was a question of how was — what were our expectations around churn from the price increase?

Erik Suppinger: Yes, that’s correct.

Gleb Budman: Yes, and we were — we had history on the computer backup price increase, although this one had our extended version history being bundled into the product, so you’re actually getting a product innovation on top of, and then, associated increase to that. So, the — we were modeling in just a modest — more modest there, and we are — and our B2 was — we modeled in a churn rate, and so far, we are better than that model churn rate, but it’s very early, and that’s why we didn’t want to say more about it yet.

Erik Suppinger: And then coming back to the performance question, is this the type of thing where S3’s performance is steadily improving over time, or is it a fairly stagnant kind of performance metric that you’re — that — on the S3 side?

Gleb Budman: So, I would say I’m not sure that we have good data on that. During our testing, it was very stable, so it’s not the kind of thing where it moved around wildly during our testing, nor did we see any performance improvements on their front during that period, but that period was fairly short in terms of how S3 performance compared this year to last year to two years ago. I’m not sure that we have that data. Maybe there’s some public information available on that. But in general, I think they — what they’ve been doing is S3 has kind of been the default offering, and then they’ve had slower versions, things like Glacier, which are slower, but not necessarily things that are faster. So this is currently faster than their top tier of service.

Erik Suppinger: All right, very good. Thank you.

Operator: Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Eric Martinuzzi: Yes, and the renewals you talked about, at least based on the one month of evidence that you’re seeing customer, the churn in line with expectations, and then kind of the macro perspective, we’ve got data growth, but there hasn’t been any deceleration there. On the computer backup side, at least for the one month of observation, have you seen any pushback on people asking for terms on their one or two year, I know it’s a one or two year upfront payment, any pushback there?

Gleb Budman: It’s funny as we’ve actually seen some customers wanting to switch from monthly to one and two year to lock in the price point ahead of the pricing.

Eric Martinuzzi: Yes, okay. So the dollar amount’s not an issue for people. Okay. And then shifting over to the 2024, I know you’re going to give us a full year outlook in February, but one of the things that we’ve seen here in 2023 is on the gross margin side is some data center investments. How should we be thinking about that for 2024?

Gleb Budman: Yes, we have always said that gross margin was going to be in the mid 70% on the non-GAAP. And now we think of it as in the upper 70% range.

Eric Martinuzzi: Got it. Thanks for taking my question.

Operator: Our next question comes from Zach Cummins with B Riley Securities. Please go ahead.

Zach Cummins: Great. Hi, Gleb. Hi, Frank. Thanks for taking my questions. Just starting off, Frank, can you talk a little bit more about the cash usage? I know it sounds like it’s supposed to fall by about half in Q4. I think you gave a target near the end of August of at least 20 million exiting next year. Are you still feeling pretty good about that target or how should we think about cash usage?

Frank Patchel: That we provided last time was that we would exit 2024 with $20 million and we still feel very good about that. And that the cash break-even would be in the first half of 2025. So that remains the same.

Zach Cummins: Got it. Helpful. And one question for Gleb, just around the opportunity with the AI training models, interesting to see kind of your closer partnership with the Coreweave. Can you just talk about the potential opportunity you’re seeing there and any potential tailwind you could see as more people look for ways to train AI models?

Gleb Budman: Yes, absolutely. I mean, I think we’ve all seen that AI uses data at large scale and that the growth in data and data needs and data usage, data evaluation is growing exponentially. We’ve shared customers and how their use cases are on this call and prior call and others that where our customers are using our storage to — keeping the data that’s being used. So Backblaze B2 Cloud Storage has a play in different parts of the workflow for AI. And I think it was interesting that in the example that we brought, that we shared of the customer, they were a Coreweave customer that started looking for how do I find a place to keep my data somewhere where it’s affordable to keep it, but also easily accessible to Coreweave.

And so Coreweave actually introduced them to us. We’ve had customers that have come to us off of some of the traditional cloud providers and looked for it, used us first for the storage and then we’ve introduced them to Coreweave for the compute side of it. So I think the overall opportunity is data growth in lots of different areas as a result of the AI use cases, the usage of that data increasing and the fact that you want your data to be accessible to the different places where you want to run models and do analysis and that therefore it needs to be part of this open cloud ecosystem. That if your data is locked inside of a traditional cloud like AWS, then it becomes expensive to leverage it with other providers like Coreweave and others where you want the data to be accessible to them.

So I believe that that position as an open cloud provider for storage is an increasingly good place to be when customers want their data accessible to all these different model providers.

Zach Cummins: Got it. Well, thanks for taking my questions and best of luck with the rest of the year.

Gleb Budman: Thank you.

Operator: Our next question comes from Jason Ader with William Blair. Please go ahead.

Jason Ader: Yes, thank you. Hey guys, just a few ones for me. First off, could you just remind us of the specific details on the price increases for both computer backup and B2?

