Thank you for standing by. My name is Gail, and I will be your operator for today's call. At this time, I would like to welcome everyone to the Backblaze First Quarter 2025 Earnings Call. It is now my pleasure to turn today's call over to Mimi Kong, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Backblaze's First Quarter of 2025 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. 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 savings 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, retain and expand our business with existing customers, impact of changes to global trade policies and third-party attempts to generate negative news regarding the company regardless of accuracy. 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 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 flows. We will be participating in Needham's Tech Conference on May 13 in New York and the Craig-Hallum Conference in Minneapolis on May 28. Looking forward to seeing some of you in person. Thank you for joining us. And I would now like to turn the call over to Gleb.

Thank you, Mimi, and welcome, everyone, to the call. We delivered strong results this quarter and are building towards a strong year overall. In Q1, revenue and adjusted EBITDA margin beat the high end of guidance. Overall, company revenue grew 15% over the same period last year. B2 Cloud Storage, which is now the largest part of our business, continued to gain momentum with organic growth accelerating for the second consecutive quarter and achieving 23%. We're not only driving growth, but also the bottom line. Our adjusted EBITDA margin tripled over the same period last year to 18%, and we've made substantial progress on improving our adjusted free cash flow from negative 13% in the fourth quarter to negative 6% in the first quarter. By combining B2 revenue growth and adjusted free cash flow margin, in a single quarter from Q4 to Q1, we've moved from 9% to 17%, a great step towards becoming a Rule of 40 company. Looking ahead, we continue to be on track to accelerate B2 growth each quarter, reaching at least 30% by Q4 of this year and to achieve adjusted free cash flow positive in Q4 as well. In a moment, I'm going to talk about AI and why we're excited about Backblaze's ability to continue to deliver superior services for its customers and superior performance for its investors. But first, I think we need to take a moment and talk about a recently published misleading report that relied on false claims by 2 disgruntled former employees, one of whom was fired for poor performance and the other for gross misconduct. We believe reports like this are part of a common market manipulation schemes in which short positions are taken ahead of issuing a deceptive and distorting report, which when published, is intended to…

Thank you, Gleb, and good afternoon, everybody. As Gleb noted, we're very pleased to report a strong first quarter with both revenues and adjusted EBITDA exceeding the upper end of our guidance. Additionally, adjusted EBITDA margin tripled over the same period last year. Moving on to the specific results for the quarter. Total revenue came in at $34.6 million, representing a 15% increase over the prior year. B2 revenue growth accelerated to 23% on a year-over-year basis compared to 22% in the previous quarter. This marks the second consecutive quarter of increased organic growth. We define organic growth as the underlying growth of our business, excluding the 2023 price increase impact to help provide a more meaningful comparison. Our organic growth in Q3 2024, factoring out the 2023 price increase was 19%. The increase in revenue growth is driven by improving our direct sales execution, better customer retention and the ramp-up of a large customer. The Computer Backup business grew 8% from the prior year, primarily driven by the 2023 price increase. Now let's turn to net revenue retention, or NRR. For the quarter, our overall NRR is 113% compared to 112% in the prior year. For our B2 segment, NRR continues to be strong at 117%. The decrease from last year's 126% is mainly due to the lapping of the price increase. In our Computer Backup business, NRR is 108% compared to 101% in the prior year. This metric continues to benefit from the price increase implemented in 2023, which will taper off in Q2. On gross customer retention, this remains consistently strong at approximately 90% across both our B2 and Computer Backup segments as our customers continue to demonstrate high customer loyalty and retention. Turning to profitability. Our GAAP gross margins for the quarter was 56% compared to…

[Operator Instructions] So your first question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

So several. I mean, congrats on the quarter. Curious on the AI side. Can you put a little finer point on that? I mean anything you can share in terms of, I don't know, targets as a percent of revenues, where it is now or context as to the magnitude of impact on the pipeline?

