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Backblaze, Inc. (BLZE)

Q3 2024 Earnings Call· Sat, Nov 9, 2024

$4.25

-0.70%

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Transcript

Operator

Operator

Good day, and welcome to the Backblaze Third Quarter 2024 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 Ms. Mimi Kong, Head of Investor Relations. Please go ahead, ma'am.

Mimi Kong

Analyst

Thank you. Good afternoon, and welcome to Backblaze's third quarter 2024 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Marc Suidan, 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, the impact of our go-to-market transformation and cost-saving initiatives, use of our IPO proceeds, results from new features, 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 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 the 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, gross customer retention rate and adjusted free cash flows. Thank you for joining us. I would now like to turn the call over to Gleb.

Gleb Budman

Analyst

Thank you, Mimi, and welcome, everyone, to the call. We had strong third quarter results. Revenue grew 29% with B2 Cloud Storage growing 39% and adjusted EBITDA margin came in at 12%, our record since going public. Over the past few quarters, I've shared product innovations that we have delivered and I feel very good about the unique value proposition we provide and the product road map we have in place. But today, I want to focus on 2 new major initiatives. The first to drive revenue growth, particularly around B2 Cloud Storage and the second, to drive cost efficiencies. In our prior call, I introduced 2 new executives that we brought on; Jason Wakeam as Chief Revenue Officer; and Marc Suidan as Chief Financial Officer. They joined us with a clear mandate; grow revenue faster and accelerate our path to being free cash flow positive. I'll share details about the new go-to-market transformation that Jason is spearheading and Marc will speak about aggressively tightening our cost structure. On the go-to-market front, Jason has hit the ground running and has brought a new sense of energy to the team. He's focused on 3 critical areas to drive greater growth; upskilling, partnerships and sales plays. First, upskilling. We identified that the team lacked a structured approach to qualify leads and execute larger deals. In response, Jason set up a repeatable process that gave the team clear objectives and focus. While still early, we have seen an immediate impact. The team booked a record amount of annual contract value wins in over a year. We also signed 2 multiyear deals, each totaling approximately $1 million and built a record pipeline, including the most 7-figure opportunities in our history. Second, partnerships. We previously did a good job signing up resellers, but we realized…

Marc Suidan

Analyst

Thank you, Gleb, and good afternoon, everybody. It's hard to believe that it's been 3 months since I joined. But as Gleb noted, we've been pretty busy planning the future. When I first joined, I had 3 major hypothesis about Backblaze. First, Backblaze offered an incredible product with a unique competitive advantage priced at 80% below the traditional cloud service providers. Second, a go-to-market model that needed reinvigoration. And third, a cost structure that can be rightsized to increase operating leverage. So, 3 months into the job, I would say that my original hypothesis still stand and have been further reaffirmed. As Gleb noted, Jason has been leading a transformational change in our go-to-market activities, supported by a product that customers love. On the cost structure side, we did kick off a comprehensive zero-based budgeting exercise. Most companies expect to have automatic year-over-year increases from inflation, vendor price increases and salary raises. Despite those expected cost increases, I'm happy to announce that our year-over-year run rate costs are expected to go down by over $8 million. This is coming from a variety of actions, including a 12% reduction in force that took place this month, an aggressive process of putting all our external spend out to bid and stopping activities that do not align with our future strategy. This allows us to invest some of those savings into revenue-generating sales capacity, which would offset some of the above savings. Let me now turn to the results of the quarter. Q3 revenue was $32.6 million, representing 29% year-over-year growth and in line with the midpoint of our guidance. B2 Cloud Storage revenue was $16.2 million, reflecting a 39% increase over the same period last year. B2 growth was strong, but lower than we would have liked and this was primarily due…

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Jeff Van Rhee with Craig-Hallum Capital Group.

Jeff Van Rhee

Analyst

A couple for me guys. First, Gleb, on the B2 side, talk for a second about the -- you said some churn late in the quarter. Just to expand on that because you had pretty good -- you had some expansion in the net retention number from 114% to 118%. So, it sounds like you thought it was going to be even better. But just talk a bit about that. And then secondarily, you're getting some big deals here in -- on the B2 side and clearly moving upmarket in terms of realizing how far upmarket you can stretch. Maybe just talk about how far upmarket B2 goes. Who do you see as the ideal addressable market for that product capability?

Gleb Budman

Analyst

Jeff, thanks for the questions. Appreciate it. On the churn side, the churn that we saw what happened early in the quarter. We expected it, but it happened earlier in the quarter. So the -- we still had -- like you said, we still had very strong NRR and we had a strong gross customer retention. It's just a handful of customers that churned out earlier than later in the quarter. In terms of the upmarket side of things, we don't really see a specific limit to how far it can go. We've got multiple exabytes worth of storage under management already that's large enough to handle any workload. We've signed those couple roughly $1 million multiyear deals that we talked about. So, those are quite significant size opportunities. We think we have the opportunity to go above and beyond that as well. We do want to build repeatability into more of that go-to-market motion. So -- but if you think about the path where we came from, in 2021, when we went public, the average customer was paying us $124. So, moving up to 115 customers paying us over $50,000 that we announced last quarter and these 2 customers paying us about $1 million each is quite the trajectory already.

