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

Thank you. Good afternoon and welcome to Backblaze's fourth quarter and fiscal year 2023 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Frank Patchel, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new features and offerings and the impact of price changes, partnerships and sales and marketing initiatives. Our ability to compete effectively and manage our growth and our strategy to acquire new customers and retain and expand our business with existing customers. 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 Annual Report on Form 10-K and our other financial filings. You should not rely on our forward-looking statements as 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 can also find a slide presentation related to our comments in the webcast, which will also be posted to our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR and gross customer retention, number of customers and ARPU. Before I turn the call over to Gleb, I'd also like to mention that in the latter portion of our call, as in prior calls, we will be addressing questions from investors that we gathered through the Say Technologies platform. Thank you for joining us and I would now like to turn the call over to Gleb.

Thanks Mimi, and thank you, everyone for joining us today. We are very pleased with our Q4 results. We delivered new product features and accelerated revenue growth with B2 cloud storage having particularly strong growth of 47% year-over-year. We also demonstrated continued financial strength, as we reached adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage. In addition, we are reiterating our forecast to exit this year with at least $20 million of cash on hand. I want to take a moment to highlight some key results. First, we delivered significant innovations. Second, we've continued to move up in the mid-market. Finally, we've accomplished this while dramatically improving our financial position. We've accelerated our overall growth rate to 25% in Q4, while at the same time improving our profitability and cash usage. We achieved adjusted EBITDA of 6%, beating the high end of our prior guidance of 3%, and we used just $2.4 million of cash, which is about $6 million less than we used in the prior quarter. These three achievements provide a strong foundation for the year ahead, positioning us to take advantage of a shift we're seeing in the market. I want to take a moment to talk about that shift. We're seeing larger businesses come to us because they want to build using the cloud providers that best suit their needs instead of being forced to stay in the traditional closed cloud platforms. For some of these businesses, it's about unique functionality. They're able to optimize with specialized solutions fitted to their use case. For others, it's financial. They can achieve massive savings by migrating away from expensive and complex traditional cloud providers, and for some it's about trust that providers won't compete with them indirectly. These are some…

Thank you, Glab, and thanks everyone for joining us today. Turning to our fourth quarter financial results, unless otherwise noted, I will be referring to non-GAAP metrics and the growth rates mentioned are year-on-year. We remain focused on two key metrics, revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q4 revenue totaled $28.7 million, an increase of 25% year-over-year. B2 cloud storage revenue was $14 million, reflecting 47% growth. Computer backup revenue totaled $14.7 million, reflecting 10% growth. Quarter four represents the introduction of our pricing changes. The exact impact of the Q4 price increase cannot be determined for a number of reasons, including changes we made to the product offerings. However, we believe without the price increase organic growth for both B2 cloud storage and computer backup would've been similar to quarter three. As a result of the price adjustment it is common to see an increase in customer churn. However, we did not see any incremental customer churn in quarter three at announcement or in quarter four at implementation. This is illustrated by our continued strong gross customer retention rate of 91% for the total company. We did see some incremental data in license reductions, likely due to the price increase, which was expected. We believe our consistent and strong customer retention rate speaks to the value of our services and how offering these popular features of 3x free egress and extended version history further differentiates us from our competition. Turning to our net revenue retention or NRR, total company NRR was 109% with B2 cloud storage at 122% and computer backup at 100%, which have all improved over the prior quarter. Working down the P&L adjusted gross margin increased about 300 basis points sequentially to 77%, which was primarily due to the…

Thanks, Frank. In summary, the team has done an excellent job delivering product innovation, driving revenue growth and achieving adjusted EBITDA profitability. We are uniquely positioned to capture the massive market opportunity ahead and execute on our mission to help customers leverage the open cloud ecosystem. Operator, we're now ready to take questions on our call.

[Operator Instructions] Our first question comes from Chad Bennett with Craig-Hallum.