Jeff, this is Gleb. Thanks for the question. So in general, we're just excited about the AI opportunity. It was the fastest-growing part of the business in Q1. It's a significant part of the business now overall. Our largest customer now is actually an AI company. So there's just -- there's a lot of momentum on that front. There's also a lot of different variety of use cases that we're seeing there. So there's a lot going on there. One thing I'll just touch on that also is there's a lot of discussion around are AI companies being used for -- are the use cases around modeling or inference, which I think the answer is yes, but also there's a whole pipeline. You have data creation, you have labeling, you have modeling, you have inference, you have the relearning afterwards. And we have customers doing things at each stage of that. We have customers who are collecting the data with us. We also have AI companies that are customers that are doing autonomous vehicles and industrial automation, robotics, drug discovery. I mean it's a long set. So we're excited about the AI opportunity. And one thing I'll highlight also is we talked about the 25x data growth and Overdrive, which is an offering that we just launched recently last -- about a week ago with a target to help more of those AI use cases because we're seeing even more demand from companies for larger throughput there.

Yes. Helpful. And on the B2, the sales build as you're trying to get a repeatable enterprise sales motion, which of those -- can you talk about the progress you've made, kind of what's been proven out? And what are the queries you've still got work in progress?

The go-to-market transformation is definitely underway. And I think you can see that because we've accelerated organic growth for the second quarter, and we've doubled sales bookings. We do have still path to go. So I think the direct sales efforts are going well. We've still got more wood to chop on getting the partner and channel and some of the demand gen side of things working. We're seeing progress on those, but I think there's still a lot of opportunity there. And it's an area that we're leaning into. And I think it's a $100 billion market. So we feel like we've got a lot of opportunity to try and drive more awareness and more demand gen.

Yes. Great. Maybe just one last one, if I could sneak it in for Marc. On the numbers, you mentioned dilution, love the initiatives to keep the dilution down. What do you think we should assume for the next year or 2 in terms of actual dilution? And then while we're on numbers, just your thoughts on software capitalized software for the rest of the year.

Yes. Thanks, Jeff. Good questions. So first of all, I mean, on dilution, we started the journey. So I think we will aim to share more on what it could look like, not ready to do it yet. But definitely, it's a big priority for us to tackle. And we started in Q1 because if you look at our statement of cash flows, you could see a line for us settling the tax in cash instead of shares. On your second question, listen, the way we look at R&D is if you take our R&D expense on the P&L plus the capitalized R&D, that's really our all-in expense together. We hit a high of 60% of revenue in Q1 of '23. A year ago, that was 44% and this quarter was 40%. So we're holding that investment relatively steady in absolute dollars. And as a percentage of revenue, we'll keep benefiting from scale there.

Sounds good. Nice to see the progress on cash flow and the guide there. So appreciate the intro, guys.

Your next question comes from the line of Mike Cikos with Needham.

Congrats on the quarter. Really good to see that record TCV deal you're signing over multiple years here with this customer. I just wanted to tease that out for a second. And I know that you said that you signed with you about a year ago. And now you have the full -- I guess, the full piece coming to you with this contract. Just curious, what was the negotiation process like? Did they put that out to bid? Or once they got a flavor of Backblaze, so to speak, they decided to come over to you. I'm just interested what that process was like from your side.

Yes. Thanks for the question, Mike. So first of all, it was a displacement of AWS, right? So we're excited that it continues to show that we're winning deals, winning upmarket deals. It was the largest TCV deal that we signed in the history of the company. We started talking with them actually a few years back. They were -- at that point, they were on AWS. They were just kind of contemplating where their infrastructure was going to go. And then last year, we signed a 6-figure deal with them where they moved all were part of their infrastructure over to us. And then as they got more and more familiar with the platform, saw how performing it was, saw how valuable it was, how efficient it was and also, frankly, the customer service that they got from us versus what they were seeing before from AWS, they decided to lean in and move all of their data over. And so it became a multimillion dollar deal this quarter.

Great. And I guess the follow-up, I know that you guys only announced the B2 Cloud Storage Overdrive last week. Was that in any way a deciding factor for this customer or maybe the visibility into the road map? I'm just curious if that came into play as well.

It wasn't one for this customer. Their use case did not necessitate Overdrive, but I will say that Overdrive is something that we decided to build because we had customers that were coming to us and saying, I love the performance that I'm seeing, and I could use more if there was more possible. Just the demand, especially around some of the AI customers, but not exclusively. And so as we were digging into the opportunities around our platform, we felt like we can actually optimize our platform to allow for this new offering without a massive R&D investment. So we did have -- we did optimize some of the software. We did optimize some of the hardware. We did tune the platform for this purpose, but we were able to rest on years and years of R&D behind it. And it's only been a week, but we've already had a number of Fortune 500 companies that have reached out inbound to explore Overdrive for them. So we're getting some good early signals that it's something people are excited about.

