Backblaze, Inc. (NASDAQ:BLZE) Q4 2022 Earnings Call Transcript

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.

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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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Q&A Session

Operator: Thank you. . Our first question comes from Ittai Kidron with Oppenheimer and Company. Please go ahead.

Unidentified Analyst: Hey, guys. This is (Ph) on for Ittai. Can you hear me?

Gleb Budman: Yes, we can hear you.

Unidentified Analyst: Great. Congrats on the nice quarter. I wanted to just ask about the macro environment. Are you seeing any kind of changes in terms of like the deal cycles or anything that is kind of sticking out maybe from a geo perspective, if there is any color you can give on that?

Gleb Budman: Yes. Thank you, Tycho, for the question and good to hear from you. So obviously, we are all seeing the environment being what it is. Having said that, I think we get a lot of customers who are self serve motion. On the sales assist side, when we have looked at the data both on close rates and on deal length. We have actually seen slight improvements on those fronts. I know that, a number of companies have talked about sales elongation and close rates getting worse. We have actually seen some slight improvements on those, which we believe is partially because customers are looking at how do they optimize their cloud infrastructure and that is becoming an urgent need for many of them. And so they are looking at ways to do that since we are one-fifth of price point of the traditional cloud vendors and they get to save a lot of efficiency and time through the ease of use.

It is making that some of those sales, I think, happen more effectively and more efficiently, plus I think we have just becoming continue to get better at our execution on that front.

Unidentified Analyst: Got it. That is helpful. And then have you guys made any changes to your hiring plan for the year.

Gleb Budman: If you remember that in 2022, we had gone public in lately 2021. So in 2022 we were standing up whole functional areas, so we had a lot of hiring in 2022. We did slow it slightly in three and four quarters, three and four because we were conscious of the macroeconomic environment and concerns about it. In 2023, it is a much more moderated headcount plan because we are filling in those areas that we need, but we are not standing up whole groups.

Operator: Our next question comes from Simon Leopold with Raymond James.

Victor Chiu: This is Victor Chiu in for Simon Leopold. Can you help provide some color around your visibility into the dynamics of your customers switching to B2 specifically, do you have metrics like the percentage that come from AWS versus an internal solution versus some other cloud provider?

Gleb Budman: Yes, it is a good question. We don’t have specific data on that, in part because so many of our customers do show up as self-serve, so we don’t have data on what they had before. We just see that they come, they try, they like the service, they sign up, they put a credit card down, and they go. We do see customers coming from both. So we see customers that are switching from traditional cloud providers because we are one fifth the price point much easier to use and a better fit for them. And we also see customers saying, I don’t want to deal with on-premise infrastructure anymore. And so we are – I want to move to public cloud. And many of them, we are their first public cloud. They have seen public cloud, they know that the benefits of it, but they have not made the leap oftentimes because they have seen the complexity and the cost of the traditional vendors.

And when they find back boys, they say, wow, that is very easy and really affordable. I can do that. And they end up leaving their on-premise infrastructure to move to back boys of the public cloud, but we don’t have a concrete breakdown between those two on the frequency.

Victor Chiu: And just to follow-up on the previous question, you noted that the sales cycles the elongation of some deal closures aren’t impacting you guys to the same degree. Are there specific trends or in instances that you are observing that gives you that – you can see that kind of helped explain why you are faring better than some of your peers in that regard?

Gleb Budman: Yes, I think actually just to clarify, it is not just that we are not seeing as much of a negative impact. We have actually seen some benefit over this time period. And I think that, we look at that as likely the result of two things. One is that, that customers are trying to optimize their cloud infrastructure spend. And a great way to do that is to switch from traditional providers or on-prem infrastructure. And the other is because as an organization, I think we are continuing to become more effective and efficient.

Operator: Our next question comes from Eric Martin newsy with Lake Street Capital Markets.