Great job on the quarter. I mean, the EBITDA number was phenomenal. Good to see that leverage playing out. Just in terms of Frank, I know you talked about really minimal to non-existent uptick in churn as a result of the price increases to date. Just thinking about the first blush at the fiscal ‘24 guide, are you expecting that to change or anything directionally there on churn on either side of the business? And then with respect to the two segments, is there any difference in kind of growth rates that you're factoring in those two segments relative to what you just did in Q4 for fiscal ‘24?

Let me address the churn first. We were pleasantly surprised and very pleased with the churn rate because you would think when you have a price increase that you would've had some increase in churn. And our customer retention was exactly the same as in the prior Q3, and we had expected to have some increase at announcement, which we didn't see and some increase at implementation, which we didn't have. So that was very good. So we now have over four months of experience with it and with January over five. So we're not expecting any increase in that churn rate. So we think the customer retention will remain at that very high company, 91% certainly in that range. But what we did have, if you look at the data and license reductions that we did see, we did have a relatively small reduction there of about 1% to 2%.

And then just in terms of the two segments, Frank and how you're thinking about that relative to fourth quarter growth rates?

As far as our growth rates go, we think our growth rate without the price increase kind of mirrored what was going on in quarter three. So we were very pleased to see that growth rate of B2 at the high 30% range in organic and 40% or better with the price increase. And we're expecting that through fiscal year ‘24. And then the same on the computer backup that organic side was in the low single-digits and with the price increase we're in the low double-digits and that's how we're projecting it forward in 2024.

And then maybe one follow up if I could for Gleb. You highlighted few times Gleb on the call that the increase in deal size as you're seeing and moving up, I think, you characterize it in more into the mid-market. I guess is there just you cited a couple very interesting wins. But can you just speak to whether it's B2 reserve, pipeline growth or maybe it's actually additional use cases you're seeing in the mid-market that maybe you weren't seeing a year or two ago, kind of any characterization of the magnitude of improvement or demand you're seeing from the mid-market?

And by the way, maybe just to say, because I think Frank was talking about the growth rates of the businesses and said high 30. And so, I think just to make sure that came across through the audio, which is it's 30 being a high number, not a high 30 organic growth rate. So just to make sure that was heard correctly. We are still very excited about the fact that in 2024, we're seeing around 40% growth for B2, which I think is obviously a very strong growth rate. In terms of the up market movement. So we're seeing up market movement in various ways. We're seeing that in backup customers, we're seeing that in application storage customers. We're seeing that in media and entertainment customers, in general, we're seeing more up market movement. The application storage customers and committed contracts that we're seeing in particular are some of the areas where we're seeing upmarket attraction. These are customers that typically are on one of the traditional clouds. They have gotten to some scale and they want to move off and do that for combination of savings on the storage. Often egress is an important component for them, because they're using other cloud providers like CDNs or compute providers and they need the data to be able to exit from the storage and not be charged normally for that. And so, the example I gave on the call a few minutes ago around the customer that saved $800,000. That's an application developer. It's a media streaming company, but it's an application storage use case. And that's probably where we're seeing some more of the larger deal type traction.

The next question comes from Jason Ader with William Blair.

First question for me is just for the media streaming use case that you just talked about, how are you finding these customers, Gleb? Are they coming to you? Is it part of the -- some of the investments you've made in salespeople? Just give us a sense for how you're landing some of these upmarket customers?

