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spk25: Good day, and welcome to the Backblaze fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to James Kistner, Vice President of Investor Relations. Please go ahead.
spk16: Thank you. Good afternoon, and welcome to Backblaze's fourth quarter and fiscal year 2022 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Frank Patchell, 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 for new offerings, partnerships and sales and marketing initiatives, our ability to compete effectively, acquire new customers and retain and expand our business with existing customers, hire and retain key personnel, and effectively manage our growth. These statements are subject to risks and uncertainties that could cause actual results to differ materially. including those described in our Respectors 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 is furnished with our Form 8-K file 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 number of customers. 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 SAIT Technologies platform. I would now like to turn the call over to Gleb. Gleb? Thank you, James, and thanks to all of you for joining us. At Backblaze, we're incredibly passionate about our mission to make it astonishingly easy to store, protect, and use data. Given the ever-growing importance of data to businesses and consumers alike, and the high cost and complexity of traditional cloud providers, we are seeking to aggressively scale our B2 cloud storage business to provide an easier, more cost-effective solution at a time when it is needed most. when businesses are feeling the pain of runaway cloud infrastructure costs. Today, we have over 500,000 customers and have two cloud service offerings that operate on our storage cloud platform. First, our B2 cloud storage service provides developers, IT personnel, and others with cloud storage that is dramatically easier to use and is one-fifth the price of Amazon S3 and others. Second, our computer backup service provides unlimited cloud backup for laptops and desktops for companies and individuals. While our computer backup business remains the larger of our two cloud service offerings at the moment, our strategy and increasing investments center around capitalizing on the approximately 100 billion total 2025 market opportunity for B2 cloud storage based on projections from IDC and company analysis. 2022 was a pivotal year for us and was our first complete year as a publicly traded company, and we're proud of what we've accomplished. We launched new products, new go-to-market motions, established key partnerships, and set up additional key functions to operate as a well-run public company. For products, we launched our B2 Reserve, cloud replication, a new East Coast data center region, and more. For go-to-market motions, not only did we scale our efficient self-serve motions, developer evangelism, and partnership efforts, but we also created a new channel partner program, signed new national resource and distributors, and landed the biggest customer order in our history in our strategically important application storage category. And despite inflation, recession fears, and more, we grew total revenue over 25% year-on-year, grew B2 over 45%, and B2 now makes up 41% of total revenue. Looking to the future, I'm especially excited about our role and position as a specialized cloud in supporting where the cloud is headed. Let me explain why. We believe the cloud has gone through three key phases. When we founded Backblaze in 2007, the cloud was in its infancy. This was phase one. Most people weren't clear what cloud computing was or even if it was going to take root. The question for most businesses was, what is the cloud? That question defined the first phase of public cloud services. Fast forward to 2016, almost 10 years later, and Amazon had nearly 50% market share of public cloud services, more than Microsoft, Google, and IBM combined. Amazon AWS generated over 12 billion in revenue that year. This was phase two of the public cloud. The cloud was undeniably a thing, and businesses saw the value of it. But by cloud, most people thought of Amazon AWS. This brings us to today and the future, phase three. Phase three is defined by the open multi-cloud internet. Consulting firm Deloitte recently published their U.S. Future of Cloud Survey Report, and it clearly supports the notion that multi-cloud is now the norm. Of the 500 senior cloud decision-maker surveys, 79% said they work with more than one cloud provider. Why? Businesses have internalized several key lessons about the cloud. First, the traditional cloud vendors are very expensive and attempt to lock customers in with egregious fees to retrieve their own data and use it. Second, specialized cloud providers like Backboys offer best of breed services that are differentiated and valuable. In our case, with dramatically lower cost, better ease of use, and free or low cost data transfer. Finally, there's a benefit from a resiliency standpoint of having one's data held in more than one cloud. So in this third phase, what we're seeing is businesses clamoring for an open internet where customers are free to choose best of breed specialized cloud services, whether it's our partners Fastly and DigitalOcean for networking and compute, Twilio for messaging and communications, Stripe for billing, or Backblaze for storage. We believe storage is a critical component of the tech stack, and in fact, I would argue data storage is probably the most critical because none of these other things would exist if you don't have data. This is evidenced by many trends, the most recent being the explosion of generative AI, which requires data storage for models and creates data at scale. the importance of data continues to increase every day. And for AI, having scalable, cost-efficient data storage is an important enabler. This new phase of the cloud makes us very excited for our future, and we see a runway of growth for many years to come. Focusing on 2023, businesses are feeling the pain of inflation in the choppy economic environment and are looking to reduce costs while maintaining the quality of their services. We believe that we are strongly positioned for such an environment as we can help businesses dramatically lower the cost of their infrastructure with cloud storage that is one-fifth the price of the traditional cloud providers. As evidence of our strong position, B2 grew 44% year-on-year in Q4, more than twice the growth rate of 20% for Amazon AWS. I'll now focus on our current priorities and the recent developments that demonstrate our progress on these strategic imperatives. First, partnerships. As we've noted in the past, partnerships are a key part of our growth strategy. For B2, we know that at least one third and likely significantly more of the data stored in B2 is coming to us as a result of partnerships. In 2023, we're investing to cultivate this important growth driver. We have two types of partners, technology partners and channel partners. Technology partners include what we previously called developer and alliance partners. This quarter, I'd like to highlight two technology partners, Commvault and Telestream. Commvault is a well-known backup and data services provider, and their customers can use B2 as the cloud destination for their backups. Telestream provides a solution for organizations to handle media management. and their customers include 96% of the top US broadcast station groups and 82% of Fortune 100 companies. Those customers can now use B2 as the cloud destination for all that content. Turning to channel partnerships, we continue to scale this effort. As we mentioned previously, our B2 Reserve prepaid storage offering is well-suited for the channel. While still a new offering for us, B2 Reserve revenue nearly tripled quarter on quarter in Q4. And we continue to be excited by and focusing investments on the combination of channel and B2 Reserve. Second, we are continuing to cultivate