Jeff Van Rhee

Analyst

Yes. Yes, for sure. And maybe just last for me. You commented, obviously, you're making some substantial changes in the go-to-market while managing for free cash flow. An interesting comment coming out of Q2 '25, you're looking for accelerated revenue growth. Just talk about -- just to be clear, are we talking overall revenue growth? Or are you just speaking specifically there to B2?

Marc Suidan

Analyst

Jeff, this is Marc Suidan. Great to be on. I know it's my first earnings call. So, hi to you and everybody on. Jeff, what I would say is in the short term, I mean, obviously, as we lapse the price increase, our B2 year-over-year revenue for the full year will probably be mid- to high-30s. I think what's important here is where we're headed to, and as Gleb made in his comment is once we come out of Q2 of next year is when the leading indicators would start translating to the lagging indicators, right? Leading indicators now, obviously, we entered Q4 with record sales pipeline, closed these 7-figure type of deals and got more of those. So, we're very excited about the momentum, but these are leading indicators that then will translate into revenue.

Operator

Operator

Your next question will come from Ittai Kidron with Oppenheimer & Company.

Ittai Kidron

Analyst

A lot to unpack here. Maybe just, Marc, following on your answer here. I mean, look, Gleb was very clear on 2Q acceleration. And if you're lapping the price increases on the Computer Backup, it will have to be B2 to accelerate, just pure math.

Marc Suidan

Analyst

Yes. Listen, that's fair, right, Ittai. I mean that's -- B2 is definitely the long-term growth play for us and we continue to see that happening. I mean it's a market that grows at about 19%. We're already growing above market. But to be honest, it's not good enough for us, right? We got to be growing at a faster rate. And I'm talking about post price increase coming out of that phase, right, because that's not a permanent benefit. So, coming out of price increase, we want to see that B2 number year-over-year be a lot healthier, be higher. I think that go-to-market transformation we said is it takes about 3 quarters to do. We're a quarter into it. And that's why Gleb said, coming out of Q1, you'll see the benefit in kind of Q2 and the second half of next year. We have all the right indicators coming into it. In fact, we're liking so much the early indicators of our sales efficiency that part of our savings of the $8 million, we're injecting it into more sales capacity to further accelerate that growth.

Ittai Kidron

Analyst

Got it. With regards to the 12% workforce reduction, can you be a little bit more specific in what areas you were cutting?

Marc Suidan

Analyst

So, it's a comprehensive zero-based budgeting exercise. Headcount -- payroll is our biggest cost, but we have other cost drivers, too. So, we went -- I mean we just took a fresh look at everything entirely. So, I would say, in general, it's kind of across the board so that we could create capacity of where we want to invest, which would be sales capacity. One area where we probably did more than others is our marketing. We found our marketing over-indexed on payroll. And as we are seeing our sales velocity increase, we need to feed it more demand generation. So we want to shift, frankly, from headcount to demand generation budget there. So that's where you're seeing a big part of that 12%. But I'd say it's pretty much across the board because we took a fresh look at everything. And as you can imagine, some things you could be locked into for a while, will take longer to realize, but the 12% is effective immediately.

Ittai Kidron

Analyst

I appreciate that. And then it's great to see the positive free cash flow target for the fourth quarter of '25. But can you give us a rough estimate? And what would you think your exit cash balance would be at that point?

Marc Suidan

Analyst

Well, you're asking me for numbers we haven't given. What I'll tell you is this much. I mean, we would aim to not have any change in cash, meaning Q1 and Q2 will likely continue a bit of negative free cash flows. And then at some point, getting through Q4 will be free cash flow positive. But when you add other things like option exercises and other sources of cash, chances are there wouldn't be much change next year in cash balance. But then we come out of it in a free cash flow positive way. So, when we're headed into 2026, you're talking about higher -- hopefully, higher revenue growth for B2, right? And then operating leverage where $0.75 of every extra dollar coming then would flow to the bottom line.

Gleb Budman

Analyst

One thing I'll say is -- and for those, one of the things that I've been excited about with having Marc join on board is he's taking a very thorough look across our spend broadly. So, the zero-based budgeting approach, I mean, putting all the existing vendors out to bid and negotiating on the contracts on the subscriptions, et cetera. So, it's a pretty comprehensive process and I think it's going to drive good efficiency for us going forward.