So media and entertainment is a market and use case that we started looking at a while ago, because media companies have large volumes of data, video footage, photos, music and they typically have workflows around those that benefit significantly from cloud storage as the way that data flows. We have media and entertainment customers that do their backups and archives with us. We also have media and entertainment companies that do their workflows with us, where it used to be especially pre-COVID times that they would all sit in one place and do their production work together in an office that has become much more distributed, which means you need access to all that media assets in a cloud environment so that they can access the data regardless of where they are. And some of them are also taking that next step and actually doing distribution using our cloud storage offering. So we see it as an evolution for them. The first most basic level is the backups and archives. Then it's a more active archive use case where they archive the data, but then they're pulling from it. Then it's actually developing the media production, leveraging our workflows and then finally doing distribution. And so in terms of where we're finding them, a lot of them continue to come to us through the same methods that we attract all of our customers, which is a combination of content and community. The blogs that we publish, which has millions of readers around it, a lot of those also end up being media, entertainment customers. But we've also layered on marketing motions, including events. So, we have a -- we present at media events such as NAD in Las Vegas. We've been at other media events in New York and Amsterdam and other places. So that layers on top of that. And then the channel effort that we've been investing in is also a good partner for us where they have relationships with media companies. They find out that they need help, they want to transition off of LPO, off of on-premise systems or sometimes off of the traditional legacy clouds. And they bring those deals to us, and then we work with them to support those customers.

And then just second quick question for you Gleb, is when you talk about the Backblaze or B2 being used for some of the AI related use cases, I guess I always thought that AI required flash storage just because of the need for speed especially on the inferencing side. So can you just talk to whether it's just kind of a misperception on my part?

And obviously, AI has a lot of different aspects of it and we've published including on our blog, we published some of the workflows that companies use with AI. There's the development of the training models, which starts with a lot of data. And then the workflow is to run multiple, multiple iterations at high speeds on that data to build the model. That generally requires very high performance storage, closely located to the compute. That's not the optimal use case for us at least up today. But a lot of the other workflows are actually really good fits. And so the workflow types that we've seen customers follow is where they will often upload information. Sometimes it's from cameras, sometimes it's from existing assets they have, sometimes it's from systems that are generating data. That data flows into Backblaze, it's stored in B2. Then they use our combination of free egress and partnerships with other GPU clouds to send the data to those locations for processing. And then that processed data then gets put back into Backblaze B2 for a combination of one being served up as part of the application itself to customers, and two, for longer term retention around backups and archives that AI data. We also have some customers that use it as the original place where they store the data before it gets used for model training. So there are some use cases for which object storage in the cloud is a great fit and some for which it's not, but it's a tremendous amount of data that is being generated out there for AI. We think that we're -- we think AI is still definitely in the early innings of the opportunities that we all have to help there.

The next question comes from Simon Leopold with Raymond James.

This is Victor Chuan [Ph] for Simon Leopold. I just want to follow up on that AI question. Did you guys say that you have some AI kind of specific functions and initiatives kind of in the works? Or would you just mentioning that the use cases currently for AI? I'm just want to elaborate on specifically your exposure to AI and kind of what your AI solutions kind of focus features are?

This is Gleb. The short answer is yes to both. If you look back at some of what we did in the last year, the first part of it is making sure that we have a durable, high performance available storage platform that's affordable is a key component of providing value to customers who want to service their AI data needs. Fundamentally, making sure that we're providing them a top tier storage platform for all of that AI data that is -- that needs to be sourced somewhere, needs to be delivered to other locations and needs to be delivered to customers is key. We've been investing behind that platform, and in Q4 we built or launched shards stash, which was the higher performance way of for B2 to work, which is a helpful piece of continuing to add value to that platform. So that's kind of step one. Step two, is making sure that we're supporting our customers in understanding how to run these different workflows and how to use object cloud storage as part of that. And so we've been working on like as I mentioned on our blog, there are stories and case studies around the different workflows and how to use them and understanding that landscape better. The third thing is partnerships. We mentioned that we partnered with CoreWeave, we partnered with Vulture [ph]. We have these GPU clouds that we partnered with and we make it easy for customers to move their data between us and them as part of this open cloud ecosystem supporting their AI usage. And then the last part of it is that, as I mentioned, our head of sales, once we hire a new head of sales is going to be focusing his entire area of focus on our AI initiatives, which includes both the go-to-market thing some of which I talked about, but also the product platform side. And David Ngo, who's our new Chief Product Officer is also looking at the product roadmap opportunities to help customers. At core, there's a tremendous amount of data getting generated. There's a lot of use cases around that. Just providing a really robust platform for all that data, we believe is the kind of most important job one. But then we do see opportunity to help customers in additional ways beyond that.