Great. I appreciate the color. And maybe one more, if I could. Marc, really appreciate you calling out some of the dynamics around tariffs, especially with the uncertainty that's out there in the market. Just to bring it back to the lead gen for a second. I know you guys are talking about some pretty impressive statistics. But if I think about top of funnel activity from a demand gen standpoint or new leads coming into the pipe, has there been any change at the margin there? And again, really just trying to get a temperature check as far as what might be playing out in real time given how things feel almost week-to-week at this point?

Yes. I mean, I would say on the demand gen side, Mike, the change is more on our side versus the market dynamics. And let me say to explain what that means, back in Q4, we did a restructuring. We restructured the whole marketing department and budget where we set it out, so we're -- have a lot more outbound spend versus internal payroll. So I would say like January through February, the team was really kind of adjusting to their new plans and where they need to go. And March is really when we started cranking the outbound effort. And that's why we said that into Q2, there's going to be more spend there. So going back to Gleb's comments around the go-to-market transformation, that is a big area of focus now of really ramping up that demand generation, that awareness because our win rate is really high. We just need to be flowing more opportunities through there. I mean the tariffs and the topic of that kind haven't really impacted the demand side in any notable way.

Operator, are there more questions in the queue?

So I'll handle this one. Zach, I'm going to put you up next. I'm going to unmute you. Actually, I can't unmute. Hold on, let me find what's going on.

Operator, are you there? Operator?

We think that we've lost our operator. Unfortunately, I can't quite handle the queue right now.

I'm hare. Your next question comes from Zach Cummins with B. Riley Securities.

Yes, this is Ethan Widell calling in for Zach Cummins. Looks like you've got nice growth in B2, but a little downtick in NRR. Is that just from lapping the price tailwinds? Or is there anything else there? Can you maybe talk a little bit about the dynamics you're seeing there?

Zach, this is Marc. Yes, listen, our -- I mean, our NRR remains really solid high. Now given we lap the price increase, that's what you're seeing. So I would say it will be -- it's a rolling trailing 4-quarter average. So it will be around that range for a few quarters. As we continue our path of generating higher revenue growth for B2, that will then start trickling in, and you'll see it improve from there.

Got it. Appreciate that color. And then just touching on some of the tailwinds you're seeing from AI demand and the Overdrive solution. It seems like good early traction there. I guess in terms of the use cases that you spoke to, it seems like there's a lot of different use cases, but are there any in particular that are driving outsized interest so far?

Well, I'd say that the 2 kind of core ones that people talk about, right, the model building and the inferencing are 2 of the larger ones. So on the model building side, we have customers who are either generating data. So for example, they're indexing the Internet or they're taking imagery from satellites and other types of locations where they're capturing data that is being used to train models or they already have large data sets that they're then repurposing in different ways to help the AI models being built. So that whole category is a fairly large aspect for us. And then we have lots and lots of customers that are doing a variety of different inferencing type use cases. Some of the ones I shared around autonomous vehicles and automation, industrial automation, robotics and drug discovery and others are ones where they're heavy inferencing type workloads. But the overall flow, right, where you collect the data, you label it, you create the models, you do inferencing on them and then you retrain, we have people doing each part of that. And a number of these are going to be doing multiple pieces of that pipeline as part of their core AI workflow.

Your next question comes from the line of Maxwell Michaelis with Lake Street Capital Markets.

Solid quarter. First one, I just want to revisit the record contract here. When we look at maybe why they came over to -- or Backblaze, I know you mentioned customer service, better performance, value. But maybe outside of customer service, maybe what specifically about the performance of the product is what drove them to bring on their entire infrastructure over to Backblaze?

Yes. I mean I think if you look at it, they are a company that's an application storage company. They have an application where they have many, many end customers that use it. They store a lot of data for their customers. They need to have that data not only be stored, but then delivered out to their customers. And so they needed to work quickly in getting that content out to their customers as well. So it's the performance of getting the data out to their customers wherever they happen to be as well as the cost and value of both storing the data, using it and then distributing it.

