Good day and welcome to the Backblaze Second Quarter 2022 Earnings 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 Mr. James Kisner, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to Backblaze's second quarter of 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 this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new products, partner announcements in sales and marketing initiatives, our ability to compete effectively acquiring 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 actual results to differ materially, including those described in our risk factors that are included in our Form 10-Q for the quarter ended June 30, 2022 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. A 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. 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. I would now like to turn the call over to Gleb. Gleb.

Thank you, James. And thanks to all of you for joining us. We delivered a strong second quarter with 28% year-on-year revenue growth, which is an acceleration from both Q1 2022 and Q2 of last year. Our B2 Cloud storage business grew a strong 45% and now makes up 37% of total revenue and our Computer Backup business grew a healthy 20%. ARR for the company reached approximately $83 million with B2 contributing over $31 million and Computer Backup over $51 million. As a reminder for those on the call that may be newer to the story, Backblaze is the leading independent cloud for data storage. And our mission is to make it astonishingly easy to store, use and protect data. We have two Cloud service offerings that operate on our storage cloud platform. First, our B2 cloud storage service provides developers and IT personnel, cloud storage that is dramatically easier to use and is one-fifth the price of Amazon Web Services S3 and others. And second, our computer backup service provides unlimited cloud backup for laptops and desktops for companies and individuals. While the 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 combined 2025 addressable markets for B2 Cloud Storage based on projections from IDC and company analysis. The second quarter was an exciting one for B2 Cloud Storage. Overall the amount of data added by Backblaze B2 customers was greater in Q2 than for any other quarter in the history of the company. We also added a customer who signed the largest purchase ever B2 in our company's history for approximately $1 million. A win that came through the efforts of our sales assisted team. Turning to…

Thank you, Gleb, and thanks everyone for joining us today. Turning to our Q2 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, taxes, depreciation, amortization, stock-based compensation expense and other expenses or benefits that are non-cash or that we deem non-recurring. Our Q2 revenue totaled $20.7 million, an increase of 28% year-on-year. Backblaze B2 contributed sales of $7.7 million, reflecting 45% growth. Computer Backup revenue totaled $12.8 million, reflecting 20% growth. In Q2, B2 Cloud Storage represented 37% of total revenue, continuing its upward trend. Computer Backup continued to benefit from the price increase we implemented in Q3 2021. Recall since most Backup customers are on an annual or two-year subscriptions, this increase which was from roughly $6 per month to $7 per month, will continue to phase in as they renew across the next two years at the higher price. But that benefit will begin to wane significantly in quarter four of this year as we pass the one-year anniversary of the increase. Our retention metrics remain strong. Recall, we track two key metrics, net revenue retention, NRR and gross customer retention. These metrics are defined in more detail in our earnings release and filings. But basically NRR is the growth of the recurring revenue for initial set of customers while gross customer retention measures retention of customers. Both metrics are trailing four quarter averages. Total company NRR was 113% with B2 Cloud Storage at 126% and Computer Backup at 107%. Gross customer retention was 91% overall, with 90% of B2 Cloud Storage and 91% for Computer Backup. Working down the P&L, adjusted gross margin, which excludes non-cash…

Operator, we are now ready to take questions from analysts.

Thank you. [Operator Instructions] And the first question will come from Simon Leopold with Raymond James. Please go ahead.

Thank you for taking the question. I wanted to see whether you're seeing something that I've heard termed the Walmart effect, which is basically customers who had been buying an expensive good looking for savings and moving down market and whether or not you're seeing maybe effects of a potential recession driving customers from an AWS or another expensive provider into Backblaze. Do you have any way of assessing if that trend is something you'd see. And then I've got a quick follow-up.

Hi Simon. Thanks for the question. So, I think what we've generally talked about is that a recession if one happens is not necessarily good for small and medium businesses, but to the extent that companies are looking for ways to trim costs going from one of the traditional providers to Backblaze B2, saves them a tremendous amount since we're about one-fifth of the price point. And so, in addition to it being easier, certainly the savings of having it one-fifth is material. And then for a number of the customers if they have significant egress costs, because there are developers hosting content and getting data out. The fact that we don't charge egress out to our developer partners is also another significant savings. So, we've certainly seen customers come to us from - for savings reasons. I gave the example, just a few minutes ago in the earnings call of DevChain which switched to us in part because they were surprised by the large expense, when their credits ran out in AWS and so they switched to us and that saved them a lot of money, both on the storage and also in the egress. And so we definitely see that quite frequently and I think that to be extent that customers want to continue looking for ways to do that, we're obviously a good choice. And I mentioned also that I had a conversation with a - with an investor from a portfolio - they had a portfolio of companies and he was talking about how they were going to have an annual gathering of all their portfolio companies and one of the conversations that they were planning on having with all the portfolio companies was in a world where cash is potentially more difficult to raise, what their portfolio companies can do to maintain quality of service, while reducing cash burn, and he was saying that he was explicitly planning on bringing up switching to Backblaze B2, as one of the ways that their company should look at to do that. So I think that we are seeing some of that and I think that we may well continue to.