And I guess I just have one more kind of general industry question. More recently, we've heard commentary from a number of cloud providers who have kind of noted an industry wide trend around cloud cost optimization and kind of increased scrutiny around public cloud spending from their entire customer base. So, just kind of curious if you've observed any similar dynamics, and if not why do you think that's the case?

So, I think that we are different in that with a lot of the traditional clouds, and we've certainly seen that commentary as well, and we've seen the impact on them from that. With a lot of the traditional clouds, their offerings are priced highly high priced, and they've often been -- it's been complicated and confusing to understand for the customers what is -- what they're paying for. And so, we've heard from many customers say that they were surprised by their cloud bills. They were unsure where the dollars were going and what they were spending on. And so I think that one of the differences is back place has always been transparent. We've always made it easy to understand what you're paying for. And we've always been very affordable in our price point. So I think that effectively our customers have always been optimized as part of that. And so I think as a result, we're not subject to some of the same trends that they're seeing. Now, as Frank mentioned, we did see a 1% to 2% incremental reduction in licenses and data in Q4, which we believe is largely attributed to the price increase execution that we did.

This is Frank. I would add one item. Of course, this greater scrutiny and attention on data storage costs benefits us because we have such a good value play in the market. So, we really appreciate that attention and that commentary.

The next question comes from Erik Suppinger with JMP.

First off, do you have a sense for what portion of your install -- of your customer base is on the new pricing? I believe you have a mixture of month to month customers and annual contract customers. And I'm just curious how much of it was on that month to month? And then secondly, for these larger customers, are they typically customers that are on likes of AWS or Azure and then they're moving off completely, they're moving their applications off. If they're doing AI applications, they're moving those off completely, or are they just migrating their storage off of those hyperscalers?

This is Frank. I'll take the first part of the question. Who's on the new pricing? So on our B2 side, the group that is on it is the pay as you go customers. The rest of our client base are on committed contracts or they are the B2 reserve group, which pay in advance. So they were unaffected by the price increase. But they all went on immediately. So that pay as you go group, it was immediately affected in the beginning of the quarter. As far as the computer backup group, 25% of them approximately are monthly and they immediately had the increase. And then 75% are either one year or two year, and they are graduating in upon renewal.

And then Eric to your other question about for the upmarket customers and -- are you asking whether they're fully migrating off of the traditional cloud providers or whether they're moving that data off? And I will say it is a mix of both. We've absolutely seen both types. One scenario that we've seen is customers who have -- who don't have a million different things they're doing inside of the traditional cloud. And really they need a handful of significant important services. Storage being obviously one of them. Often it's storage, compute and networking. And so, they'll use us for storage. They'll use companies like CloudFlare, Fastly Bunny for networking and they'll use someone like a CoreWeave or a Vulture[Ph] or DigitalOcean for the compute. And they'll migrate fully out of them and go full on open cloud, get have freedom of the data as part of their stack. We've also seen the other side where they continue to leverage the traditional clouds for some of their other services. But they use us for storage. I'll -- one customer I give an example is they actually kept their storage in AWS, but they added Backblaze and they actually made us the default and they were able to increase their durability that way, but they then also decreased their bill by half overall, because they were paying so much for getting the data out of Amazon to their preferred network provider that by switching to us, they were able to save enough money to add us and still cut their bill, the whole entire infrastructure bill have. So we see both. It kind of depends on what they're trying to do with their infrastructure.

As you move up market, is this going to create more opportunities for you to work with your the bandwidth Alliance and to strengthen that partnership?