Eric Martin: Given the outlook for 2023, I was just curious if you could comment on the growth rates for the two different parts of the business. I know in 2022, we had the 46% growth from B2, but we had the price increase and the 17% growth from the computer backup business. Just for those of us modeling at home, I’m thinking that the B2 is probably still in that 40% range, but we could be in low single digits for computer backup.

GlebBudman: Hi, Erik. We don’t guide the product specifically, but when you use the guidance that we have provided and you kind of work with your model, you are going to get B2 in that low 40s with the difference coming into computer backup in the low single digits, low to mid-single digit.

Erik Suppige: Okay. And then the – given the price differential that you guys have, and the fact that you didn’t see any of the deal elongation that a lot of other people saw in Q4. Have you seen an increase in interest from large prospects? So, I wouldn’t expect large prospects to have kind of pulled the trigger on Backblaze really fast, but just kind of a pipeline of larger transactions is, how does that compare to say, six months or a year ago?

Frank Patchel: Yes. I think, we are always talking to companies of all sizes. I don’t think we have anything specific to say on the different sizes of organizations within the pipeline. Much of our business comes from the kind of the core of the mid-market for us. We are always in conversations with customers of different sizes, so I don’t think I have anything really concrete to say on the shift between the different parts of the pipeline.

Erik Suppige: Okay. And then the last question for me on the B2, congratulations on that self-serve success. It is great to see kind of a new high here in January of 2023 on the self-serve signups. What do you attribute that to? Is that the result of maybe an increased focus on sales, on channel development enhancements at the web, the economy? What’s the big driver there?

Frank Patchel: Yes. So we, I think, you remember we talked about how – we have this efficient self-serve motion that includes generating good content, and then bringing people to the website, and then converting them through the website experience. And we have actually worked on both of those areas, both in terms of generating good content, things like our drive stats where we publish statistics around the hard drive reliability that is been thriving. We have had higher numbers on both total traffic on the drive stats, and recent drive traffic on the drive stats. So, it is driving interest from that front. And then also on the conversion side of it, we did invest last year in additional resources for the team who focuses on optimizing the website flow for customers, making it even easier.

And so that then translates into additional people coming through the funnel once they are – once they have come to the website. And this is an area that we have continued to focus on this year. It is a continued, it is not a one and done, it is a continued focus that will be doing throughout the year. It talks about great example, we have talked about how we moderate and measure our different investments and that investment is one that we actually increased during the year because we were seeing good preliminary results. So I’m really pleased with that investment is coming to fruition.

Erik Suppige: Got it. Thanks.

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

Zach Cummins: Yes. Hi, good afternoon. Gleb and Frank congrats again on the solid results and thanks for taking my questions. Gleb, could you go a little bit deeper into the traction you have seen so far with channel partners and your B2 Reserve product? Seems to be some pretty encouraging early progress and just curious how you are thinking about the potential growth from that channel in 2023?

Gleb Budman: Sure. It is something that we are excited about. I think the combination of feature reserve and channel is a great mix. And we have seen that because it is all the needs that the customers have. So typically IT buyers solving backup archiving ransom ware type use cases. And so it makes it easier for them to purchase, because it is a prepaid fixed price amount. It is predictable and it is easier for them to go to their finance department, their CFO and say, this is what it is going to cost me, which is especially this year is something they are more focused on getting clear answers to. It is something where the channel is accustomed to selling a SKU. So it is a good way for the channels to sell. And so it is a good fit, product market fit on that front.

B2 Reserve, as I noted, it is grown very rapidly over the last couple of quarters. We have signed several national retailers and distributors. We signed another distributor just this quarter. And basically what we are doing is, we have hired up additional people into the partnership team to go and pursue various strategies on, primarily getting more traction with these large national resource. It is not so much a strategy of get lots and lots and lots of the retailers and distributors. It is a strategy of getting more traction increasingly with the ones that we signed because they are major significant ones. And so that is basically how we are looking at it. We are putting people added. We are putting programs added and we are aligning around a core handful of strategies to execute on that price.

