Thank you for standing by and welcome to the Backblaze Q3 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. James Kisner, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good afternoon and welcome to Backblaze's third quarter 2021 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 quarterly financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements of future financial results are goals and expectations regarding future revenue growth, profitability, use of IPO proceeds and investments in our business or anticipated capital expenditures and our estimates regarding our capital requirements. Our ability to acquire new customers and successfully engage and expand usage of our existing customers, the cost and success of our marketing efforts. Our ability to promote our brand, our reliance on key personnel and ability to identify, recruit and retain skilled personnel; our ability to effectively manage our growth, our ability to compete effectively with existing competitors and new market entrants and the growth rates of the markets in which we compete. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors that will be included in our Form 10-Q for the quarter ended September 30, 2021, in our recently filed S1 prospectus. Should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliation of GAAP to non-GAAP results may be found in our earnings release which was furnished with our Form 8-K filed today with the SEC. You'll also find a slide presentation related to our comments in the webcast viewer. The site is currently redirected to a static page while our general vendor is working the patch for the Log4j vulnerability that is broadly affecting many companies on the global Internet. We will post the presentation on the static page as well. I would now like to turn the call over to Gleb. Gleb?

Thank you, James and thanks to all of you for joining what is Backblaze's first quarterly earnings call as a public company. We had a strong Q3 and we'll delve into the details of the quarter in a moment. But since this is our first earnings call, I'd like to spend a few moments introducing our company to those who may be new to the story. Backblaze is building the leading independent cloud for data storage. And I'd like to explain why that's so critical. Today, for mid-market companies, the cloud storage offerings of the large diversified vendors are complex and expensive. Also, due to the breadth of those vendors, they attempt to lock in data to only using their services and they are increasingly in competition with their own customers and partners. Unlike those vendors, all we do is storage and we don't compete with our customers. Customers are increasingly wanting to use their data with best-of-breed providers in a multi-cloud fashion. This is why we believe the future is being built on independent cloud platforms and ours has been over 14 years in the making. For each major element of the tech stack, an independent cloud platform, such as our partners Cloudflare for networking or DigitalOcean for compute has emerged and built a large business, yet no one has done that for data storage. We believe that data storage is among the most critical of all of these elements since none of them would exist without data. We believe that we are well-positioned to be the independent trusted cloud platform that enables developers and businesses to use their data, how they want with whoever they want at disruptively affordable economics. We have gotten to where we are today through the hard work and dedication of our incredible team…

Thank you, Gleb and thanks, everyone, for joining us today. I'll start by providing a brief overview of our financial model and then review our third quarter results, concluding with our guidance for the fourth quarter. We provide cloud-based storage solutions using our proprietary global software platform. Our products, B2 Cloud Storage and Computer Backup utilize our shared storage cloud technology platform. They also share the same go-to-market motions with nearly 80% of our revenue generated from the self-serve motion. Our revenue is nearly 100% recurring, primarily paid via credit card. Computer Backup clients have monthly one-year and two-year subscriptions with the one in two years build in advance and recognized ratably over the subscription period. Our B2 customers are billed monthly in arrears based upon the actual storage used. B2 customers tend to have ever larger invoices since data storage is cumulative and seldom purged. Before I discuss the financial highlights, I want to comment on the impact of the COVID pandemic on our business. Over the long term, we believe that pandemic can serve as an accelerator for the adoption of public cloud solutions like ours. But over the short term, the impact can cause some variability in the amount of the new data created in stored in B2, as well as the number of new subscriptions needed for Computer Backup customers. We remain fortunate that today these impacts have been limited. Turning to our Q3 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. Adjusted EBITDA is defined as earnings before interest, depreciation, amortization, noncash charges, such as stock-based compensation expense and other expenses or benefits we deem nonrecurring. Our Q3 revenue totaled $17.3 million,…

Thanks, Frank. We're very excited about the opportunity to be the leading independent cloud for data storage. Our strong Q3 financial results and other accomplishments highlight our building momentum and we're thrilled to be at this inflection point. Operator, we're now ready to take questions.

Thank you. [Operator Instructions] Our first question comes from Ittai Kidron of Oppenheimer & Company. Your line is open.