Yes, I think so. In part because -- we're -- in the up market we're doing more of a consultative discussion with these customers. And so, as you know we have a large self-serve business and those customers are doing what they choose to do, and many of them are moving off of the traditional cloud providers also, but they're doing that without having conversations with it, with the market one, it we're having more of the discussion of what makes sense in a strategic sense for you Mr. customer as you go forward in your future, and how do you want that infrastructure to work for you long-term.

The next question comes from Eric Martinuzzi with Lake Street Capital Markets.

Good quarter and outlook. I was curious to know on the 2024 view, where do you expect the gross margin ranging for the full year?

We are previously saying that our -- before that our gross margin was going to be the mid 70% range, and now we're very comfortable to say it's going to be in the upper 70% range non-GAAP. So we we're seeing that as about approximately a 4 percentage point improvement and about half of that is attributed to the price increase.

And then I did see a decline in the computer backup customers as of year end, you we're down to 431,745 versus 436,080. So what is the explanation there?

This is Gleb. First of all, as Frank, mentioned or think we saw a 1% to 2% licensed usage decline in quarter. So, the number that you're talking about is the customer number, which stayed consistent at that high gross customer retention rate. What I will say is that, that number in general is something that we're looking at whether it's a relevant metric going forward into the future because it's so heavily influenced by the number of consumer customers on that product line. Whereas, we are increasingly focused on going into -- servicing businesses in particular more up market businesses. And so you can imagine one that number is driven by one consumer customer is treated the same as one customer that pays us six figures and so that's --

That's where I -- it sounds like just especially given the guide, it's not all customers are created equal.

Exactly. And as we mentioned that we just launched enterprise control, which is a functionality to help the larger customers manage all of their licenses and computers. Again, not relevant for an individual consumer customer and the individual consumers are what drives the pure number of customers metric.

The next question comes from Zach Cummins with B Riley Securities.

Congrats on the quarter on the guide. Just a few questions for me. Gleb, you were talking about initiatives of moving up market and potentially changing some of the commission structure for some of your salespeople. So, can you talk about maybe potential changes as you move up market in any sort of incremental investments you need to make outside of the leadership change that's ongoing right now?

So we've been taking steps down this path. So you probably remember when we went public, we were 80% of all of our business was from self-serve. And we had talked about how the sales assisted customers were larger and it was a somewhat nascent motion for us, but we were seeing larger deals and customers liking that service that we provide. And so we said we were going to be using some of the proceeds to stand up a sales team and start putting more focus behind the sales effort. And so some of the things that we've done over that time was we stood up an SDR team, which is an outbound team. We staffed up some of the sales team in terms of SDRs, BDRs, account executives, solutions engineers and built out that team We've also divided the groups up into territories. We've changed some of the ways that we structure and guide leads through the funnel to them. And some of the sales operations aspects of it introducing B2 reserve and the ability to sell committed contracts were two important steps that allowed us to actually have the sales team sell as opposed to only assist in a self-serve type motion. And then adding the channel motion helped the sales team as well. So those are a number of changes we've been making over the last two years to help enable the sales team to sell to organizations and sell to larger organizations. We're looking for the, new Head of Sales. In addition to that we have a number of open recs on the sales team for senior account execs to sell to those larger organizations. We have the commission program that we talked about. These are just some of the things that we have done and some of the things that we are doing as part of continuing to move up market. There are things around the other organizations, marketing customer support cloud operations and others are also being supportive in that kind of entire company focus of moving up market.

And final question for me is just around cash usage. Nice to see the reaffirmed $20 million target at the end of this upcoming year. Frank, aside from the improved profitability in the business, I mean, can you walk me through just some of the other key inputs in terms of expectations for CapEx and some of your principal payments for capital lease obligations?

