Thank you for standing by. And at this time, I would like to welcome everyone to today's Backblaze Fourth Quarter and Full-Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mimi Kong, Head of Investor Relations. Mimi, please go ahead.

Thank you. Good afternoon, and welcome to Backblaze's fourth quarter and full-year 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, sales and marketing initiatives, cost-saving initiatives, results from new features, the impact of price changes, 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 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 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, ARPU and adjusted free cash flow. We'd also like to inform you that we will be participating in the Oppenheimer Emerging Growth Conference tomorrow on February 26 and the Citizens JMP Tech Conference on March 3 and 4. We hope to see you there. Thank you for joining us and would now like to turn the call over to Gleb.

Thank you, Mimi, and welcome, everyone, to the call. Revenue grew 18% over the same period last year and B2 Cloud Storage grew 22%. B2 Cloud Storage, our fastest-growing solution is now over 50% of the business in Q4 and adjusted EBITDA margin came in at 14%, doubling over the same period last year. I'll talk more about the quarter in a moment, but first, I wanted to take stock of where we've been and where we are going. In the last four years, we have more than doubled both the revenue and adjusted EBITDA margin. We transitioned from a company selling primarily to SMB customers to a self-serve model to one that also supports enterprises with a direct sales and partnership model. We also doubled our number of data regions and launched a host of innovations to provide customers and partners with more value. As we look to the next few years, we are focused on becoming a Rule of 40 company, delivering both growth and profitability and continuing to build the leading storage cloud for the Cloud 2.0 era. Now let's talk about our recent results. During our last earnings call, we shared two key initiatives: a go-to-market transformation focused on driving B2 growth and our plan to be adjusted free cash flow positive by Q4. First, I'll share details about our go-to-market transformation, and then Marc will provide an update on our path to becoming adjusted free cash flow positive. I am pleased with the impressive progress our team has made on our go-to-market transformation as we are already seeing strong early signs. ARR win rates were up significantly, and sales productivity in Q4 doubled year-over-year, leading the team to meaningfully beat quota for the quarter and the full-year despite being behind quota when Jason, our new…

Thank you, Gleb, and good afternoon, everybody. It's been a very busy six months since I joined the company where we've deployed numerous changes to position ourselves for higher growth and free cash flow profitability. We are executing on an aggressive agenda to drive change quickly. We launched a go-to-market transformation and a cost restructuring initiative, which are both showing good early results. We also successfully completed an oversubscribed secondary offering for $37 million in net proceeds in November of 2024. I want to note that while the company did not need additional capital to turn free cash flow positive, we felt it was prudent to execute a secondary offering to reinforce our liquidity and generally strengthen our balance sheet. Now let me share our results for the quarter. Q4 revenue was $33.8 million, representing 18% year-over-year growth and slightly ahead of the midpoint of our guidance. Computer backup revenue was $16.7 million, representing 13% year-over-year growth primarily driven by price increase implemented in Q4 of 2023. B2 Cloud Storage revenue was $17.1 million, representing 22% year-over-year growth primarily driven by existing customer data expansion and new customer acquisition. I'd like to point out that in Q4, we fully lapped the B2 price increase. The strength of our B2 growth in Q4 is easier to see if we exclude the impact of the price increase from the prior period. Excluding the benefit of the price increase, third quarter organic B2 growth would have been approximately 19%, which we view as our low point of growth. Compared to our fourth quarter, growth was 22%, representing a 300 basis point sequential improvement. As Gleb noted, we expect that our go-to-market transformation should continue to accelerate B2 revenue growth throughout 2025, which I will comment on further in the guidance section. Our B2…

Thank you so much. [Operator Instructions] Okay. It looks like our first question today comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Jeff, please go ahead.

Great. Thank you. Hi, guys. So just a few for me. On the partner front, it sounds like you've got a lot of things changing. Any, hard and fast, like what are the key metrics you're monitoring for the year, specifically any quantitative goals for partners in 2025?

Hey, Jeff. Good to hear from you, this is Gleb. So on the partner side, we have the two different parts of it. We have the channel and then we have the alliance side of it. On the channel, it's somewhat traditional style metrics. So we look at pipeline and then sales productivity. Sales productivity, when we measure it, it's average ARR closed one per person on the team. And so it flows through to the channel that way as well. On the alliances side, it's a little more nuanced. We're doing co-build, co-market and co-sell. So what we're looking to do there is build up solutions that we jointly go to the market with and to solve specific customer problems.