Thanks guys and congrats on the first quarter out of the gate, well done. Gleb, I wanted to spend some a little bit of time on your go-to-market motion, especially on B2 and your investment in the direct sales force. Maybe you can talk about the hiring over there. In what pace are you moving? And perhaps more importantly, what if you've seen as far as productivity gains and the adjustment to this new model, how would you characterize progress overall here? And how that's driving perhaps more visibility from a pipeline standpoint for your B2 business?

Ittai, good to hear from you. Thanks for the questions. So we have the two different go-to-market motions is the self-serve motion and the sales-assist motion. On the sales-assisted motion we are -- we had started in the beginning of 2021, we started the outbound sales effort. It's an insight team reaching out using e-mail and phone calls to reach out to prospective cues. And we also started our customer success management team toward the beginning of 2021. We've been scaling those through 2021 and there are definitely areas that we are scaling faster with proceeds. So we are actively doing that now. We also have our partnership team which we started a couple of years ago and is another area of investment with proceeds. So we have both of those components of the sale-assisted model are ones which we're excited about the opportunity to grow faster with the proceeds that we've just closed.

Can you perhaps elaborate on the investments you've made before the proceeds? And how have you seen productivity improve through this time frame? Is it developing to your expectations?

Yes. We -- when we started the outbound sales effort at the beginning of the year, we started carefully, we hired one person at the very beginning of the year just to run that experiment. We saw that -- we thought it might take a few months. We actually saw that the pipeline was being built quicker and so we ended up hiring two additional people. And as we saw addition pipeline being built with those two, we hired another two people. And so we've been excited by the -- what we call opportunity potential that, that team is scaling up and it's actually been, we believe, we're quite successful in doing that. That group, the sales-assisted group overall drives customers that are about 20x the size of our self-serve customers. And so we're excited by the fact that as the sales assist motion scales, it brings more of the larger customers onto the platform. And the sales-assisted motion in particular with our outbound efforts and our customer success efforts are ones where more directly, we can put dollars behind people to generate output.

Very good. Good luck. I'll jump back in line. Thanks.

Thanks, Ittai.

Thank you.

Thank you. Our next question comes from Jason Ader of William Blair. Your line is open.

Yes. Hi guys, good afternoon. Thanks for the questions. My -- I wanted to talk about AWS. And in particular, I saw at re:Invent, they announced a kind of new lower cost instant retrieval storage class. I think it's kind of S3 Glacier but with faster retrieval times. I'm just wondering, first, what's your reaction to that? Is that -- do you see that as competitive with your sort with the B2 service? And then what's the risk over time that AWS could continue to kind of chip away at the price gap that you have. And also introduce -- I guess, they also introduced the -- they cut some of the egress fees, correct. So those are kind of the two areas where it seems like there's a big gap between what you offer, what's the risk that they could narrow that gap over time?

Good insights, Jason. Thank you. So I think there were two separate parts of the question and I'll hit on each of them separately. On the product announcements, AWS has hundreds of different services and they've had many different offerings on the storage side as well. When we look at it, the complexity around the pricing for that offering, the footnote alone to explain the pricing for that one subproduct to one component of which was that you get out of it was at the most financial foot in the stone. So, I think our ease of use continues to be a leading differentiator between us and the other diversified cloud platforms. And I think this new announcement is just another example of that, where they've added yet another layer with yet another bit of complexity for customers to try and figure out which is potentially fine and maybe even useful for the largest enterprises but is just additional complexity for mid-market companies where with Backblaze, it's one simple offering at one simple price point. They just use the service and all of their data is instantly available. On the egress side, the Amazon made one small step forward in reducing the cost of egress fees. We look at that as a positive. A lot of the data today is stored and locked inside of Amazon, if they continue to make further steps in that path, it will free more customers to use other best of breed services like ours. So we are excited about that one little motion. We believe in multi-cloud. We believe customers should be able to use their data with who they want, how they want. And that's part of why we were pushing for reduced egress fees and part of why we were a founding member with Cloudflare of the bandwidth lens. And so this is -- they made one very, very small step in that direction but we view that as a positive step for us and for the customers.

Great, great. And then, one quick follow-up. Have you guys done any performance benchmarking and for your B2 service relative to S3 and other -- some of the other cloud storage services. I'm just wondering how your performance compares to kind of the standard S3 and some of the other cloud storage services out there.