our relationships with developers for application storage use cases, which we define as customers that use B2 Cloud Storage as the storage infrastructure for their SaaS, e-commerce, or other business. We continue to make progress on this front, and I'll share another recent customer example in a minute. In Q4, we also held our annual technology day with thousands of registrants and over 60% growth in attendance over the prior year. Finally, I want to talk about our self-serve go-to-market motion. As many of you know, Self serves was the primary means of acquiring our customers for many years and drive significant efficiency in our customer acquisition approach. We have scaled the team focused on improving our self-serve funnel. And in January, we had the best month of self-serve account creations in a year. While we have been historically successful in driving self-serve customers, we believe there's still significantly more opportunity to continue our success here and drive greater efficiency in our customer acquisition. Now I'd like to share two new customers that highlight how B2 has helped drive their success. Let's start with an application storage customer called Monument. Monument wanted to build an offering similar to Google Photos, but with a focus on privacy. They developed Monument Cloud, which uses advanced AI to build a cloud-based photo service built around their philosophy of privacy. Monument considered AWS, but realized they'd ultimately lose money if they built the infrastructure for Monument Cloud on AWS. While they started using initially free credits from AWS to develop their AI model, they ultimately chose to build their cloud infrastructure using three specialized cloud providers, one for compute, one for photo thumbnails, and Backblaze for their overall storage cloud. Having done that, Monument Cloud has quickly become the company's flagship offering, drawing 25,000 active users. Second customer I'd like to highlight is another example of how a multi-cloud solution can save businesses money. Daltics is a pioneer in providing retail data to its customers, such as Unilever. With an infrastructure built almost entirely around AWS, Daltics began to have concerns about the cost of using S3. Daltics settled on using Amazon S3 for short-term storage and moving long-term storage into Backblaze, which would reduce costs while keeping data accessible. Daltics believes that in 2023, they will have saved approximately $75,000 to $100,000 on their storage spend, thanks to leveraging Backblaze v2, and will continue to save into the future. Before I turn the call over to Frank, a final topic. We started the company 16 years ago, and it's now been over a year since the company went public. And over the past few years, we've built out a great executive team. Recently, as one might naturally expect, some of the founders and early employees of Backboys have begun a smooth transition out of the company. Each of them remains a part of the Backboys family. And on behalf of all the employees of Backboys, I want to say a big thank you to each of them for their contributions. And we all wish them well in their future endeavors. I'll now turn the call over to Frank Patchell, who can review the financial results of the quarter in more detail. Frank.
spk13: Thank you, Gleb, and thanks, everyone, for joining us today. Before turning to Q4, I will comment on our 2022 achievements. In our first year after our IPO, we continued to build out the systems, people, and processes to run a successful public company. We've executed well, despite a turbulent financial market and record inflation, risks of recession, and a tight labor market. While focusing on the approximately 100 billion market opportunity and successfully growing B2 over 40%, roughly twice the rate of the broader public cloud market, we're actively managing expenses and intend to be approaching adjusted EBITDA breakeven in Q4 of 2023. Turning to our Q4 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 $22.9 million, an increase of 23%. Backblaze B2 contributed sales of $9.5 million, reflecting 44% growth. Computer backup revenue totaled $13.3 million, reflecting 11% growth. In quarter four, V2 cloud storage represented 41% of total revenue, continuing its upward trend. Computer backup continued to benefit from the price increase we implemented in quarter three, 2021. Recall the amount of growth on the computer backup business driven by pricing has been diminishing since we are past the one year anniversary of the increase, and we see little benefit in 2023. Turning to retention metrics, We tracked net revenue retention, or NRR, and gross customer retention. Total company NRR was 113%, an increase of two points year over year, with B2Cloud storage at 122% and computer backup at 108%. Gross customer retention was 91% overall, consistent with the prior year, with 90% for both B2Cloud storage and computer backups. As part of our year-end numbers, we've also disclosed customer count and annual average revenue per customer as of December 31st, 2022. We share these metrics once per year. Our paid customers increased to 506,000 from 493,000 in Quarter 4, 2021. The number of customers for B2 grew to 87,000 from 74,000 one year ago. The number of customers for computer backup totaled 436,000, up from 433,000 in Q4 2021. Now, turning to the annual average revenue per customer, or ARPU, for the entire company, it increased to $181 versus $153 in Q4 2021. B2 Cloud Storage ARPU grew to $437 versus $360 one year ago. and computer backup ARPU was $124, up from $113 one year ago. We've shared the number of customers this year, but because this metric does not fully reflect how we bill for services, it is becoming less meaningful as an indicator of our business in the future. Working down the P&L, adjusted gross margin was 75%, consistent year-on-year. We do not guide gross margin explicitly, but we continue to see adjusted gross margin in the mid-70s in the near term. Adjusted EBITDA was a loss of $2.5 million or minus 11% of revenue compared to a loss of $1.3 million or minus 7% in Q4 of 2021. Year over year, the lower adjusted EBITDA margin reflects planned expenses from higher investments, primarily in sales and marketing and R&D, as we continue to pursue the large market potential for B2 cloud storage. On a GAAP basis, we also had a one-time $1.5 million settlement payment to resolve a dispute in connection with the holders of the 2021 SAFe investment. Turning to the balance sheet, Cash and short-term investments, including restricted cash, totaled $70 million as of December 31, 2022, versus $80 million as of the end of Q3 2022. Q4 cash usage included approximately $1 million of non-recurring indirect tax payments. Now, I'd like to provide our outlook for Q1. For the first quarter, we expect revenue to be in the range of $23.1 to $23.5 million. We expect Q1 adjusted EBITDA margin of minus 15% to minus 11%. Note, our EBITDA fluctuates on a quarterly basis as expenses are typically seasonally high in quarter one. We expect a Quarter 1, 2023 basic share count of approximately $33.5 to $35.5 million. Also, for Q1 and Q2 gap results, we anticipate one-time costs due to reductions in force, other terminations, and restructuring expenses. From a cash standpoint, these costs will approximate $4 million, with the majority likely occurring in Quarter 1. Turning to our full year 2023, we expect revenue of $98 to $102 million and an adjusted EBITDA margin of minus 10 to minus 6%. We are targeting to approach adjusted EBITDA breakeven in quarter four of this year. I will now pass the call back to Gleb.
spk16: Thank you, Frank. Operator, we're now ready to take questions from analysts.
spk25: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
spk19: At this time, we will pause momentarily to assemble our roster. Our first question comes from Itai Kidron with Oppenheimer and Company.
spk25: Please go ahead.
spk18: Hey, guys. This is Herschel on for Itai. Can you hear me?
spk22: Yeah, we can hear you, Ted.