Gleb Budman: Yes, the details on B2 were only for pay-as-you-go customers. So our customers that are locked in on B2 Reserve or other committed contracts had no impact. And it was 20%. And then on our computer backup side, what we were really doing is taking our EVH, our extended version history product, which was $2 per month, and we were bundling that in. So we’re adding $2 per month to the accounts for all those that didn’t have it. It was a very popular product already, so it was only for those who didn’t have it. And then we just did a little bit of rounding here and there to make it a market-friendly price. And then we have our regular discounts for one year and two years.

Jason Ader: What percentage of customers didn’t have EVH?

Gleb Budman: We’ve never shared the specifics there, but what I’ll say is EVH had good adoption. I mean, it was definitely a material percentage of the customers that had adopted it, but it was significantly less than half of the customer base that had already taken it. And it was getting good adoption continuing, which was why we felt like it was a good option to include it in because customers liked it.

Jason Ader: So now it’s just completely baked in. When somebody signs up for this product, it’s the Getty.

Gleb Budman: Exactly.

Jason Ader: Okay, good. All right. And then as we look forward, what is the outlook for the computer backup business? You’re having a good year this year. I guess a lot of that must be due to the price increase. How should we think about next year, just broadly speaking? Do you think they — I know you’re going to give more specific guidance, but do you think the growth rate could moderate somewhat just because of the impact of the price increase won’t be as material in 2024? Just help us think through some of the puts and takes on computer backup in 2024.

Gleb Budman: Well, as we looked at the puts and takes, as you described it, we’ve said that we’re going to have a growth rate in the upper single digit for computer backup. So that would include new accounts, additional subscriptions, and the price increase for Q4.

Jason Ader: For Q4, got you. But for next year, I was thinking, yes.

Gleb Budman: Yes, I think for next year, one of the things is that the price increase is still going to be rolling out for computer backup, like Frank said, over the course of two years. So all of the monthly customers will have already on it now, but the one-year customers and the two-year customers will continue to be seeing the price increase over the next two-year period.

Jason Ader: Okay, so the single-digit growth that you talked about for this year, and I think you all talked about it for next year as well. So at this point, that still holds, it sounds like.

Gleb Budman: Well, we’ll give that growth kind of outlook in the February time frame.

Jason Ader: Okay. Okay, good. And then the last question for me is just, you talked about sort of the inflection point in growth in the business in Q4, and then moving into next year. Can you just sort of rank order the drivers there that is creating this inflection point?

Gleb Budman: Oh, sure. It’s always the business itself, the new logos that are coming on. It’s always growth and existing business, which we call amplification B2, and added subscriptions and computer backup, and then the price increase.

Jason Ader: Okay, good. And, okay, and the B2 reserve, is that part of that? Is it just that type of thing?

Gleb Budman: Yes, yes, because it’s continuing to be a larger and larger portion of our growth.

Jason Ader: Okay, that’s the amplification piece.

Gleb Budman: No, B2 reserve is the, when it’s sold to our resellers, it’s usually when customers are taking a year contract for a stated amount of storage, and that’s bundled in with the resellers, other products that they’re selling. And it has a different revenue recognition, if you recall.

Jason Ader: Okay, thank you guys.

Gleb Budman: Thank you.

Operator: There are no further questions online. I’ll now pass the call back over to Mimi for further questions.

Mimi Kong: Thanks to all the analysts joining to today’s call. As I mentioned, we’re going to move on to some great questions that we received from our retail investors on the Say Technologies platform. And our first question is for Gleb. Gleb, I understand that that Backblaze plays mostly in the small mid-market space, but has there been a trend or push toward larger POs or customers?

Gleb Budman: Yes, absolutely. We talked about that we’re focused on the mid-market and that we’re increasingly focused on moving up in the mid-market. And so last quarter, we talked about having 74 customers with over $50,000 of ARR. And this quarter, we continue to add to that number. Compared to our average — our multi-year commit that we signed this quarter. So we are continuing to focus on and move up market with our services.

Mimi Kong: This next question is also for you, Gleb. The company seems fairly quiet and not very strong when it comes to marketing. Are there any plans to up the marketing game to attract new customers and companies to your product?

Gleb Budman: So we actually believe we’re getting good awareness within our target market. About 3 million people annually read our storage-focused blog. We’ve also scaled our presence and our success outcomes at events and trade shows. As I mentioned earlier, our pipeline is the highest ever. And on top of that, we are planning to ramp up our brand-building effort in 2024. And we’ve recently been laying the groundwork to do just that.

Mimi Kong: Now, how do you see AI aligning to your strategy and financial results?

Gleb Budman: So we talked about the AI opportunity for us a little bit earlier in the call. So, but I’ll just touching on that for a second, which is it’s obviously a massive use case for data. Backblaze V2 is an ideal platform for those storage use cases. We help customers at various places in their workflows. And our partnership with Coreweave supports customers who wish to use Backblaze for storage, Coreweave for specialized GPUs. And we certainly believe that we have a significant opportunity to continue to help in that space.

Mimi Kong: What do you anticipate will be the hardest hurdles in the coming years? And what are the challenges that should be anticipated?