So performance is something that customers need in -- for their different offerings. And if you look at all the different ways that customers use our service, our performance supports them in all their different needs. I think one of the key things with object storage is that you can architect your service to use as many threads as needed. And so customers can get any kind of performance they want out of our system by using additional threads with our service. So we have hundreds and hundreds of gigabits of bandwidth available for them and they can simply use more threads from their service to get additional performance out of the system.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Simon Leopold of Raymond James. Your line is open.

Thanks for taking the question. I wanted to ask about really two things. One is, you talked about the trend of the -- basically revenue per customer on an annualized basis is trending higher. Could you help us understand how to think about that metric of where are you and where do you expect to be in, say, a year? Just trying to get a better handle on that. The second thing is maybe a follow-on. You talked a little bit about the sales assist and the hiring I'd just like to hear about what you're doing in terms of maybe the branding and the marketing efforts around promoting the Backblaze brand and raising your profile?

Thanks, Simon. Let me touch on each of those and then maybe Frank will want to add color as well. So on the revenue per customer, the -- as you saw in the release, our revenue per customer on both our cloud services has been increasing quarter-over-quarter consistently. And the revenue per customer of B2 is roughly 3x that of computer backup. And so as we continue to have the individual cloud services grow the revenue customer. And as B2 becomes a more dominant part of the overall company, both of those things drive the revenue per customer for the overall company. And some of the things that drive that increased revenue per customer are the following. We have customers that are larger, that are joining us, partially as just our continued efforts of acquiring new customers and the sales assisted motions behind that. Partially, it's a result of customers using additional services through cross-sell and upsell. So for example, on a Computer Backup version history adoption, also the cross-sell of Computer Backup to B2 customers and the B2 cross-sell to Computer Backup customers. And then currently, the price increase on Computer Backup is going to be driving that just mechanically as over time as more of the customer base moves on to that price increase? And finally, the new features and functionality. So we mentioned that we are shipping cloud application, expecting to ship that in the first half of 2022 and that is an upsell feature. So all those things drive revenue per customer. The other question was how do we -- what are we doing on the marketing side? So we have -- we are investing in the efforts that we have been doing. So scaling up the content and content engagement side but we're also investing now in paid advertising. So we created a campaign around the time of the IPO. It was the Blaze-on campaign and we're investing in getting that spread and viewed by more people. So leveraging the IPO itself and then leveraging paid methods to build the brand awareness as we continue to establish us as the independent cloud for data storage.

I would just say that we -- on that hiring front which we didn't really touch on and this is more anecdotal. But the we are more well-known right away. We have seen that. We did invest in more recruiting so that we could find the best and brightest and attract them to Backblaze. So as for opening all these positions that we're talking about in using our proceeds to accelerate growth, we are better known. But the big thing for us is still finding the right people and getting them on board.

Thank you very much.

Thanks. Our next question comes from Eric [ph] of JMP Securities. Your line is open.

Yes, thanks for taking the question. I wanted to follow-up on the response on AWS. I think in your blog, you had noted that a customer might save up to $9 per month on egress fees; and that seems to be a pretty nominal amount would suggest that they really made more of a symbolic price reduction and really a meaningful reduction. And I'm curious, what is your perspective in terms of their objective with making that change? And do you think that there might be more reductions not too far down the line?

Thanks for the question, Eric. Good to hear from you as well. The -- I will say I obviously don't fit inside of the boardroom at AWS, so I don't know exactly what their specific thinking was. But I will say that there is certainly pressure in the marketplace to have the egregious egress fees that they charge be dropped or removed. So I don't know exactly what ended up causing it but I will say that customers are starting to realize that paying the equivalent of 20 months' worth of Backblaze B2 storage, just to be allowed to get your own data out doesn't feel fair. And as companies want to use more of the best-of-breed services and want to have access to their data to use the way they want, they can do that with Backblaze today and they are locked inside of AWS. So, I think that there is certainly pressure for them to reduce those fees but as you said, the actual move that they made is very nominal in helping their customers.