spk18: Great. Congrats on the nice quarter. I want to just ask about the macro environment. Are you seeing any kind of changes in terms of the deal cycles or anything that's kind of you know, sticking out maybe from a geo perspective, if there's any color you can give on that.
spk16: Yeah, thank you, Jack, for the question. And good to hear from you. So, you know, obviously we're all seeing the macro environment being what it is. Having said that, I think, you know, we get a lot of customers who are self-serve motion. On the sales assist side, when we've looked at the data both on close rates and on deal length, we've actually seen slight improvements on those fronts. I know that a number of companies have talked about sales elongation and close rates getting worse. We've actually seen some slight improvements on those, which we believe is partially because customers are looking at how do they optimize their cloud infrastructure, and that is becoming an urgent need for many of them. And so they're looking at ways to do that. And since we're one-fifth the price point of the traditional cloud vendors and they get to save a lot of efficiency and time through the ease of use, it's making some of those sales, I think, happen more effectively and more efficiently. Plus, I think we are just continuing to get better at our execution on that front.
spk18: Got it. That's helpful. And then have you guys made any changes to your hiring plan for the year?
spk13: If you remember that in 2022, you know, we had gone public in late, late 2021. So in 2022, we were standing up whole functional areas. So we had a lot of hiring in 2022. We did slow it slightly in three and four quarters, three and four, because we were conscious of the macro economic environment and concerns about it. In 2023, we are, it's a much more moderated, headcount plan because we're filling in those areas that we need, but we're not standing up whole groups.
spk20: Got it. That's helpful. Thank you. Thank you, Beth.
spk25: Our next question comes from Simon Leopold with Raymond James. Please go ahead.
spk28: Hi, guys. This is Victor Chu in for Simon Leopold. Can you help provide some color around your visibility into the dynamics of your customers switching to B2 specifically? Do you have metrics like the percentage that come from AWS versus an internal solution versus some other cloud provider?
spk16: Yeah, it's a good question. We don't have specific data on that in part because so many of our customers do show up as self-serve, so we don't have data on what they had before. We just see that they come, they try, they like the service, they sign up, they put a credit card down, and they go. We do see customers coming from both. So we see customers that are switching from traditional cloud providers because we're one-fifth the price point, much easier to use, and a better fit for them. And we also see customers saying, I don't want to deal with on-premise infrastructure anymore, and so I want to move to public cloud. For many of them, we are their first public cloud. They've seen public cloud. They know the benefits of it, but they have not made the leap oftentimes because they've seen the complexity and the cost of the traditional vendors. And when they find Backvoiz, they say, wow, that's really easy and really affordable. I can do that. And they end up leaving their on-premise infrastructure to move to Backvoiz with the public cloud. But we don't have a concrete breakdown between those two on the frequency.
spk28: Okay. And just to follow up on the previous question, you noted that the sales cycles and the elongation of some deal closures, you know, aren't impacting you guys, you know, to the same degree. Are there specific trends or instances, you know, that you're observing that gives you, you know, that you can see that that kind of helped, you know, explain why you're faring better than some of your peers in that regard?
spk16: Yeah, I think actually just to clarify, it's not just that we're not seeing as much of a negative impact. We've actually seen some benefit over the time period. Right, right, right. And I think that we look at that as likely the result of two things. One is that customers are trying to optimize their cloud infrastructure spend. And a great way to do that is to switch from traditional providers or on-premise infrastructure. And the other is because as an organization, I think we're continuing to become more effective and efficient.
spk21: Got it. That's helpful. Thank you.
spk25: Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.
spk03: Yeah, given the outlook for 2023, I was just curious if you could comment on the growth rates for the two different parts of the business. I know in 2022, we had the 46% growth from B2, but we had the price increase and the 17% growth from the computer backup business. Just for those of us modeling at home, I'm thinking that the B2 is probably still in that 40% range, but we could be in low single digits for computer backup?
spk13: Hi, Eric. We don't guide the product specifically, but when you use the guidance that we've provided and you kind of work with your model, you're going to get B2 in that low 40s with the difference coming into computer backup in the low single digits. Low to mid single digits.
spk03: Okay. And then given the price differential that you guys have and the fact that you didn't see any of the deal elongation that a lot of other people saw in Q4, have you seen an increase in interest from large prospects? So I wouldn't expect large prospects to have kind of pulled the trigger on Backblaze really fast. But just kind of a pipeline of larger transactions, how does that compare to, say, six months or a year ago?
spk15: I'd say we're always targeting companies of all sizes.
spk16: I don't think we have anything specific to say on the different sizes of organizations within the pipeline. Much of our business comes from the core of the mid-market for us. We are always in conversations with customers of different sizes, so I don't think I have anything really concrete to say on the shifts between the different parts of the pipeline.
spk03: Okay. And then the last question for me. On the B2, congratulations on that self-serve success. It's great to see kind of a new high here in January of 2023 on the self-serve signups. What do you attribute that to? Is that the result of maybe an increased focus on sales, on channel development, on You know, enhancements at the web, the economy, what's the big driver there?
spk16: Yeah, so I think you remember we talked about how we have this efficient, self-serve motion that includes generating good content and then bringing people to the website and then converting them through the website experience. And we've actually worked on both of those areas, both in terms of generating good content Things like our drive stats where we publish statistics around the hard drive reliability that's been thriving we've had higher numbers on both total traffic on the drive stats and recent traffic on the drive stats. So it's driving interest from that front. And then also on the conversion side of it, we did invest last year in additional resources for the team who focuses on optimizing the website flow for customers, making it even easier. And so that then translates into additional people coming through the funnel once they come to the website. And this is an area that we continue to focus on this year. It's a continued – it's not a one and done. It's a continued focus that we'll be doing throughout the year.
spk13: It's also a great example. We've talked about how we moderate and measure our different investments. And that investment is one that we actually increased during the year because we were seeing good preliminary results. So I'm really pleased that that investment is coming to fruition.
spk21: Got it. Thanks.
spk25: Our next question comes from Zach Cummins with B Reilly Securities. Please go ahead.
spk27: Hi, good afternoon, Gleb and Frank. Congrats again on the solid results and thanks for taking my questions. Gleb, could you go a little bit deeper into the traction you've seen so far with channel partners and your B2 Reserve product? Seems to be some pretty encouraging early progress and just curious how you're thinking about the potential growth from that channel in 2023.