Okay. And then I want to shift over to AI here. It seems like you guys have solid demand around the AI portion of the business. Maybe in terms of numbers, maybe from like a new business standpoint, maybe what percentage of new business coming into Backblaze has some sort of AI aspect attached to it?

So we're not sharing specific subdivision numbers on that. But what I will tell you is that it was the fastest-growing part of our Q1 business. So it's a material part of the growth at this point.

Okay. And then in terms of B2 Overdrive pricing, like how similar is that to just your typical B2 product?

So B2 starts at $6 per terabyte per month. B2 Overdrive starts at $15 per terabyte per month. So it starts at 2.5x the price point. One of the things that I'll mention on the competitive side of things is if you took, for example, a 10-petabyte customer that wanted to send that 10 petabytes out 3x each month somewhere to the customers to a GPU cloud to another partner, that would cost about $1.7 million per month on AWS. It would cost about $150,000 on Backblaze B2 Overdrive. So it's 2.5x our price point for B2, but it's still about 90% less expensive than the alternatives that customers have to do the same type of workloads.

Your next question comes from the line of Jason Ader with William Blair.

Gleb, can you elaborate a little bit on the comment where you said, "While some customers are taking more time to make decisions in the current business environment." What did you mean by that? Are you actually seeing that play out in Backblaze's business? Or are you just making kind of a broader comment and sort of hedging against the sort of macro headwinds that could emerge here?

Yes, Jason, thanks for the question. So we have seen some customers take more time. And so it's not just a hedge for the macro overall. It is something that we've seen some customers kind of take a little more time with their thinking in general as they've been, I would say, distracted by -- inside of their own business by the macro. Having said that, it's -- our self-serve business seems to be going unfettered in its growth. We've doubled sales bookings into the quarter. So like Marc said, I think we have more control over the things that we do versus the implications of the macro. But I did want to call out that we have seen some customers actually take more time.

Got you. Okay. So you're still confident on that 30% exit growth rate.

Yes, we're still confident about -- exactly. So yes, exactly. So what we shared last quarter, which was that we would accelerate growth for B2 quarter-over- quarter-over-quarter this year and exit the year at 30% plus, we're still confident to hit that journey and that exit rate.

Okay. And so you're balancing the, call it, a handful of customers that are maybe a little bit slower in the decision-making with the momentum that you had in Q1. Is that the right way to think about it?

Yes, the momentum that we have in Q1 plus the other early indicators that we have in our business.

And the month of April was sort of fair to say that was kind of in line with your expectations and consistent with Q1 demand?

Yes. Jason, this is Marc. Yes, that's exactly right. It's been pretty consistent. And the good thing is, I would say, the diversity of our customer set, right? We still have, I mean, an incredible amount of upselling that occurs to existing customers. On the self-serve front, we still have a lot of customers every quarter by the thousands that are showing up and starting. So we haven't seen any change in momentum on those fronts. So when you combine the changes we've done on the go-to-market stuff, and we're not fully done there yet. I'd say yes, we feel pretty confident about getting to that 30% B2 growth in Q4.

Okay. Excellent. And then last thing for me is for you, Gleb, can you talk about just sort of how the competitive landscape may have changed or not since the IPO? Are you running into any, call it, new players versus what it was at the time of the IPO? Are you in more bake-offs today because you're more of an established player? Maybe just talk to some of those competitive landscape questions.

Yes, Jason, thanks. So since IPO, obviously, it's been a few years now. The world has changed a smidge. Having said that, in the big picture of things, things haven't changed that much. And what I mean by that is, back then, we were looking at and saying, it's a huge market. Amazon, Google and Microsoft are certainly big players in the market, but it's a really big market and there's a lot of opportunity. I would say that, that is still largely true today. It's about a $100 billion market, and they are still the big players in this space, but there's still a lot of opportunity, a lot of space, and we are taking -- winning customers both away from them, like this large TCV customer I talked about and also from customers that haven't yet moved to the cloud. So a lot of our customers, we are their first cloud provider, which in 2025 might seem surprising still, but it is still the case. So I would say that there are a variety of smaller players in the market, some of which existed back then, some of which are newer. But our win rates according to kind of industry averages are still pretty world-class. So people like the product line. They like the platform. I think the key thing for us was getting the go-to-market motion really cranking so that people would be aware that this was an option for them. They would be -- that we would be put in front of them at the right moment when there was something to consider and then working through that. And I think things like the doubling of sales bookings and other things are a sign that we're starting to see that success.