Zach Cummins: Understood. That is helpful. And final question for me is any sort of update you can give on the cloud vacation product, any sort of feedback from early adopters? And do you think, I guess, and standing up your East Coast data center is going to help to drive further adoption of that product here in 2023?

Gleb Budman: Yes. So for everybody to just remind, cloud application is a functionality where a customer can keep their data in one region inside of Backblaze B2 and then choose to keep it in another region instead of Backblaze B2. So we launched that in the middle of 2022. It was a soft launch because the choices that the customers had were to keep the data in the U.S. West Coast region and in Europe and those are the two choices. At the end of this past year, we launched the East Coast data center, which now gives people the choice of keeping their data on the West and the East Coast of the U.S. or also in the Western Europe or Eastern Europe. We do expect that, that is a benefit to customers. We have certainly heard from customers who have said they do want to replicate, but they want to keep their data inside of the U.S., so they want it replicated inside of the U.S. and that gives them the ability to do that.

We have also actually started standing up additional programs for Marketing Cloud application, including functionality inside of the product itself that helps explain how to set it up for customers as well as targeted outreach to customers that we have to educate them on the ability for them to do this. So, like I said before, we don’t expect cloud applications to be a hockey stick type of approach. It is something that we see as a value for customers gives them the opportunity to keep data closer to wherever they want it to be. It lets them fulfill insurance requirements that allow often for data to be geographically distributed. It allows them to add additional resiliency. And it is only continue to see growth in, but we expect that to be continual, gradual growth in the offering.

James Kisner: Thank you for all those great questions from the sales setting analyst community. I would now like to read questions that come from investors that were submitted on the technologies platform. I want to thank those investors that submitted questions. I think we have kind of addressed some of them, and we are going to try to address some of the more popular ones right now. The first one is for Rank Frank. Really, it is actually, we had a couple different forms of this question. When can we expect to get paid dividends, Frank?

Frank Patchel: Well, we are a growth company and beyond that a growth technology company, and we have so many growth opportunities in front of us. Remember that our core market is over a hundred billion. So the best use of our cash right now is to invest in opportunities that get us parts of that market, and that is what we are doing. So we don’t have any plan to pay dividends consequently, because these other opportunities can be so lucrative for us.

James Kisner: This is actually the combination of really think about five of the questions on the platform. In some form or another, folks are asking, what are the main goals of the company, both in the next 12 months and beyond, like, what are we focusing on as a company? What goals and objectives have we set for the long haul? I will have ask Gleb that question.

Gleb Budman: So, for the long haul, we have talked about there are three phases of cloud. We are entering the third phase, which is a focus on specialized clouds and the open cloud internet where customers get to choose the, how they want to work with the cloud, what services they want, and get the best of breed services. And we certainly intend to continue to lean into that opportunity and help customers with their data storage needs, and really helping them to store and protect and as well as use their actual data. In the shorter term, we some of the things that we have talked about are we want to focus on growing B2. We see this $100 billion opportunity ahead of us. We want to grow B2 and pursue that opportunity. Three core areas in which we are focusing that are channel and partnerships.

Focusing on the application storage use case, helping developers build on our platform along with our other technology partners and optimizing the self-serve experience, continuing to make it increasingly easy for customers to adopt back blades for their needs. The other thing that we talked about is more of a financial company goal for the year, which is in Q4 we want to approach adjusted EBITDA breakeven. So continuing to focus on growth, but also being cognizant of both macro environment and in general our goal, continuing to build a strong and sustainable company, by moderating these growth in our expenses.

James Kisner: Right. Another couple question is really around the outlook for Gleb, I think, what if the outlook for 2023? Do you expect any growth for this year?