spk16: Sure. It is something that we're excited about. I think the combination of B2 Reserve and Channel is a great mix. And we've seen that because it's it solves the needs that the customers have so typically IT buyers solving backup archiving ransomware type use cases and it's and so it makes it easier for them to purchase because it's a prepaid fixed price amount it's predictable it's easier for them to go to their finance department their CFO and say this is what it's going to cost me which especially this year is something they're more focused on getting clear answers to. It's something where the channel is accustomed to selling the SKU so that it's a good way for the channels to sell. And so it's a good fit, product market fit on that front. B2 Reserve, as I noted, it's grown very rapidly over the last couple quarters. We've signed several national retailers and distributors. We signed another distributor just this quarter. And basically what we're doing is we've hired up additional people into the partnership team to go and pursue various strategies on primarily getting more traction with these large national resellers it's not so much a strategy of get lots and lots and lots of resellers and distributors it is a strategy of getting more traction increasingly with the ones that we're selling because they're major significant ones and so that's basically how we're looking at it we're putting people at it we're putting programs at it and we're aligning around core handful of strategies to speed down that price.
spk27: Understood. That's helpful. And final question for me is any sort of update you can give on the cloud replication product, any sort of feedback from early adopters? And do you think, I guess, standing up your East Coast data center is going to help drive further adoption of that product here in 2023?
spk16: Yeah, so for everybody to just remind, cloud application is the functionality where a customer can keep their data in one region inside of Backblaze v2 and then choose to keep it in another region inside of Backblaze v2. So we launched that in the middle of 2022. It was a soft launch because the choices that the customers had were to keep the data in the US, West Coast region, and in Europe. And those were the two choices. At the end of this past year, we launched the East Coast Data Center, which now gives people the choice of keeping the data on the West and East Coast of the US or also on the West and Europe or Eastern Europe. We do expect that that is a benefit to customers. We've certainly heard from customers who have said they do want to replicate, but they want to keep their data inside of the U.S., so they want it replicated inside of the U.S., and that gives them the ability to do that. We've also actually started standing up additional programs for marketing cloud application, including functionality inside of the product itself that helps explain how to set it up for customers. as well as targeted outreach to customers that we have. to educate them on the ability for them to do this. So, you know, like I've said before, we don't expect cloud application to be a hockey stick type of approach. It's something that we see as a value for customers. It gives them the opportunity to keep data closer to wherever they want it to be. It lets them fulfill insurance requirements that allow often for data to be geographically distributed. It allows them to add additional resiliency, and it's something that we'll continue to see growth in, but we expect that to be continuing gradual growth in the offering.
spk27: Great. Well, thanks for taking my questions, and best of luck with the rest of Q1. Thank you so much. Thank you.
spk15: All right.
spk16: Thank you for all those great questions from the cell site in this community. I would now like to read questions that come from investors that were submitted on the SAE Technologies platform. I want to thank those investors that submitted questions. I think we've kind of addressed some of them, and we're going to try to address some of the more popular ones right now. The first one is for Frank. Really, it's actually, we had a couple different forms of this question. You know, when can we expect to get paid dividends, Frank?
spk13: Well, we're a growth company and beyond that, a growth technology company. And we have so many growth opportunities in front of us. Remember that our core market is over 100 billion. So the best use of our cash right now is to invest in opportunities that get us parts of that market. And that's what we're doing. So we don't have any plan to pay dividends consequently because these other opportunities can be so lucrative for us.
spk16: All right. Thank you, Frank. This is actually the combination of really I think about five of the questions on the platform. In some form or another, folks are asking, you know, what are the main goals of the company, both in the next 12 months and, you know, and beyond? Like, what are we focusing on as a company? What goals and objectives have we set for the long haul? I'll ask Webb that question.
spk24: Thanks, James.
spk16: So, for the long haul, we've talked about there are three phases of cloud. We're entering the third phase, which is a focus on specialized clouds and the open cloud internet where customers get to choose how they want to work with the cloud, what services they want, and get the best of breed services. And we certainly intend to continue to lean into that opportunity and help customers with their data storage needs and really helping them to store and protect as well as use their actual data. In the shorter term, Some of the things that we've talked about are we want to focus on growing B2. We see this $100 billion opportunity ahead of us. We want to grow B2 and pursue that opportunity. Three core areas in which we're focusing that are channel and partnerships, focusing on the application storage use case, helping developers build on our platform along with our other technology partners. and optimizing the self-serve experience, continuing to make it increasingly easy for customers to adopt Backblaze for their needs. The other thing that we talked about is more of a financial company goal for the year, which is in Q4, we want to approach adjusted EBITDA break-even. So continuing to focus on growth, but also being cognizant of both macro environment and in general, our goal continues to build a strong and sustainable company by moderating the growth in our expenses. I have a couple questions really around the outlook for GLEB, I think. What is the outlook for 2023? Do you expect any growth for this year? So we certainly expect growth for this year. I guess outlook can be a pretty broadly interpreted term. But in general, we're excited by that $100 billion opportunity in 2025 that we see. So we continue to capitalize on that. In 2023, we're excited about the opportunity to help customers reduce their cloud infrastructure spend by switching to B2. That's certainly a core focus for us and something that we think we're fairly uniquely situated to help customers with this year. From a financial outlook perspective, Frank gave the guidance for the year. At the midpoint, we intend to do $100 million in revenue, and at the midpoint, we're intending to have negative 8% adjusted EBITDA for the year. The next one's for Frank. At what point does the company expect to pivot to profitability?
spk13: Yeah, I'll have to comment a little bit on pivot. If you remember that Backblaze in its first 15 years had very little outside investment. So the company had to have the cash and good performance to survive since it wasn't depending on outside investors to sustain it. So even in our year that we went public in 2021, we had 5% positive adjusted EBITDA. The reason we have negative EBITDA today is that we've been investing in that big $100 billion market, principally in sales and marketing and in R&D expenses, and also the things that are needed to be a public company. So as we look forward, I think the key thing is that we see 2023 adjusted EBITDA approaching break even by quarter four. And that's an indicator of where we're headed overall.