And that's total sales bookings or just B2?

That's total sales bookings. The bookings from the sales team doubled -- more than doubled from Q1 of last year to Q1 of this year.

Your next question comes from the line of Victor Chiu with Raymond James.

This is Victor in for Simon Leopold. I just wanted to follow up on your comment regarding the elongated decision process that you're observing from some customers. On the flip side of that coin, is it possible that you could see some tailwinds from customers looking to migrate towards lower TCO solutions? Or maybe are you observing some of that in kind of the net of what you're seeing as kind of your comments about the slower decision-making process and the kind of lower net overall? Or what would the timing of that kind of look like if that dynamic is something that we could expect?

Yes. I mean I think you're exactly right. We provide a great value proposition for customers, right? It's 80% to 90% lower cost than the traditional cloud providers. We provide free egress out to the customers, so it supports the open cloud. We give them access so that they can provide -- use whichever GPU clouds they want for their AI workloads. We have this high-performance offering with Overdrive. I mean so there's a lot of value at a low price. And in an environment where companies are focused on squeezing more out of their dollars, whether they're focused on tightening their budgets, Backblaze is a great solution for that. So I think there are -- when customers are concerned, they sometimes are indecisive and that slows things down, which I think is what we've seen with some customers. And at the same time, when customers are decisive about wanting to improve their businesses, they can choose Backblaze to help them do that.

Yes. Victor, this is Marc. What I would add also is what we're seeing on a smaller pattern is some customers are more comfortable proceeding faster in a non-committed contract fashion because we have a lot of pay-as-you-go customers, and we have a lot of committed contracts. So what we're seeing is for those that experience that kind of slowness in decisions, it doesn't -- they're ready to jump in and just try it on a pay-as-you-go basis. So we've actually seen some really solid momentum on that front that makes up for any slowness in decisions on the other side.

Great. That's helpful. And then just on the B2 Overdrive announcement -- sorry if I missed this, but does the offering involve any kind of material changes to your physical hardware infrastructure? Or is it primarily leveraging software -- the software optimizations that you noted earlier?

Yes, it's mostly on the software side, although we've done some hardware optimization to support it as well. So we've been building performance functionality into the platform for a while. One of the things that we had talked publicly about was Shard Stash, which was both a software and hardware optimization for the platform that enabled us to be up to 30% faster for uploads of small files than the traditional companies. And so we've done a lot of work on the software optimization side. There are some hardware changes that we made as well to optimize it as well.

And kind of what are the kind of use cases that you envision kind of driving this? Are customers building data lakes with this? Or is it kind of supplementing their AI clusters with their existing AI clusters? Kind of just help us understand what are the primary use cases that you envision for this?

So AI has been one of the big ones that drove the original interest in this. We're starting to have companies reach out to us with other use cases as well. So the ones that we've talked about are AI being the big one, other high-performance compute being another one where they may want to do, whether it's weather modeling, drug discovery or other things and analytics where what they need to do is have a lot of data, move it somewhere to do a lot of processing and then bring it back or take the results out of it. Those are the types of things where we see this being a really good offering. And I'll just say, I mean, I'm really proud of our team, both on the engineering and cloud operations side and everything that have been able to pull this off. One of the prospects that we spoke to, they said they were basically blown away that had no idea that you could get this kind of performance out of a platform built on spinning drives that normally, this is the kind of thing that requires flash and SSD to be used, which is much more expensive. And we've been able to pull that off on spinning drives. So we get the value and the performance out of it. And that's really a testament to the team that built it.

And that concludes the question-and-answer session. And I will now turn the conference over to Gleb Budman for closing comments.

Thank you. So we've delivered a strong Q1, beating both top and bottom line guidance. We accelerated B2 organic growth again, and we're on track for a 30% plus growth in Q4. We're winning with AI use cases. We've launched this high-performance offering with B2 Overdrive. So I'm really excited about where we are, where we're going, and I want to thank our employees for delivering these results, our customers and partners for working with us, our investors for continuing to support us. And I want to thank all of you for joining us today. We'll see some of you at the Needham Conference in New York next week. We'll see some of you at the Craig-Hallum Conference in a couple of weeks, and we look forward to seeing everyone in our next earnings call. Thank you. Operator, close it up.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.