Ittai Kidron

Analyst

Got it. And then I guess, Gleb, for you then on the sales evolution that Jason is implementing. All the points that you mentioned on how he's changing things make a lot of sense. I guess my question is more of a time to productivity, number one? And second, when you look at the talent that you have, clearly, I'm sure in the workforce reduction, perhaps there are some changes over there as well. But do you believe that the talent that you have can adjust, appropriately adjust to the changes that Jason is implementing? Or you'll need to continue to kind of weave in and weave out as you go in order to kind of get this right? I mean all the steps are -- seem very logical. Just to call already that you think in 2Q, there will be acceleration, meaning giving yourself 6, 9 months to see that transformation, it kind of get tight, I guess. So, help me get my hands around your confidence level here and what else will need to change there?

Gleb Budman

Analyst

Yes. So, Jason has been on for a few months now, right? So we've seen the steps that he's taken. And I guess the reason that I have a good level of confidence, and I think we have just internal enthusiasm is the early indicators of that engagement. So, Jason brought on a VP of Sales and Head of Partnerships that we announced recently. They've hit the ground running. The team that he has, he's evaluated who's on his team and has made some changes on that front, but also been excited about many of the people that he has on there. So, I think he's got a good team. We're planning to invest, like Marc said, in some additional capacity for the sales team based on those good early indicators. And just the fact that we even with the short time he's been on and even with the short time he's had to make changes, we've already seen both the early indicators of success, things like pipeline growth, but also actual early successes like the closed one deals. So that gives me some confidence that he and we together are going to be able to achieve some good results.

Operator

Operator

Our next question will come from Eric Martinuzzi with Lake Street Capital Markets.

Eric Martinuzzi

Analyst

Yes. I wanted to ask about the gross margin. We had a good quarter here with the 78% gross margin. Given the investment in the new data center in Canada, should we be looking for that gross margin to maybe take a step down in Q4? Or what are we thinking about for gross margin trajectory given the investment?

Gleb Budman

Analyst

Eric, I don't see that much impact to the gross margin in those expansion because they're colocations and then we lease out the hardware. So, it kind of blends in over a few years as we ramp it up. So, I would say the adjusted gross margin going from 74% to 78% benefited well from the price increase, which is a permanent shift. So, I don't see that changing in any meaningful way in the short term.

Eric Martinuzzi

Analyst

Okay. And then back to the top line, you talked about a record pipeline build. Are we changing those large deals, obviously, is where we're trying to get increased build. Is the build that you're seeing reflective of changes that have taken place since Jason came on board? Or is this kind of -- these are -- these deals were in the hopper prior to his arrival?

Gleb Budman

Analyst

Yes. Eric, one of the things that actually Jason did when he came in was he scrubbed the pipeline that we had and instituted some more rigorous controls around what qualifies as pipeline. So, I actually would say that the quality of the pipeline in addition to the size of the pipeline, the size of the pipeline has increased, but I think the quality of the pipeline that is in that has actually increased because he's put more rigor around that.

Operator

Operator

Your next question will come from Zach Cummins with B. Riley Securities.

Ethan Widell

Analyst

This is Ethan Widell calling in for Zach Cummins. To start with the Opti9 partnership, can you maybe elaborate a little bit on how that might facilitate your move upmarket or allow some SAM expansion for the new data region?

Gleb Budman

Analyst

Sure. So, Opti9 is the largest Veeam MSP in Canada and they have customers globally. So, they service, they're an MSP, they service customers with a variety of IT needs, including backup and security and disaster recovery. And they use Veeam and other products to provide those services. The back end of those products need storage, right? So, when you're using a product for backup, a product for disaster recovery, a product for ransomware protection, you need -- those products need data somewhere and they're going to be using us for the data storage for their customers going forward. And so it's an opportunity. That one is not specifically about upmarket movement, although they have customers, medium and large customers as well. But that is more about a regional and partnership-focused expansion with them.

Ethan Widell

Analyst

Got it. Makes sense. And it sounds like you have some good early traction with your expanded sales team. Are you still looking to build out your sales team at this juncture, balancing out with your cost efficiency initiatives?

Marc Suidan

Analyst

Yes, Ethan, this is Marc. Like I said, the -- we have $8 million -- over $8 million of year-over-year savings in our fixed costs. We will reinvest some of that to expand sales capacity. The good thing about our sales team now is whatever is set in there in terms of channel management, account management, the kind of stuff, I'd say that should be revenue generating, but it's not as much as, let's say, sales rep. The reinvestment is all going into sales rep expansion and that kind of skill set. So really -- yes, so it's really about, as Jason has pretty much well underway of fixing up the productivity of that team. Now adding it to it along those models is what we're doing.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gleb Budman for any closing remarks. Please go ahead, sir.

Gleb Budman

Analyst

Thank you, everybody, for the questions. I also want to take a moment to say that while we believe that the reduction in force was the right decision to align our spending with where Backblaze is going in the future, it was a difficult decision as we care about all of our employees. I want to thank our whole team for all the work and the dedication to both our customers and to our company and I'm excited to have the opportunity to work together in our next chapter. Thank you, everybody, for joining the call and we'll talk to you next time. Bye-bye.

Operator

Operator

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