spk16: Thank you, Frank. Next one's for Gleb. Are there any plans to leverage partnerships with other companies in the same service industry like Salesforce, Microsoft, or AWS? So partnerships are a strong source of business for us. We have over 100 technology partnerships, and we've mentioned that they're responsible for helping us generate over a third of all the revenue in Backlight v2. We partner with companies like Fastly and Cloudflare and DigitalOcean and Commvault and Veeam and many others. We are always looking to consider a wide variety of partnerships to drive sales and to enhance shareholder value. I'm happy to consider other ideas if you have any specific ideas. Certainly feel free to email us, partnercontact at backboys.com. Always happy to hear additional ideas. All right, another one for Gleb. Another couple of questions for Gleb along the same kind of topic. You know, is your team developing any artificial intelligence features or products to integrate in your cloud services? With AI becoming the focal point of the industry, what is the plan to leverage this in your offerings to good customers? How will it affect the growth of the business going forward? So AI is a big conversation right now, and we certainly help many of our customers today that leverage AI for their products and platforms and for their customers. AI is used by a number of our partners for things like text-to-speech transcription, language translation, object recognition, celebrity recognition, many other use cases. We have partners who do these things and leverage us for the storage cloud component. So all of these things on which you do AI are data. And as a data storage provider, we're pretty well situated to benefit from the explosion in AI in general. requires a lot of data to get trained. AI also creates a lot of data. And Backways stands to benefit from both of those trends. I'll say that we also, from a product functionality perspective, we highlighted on our blog not too long ago, one of our team members showed how to actually build an AI training model. using AI tools that are out there and using Backblaze v2 as the storage cloud for all the data sets for the training model so and it's all outlined on our blog so you can you can try that for yourself if you want it's called stable diffusion and Backblaze create a masterpiece from a bucket of your own images. So give that a shot if you're interested in experimenting with how you can use the BackWay storage cloud along with some of the AI tools. As far as our own plans for building out functionality, we are certainly intrigued by the opportunities and look at some of the interesting possibilities there. To what extent is BackWay used as a data lake, a central place for organizations raw data to be filtered into the places like Snowflake. Again, this one's for web too. Yeah, we have many customers who use this as a data lake. I mean, even Daltics, which is a customer example that I gave earlier in this call, Daltics actually has a data lake of billions of files that they use and they mine and they analyze and that they're leveraging Back Boys for that data lake. And they've called Back Boys an ideal solution for them for that purpose. So it's certainly something that we help customers with today and it's certainly something that we see as a growth opportunity in the future. As someone that went shopping for desktop hard drives to ship to Back Boys during the shortage, Does BackWays have plans to source more components from the U.S. as overseas market conditions and availability fluctuate? So, first of all, thank you for being one of the people who helped us do that back in, I believe that was 2011. So, thank you for helping us back then and being with us for over 10 years. We source from all three of the global manufacturers of hard drives to ensure that we have a diverse supply chain. So we worked hard to keep good relationships with all of them and buy from wherever they sell them food. So we're constantly ensuring that we work toward having a strong supply chain.
spk13: And it is strong. I would say that our supply chain is in very good shape. We're sourcing from everyone. We get great cooperation, and we're not seeing the shortages or the elongated lead times that we saw during the beginning of the pandemic.
spk16: Next is going to be for either one of you, I suppose. What are your career plans when you're eventually replaced from leadership? So, frankly, I haven't given too much thought to a courier after backblaze or outside of backblaze since I don't have any plans to leave any time soon. Mostly I'm excited about the opportunity we have ahead of us. We have, I think this is a really interesting time in the backblaze history as the combination of this very large market, the fairly unique product market fit that we have to help customers, especially as they look to optimize their cloud infrastructure, and the opportunity we have to really help customers use their data in addition to storing and protecting it. So I'm excited about all that opportunity going forward.
spk13: I would just say Backblaze is a very exciting business. There's a lot going on in it, and that's my focus, is to try to keep up with all of that.
spk07: No plans to retire to a private island at this point.
spk16: So, Gleb, how can we better advertise the company to consumers? I think they're talking about how they themselves can. So it sounds like a shareholder, a customer, and someone that's interested in helping us more. I love every part of that. So we encourage you to refer your friends, including you can use our Refer a Friend program. If you go to backway.com, slash refer.html. You can learn about the Refer a Friend program. If you do that, if you refer someone to the service, they get a month free, you get a month free. So benefit for both. and your unique referral code is actually listed inside of your account. So if you just sign into your Back Boys account in left nav, you can get your unique code. And we would love for you to do that or in any other way that you want to refer. All right. So the next question is really about backup. You know, from the moment you arrive at Back Boys' website, it's B2 business options and support. It feels like personal backup has fallen to the wayside. Does BackWay see personal data storage as a profitable space, and will there be any future efforts to enhance or advertise it? So computer backup was our original business. We started that back in 2007. B2 Cloud Storage is the newer business line that we introduced back in 2017. And we are increasingly focused on Backblade v2 in large part because we can help so many more customers with so many more different use cases and really provide them the platform for all kinds of different storage needs and help them in a variety of ways. Having said that, we continue to love our computer backup service and the customers that use it. And we still continue to invest in that service. Just this year, we launched new version version 8.5 of the Mac and Windows applications. We launched a new mobile application on both iOS and Android or version 6.0 of that as well as a number of other enhancements and optimizations. So we absolutely continue to love that service and want to continue to support our customers on that. Any plans of expanding the company to the East Coast? That's funny. The question maybe got submitted just shortly before the announcement. So as we announced a little bit earlier, at the end of last year, we launched our East Coast Data Center region. It's live and available, so customers can sign up directly and use that. And you can also use a cloud application and keep your data in both West and East or East and Europe as you wish. What measures are being taken to circumvent cybersecurity concerns? This investor noted the last passed and Capital One data breaches. So security is always top of mind. We're constantly working to ensure customer data is secure. We have a really experienced chief information security officer who's part of our executive team. We have a security department that works for him. We employ a variety of measures. We encrypt data. We keep redundancy. We keep physical security. We have access controls. We have network security. We do continuous