Very helpful. And then just one last for me. When you look at the two sub-segments, you think of maybe a little further out, how do you see B2 over, say, a three to five-year period and same for Computer Backup in terms of growth rates? What do you envision? How do you see it playing out?

Yes. Hi, Jeff. I mean, the way we see it is we should finish 2025 with B2 growing year-over-year at 30% plus and then that should continue. It's a disruptive solution in a market that's already growing at 18%, 19%. So we'll beat the market there. On the backup side, I mean, if you think about the backup side, I would say the first half of the year will grow because of the tailwinds from the price increase for multiyear contracts. And afterwards, they'll pretty much follow the customer count that we have on the earnings release since the majority of it is consumers, so that would – so it would exit the year at minus 2%. So overall, it will be flattish for the year. The backup side, longer term, frankly, it's a good business, but it's more about the business side versus the consumer. The consumer is in a secular macro decline versus the business side is the growth opportunity. And since we're building the installed base, there's a good cross-selling opportunity between B2 and that overall backup solution.

Yes. If I could sneak just one last in. Gross margins, Marc, just how do you see them progressing as we go through the year?

Pretty stable. That 78% we exited the year which should be pretty stable into next year. We don't see any major changes in that adjusted gross margin.

Okay. Great. Thank you.

And our next call – or excuse me, the next question comes from the line of Ittai Kidron with Oppenheimer. Ittai, please go ahead.

Hi. Thanks. Appreciated it and great commentary, Gleb, on the business and Marc as well, great stuff. Gleb, I wanted to dig in into the AI commentary. Looks interesting. I guess maybe you can perhaps give us a little bit more color on the use cases within AI, meaning it's one thing to have a customer who is an AI customer. But if the use cases that they're using it for are not actually levered towards what they're doing, it's just another customer. So help me understand in what way is their growth going to translate into your growth. That will be helpful.

Yes. Thanks for the question, Ittai and it makes absolute sense. From many of these customers, we are very directly tied to their growth. We are their strategic vendor that enables them to succeed. So breaking down the AI data pipeline a little bit, there's – we think of five different components of the AI pipeline that is broadly depending on which customers are doing what. So there's data collection where they need to get data from all over the place wherever that's coming from and store it somewhere. The data processing, which is all of the labeling, tagging, et cetera. The model training, where they take the data, you bring it to some GPUs and then train to create a model. There's inference where they run the actual applications and use the models to get insights and then there's monitoring of all the systems. So we have customers who use it in each of these areas. Data collection is one of the most – one of the largest areas that customer uses for. We have customers that are scraping data from across the Internet and using that for collection for model training, they're using us as the destination for all of that data. We have customers who have large data sets that from – that they've built up over years around photography, videography, et cetera, that they're using to train different models or sell for AI insights. We have customers who are using them for all of those kinds of data collection and storage components. The next part of it, which is data processing. We have customers that then take that data use our storage and then free egress to third-party and open source tools for data labeling. And so they use us for that piece of it. Model…

That’s very helpful.

What I want to add to that is we're obviously incredibly enthusiastic about the traction on the AI front. But I'd say we took a more prudent approach of what to incorporate into the rest of year outlook because it's a very nascent industry for us and everybody. So us achieving the 30% by Q4 of 2025, we bet on just continuing at this pace. And hopefully, it does. And also, frankly, just to be clear on what makes up the numbers and the guide out there. We did have a larger customer loss in Q1, so that's not reflecting any of this, but it's reflected in these growth numbers. So our new customer acquisition engine is hot and running. That's kind of pretty much what it says.

Yes. And maybe just one other thing on your specific point Ittai is, one of our customers is actually they're a $1 billion construction company. So they're not at all an AI company. They've been using us for a while for data backup and cyber resilience. But what they have actually started talking to us now about is how do they evolve their business to take advantage of AI. And so the path that they're actually looking at doing with us is capturing all of the video footage from their construction sites that's captured by cameras, drones and the rest using that then to train models for understanding safety on their construction sites. Tagging all of the hats, the jackets, the gloves and all the other safety components that are part of the construction site requirements and then using that as inference where they can look at new construction going up and making sure that the proper safety measures are being taken. So even companies that have nothing to do with AI in general are actually looking at expanding their use cases with us to include AI in them.

That's helpful. And then, Marc, on your – the acceleration in growth that you're anticipating on B2 through the year I guess, help me – it's all a bit counterintuitive in a way, right? Help me understand, and I understand all the changes you made in go-to-market and the booking commentary is quite interesting. But I guess, what, in your mind, because it feels like you're kind of heading in the right direction here, but what in your mind still needs to happen here for you to have very strong visibility into this? And – because again, it's not common to see this type of pattern through the year of acceleration. And so I just kind of wanted to make sure I get my hands around, what, in your view, you kind of already feel very good about and kind of have it in the pocket versus still needs to come for you to be able to deliver to this?