And just from a total cost of ownership - just from a total cost of ownership standpoint, I would add that in addition to being highly affordable for the companies that Gleb has mentioned, it's also so much easier that when companies are strained and not adding their - to their IT staff, because they just can't right now having a much easier service is very helpful.

Thanks and just as a quick follow-up, your operating expenses were a bit below what we had modeled and you've forecast a better full-year EBITDA. And I'm just wondering whether or not you essentially are focused on trying to achieve profitability a little bit earlier and maybe be a little bit more prudent in your spending then your prior outlook or if there may be some other factors at work here. Thanks.

Well, from an investment standpoint, just for context, remember that in our sales and marketing spend as compared to last year, we are up over 90% and in R&D, our other key investment area, we're up over 75%. So, clearly we are investing, but there can be differences in the timing of those investments, which we certainly do. We had some things shift from quarter two to quarter three, but for the most part differences in - or reductions in the expense were intentional and where those came into play was in the different programs that we are instituting in these spend areas in sales and marketing and R&D, we do look at how well they're doing and we've accelerated some and we've slowed down others. And we'll continue to evaluate and look at that and that can cause differences quarter-to-quarter, but we're not intentionally doing anything other than that.

Thanks.

Sure. Maybe just to add, just a tiny little more, we are - we are continuing to focus on growth and so that's - so to Frank's point, We do look at continuing to add investments as we - as we have said we intend to. Having said that, we're obviously paying attention like everybody else to the unprecedented environment with inflation and other macroeconomic concerns and so we are keeping an eye on that. We are continuing to focus on growth investments, but we are looking at that and in addition to continuing to evaluate the specific programs, we just continue to evaluate the general spend and I think one of the things is, as Frank said, we hired quite a bit up in the first half of the year and as probably most people who've run business know, it takes some amount of time to just digest a lot of new hires. Getting people ramped and integrated. So we are spending some time and effort on doing that as well. So, continuing to focus on growth, but also certainly paying attention to the macroeconomic environment and I think one of the - while we're not trying to get it to profitability at this point, the fact that we had been EBITDA positive for years before certainly positions us well to be able to have the ability to return to profitability if we desire to do so at some point.

Thank you very much for that.

The next question will come from Erik Suppiger with JMP Securities. Please go ahead.

Yes, thanks for taking the question. Last quarter you had talked about customers slowing the growth in their data. This quarter, you're seeing some upside in terms of data growth. Can you talk a little bit, did you see that trend of the individual customer growth reversing or was it more about new customers coming on, what changed from the dynamics last quarter.

It was, it was definitely the growth in existing customers, with the data - you're correct in saying that the data growth in first quarter was slightly down and in second quarter that did reverse to more of what we expected, especially in the second half. So we're seeing the data growth in our existing accounts to be more as we would expect going into third quarter.

You said in the second half, you're saying in the second half of the second quarter you saw - picking up.

That's right. It wasn't really in the second half of the second quarter.

Do you have any speculation, what changed at your customers, was it any particular dynamic or any idea what that was.

Not specifically, we are attributing it to the macro environment that we're in, because in first quarter so much was going on between the war and the pandemic and inflation and the interest rates that we're thinking that, that may have caused a pause in what some companies were doing as far as their activities, which was decreasing their rate of growth in their data storage. And it seems like companies may have become more comfortable as we got into second quarter because to move the needle for us, we had a lot of companies and customers come back to the rate of storage that we would have expected.

Did - has that momentum continued here into the third quarter.

Yes, we're not really commenting on the third quarter, but I don't mind saying that, that is yes.

Okay, and then lastly, I think you had said a couple of comments about you're hiring, are you still planning to reach 180 additional people in 2022.

Hiring has - continues to be challenging in the technology areas. So, we haven't hired as many there. In some technology areas, we actually did a little better, but in overall that's been a little bit challenging. So, we're not trying to slow that down and in some of the other areas when I was speaking about that we calibrate some of our new expenses, some of that is the slowdown of head count in some of those new sales and marketing areas. So, we definitely have that and so we're running at about between 70% - 80% of our hiring goal and I would expect to be something like that in the future.

That was 70% to 80% of the 180 people, is that what I heard.

Yes.

Okay, great. Thank you.

Your next question will come from Max Michaels with Lake Street. Please go ahead.