Okay. And then the NRR of 110%, I'm curious, where do you anticipate that to go? It's trailed off some and over the course of the last year and I'm curious -- and I think even from last quarter, down 1%. I'm curious where do you anticipate that will be going as we look ahead over the next, say, 12 months?

Well, NRR is an important metric for us. And we do think of ourselves, especially with that 129% in B2 as best-in-class. So we don't project it into the future but we do understand that it can move a little bit upward and downward and that the COVID pandemic in the amount of data that individual customers are adding can have a near-term impact. But overall, we expect customers to be adding data because that's been the history and that drives the NRR for us. We also remember that we do have an upcoming product called cloud replication within B2 and that is projected to come online for us midyear and that will also add a lot of NRR for us.

The one other thing just to mention is also in addition to the cloud replication which is a functionality that Frank mentioned for B2, on the computer backup side, the price increase that we did do this quarter is going to flow through the customer base over the course of approximately two years and so there will be some assistance from that as well.

Great. Okay, thank you.

Thank you.

Thank you. Our next question comes from Erin [ph] of Lake Street Capital. Your line is open.

Hey, congrats on the good Q3 and the healthy guide. My question has to do with where you're investing in the business. I first wanted to figure out the 250 person headcount Gleb, that you mentioned, was that September 30 or was that November 30 number?

In -- it's really October. So September 30, we had a little over -- we were in the 240s; so we're just approximating it at 250.

Okay. And then I know based on the S-1, you were at 228 back in June. So roughly a 10% increase sequentially in the headcount. I would imagine you're definitely putting your shoulder into the go-to-market. I'd imagine it's probably easier to get the sales assist side as opposed to the partnership side but I wanted to drill down more on the partnership headcount investment. How is the hiring going there?

Yes. It's an interesting question and I appreciate the detailed follow-up. So on the partnership side, we've actually had good success in bringing the team members onto that team. In fact, we had a number of them out at the IPO event in New York and we were able to actually meet in person which was great. The types of people that we're hiring for that are ones who are both looking to bring on new partners into the fold, as well as ones that are working to do activities with those partners, the joint marketing types of activities. That team doesn't need to scale at the same rate as the outbound team because of the nature of just how that works, there is more leverage with the individuals but we have actually been able to scale up that team already.

And you are correct that it's easier to find sales executives who want to join great companies with big futures. So we do see more candidates on the regular sales executive side.

Understood. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from Zach Cummins of B.Riley Securities. Your line is open.

Yes, hi, good afternoon. Thanks for taking my questions and congrats on the solid first quarter out the gate here. Just really following up on a lot of the similar questions that have been asked. I mean, Gleb, how should we think about the growth potential for B2 just given the expected investments from the IPO? It sounds like much of the growth thus far has been driven by new customer growth, but how should we think about that balance between new customer growth and expansion within that existing base going forward?

Yes Zach, it's a good question. And I think the first part of it is we expect to continue driving new customer growth. And we expect that new customer growth continues to be the dominant part of where the revenue and the growth comes from. At the same time, having a net revenue retention rate of around 130%, obviously is material and it drives a lot of upside for us. We continue to invest in both areas; so on the net revenue retention side, the customer success management team that I mentioned that we started in the earlier part of 2021 on the sales assist side [ph], as well as the customer journey management which is more on the self-serve side but serves a similar type of function of increasing opportunity with existing customers, as well as the cloud replication that's coming in the first half are all things which help drive net revenue retention for that base. But we do believe that the dominant part continues to come from new customer acquisition.

Understood. And just a final question really; on the computer backup side, with the recent price increase, I mean, I know it's still very early on, just a few months in but have you seen any notable uptick in attrition with that recent price increase?

We haven't actually. We've seen very consistent gross customer retention, and that's consistent with what we saw when we did a price increase back in 2019. So I think it really speaks to the value that our customers see from the services that we don't see -- we haven't seen an impact from the price increase.

Understood. Well, thanks for taking my questions and congrats again on the solid results.

Thank you. Appreciate it.

Thank you. I'm showing no further questions at this time. Let's turn the call back over to Gleb Budman for any closing remarks.

Thank you, operator. Just wanted to say, thank you everybody for taking the time to engage with us on our first earnings call as a public company. We're very excited to be taking this next step, and wishing you happy holidays. And we look forward to talking to you in a couple of months. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.