GlebBudman: So we certainly expect growth for this year. I guess outlook can be a pretty broadly interpreted term, but in general, we are excited by that a $100 billion opportunity in 2025 that we see. So we continue to capitalize on that. In2023, we are excited about the opportunity to help customers reduce their cloud infrastructure spend by switching to B2. That is certainly a core focus for us and something that we think we are fairly uniquely situated to help customers with this year. From a financial outlook perspective, Frank gave the guidance for the year at the midpoint. We intend to do a 100 million in revenue, and at the midpoint, we have – we are intending to have negative 8% adjusted EBITDA for the year.

James Kisner: Right. The next one’s for Frank, at what point does the company expect to pivot to profitability?

Frank Patchel: Yes. I will have to comment a little bit on pivot. If you remember that. Backblaze in its first 15 years had very little outside investment. So the company had to have the cash and good performance to survive since it wasn’t depending on outside investors to sustain it. So even in our year that we went public in 2021, we had 5% positive adjusted EBITDA. The reason we have negative EBITDA today is that we have been investing in that big a $100 billion market, principally in sales and marketing and in R&D expenses, and also the things that are needed to be a public company. So the – as we look forward, I think the key thing is that we see 2023 adjusted EBITDA approaching breakeven by quarter four, and that is an indicator of where we are headed overall.

James Kisner: Thank you, Frank. Next one’s for Gleb. Are there any plans to leverage partnerships with other companies in the same service industry like Salesforce, Microsoft, or AWS?

GlebBudman: So, partnerships are a strong source of business for us. We have over a 100 technology partnerships and we have mentioned that they are responsible for helping us generate over a third of all the revenue in Backblaze B2. We partner with companies like Fastly, and CloudFlare, and Digital Ocean, and Commvault and Veeam and many others. We are always looking to consider a wide variety of partnerships to drive sales and to enhance shareholder value. So, happy to consider other ideas. If you have any specific ideascertainly feel free to email uspartnercontact@backblaze.com, always happy to hear additional ideas.

James Kisner: Alright, another one for Gleb. Another couple of questions for Gleb along the same kind of topic. Is your team developing any artificial intelligence features or products to integrate in your cloud services with AI becoming the focal point of the industry, what is the plan to leverage this and your offerings to customers? How would it affect the growth of the business going forward?

Gleb Budman: So AI is obviously a big conversation right now and we certainly help many of our customers today that, leverage AI for their products and platforms and for their customers. AI is used by a number of our partners for things like text-to-speech transcription, language translation, object recognition, celebrity recognition, many other use cases. We have partners who do these things and leverage us for the storage cloud component. So all of these things on which you do AI are our data. And as a data storage provider, we are pretty well situated to benefit from the explosion in AI in general. AI requires a lot of data to get trained, AI also creates a lot of data and Backblaze tends to benefit from both of those trends.

I will say that, we also, from a product functionality perspective, we highlighted on our blog not too long ago, one of our team members showed how to actually build an AI training model, using AI tools that are out there and using Backblaze B2 as the storage cloud for all the datasets for the training model. And it is all outlined on our blog, so you can try that for yourself if you want. It is called stable diffusion and Backblaze, create a master piece for a bucket of your own images. So give a shot if you are interested in experimenting with how you could use Backblaze. The Backblaze of the search file along with all the AI tools. As far as our only plans for building out functionality, we are certainly even intrigued by the opportunities and look that some of the interesting possibilities there.

James Kisner: To what extent is Backblaze used as a data lake, a central place for organizations, raw data to be filtered into the places like Snowflake? Again, this one is related to.

Gleb Budman: Yes. We have many customers who use us a data lake. I mean, even which is a customer example that I gave earlier in this call. Deltic actually has a data link of billions of files that they use and they mine and they analyze and that they are leveraging Backblaze for that data lake and they have called Backblaze an ideal solution for them for that purpose. So it is certainly something that we help customers with today and that is certainly something that we see as a growth opportunity in the future.