Hi guys, nice quarter. Just going over the press release, saw that you guys added your largest purchase order ever. My question is just about have you guys seen the size of your purchase orders and your customers grow as your outbound sales force has grown? And do you see that trending the same way going forward?

Thanks for the question. So, the first part of that is, we are working toward continuing to move up inside of the mid-market. So we're not trying to go after very large organizations, but we're continuing to focus on our mid-market target audience. And the sales-assisted motion is one which focuses on the larger size of that, and the sales-assisted motion is something that has become a more dominant part of the overall breakdown between self-serve and sales-assist. So, we are seeing more larger organizations. The $1 million-ish PO that we just signed was obviously the largest that we've done. But in general, sales-assist is becoming a more significant part of the overall mix.

Okay thanks guys.

Thank you.

The next question will come from Ethan Weidel with B. Riley Securities. Please go ahead.

Hi, thanks for taking my question. Following up on that large customer purchase order, was this a new customer or an expansion and within which verticals do they operate, if you would mind to give some color there?

Sure. So, it's a brand new customer for us, so it's exciting on that front. And we - like with all of our customers, we expect that customers sign on and as long as they continue to be happy, they will grow over time, but this was a new customer for us. And in terms of the vertical for us, this was a video-focused company.

Excellent, thanks. Another Cloud Replication has gone live. What kind of incremental feedback have you received from early adopters?

So, Cloud Replication just went live towards the end of June, and we're excited that it's live and it's available for customers. It's still early for that offering. We do appreciate that it's available now for customers. Like we talked about, and I think before, we expect a gradual adoption of it, and we didn't plan for much of it in having much impact in 2022, but we're happy that it's out there and available for customers.

Understood.

Thanks for all those great questions from the sell-side analyst community. I would now like to read questions that come from investors. And I thank those investors that submitted questions, and while a handful of like they have already been answered, we're going to address some of the more popular questions now. First one is for Gleb. There has been an abnormal amount of insider activity this summer. It is troubling to see so many members of the management team selling, especially at this dramatically diminished price. Can you speak to this more and why investors shouldn't be alarmed by this trend?

Sure. We'd like to be transparent. And so we actually put a detailed explanation of the motivations for the stock sale plan in a post on our blog earlier this year, and I encourage everyone to read that, it was back in March. The main idea here is that we set up a plan all the way back in February, knowing that, that plan wouldn't go into effect until May and then it would have a small number of shares sold daily over the course of the year, with the whole intent of not having any appearance of attempting to time the market or attempting to guess is the stock price. And so, that's the way that the plan is structured. So it has no judgment on where the market is or where the stock is. And even after the plan completes at the end of the full year, we will still have the majority of our shares. We will still remain large holders of the stock, and we're still very positive on the long-term outlook for the business.

All right. Next question. The stock has lost around 70% of its value over the past year. That said, as a daily user of Backblaze's services, I strongly believe in the potential of this company. What steps are being taken to innovate and gain competitive advantage to deliver new value to shareholders?

So first, I want to thank the person asking the question for being a customer and for the praise and belief in Backblaze. As you know, markets are volatile and Backblaze shares are not alone amongst publicly-traded peers, particularly in software and recent IPOs, to have seen some pressure. In terms of competitive advantage, we believe we are dramatically easier to use and are a fraction of the price of the traditional cloud vendors, and we continue to innovate. For example, we recently launched B2 Reserve, Cloud Replication and Universal Data Migration. And our plan is to continue to pursue that massive end market with great products and to drive value for our shareholders.

Okay. Next question. Could you provide more insight on how the growing sales team investment has been shaping up or helped impact the business bottom line in recent months?

So, as we talked a lot about on our last call, we've only started really ramping up the sales-assisted headcount over the last couple of quarters. And so, due to the time to ramp the people and then the sales cycle of those efforts, we said we'd expect to start seeing a return later this year to early next year. But certainly getting the largest PO ever through our sales-assisted motions is certainly an encouraging data point. The other thing I would note is, one of the things we mentioned was, as part of the investment in sales team was investments in partnerships. And I do want to highlight why we bring up partnerships on a semi-regular basis, and it's because partnerships are actually very meaningful to our business. We're not going to report regularly on this, but I do want to say that while we can't track where all of the data in Backblaze B2 originated from, we do know that at least one-third and likely materially more than that has come directly through our partnerships. So that's why we continue to invest in our partner team and that channel motion and the partnerships and why we continue to highlight these key new partnerships.

Okay. Next question is, how do you see the company competing with Azure and AWS in the segment of enterprise customers, given that once the company is into a particular cloud ecosystem, it's hard to restructure its cloud solutions?