Gleb Budman: So as we scale and we continue to become a much larger business, ensuring that we continue to maintain our great culture is certainly something I’m paying a lot of attention to. Our people care deeply about our customers, each other, our mission. And I want to make sure that we don’t lose that as we become a larger and larger company.

Mimi Kong: Frank, this question’s for you. In what many other ways are you planning to bring in cash and expand the company so we could see a healthy share price growth?

Frank Patchel: Now for our current growth plans, we don’t expect to need to raise cash. And that’s because of our overall growth, the price increase and the operating efficiencies that continue to phase in. But we are actively investing in growing the company because remember, we have a huge market of $100 million in front of us.

Mimi Kong: Gleb, how do you plan to compete with the massive cloud companies such as Microsoft, Amazon, and Alphabet?

Gleb Budman: So we’ve competed with them since the day we launched B2 Cloud Storage seven years ago and we continuously win customers away from them. We are easier to use. There was an analysis that found that our customers saved 92% of their time by using us. We’re dramatically less expensive. We now have free egress, which is something that they are trying to do the opposite of. They’re trying to lock customers in. And now we are also faster than Amazon. So we feel very good about our ability to compete successfully.

Mimi Kong: Now, considering the current conflicts the U.S. is economically or otherwise involved in, how do you see the company being affected both short term and long-term?

Gleb Budman: So we have about half a million customers spread across 175 countries. We don’t have any particular concentration in conflict areas, so I don’t think the company is directly affected. Looking at the U.S. economy specifically, which is obviously experiencing some economic pressure on interest rates and inflation, etcetera, that challenge in many ways is an opportunity for us as we believe that we’re well positioned to help customers when they’re affected by those pressures. Since we’re such a good value for them as customers look to optimize their costs and their workflows, we’re a great way to do that.

Mimi Kong: Gleb, nowadays, we rely more on remote storage for our data. With that being said, we have also progressed to terabyte-sized micro-memory cards. Is Backblaze interested in on-site server or alternative node storage options for its clients?

Gleb Budman: We always listen to customer needs. For the most part, we see customers shifting from traditional cloud providers and from on-premises to Backblaze. We don’t see a lot of interest in redeploying on-premises equipment, but always listening to clients and paying attention to what they’re trying to do. If something shifts on that front, we’ll certainly look to consider it for our roadmap.

Mimi Kong: Are there any plans to change pricing model or tiered pricing?

Gleb Budman: No current plans. We just successfully rolled out the price increase that we’ve talked about on this call. We have a very simple pricing model. That’s one of the reasons our customers like us. We don’t have that same complicated pricing structure that Amazon has, which can result in expenses running away from customers. So no plans to change that.

Mimi Kong: Now Frank, this one’s for you. What is the growth of the company?

Frank Patchel: Well as we reported, we have 15% of growth, but our B2 flagship product grew 31%. We also made a substantial increase in our guidance for Q4, and we discussed that we really are at an inflection point. So due to that continued growth that we’re getting in new logos and the price increase, we see that growth continuing and carrying into 2024.

Mimi Kong: Now, Gleb, if Backblaze prices are competitive, then what do you see as the biggest hang-ups conversion and adoption to your services?

Gleb Budman: Historically, we haven’t spent a lot on branding and awareness, but we’re taking steps in that direction, as I mentioned earlier about our brand building efforts. When customers do evaluate Backblaze, we have a high rate of success. And I think one of the important things is that we’re starting to see the shift toward the open cloud. For a long time, years and years ago, there was the adage of no one got fired for buying IBM? Then it became, you did get fired for buying IBM, because over time, customer needs change and technologies change, and these shifts sometimes take time, but when they do, they become significant. And we see the pendulum shifting back to customers wanting to break free from that lock-in of the traditional clouds. And so that’s a trend that I think we’re seeing and see a lot of opportunity in.

Mimi Kong: And this is our last question. We’re getting close to time. Now, Frank, what is being done to limit cost of operations to better the PE ratio as it sits in the negatives?

Frank Patchel: Well, first of all, we are focused on growing revenue. Remember, we have the enormous opportunity out there, but we are driving operational efficiencies too. You can see it in our operating costs, our OpEx, which is fairly flat quarter-on-quarter. This quarter, it was actually below the previous. And part of that is that our headcount growth has really been slowing. We’re really fairly flat to last year in comparison. And we’re also going be able to leverage that expanded footprint in our data centers, which remember we expanded them during this year and now we can grow into them. But overall, we’re a growth company and we continue to drive growth with our investments. And we do still expect to reach cash flow positive by mid 2025 with all of that.

Mimi Kong: Now, before I hand the call back to Gleb, I understand there were some audio issues today. We will definitely look into it for our next call, but if there are any questions that you need any clarity on, please feel free to reach out to me at iratbackblaze.com. Now, I’ll hand the call back over to Gleb. Gleb?

Gleb Budman: All right, thanks, Mimi. Thank you everybody for joining us today on our earnings call. And we’ll look forward to chatting with you on our next one in February. Operator, you may disconnect now.

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