James Kisner: As someone that went shopping for desktop hard drives to shift to Backblaze during the shortage. Does Backblaze have plans to source more components from the U.S. as overseas market conditions and availability fluctuate?

Gleb Budman: So first of all, thank you for being one of the people who helped us do that back in I believe that was 2011. So thank you for helping us back then and being with us for over 10 years. We source from all three of the global manufacturers of hard drives to ensure that we have a diverse supply chain. So we worked hard to keep good relationships with all of them, and buy from wherever they sell them food. So we are constantly ensuring that, we work toward having a strong supply chain.

Frank Patchel: And it is strong. I would say that our supply chain is in very good shape. We are sourcing from everyone we get great cooperation and we are not seeing the shortages or the elongated lead times that we saw during the beginning of the pandemic.

James Kisner: Next could be for either one of you, I suppose, what are your career plans when you are eventually replaced from leadership?

Gleb Budman: So frankly, I haven’t given too much thought to a courier after Backblaze or outside of Backblaze, since I don’t have any plans to leave anytime soon. Mostly I’m excited about the opportunity we have ahead of us. I think this is a really interesting time in the back ways history as the combination of this very large market, the fairly unique product market fit that we have with to help customers, especially as they look to optimize their cloud infrastructure. But the opportunity we have to really help customers use their data in addition to storing and protecting it. So, I’m excited about all that opportunity going forward.

Frank Patchel: I would just say Backblaze is a very exciting business. There is a lot going on in it, and that is my focus is to try to keep up with all of that.

James Kisner: No plans to retire, and I Private Island at this point. So, how can we better advertise the company to consumers? I think they are talking about how they themselves scan.

Gleb Budman: So it sounds like a shareholder, a customer and someone that is interested in helping us more. I love every part of that. So, we encourage you to refer your friend, including you can use our Refer a Friend program. If you go to backway.com/refer.html, you can learn about the Refer Friend program. If you do that, if you refer someone to the service, they get a month free. You get a month free. So, benefit for both. And your unique referral code is actually listed inside of your account. So if you just sign into Your Back Boy account in Left – you can get your unique code and we would love for you to do that or in any other way that you want to refer.

James Kisner: So next question is really about backup. You know, from the moment you arrive at Backblaze’s website, it is B2 business options and Support, it feels like personal backup has, has fallen to the wayside. Does Backblaze see personal data storage as a profitable space? And will there be any future efforts to enhance or advertise it?

Gleb Budman: So, Computer Backup was our original business we started that back in 2007. B2 Cloud Storage is, is the newer business line that we introduced back in 2017. And we are increasingly focused on back Blade B2 in large part because we can help so many more customers with so many more different use cases and really provide them the platform for all kinds of different storage needs, and help them in a variety of ways. Having said that, we continue to love our computer backup service and the customers that use it, and we still continue to invest in that service. Just this year we launched a new version, Version 8.5 of the MAC and Windows applications. We launched a new mobile application on both iOS and Android or Version 6.0 of that as well as a number of other enhancements and optimizations. So, we absolutely continue to love that service and want to continue to support our customers on that.

James Kisner: Any plans that are spanning the company to the East Coast?

Gleb Budman: That is funny – the question was maybe got submitted just shortly before the announcement. So as we announced a little bit earlier, we – at the end of last year, we launched our East Coast Data Center region. It is live and available, so customers can sign up directly and use that. And you can also use a cloud notification and keep your data in both West or Eastern Europe as you wish.

James Kisner: What measures are being taken to circumvent cyber security concerns? This investor noted the last pass and Capital One data breaches.

GlebBudman: So security’s always top of mind. We are consequently working to ensure customer data is secure. We have a really experienced Chief Information Security Officer who is part of our executive team. We have a security department that works for him. We employ a variety of measures. We encrypt data, we keep redundancy, we keep physical security. We have access controls, we have network security, we do continuous monitoring to protect customer data. We also use third-party services to attempt to breaches. So we also have third-party bug bounty programs. So we are constantly working to ensure the safety of customer data.