monitoring to protect customer data. We also use third-party security. services to attempt to breach us. So we also have third party bug bounty programs. So we're constantly working to ensure the safety of customer data. When can we expect the company's stock to be back to its IPO level? You know, I wish I could predict the stock market as much as anybody else. Obviously, stock investing is uncertain and depends on market conditions, our performance as a company, the sector, the industry performance, how investors feel. You know, not a guess I can really venture. What do you see as the main selling points in competing with major cloud providers such as AWS, Microsoft, and Google? So main selling point, backwards B2 is one-fifth the price point of those traditional cloud providers. That's always a great value for customers, but especially in the current backward environment where customers are looking to say, how can I reduce the cost? of running my business or running my application while continuing to do the things I need to do, that makes it even more valuable and more also dramatically easier to use. There was a fairly recent market report that found that customers save over 90% of their time by using Backblaze. And so especially as everyone feels increasingly busy, saving all that time for them is critical. And then we also are part of the open internet. We are a specialized cloud provider that enables customers to use the data the way they want it, where they want it, with who they want it. We don't try to lock you in to only using our services as the traditional cloud providers do. by charging egregious ego speeds. So those are some of the key ways in which we believe we provide a lot of value versus the traditional cloud providers. All right. Given Backblaze's extremely competitive pricing for cloud storage, what's stopping large cloud customers from moving to B2? It's a good question. Fundamentally, we believe that the primary thing stopping larger customers from moving to B2 is just awareness. We need more of them to look at it and say, I know BackWay B2 exists. I understand that it is compatible with S3. I understand that it's not hard for me to switch. And I understand that I will save four-fifths of my bill on storage, plus dramatically, dramatically potentially on egress fees. And, you know, kind of getting awareness of that. So, we've signed customers of all sizes, including the roughly $1 million contract we announced in Q2. And with over 2,000 petabytes of data under management, we can support basically any site customer. So we think it's largely an awareness issue, and we're working on that with the additional go-to-market efforts that we've talked about. All right, just the last couple more to squeeze in, I think. Any plans to implement a glacier-style storage option? So BackWave B2 is cloud storage that is roughly the same price as Glacier, but without all the cost penalties and all the complexity of that offering. So we think B2 is a really attractive option for all of the various storage use cases, including for the subset that is just archival data that something like Glacier could use for. We offer really low cost while preserving The ability for the data to always be accessible and available, which we think is key since so much of the data, a lot of times customers think, oh, I'm just going to archive this. They don't need it. And then later find out that they actually do need it. We've had many customers who switched over to BackWise because of feeling the frustration of getting stuck. inside of Glacier when they actually turned out that they needed access to their data. So, we believe we provide the benefits of S3 at roughly the cost of Glacier. I'm going to ask maybe one more at a time here. When do you expect BackWay to be the leading cloud storage? When do you expect BackWay to lead the cloud storage industry? So while we do not have the revenue scale of the traditional cloud providers, we believe we are the leading specialized cloud for data storage today with one of the largest storage clouds out there. We grew about twice the rate of AWS this past quarter. And considering the cloud market is entering this third phase with customers wanting these open cloud solutions, wanting the best free services, we believe we're well-positioned to continue down this path. All right, thanks, Gleb, for those answers. So before I pass it back to Gleb to close the call, I just want to comment that we're going to be at a couple of institutional investor events this quarter, first being at the GMP Securities Technology Conference in San Francisco on March 7th, and the second is a virtual conference with William Blair, the Tech Innovators Conference. So we hope to see some institutional investors there. And with that, I'll hand back to Gleb to just close up the call briefly. Thanks, James, and thanks to all of you for your interest and for listening to our updates. We look forward to talking with you again in February. Actually, on our next call in May, operator, we're now ready to end the call. Thank you.
spk25: The conference is now concluded. Thank you for attending today's presentation.
spk19: You may now disconnect. Thank you. Thank you. you Thank you. Thank you.
spk00: Thank you. Thank you. you
spk25: Good day and welcome to the Backblaze fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to James Kistner, Vice President of Investor Relations. Please go ahead.
spk16: Thank you. Good afternoon, and welcome to Backblaze's fourth quarter and fiscal year 2022 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Frank Patchell, 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 for new offerings, partnerships and sales and marketing initiatives, our ability to compete effectively, acquire new customers and retain and expand our business with existing customers, hire and retain key personnel, and effectively manage our growth. These statements are subject to risks and uncertainties that could cause actual results to differ materially. including those described in our Respectors 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 is furnished with our Form 8-K file 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 number of customers. 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 SAIT Technologies platform. I would now like to turn the call over to Gleb. Gleb? Thank you, James, and thanks to all of you for joining us. At Backblaze, we're incredibly passionate about our mission to make it astonishingly easy to store, protect, and use data. Given the ever-growing importance of data to businesses and consumers alike, and the high cost and complexity of traditional cloud providers, we are seeking to aggressively scale our B2 cloud storage business to provide an easier, more cost-effective solution at a time when it is needed most. when businesses are feeling the pain of runaway cloud infrastructure costs. Today, we have over 500,000 customers and have two cloud service offerings that operate on our storage cloud platform. First, our B2 cloud storage service provides developers, IT personnel, and others with cloud storage that is dramatically easier to use and is one-fifth the price of Amazon S3 and others. Second, our computer backup service provides unlimited cloud backup for laptops and desktops for companies and individuals. While our computer backup business remains the larger of our two cloud service offerings at the moment, our strategy and increasing investments center around capitalizing on the approximately 100 billion total 2025 market opportunity for B2 cloud storage based on projections from IDC and company analysis. 