Yes. No, that's a good point, Ittai, right. So what I would say is I think we're off to a really good start, right? Because in Q3, if you factor out the price increase, we grew 19% year-over-year in B2. So already you're seeing an improvement in Q4. So all these things we're talking about record quarters and so on are already flowing through there. I think this is all execution time, right? I mean we have like this incredibly healthy win rate. So it is about consistency of execution. We've doubled our sales capacity. So obviously, you got to ramp up the new people, train them the right way, make sure your pipelines align the right way in terms of how it generates, where it generates. So I think it boils down to continuing our execution. And that's for the kind of, what I call, the direct sales model, right? I mean, Gleb spoke about the channel and the alliance, I wouldn't say that's activated yet, nor did we bake too much of that into these numbers, right? I see that more as a further benefits flowing into 2026.

Got it. Maybe last one on the Computer Backup, just going back to the answer to the previous individual that made you kind of comment on exiting the year, the negative 2% or 3%, I think you said on a year-over-year basis, as the price increase fades away. I guess, should we think about this business going forward, not just 2025, but for the foreseeable future is a declining business? Is there – and if that's the case, why not take a more proactive approach on the price increases and just squeeze it more and more and more through the price increases? I'm just trying to think about the long-term longevity of this business?

Yes. Ittai, this is Gleb, actually. Let me touch on this for a second, and then maybe Marc will add as well. So I think what Marc talked about is that the consumer side of that business is in a secular macro decline. We don't expect that specifically to change. On a significant portion of that Computer Backup business is also businesses using us for their computer backup, ransomware prevention, cyber resilience and we do see opportunity there. And we are signing up customers, we launched that B1E functionality, the enterprise control in Q1 of last year. So we do see interest and engagement there, and we see some opportunity. It's not the core growth focus for us as a company, right? B2 is the primary core growth focus, getting it back to 30% plus by end of the year is where we're putting most of our energy but there is some opportunity there. In terms of price increases and the like, we don't rule it out. As we've talked before, it's something that we think we have as an option. But at the same time, one of the things we do view it is hundreds of thousands of customers worldwide who are fans of Backblaze who refer customers to us and support us as a community. So we want to continue to make sure they feel like they're getting a great value, great service and continue to recommend us to others.

Appreciate it. Thank you.

Thanks, Ittai.

Yes. Thank you, Ittai. And our next question comes from the line of Simon Leopold with Raymond James. Simon, please go ahead.

Thanks for taking the question. The first thing I wanted to ask about was trying to put the AI stored data in some context. Do you have a way of sizing what percent of the B2 stored data is coming from these AI use cases? And I guess where I'm coming from is I imagine these are relatively larger data sets and therefore, maybe a higher proportion than historical, but just trying to get a way to get a sizing of this?

Yes. Hey, Simon, that's a good question. This is Gleb. So one of the things we talked about is that the data has grown tenfold. And one of the things we mentioned is that they are now three of our top 10 customers. So I would say that it's meaningful in terms of data growth for the organization. It's not massive as a percentage yet because, obviously, it's a newer set compared to 17 years of being in business but it is a fast-growing part of the business. In terms of the sizing per customer, it varies. We have lots of customers who are starting small with us. They're brand-new startups. And then we have customers who are already storing double-digit petabytes as individual customers. So it's across the range. Certainly, data is very – AI is a very data-intensive segment. So it's something that we believe there's a lot of opportunity. And when we look at some of these customers of ours that are storing double-digit petabytes, some of them are – they're very new companies, right? So I talked a moment ago about this construction company that's looking at doing AI with us. They're $1 billion revenue company. They've been around for 100 years. But they're just starting into the AI side of it. But a lot of these companies that are storing multiple petabytes with us started in the last year, two years, three years. And so we have lots and lots of these little companies that just started. I wouldn't be surprised if many of those end up becoming multiple-petabyte customers within a year or two years.

Great. The other thing I wanted to ask about was in January, you had announced opening a new data center in Canada. And I'm hoping to get a little bit of context here because I've lost track of where and how many locations you have. So basically trying to understand, one, how material is the opening of a new data center? And the other question is, are you exposed to any foreign exchange risk or do you price everywhere in dollars? Just a little bit of help understanding the international efforts? Thank you.