James Kisner: When can we expect the company’s stock to be back to its IPO level?

GlebBudman: I wish I could predict the stock market as much as anybody else. Obviously, stock investing is uncertain and depends on market conditions. Our performance as a company, the sector or the industry performance, how investors feel. Not a venture guess I can really venture.

James Kisner: What do you see as the main selling points in competing with major cloud providers such as AWS, Microsoft, and Google?

GlebBudman: So, main selling point, Backblazewould be to is one fifth the price point of those traditional cloud providers. That is always a great value for customers, but especially in the current backflow environment where customers are looking to say, how can I reduce the costs of running my business or running my application, while continuing to do the things I need to do? That makes it even more valuable, and we are also dramatically easier to use. There was a fairly recent market report that found that customers save over 90% of their time by using Backblaze. And so, especially as everyone feels increasingly busy saving all that time for them is critical. And then, we also are part of the open internet. We are a specialized cloud provider that enables customers to use the data the way they want it, where they want it, with who they want it.

We don’t try to lock you in to only using our services as the traditional cloud providers do by charging egregious egress fees. So, those are some of the key ways in which we believe we provide a lot of value versus the traditional cloud providers.

James Kisner: Right. Given Backblaze is extremely competitive pricing for cloud storage. What’s stopping large cloud customers from moving to B2?

GlebBudman: It is a good question, fundamentally, we believe that the primary thing stopping larger customers from moving to B2 is just awareness. We need more of them to look at it and say, I know back wave B2 exists. I understand that it is compatible with S3. I understand that it is not hard for me to switch, and I understand that I will save four fifths of my bill on storage plus dramatically – dramatic savings potentially on egress fees. And kind of getting awareness of that. So we signed customers of all sizes, including the roughly $1 million contract we announced in Q2. And with over 2000 petabytes of data under management, we can support basically any site customer. So we think it is, uh, it is largely an awareness issue and we are working to – working on that with the additional go-to-market efforts that we have talked about.

James Kisner: Alright. Just the last couple more, we are going to squeeze in, I think any plan to implement a glacier style storage option.

GlebBudman: So BackblazeB2 is cloud storage that is roughly the same price as Glacier, but without all the cost penalties and all the complexity of that offering. So, we think B2 is a really attractive option for all the various storage use cases, including for the subset that is just archival data that something like a relationship could be used for. We offer really low cost, while preserving the ability for the data to always be accessible and available, which we think is key since so much of the data, a lot of times customers think, oh, I’m just going to archive, if they don’t need it and then later find out that they actually do need it. We have had many customers who switched over to Backblaze because of doing the frustration of getting stuck inside of glacier when they actually turned out that they needed access to their data. So we believe we provide the benefits of S3 at roughly the cost of play ship.

James Kisner: I guess maybe one more at a time here. When do you expect Backblaze to leading cloud storage? When you think Backblaze to lead the cloud storage industry?

GlebBudman: So while we do not have the revenue scale, of the traditional cloud providers, we believe we are the leading specialized cloud for data storage today with one of the largest storage clouds out there. And we grew about twice the rate of AWS this past quarter. And considering the cloud market is entering this third phase with customers wanting these open cloud solutions, wanting the best free services, we believe we are well-positioned to continue down this path.

James Kisner: Alright. Thanks Gleb for those answers. So before I pass it back to Gleb to close the call, I just want to comment that, we are going to get a couple of institutional investor events this quarter. First being at the JMP Securities Technology Conference in San Francisco on March 7th. And the second is a virtual conference with William Blair, The Tech Innovator Gaters Conference. So we hope to see some institutional investors there. And with that, I will hand back to Gleb to just close-up the call briefly.

Gleb Budman: Thanks, James. And thank to all of you for your interest and for listening into our updates. We look forward to talking with you again in February, actually on our next April and May. Operator, we are now ready to end the call. Thank you.

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