2022 was a pivotal year for us and was our first complete year as a publicly traded company, and we're proud of what we've accomplished. We launched new products, new go-to-market motions, established key partnerships, and set up additional key functions to operate as a well-run public company. For products, we launched our B2 Reserve, cloud replication, a new East Coast data center region, and more. For go-to-market motions, not only did we scale our efficient self-serve motions, developer evangelism, and partnership efforts, but we also created a new channel partner program, signed new national resource and distributors, and landed the biggest customer order in our history in our strategically important application storage category. And despite inflation, recession fears, and more, we grew total revenue over 25% year on year, grew B2 over 45%, and B2 now makes up 41% of total revenue. Looking to the future, I'm especially excited about our role and position as a specialized cloud in supporting where the cloud is headed. Let me explain why. We believe the cloud has gone through three key phases. When we founded Backblaze in 2007, the cloud was in its infancy. This was phase one. Most people weren't clear what cloud computing was or even if it was going to take root. The question for most businesses was, what is the cloud? That question defined the first phase of public cloud services. Fast forward to 2016, almost 10 years later, and Amazon had nearly 50% market share of public cloud services, more than Microsoft, Google, and IBM combined. Amazon AWS generated over $12 billion in revenue that year. This was phase two of the public cloud. The cloud was undeniably a thing and businesses saw the value of it. But by cloud, most people thought of Amazon AWS. This brings us to today and the future, phase three. Phase three is defined by the open multi-cloud internet. Consulting firm Deloitte recently published their US Future of Cloud Survey Report, and it clearly supports the notion that multi-cloud is now the norm. Of the 500 senior cloud decision-makers surveyed, 79% said they work with more than one cloud provider. Why? Businesses have internalized several key lessons about the cloud. First, the traditional cloud vendors are very expensive and attempt to lock customers in with egregious fees to retrieve their own data and use it. Second, specialized cloud providers like Backboys offer best of breed services that are differentiated and valuable. In our case, with dramatically lower cost, better ease of use, and free or low cost data transfer. Finally, there's a benefit from a resiliency standpoint of having one's data held in more than one cloud. So in this third phase, what we're seeing is businesses clamoring for an open internet where customers are free to choose best of breed specialized cloud services, whether it's our partners Fastly and DigitalOcean for networking and compute, Twilio for messaging and communications, Stripe for billing, or Backblaze for storage. We believe storage is a critical component of the tech stack, and in fact, I would argue data storage is probably the most critical because none of these other things would exist if you don't have data. This is evidenced by many trends, the most recent being the explosion of generative AI, which requires data storage for models and creates data at scale. the importance of data continues to increase every day. And for AI, having scalable, cost-efficient data storage is an important enabler. This new phase of the cloud makes us very excited for our future, and we see a runway of growth for many years to come. Focusing on 2023, businesses are feeling the pain of inflation in the choppy economic environment and are looking to reduce costs while maintaining the quality of their services. We believe that we are strongly positioned for such an environment as we can help businesses dramatically lower the cost of their infrastructure with cloud storage that is one fifth the price of the traditional cloud providers. As evidence of our strong position, B2 grew 44% year on year in Q4, more than twice the growth rate of 20% for Amazon AWS. I'll now focus on our current priorities and the recent developments that demonstrate our progress on these strategic imperatives. First, partnerships. As we've noted in the past, partnerships are a key part of our growth strategy. For B2, we know that at least one third and likely significantly more of the data stored in B2 is coming to us as a result of partnerships. In 2023, we're investing to cultivate this important growth driver. We have two types of partners, technology partners and channel partners. Technology partners include what we've previously called developer and alliance partners. This quarter, I'd like to highlight two technology partners, Commvault and Telestream. Commvault is a well-known backup and data services provider, and their customers can use B2 as the cloud destination for their backups. Telestream provides a solution for organizations to handle media management. and their customers include 96% of the top US broadcast station groups and 82% of Fortune 100 companies. Those customers can now use B2 as the cloud destination for all that content. Turning to channel partnerships, we continue to scale this effort. As we mentioned previously, our B2 Reserve prepaid storage offering is well-suited for the channel. While still a new offering for us, B2 Reserve revenue nearly tripled quarter on quarter in Q4. And we continue to be excited by and focusing investments on the combination of channel and B2 Reserve. Second, we are continuing to cultivate our relationships with developers for application storage use cases, which we define as customers that use B2 Cloud Storage as the storage infrastructure for their SaaS, e-commerce, or other business. We continue to make progress on this front, and I'll share another recent customer example in a minute. In Q4, we also held our annual technology day with thousands of registrants and over 60% growth in attendance over the prior year. Finally, I want to talk about our self-serve go-to-market motion. As many of you know, Self-serve was the primary means of acquiring our customers for many years and drives significant efficiency in our customer acquisition approach. We have scaled the team focused on improving our self-serve funnel. And in January, we had the best month of self-serve account creations in a year. While we have been historically successful in driving self-serve customers, we believe there's still significantly more opportunity to continue our success here and drive greater efficiency in our customer acquisition. Now I'd like to share two new customers that highlight how B2 has helped drive their success. Let's start with an application storage customer called Monument. Monument wanted to build an offering similar to Google Photos, but with a focus on privacy. They developed Monument Cloud, which uses advanced AI to build a cloud-based photo service built around their philosophy of privacy. Monument considered AWS, but realized they'd ultimately lose money if they built the infrastructure for Monument Cloud on AWS. While they started using initially free credits from AWS to develop their AI model, they ultimately chose to build their cloud infrastructure using three specialized cloud providers, one for compute, one for photo thumbnails, and Backblaze for their overall storage cloud. Having done that, Monument Cloud has quickly become the company's flagship offering, drawing 25,000 active users. Second customer I'd like to highlight is another example of how a multi-cloud solution can save businesses money. Daltics is a pioneer in providing retail data to its customers, such as Unilever. With an infrastructure built almost entirely around AWS, Daltics began to have concerns about the cost of using S3. Daltics settled on using Amazon S3 for short-term storage and moving long-term storage into Backblaze, which would reduce costs while keeping data accessible. Daltics believes that in 2023, they will have saved approximately $75,000 to $100,000 on their storage spend, thanks to leveraging Backblaze v2, and will continue to save into the future. Before I turn the call over to Frank, a final topic. We started the company 16 years ago, and it's now been over a year since the company went public. And over the past few years, we've built out a great executive team. Recently, as one might naturally expect, some of the founders and early employees of Backways have begun a smooth transition out of the company. Each of them remains a part of the Backways family, and on behalf of all the employees of Backways, I want to say a big thank you to each of them for their contributions, and we all wish them well in their future endeavors. I'll now turn the call over to Frank Patchell, who can review the financial results of the quarter in more detail.