Yes. Thanks, Simon. So I'll start and then I'll let Marc touch on the currency component. So we have regions that customers can choose in the West Coast, U.S., East Coast U.S. and Central Europe. So this is our fourth region that we've opened. Canada is the fourth. So it's fairly significant for us in terms of one out of four. It's brand new, like you said, it's just launched in January. One of the things that we did that was unique with this region is we did it in partnership with an anchor tenant and an anchor partner. And so as opposed to building a data center and hoping that they will come, we actually worked with a partner, signed up together and then built the data center in partnership with them. So that derisks the investment behind the new region, and it also created a playbook for us, effectively, of how we want to go about opening other regions in the future. So that's on that side of it, and then maybe Marc can talk a little bit about the part of the question.

Yes, Simon, what I would say is there's no meaningful exposure to foreign currency risk. The expenses that are in Canadian on the lower side and the billings, the majority of our Canadian billings would be in USD. So minimal risk there. And then also, whenever we opened a region like we did in Canada, we also really make sure there's an anchor client to get started off with. That way in the, call it, the sum cost or the fixed cost to set up that first data center is quickly recovered by an initial client, and then from there, we scale pretty quickly. So I'd say there's no major exposures on the FX side for Canada.

Thank you.

Thanks, Simon.

All right. Thank you, Simon. And our next question comes from the line of Jason Ader with WB. Jason, please go ahead.

Yes, thank you. Good afternoon guys. Just wanted to ask first maybe for you, Gleb, we've seen kind of a nice resurgence in the backup software market in this theme of cyber-resilience and ransomware protection. The backup market is growing at double digits after growing for as long as I can remember in the kind of mid-single digits. And I'm just wondering, have you seen that resurgence in the software market impact or benefit Backblaze is kind of a target for backups?

Yes, it's a good question, Jason. I think we've seen some additional interest in the business side of Computer Backup. And so as we talked about a few minutes ago, the consumer side is in a long-term secular decline, but we see opportunity on the business side. Ransomware obviously is becoming – has been for a while and is continuing to become a larger and larger risk factor for companies. It's often a board-level conversation. It's the number one risk that companies often talk about. And backup, while it's not very hot as a term is really the best form of protection against ransomware for companies. And so we believe that, that is an opportunity for us. It is an opportunity for us, especially with larger organizations. The go-to-market transformation is heavily focused on our B2 side of the business. But it is also looking at how do we support larger organizations with our Computer Backup offering. And I do think that there is opportunity there, especially around messaging to some of the cyber-resilience side of the need.

Sorry if the question was confusing. I actually meant B2 Cloud as a backup target. So in other words, folks like Veeam and Commvault and others that are selling backup software, obviously, the customer needs a target where to store the backups kind of like – so I was just wondering is B2 Cloud seeing the use case of backup kind of percolate because of this secular trend in the market in acceleration and backup software growth?

I see. I misunderstood your question. Thanks for clarifying. So it is one of – backup and cyber-resiliency on B2 is and has been one of our core areas of focus. So we talked about sales plays and the sales plays that we are focused on are application storage, which includes all the application items including AI, IT backup and cyber resilience, media and entertainment and our white label Powered by solution. So it is one of our core four sales plays, and it is absolutely a significant area that has been and continues to be a growth area for us.

Okay. Great. And then one last one for me and also for you, Gleb, when we think about the competitive landscape, like at the time of the IPO, there wasn't much competition, I would say, like in terms of a SMB-oriented cloud storage platform. I mean, you had like Wasabi and maybe a couple of other small guys. But – and I know you were partnering very closely with folks like DigitalOcean and Cloudflare. Can you just kind of update us on where the competitive landscape sits today? Are you seeing more competition than you did at the time of the IPO or less or about the same?

It's a funny question actually because I remember at the time of the IPO, a lot of the conversation was how are you entering and competing into a space where some of the world's largest companies are currently in there, right, with Amazon and Google and Microsoft, isn't that the most competitive market you could possibly play in. So in some ways, I would say, in a way, the market has not evolved that much competitively because Amazon, Google and Microsoft were there, Amazon, Google and Microsoft are still there. Having said that, I think one of the things that has happened also since then is companies have broadly realized that cloud storage is an incredibly important component of the tech stack. And for a variety of reasons, having that data with Amazon or Google and Microsoft is not necessarily the best choice. And so various other companies have started offering some kind of storage, including a variety of our partners, right? So Cloudflare is a partner of ours. They were a partner of ours pre-IPO. They launched a storage offering. DigitalOcean had – did, Vultr did, OVH, I mean there's a variety of other companies that have their own storage offerings. Many of these are still partners of ours because companies who want best-of-breed provider for storage, someone who's very scalable, high performance, very affordable, designed for the open cloud – these are customers choose Backblaze for that. And so our partners still want to support their customers with those kinds of requirements.