On the CapEx side for example, we're expecting to incur about $16 million to $18 million of new equipment there. And if you recall, that is slightly less than what I had been saying previously at the $18 million to $20 million range. And the reason for -- and actually is very similar to what we spent at the midpoint this year. And the reason that is flat and or slightly declining is that we're still using up the pandemic buffer when we built up additional equipment during the pandemic time. We're still using that in our data centers, which will be largely done after quarter one. And then on the innovation side, where our engineers are continuously improving the platform, one of the areas that we expect to get a benefit in this year especially is in faster deletes. So anytime you can delete data quicker, you could store new data on the same hard drive. So that's driving some of that. The other -- so that's on the CapEx side. And then you had also asked on the leasing side, and what's really driving that part is if you look at our total leases, you would notice that the total amount of leases, long and short-term together is actually declining. So what's basically happening is that we have a larger fall off in leases that we have new leases being added. And it's for the same two reasons the pandemic leases are falling off. Because they're a lot of them came on three years ago, and they continue to fall off very quickly now. And the new leases that were adding for the new CapEx are just not as great as what's falling off. So that's why we're getting a kind of again a flat to slightly declining payment pace on those leases.

This concludes our question-and-answer session. I would like to turn the conference back over to Mimi Kong.

Thank you. At this time, I'd like to go over some of the questions submitted to us from Say Technologies. Looks like we might be able to get one in and this one's for you, Gleb. Last year, Microsoft made a change to how OneDrive syncs files resulting in Backblaze no longer being able to back up folders such as docs desktop picks when they're set to backup up sync. Carbonite has M-365 backup option. What is Backblaze's solution given how popular OneDrive sync is? And another part of that question is what would the cost and share price implications to launch a similar but improved equivalent to Microsoft and other leading backup and storage program speed?

So, I think the way that question sounds like Microsoft did something specific to make it so that we can't back that up to be clear that that's not what happened. So, what Microsoft did was customers keep files on their computer and what OneDrive did was it enabled customers to put some of their files in the cloud and not on the computer. So our computer backup service is designed to protect all of the data on your laptop or desktop. And we back up everything that is on your laptop or desktop, we back up everything that's on your external hard drives. We do that for consumers, we do that for businesses. If the data does not exist on your computer, because it's in the cloud, our computer backup service does not protect that data. And so there, so I'll say two things on that front. One is that we are very focused on continuing to grow computer backup. We think it's a good growth business. It's grown every single quarter since the start of this company, and we aim to continue to provide value to our customers with that service. The customers that we are focused on trying to add more functionality and features to are especially on the business side and the enterprise control functionality that we added is an example of that. But we're very much listening to customers and seeing what else they want from us with that offering. The other thing that I will say is that with our B2 cloud storage, we serve a variety of use cases. Backing up SaaS applications, data that's in other cloud services and data that's in Microsoft Office 365 OneDrive are things that our customers absolutely do. They do that with B2 as the cloud storage destination and leveraging our partners for the different use cases. So some of those use cases are served by partners of ours like Veeam and Veritas and Commvault and others, where they take care of the software side of backing up those different file types and applications and customers can then put that data into B2 and have that be the destination. So, I would say, we currently service those use cases. We service them along with our partners.

And then this would probably be the last question for today. Gleb, what is the single most impactful strategy over the next couple of quarters?

I'm not sure if I would call it a single most impactful, but as we talked about moving up market is certainly a key component for us along with the channel efforts that we're doing. The innovation that we've done and continue to do is something that we believe will provide a lot of value to customers and deliver growth for us. And then we believe this trend of the open cloud is the key step. So in terms of impactful strategies, those are the key things that we're leaning into. The other one obviously is -- we've talked about AI at some level. We are selling effectively the picks and shovels of the AI age. I think that is going to be a significant long-term opportunity for us.

And that's it for those questions. I'm going to hand the call back to Gleb.

Thank you, Mimi. Thank you everybody for the questions. Thank you to our investors that asked questions through the Say Technologies platform to the analysts that joined us. And operator, we're now ready to end the call. See you next quarter.

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