So just to clarify a bit, we are primarily focused on the mid-market and not so much on the enterprise, which we believe we serve far better than Amazon and others through our ease of use and lower cost. And as we talked about just a few minutes ago, we do see lots of room to move up market with - still within the mid-market in terms of that customer size. And we've made it very easy for prospective customers to switch, as we've highlighted with the DevChain customer example, between having S3 compatible APIs so you can just switch straight over without any change of code and with Universal Data Migration, which enables you to move your data out of Amazon S3 and other providers easily and for free. And so, we made switching from those providers very easy. And once you've switched, it's not only lower cost, but it's dramatically easier to stay with B2. So, from a mid-market focus, we believe we're dramatically better at serving those customers.

Are there any plans to take the open source model of the server and sell them to third-parties as a product, new software development just hardware packages?

For those on the call that are not familiar, in order to build our Storage Cloud, we originally designed the actual storage servers that we used, which we called Storage Pods. We later published a blog post open sourcing that design back in 2009, and about 1 million people read that blog post and it has spurred innovation on low-cost storage hardware in the industry. We're happy for companies to continue leveraging our open source hardware designs, but we are going to continue being focused on being a SaaS and an Infrastructure-as-a-Service provider and not on selling hardware.

Has Backblaze considered offering its services to content creators to tap growing markets?

Absolutely. Content creators is a pretty broad category. It's super easy for anyone to sign up and use Backblaze. We do actively target the media and entertainment market, which includes a lot of content creators. For example, we recently exhibited at the National Association of Broadcasters, NAB, Show in Las Vegas, and we are planning to exhibit at IBC, the International Broadcasting Convention and NAB New York. And if there are other content creator categories that you believe we should pursue, please do send us an e-mail with suggestions where we're always looking for more customers in the mid-market to help.

A handful more here. So, next one is, can you give more insight on how you plan to expand revenue streams and customer base in terms of creating new products or expanding down different possible sectors of the cloud space industry?

So I mentioned earlier, our newly launched offering, B2 Reserve, Cloud Replication and Universal Data Migration. And while we're not going to preannounce upcoming new features, we believe there's a ton of opportunity to grow with our current offerings, and we're always keeping an eye to how we can delight customers further. I'll also mention that in addition to the products themselves, the products already serve customers in a really great way and the market is very large. So, a lot of the opportunity that I see today is to build our awareness and brand familiarity, which we are actively working on, and we expect our new CMO hire to help with that as well.

So more pressure on Kevin. Number eight, competing with the top 5 cloud companies doesn't seem like a smart move with companies like Oracle investing billions into their OCI. Have we thought about partnering with a top 5 company as a preferred partner to generate more business?

We actually believe it is a smart move. Here is why. We serve the small and medium business market far better by being easier, less expensive and trusted. The complexity and cost of those traditional cloud providers is just not that attractive to mid-market companies and, therefore, we believe they are underserved. That said, we don't rule out any potential agreement that could benefit current or prospective customers. So if there's an interesting partnership, we'll certainly explore it. But fundamentally, we believe that the traditional vendors are increasingly focused on the largest enterprises, which results in complicated and expensive offerings. And the mid-market is really best suited by an easy and affordable solution, which we provide with Backblaze.

Last one from the Say Platform. I understand the priority after the IPO was building a sales team and prioritizing growth, but how has that changed with the downturn in the market? And what changes are potentially being made in the short-term, if any, to turn to profit instead of operating at a loss?

I think we touched on this one a little bit with Simon's question at the very beginning. But in general, we just raised growth capital in the IPO in November. So that was just a little bit ago. We've only spent a relatively small portion of that and the end market is huge. So, at this time, our focus continues to be growth, but we are continuing to keep a close eye on the market, inflation, economic conditions and certainly we'll adjust accordingly as needed. On a long-term basis, particularly given our recurring revenue model and a history of EBITDA profitability in prior years, we believe we are well positioned in the future to have the option and the ability to return to profitability, if we wish to do that.

Thanks for all those answers, Gleb. Before we close, I'd just like to mention that we will be attending virtual investor meetings hosted by Oppenheimer at their tech conference tomorrow, August 10. We will also be attending the Lake Street Capital Markets Best Ideas Growth Conference in New York City, September 14. We are also pleased to announce that Backblaze will soon officially launch its stock purchase program, which rewards individual shareholders with exclusive gifts, including discounts on Backblaze products. Stay tuned for an announcement soon. Additionally, Backblaze is also developing a video blog called Stocks and Storage to help investors and others further understand financial and cloud storage technology topics in layperson's terms. Keep an eye out for our first episode coming to ir.backblaze.com, and we'll be announcing that also in our social networks. I'll now turn the call back to Gleb for his closing comments.

Thanks, James. And thanks, again, to all of you for your interest and participation, and we look forward to updating you again on our progress in just a few short months. Operator, you may now end the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.