All right. Thank you. Good luck.

Thank you.

Thanks, Jason.

And our next question comes from the line of Maxwell Michaelis with Lake Street Capital Markets. Maxwell, please go ahead.

Hey, guys. Congrats on the quarter. I was wondering if you could share potentially a growth rate of customers with over $50,000 in ARR for the year. I think you had shared like a number related to that in Q2. I believe it was like 55%. I was curious what that was for the year. And I guess for a follow-up, I mean, what does that B2 guide insinuate for the growth of customers with over $50,000 in ARR for 2025? Thanks.

Yes. Hi, Maxwell, this is Marc. We didn't disclose it this quarter. But what I would say is the momentum on that front has been really good. I mean we talked about moving upmarket and what's interesting is we're obviously winning quite a $50,000 above, but there's also – we're on our third deal now that's kind of in that $1 million-plus range or right around $1 million. So it's been really positive where we're going, where we're headed, and that growth rate assumes ongoing momentum on that front.

All right. Thanks, guys.

Thanks, Maxwell for the question.

Thank you. And our final question today comes from the line of Zach Cummins with B. Riley Securities. Zach, please go ahead.

Hi, there. Ethan Widell calling in for Zach Cummins. Thanks for taking my questions. When you speak to your four kind of key sales plays. It sounds like maybe powered by Backblaze is core to your upmarket strategy. I was sort of wondering to what extent the other three are?

Yes, it's a good question. So what I would say, first of all, is all four are core to our upmarket strategy. They have a slightly different approach in terms of what we're offering to the customers. But our application storage customers are getting bigger. Our IT backup customers are getting bigger. Media and entertainment customers are getting bigger. They're powered by – deals are bigger because they are integrated into their other platforms. But frankly, all four of them are larger organizations. If you think about the – we talked about the – we gave a sample of customers at – two of whom which did $50,000 ARR, one which did $100,000 ARR. All of those were application storage customers. The – on the call, we talked about the customers that each expanded by over $100,000 from existing customers. Those are application storage customers. So I would say all four are meaningful and strategic to our upmarket momentum.

Got it. That's helpful. Thanks. And then as you aim for a nice ramp-up for B2 in the coming year, are there any other cost levers that you can pull for margins besides those you spoke to last quarter?

[Zach], are you referring to gross margin or operating margin or free cash flows?

Yes. More operating margin, but anything that you can speak to?

Yes. I mean, on the – listen, our operating leverage is $0.75 on the dollar, right? So our OpEx will roughly be kind of in line dollar for dollar in 2025 what it was in 2024. So we're holding the line because we did that whole zero-based budgeting exercise where we've been able to redeploy investments into sales capacity. And that's allowing us to fund all that growth, and while holding the OpEx line there. So that should create some really good operating leverage, and that's what will get us to be free cash flow positive right around Q4 of 2025. Now in terms of additional cost opportunities, I would tell you the culture that's always been at this company and that we're instilling is always scrutinize and rethink everything. Anything that's available that we could do more efficiently, we're always going to look to do. So this is not just a onetime exercise that we just did. It's kind of the ongoing part of our culture going forward.

Understood. Well, I appreciate the extra color. Thank you.

All right. Thank you, Zach. And that does conclude our Q&A session today. And with that, I will now turn the call back over to Gleb for closing remarks. Gleb?

Thank you. I appreciate it. I think we're really excited about the financial side of where we're headed, getting B2 to be over 30% growth in Q4 of this year, getting our adjusted EBITDA to be over 20% and in Q4, getting to free cash flow positive, both on an adjusted EBITDA and adjusted basis for free cash flow. Those are, I think, meaningful financial improvements to the way we have the company. We're excited about our opportunities that we're seeing with AI and the product innovations, the go-to-market transformation progress that we're making and our general path to Rule of 40. So I want to thank everyone for joining us today. I want to extend a special thanks to the Backblaze team, the changes and improvements we've made on the go-to-market front and on our platform is no small feat. In addition, while the cost-cutting we did in Q4 was hard, our employees have done an amazing job embracing the changes. I'm proud of the team's commitment to drive innovation in storage for our customers and partners and I believe will create significant shareholder value as a result. Thank you for joining us on the call. We'll see you next quarter.

Thanks, Gleb. And ladies and gentlemen, that concludes today's call. Once again, you may disconnect. Have a great day, everyone.