Backblaze, Inc. (NASDAQ:BLZE) Q4 2023 Earnings Call Transcript
Backblaze, Inc. (NASDAQ:BLZE) Q4 2023 Earnings Call Transcript February 15, 2024
Backblaze, Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.19. BLZE isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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.
Mimi Kong : 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.
Gleb Budman : 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 of the reasons companies are increasingly wanting to use best of breed providers in an open cloud ecosystem. Together with other cloud companies, we're well positioned to help drive that open cloud ecosystem, which is defined by interoperability, best of breed functionality, affordability and the free movement of data. I want to share a great customer story that highlights the value companies are seeing with this open cloud approach. The customer is a media streaming service with over 22 million global users.
Their previous solution was built on top of AWS, which was constraining their growth due to technical limitations and excessive download fees. Download fees, which are referred to as egress fees in our industry, are one of the restraints that traditional cloud providers use to keep customers from leaving their platforms. Our commitment to free egress, our scalable and performance storage platform and our easy integration with CDN partners convinced this customer to switch to Backblaze’s B2. By switching to Backblaze, this customer was able to develop and deliver features to their end customers that the previous platform couldn't support. Even more impressively with Backblaze, they were able to save over $800,000 on egress a year. That's $800,000 each year that they can invest back into their business, grow their customer base and in turn grow the data stored with Backblaze.
Turning to innovation, we are focused on providing the performance and functionality, businesses need to move away from legacy solutions. For over 16 years, the Backblaze team has excelled at innovating on cloud storage by finding greater performance and greater efficiency in hardware and software. In Q4, we launched shards stash for Backblaze B2, which enables upload speeds up to 30% faster than Amazon S3. Also, in Q4, we introduced free egress up to 3x the amount of data stored for every B2 cloud storage customer, furthering our commitment to the open cloud. We are the only cloud storage provider of scale that is offering this to customers without hidden fees or gotchas. We believe Backblaze is uniquely positioned to be the defacto storage platform at the center of the open cloud ecosystem, as we support customers to use their data where and how they choose.
We also recently launched computer backup enterprise control. This is a feature set that gives businesses greater administrative tools for an additional $2 per computer per month. With enterprise control, IT admins have the ability to meet their compliance requirements and easily manage backups for hundreds or thousands of computers. We're only a few weeks into availability, but we're encouraged by the early feedback we've received from customers. I'm really proud of what our team has done, but I'm even more excited for what's next. Our team continually improves the performance of our platform and enhances our products to serve new use cases. For instance, while a number of AI companies are already succeeding with us and we're integrated with leading GPU compute providers.
Our team isn't resting on that success. We continue to innovate on our storage architecture to better serve the increased demand and evolving workflows of AI related storage. We are also excited about the addition of David Ngo, as our new Chief Product Officer. David is the former CTO of Metallic at Commvault and brings over 25 years of experience in the data storage and protection industry. David is coming on board to help lead the team to bring even greater innovation and strategic leadership for our customers and partners. So we've delivered significant innovation and set ourselves up for more. Next, I'd like to talk about moving up market. First, we continue to build our channel program. Working with our channel partners helps to both increase our velocity on smaller deals and to identify and close larger deals.
A great example of the latter is a $100,000 plus deal that we closed in Q4. One of our channel partners identified an NFL team that was looking to update their approach to data storage. As many of you probably watched the Super Bowl last weekend, you can imagine the incredible amount of video and other data generated during professional football games. Working together with our channel partner, we helped this customer simplify and improve the way they work with all of that data. Second, on the partnership front, we just launched our new Powered by Backblaze program, Powered by lets businesses add B2 cloud storage to their product offerings without any of the hassle or complexity of managing cloud storage infrastructure. For example, early Powered by customers include an edge compute platform provider and a transcoding cloud service provider.
I'm excited for these types of partnerships because they help businesses expand their offerings, make it easy for their customers to get access to best of breed cloud storage, and provide Backblaze with access to new distribution channels and customers. Finally, as I've discussed, we have been successfully winning deals with larger customers and we are delivering the features and the performance larger customers are looking for. As the company takes the next step toward winning these customers at scale, we're updating our sales approach accordingly, including growing headcount and adding new sales commission program. We will also be hiring a new SVP of Sales. Nilay Patel, our current VP of Sales, helps build the go-to market for B2 cloud storage from the ground up and led the efforts to open up the use cases we currently serve.
Nilay and I agreed that now is the right time to pass the baton as the company charts its path beyond $100 million, and executive searches underway during which Nilay will continue to lead the sales organization to ensure a smooth transition. Once the new head of sales is on board, Nilay will turn his focus to our AI initiatives, which are aimed to help support customers in managing the explosive growth of AI data and its use cases. I'm very proud of what we've accomplished in 2023 by continuing to innovate moving up market and enhancing our go-to-market approach. Backblaze is in a great position to help our customers reap the full benefits of the open cloud. At the same time, we have dramatically improved our financial position as we accelerated revenue growth, achieved adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage.
I'll pass the call to Frank now to review our financial results.
Frank Patchel : 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 price increase across our products and to a lesser extent the higher utilization of prior data center expansions. This quarter adjusted EBITDA was a positive $1.6 million or 6% of revenue and beat the high end of our prior guidance of 3%. This favorably compares to a loss of $2.5 million or negative 11% in quarter four of 2022. And as Gleb mentioned, this is the first time we have reached adjusted EBITDA profitability as a public company. This was the result of a significantly growing revenue with a limited increase in operating expenses.
The beat itself benefited from higher revenue due to lower than expected churn and headcount related savings. Turning to the balance sheet, cash and short-term investments including restricted cash, totaled $33.4 million at the end of Q4 2023 versus $35.8 million at the end of Q3 2023. Our cash usage for the quarter came in at $2.4 million, which represents a significant reduction of over 70% from $9 million of usage in quarter three. Moving on to our guidance. For the first quarter, we expect revenue to be in the range of $29.6 million to $30 million. We expect Q1 adjusted EBITDA margin between 4% and 6%, reflecting continued strong performance in a quarter, which is typically a high quarter for expenses due to payroll taxes and other compensation related expenses.
For the full year 2024, revenue guidance is $126 million to $128 million with the midpoint reflecting 25% year-over-year growth. The full year adjusted EBITDA guidance range is 8% to 10%. Because of our confidence in this guidance, we have narrowed the range for revenue and adjusted EBITDA. For year end 2024, we project having at least $20 million in cash. This cash forecast includes principal lease payments on capital leases of about 15% of revenue. We also anticipate about $2.4 million in ESPP proceeds and an additional amount from employees exercising stock options. For reference, we received $1.3 million from stock option proceeds in quarter four. Looking beyond 2024, we continue to forecast cash flow breakeven by mid 2025. I will now pass the call back to Gleb.
Gleb Budman : 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: [Operator Instructions] Our first question comes from Chad Bennett with Craig-Hallum.
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