spk13: Thank you, Gleb, and thanks, everyone, for joining us today. Before turning to Q4, I will comment on our 2022 achievements. In our first year after our IPO, we continued to build out the systems, people, and processes to run a successful public company. We've executed well, despite a turbulent financial market and record inflation, risks of recession, and a tight labor market. While focusing on the approximately 100 billion market opportunity and successfully growing B2 over 40%, roughly twice the rate of the broader public cloud market, we're actively managing expenses and intend to be approaching adjusted EBITDA breakeven in Q4 of 2023. Turning to our Q4 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 $22.9 million, an increase of 23%. Backblaze B2 contributed sales of $9.5 million, reflecting 44% growth. Computer backup revenue totaled $13.3 million, reflecting 11% growth. In quarter four, V2 cloud storage represented 41% of total revenue, continuing its upward trend. Computer backup continued to benefit from the price increase we implemented in quarter three, 2021. Recall the amount of growth on the computer backup business driven by pricing has been diminishing since we are past the one year anniversary of the increase, and we see little benefit in 2023. Turning to retention metrics, We tracked net revenue retention, or NRR, and gross customer retention. Total company NRR was 113%, an increase of two points year over year, with B2Cloud storage at 122% and computer backup at 108%. Gross customer retention was 91% overall, consistent with the prior year, with 90% for both B2Cloud storage and computer backups. As part of our year-end numbers, we've also disclosed customer count and annual average revenue per customer as of December 31st, 2022. We share these metrics once per year. Our paid customers increased to 506,000 from 493,000 in Quarter 4, 2021. The number of customers for B2 grew to 87,000 from 74,000 one year ago. The number of customers for computer backup totaled 436,000, up from 433,000 in Q4 2021. Now turning to the annual average revenue per customer, or ARPU, for the entire company, it increased to $181 versus $153 in Q4 2021. B2 Cloud Storage ARPU grew to $437 versus $360 one year ago. and computer backup ARPU was $124 from $113 one year ago. We've shared the number of customers this year, but because this metric does not fully reflect how we bill for services, it is becoming less meaningful as an indicator of our business in the future. Working down the P&L, adjusted gross margin was 75%, consistent year-on-year. We do not guide gross margin explicitly, but we continue to see adjusted gross margin in the mid-70s in the near term. Adjusted EBITDA was a loss of $2.5 million or minus 11% of revenue compared to a loss of $1.3 million or minus 7% in Q4 of 2021. Year over year, the lower adjusted EBITDA margin reflects planned expenses from higher investments, primarily in sales and marketing and R&D, as we continue to pursue the large market potential for B2 cloud storage. On a GAAP basis, we also had a one-time $1.5 million settlement payment to resolve a dispute in connection with the holders of the 2021 SAFe investment. Turning to the balance sheet, Cash and short-term investments, including restricted cash, totaled $70 million as of December 31, 2022, versus $80 million as of the end of Q3 2022. Q4 cash usage included approximately $1 million of non-recurring indirect tax payments. Now, I'd like to provide our outlook for Q1. For the first quarter, we expect revenue to be in the range of $23.1 to $23.5 million. We expect Q1 adjusted EBITDA margin of minus 15% to minus 11%. Note our EBITDA fluctuates on a quarterly basis as expenses are typically seasonally high in quarter one. We expect a Quarter 1, 2023 basic share count of approximately $33.5 to $35.5 million. Also, for Q1 and Q2 gap results, we anticipate one-time costs due to reductions in force, other terminations, and restructuring expenses. From a cash standpoint, these costs will approximate $4 million, with the majority likely occurring in Quarter 1. Turning to our full year 2023, we expect revenue of $98 to $102 million and an adjusted EBITDA margin of minus 10 to minus 6%. We are targeting to approach adjusted EBITDA breakeven in quarter four of this year. I will now pass the call back to Gleb.
spk16: Thank you, Frank. Operator, we're now ready to take questions from analysts.
spk25: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
spk19: Our first question comes from Etai Kidron with Oppenheimer and Company.
spk25: Please go ahead.
spk18: Hey, guys. This is Herschel. I'm for Etai. Can you hear me?
spk22: Yeah, we can hear you, Ted.
spk18: Great. Congrats on the nice quarter. I want to just ask about the macro environment. Are you seeing any kind of changes in terms of the deal cycles or anything that's kind of you know, sticking out maybe from a geo perspective, if there's any color you can give on that.
spk16: Yeah, thank you, Jack, for the question. And good to hear from you. So, you know, obviously we're all seeing the macro environment being what it is. Having said that, I think, you know, we get a lot of customers who are self-serve motion. On the sales assist side, when we've looked at the data both on close rates, and on deal length, we've actually seen slight improvements on those fronts. I know that a number of companies have talked about sales elongation and close rates getting worse. We've actually seen some slight improvements on those, which we believe is partially because customers are looking at how do they optimize their cloud infrastructure, and that is becoming an urgent need for many of them. And so they're looking at ways to do that. And since we're one-fifth the price point of the traditional cloud vendors and they get to save a lot of efficiency and time through the ease of use, it's making some of those sales, I think, happen more effectively and more efficiently. Plus, I think we are just continuing to get better at our execution on that front.
spk18: Got it. That's helpful. And then have you guys made any changes to your hiring plan for the year?
spk13: If you remember that in 2022, you know, we had gone public in late, late 2021. So in 2022, we were standing up whole functional areas. So we had a lot of hiring in 2022. We did slow it slightly in three and four quarters, three and four, because we were conscious of the macro economic environment and concerns about it. In 2023, we are, it's a much more moderated hiring. headcount plan because we're filling in those areas that we need, but we're not standing up whole groups.
spk20: Got it. That's helpful. Thank you.
spk25: Our next question comes from Simon Leopold with Raymond James. Please go ahead.
spk28: Hi, guys. This is Victor Chu in for Simon Leopold. Can you help provide some color around your visibility into the dynamics of your customers switching to B2 specifically? Do you have metrics like the percentage that come from AWS versus an internal solution versus some other cloud provider?
spk16: Yeah, it's a good question. We don't have specific data on that in part because so many of our customers do show up as self-serve, so we don't have data on what they had before. We just see that they come, they try, they like the service, they sign up, they put a credit card down, and they go. We do see customers coming from both. So we see customers that are switching from traditional cloud providers because we're one-fifth the price point, much easier to use, and a better fit for them. And we also see customers saying, I don't want to deal with on-premise infrastructure anymore, and so I want to move to public cloud. For many of them, we are their first public cloud. They've seen public cloud. They know the benefits of it, but they have not made the leap oftentimes because they've seen the complexity and the cost of the traditional vendors. And when they find Backvoiz, they say, wow, that's really easy and really affordable. I can do that. And they end up leaving their on-premise infrastructure to move to Backvoiz with the public cloud. But we don't have a concrete breakdown between those two on the frequency.
spk28: Okay. And just to follow up on the previous question, you noted that the sales cycles and the elongation of some deal closures, you know, aren't impacting you guys, you know, to the same degree. Are there specific trends or, you know, instances, you know, that you're observing that gives you, you know, that you can see that that kind of helped, you know, explain why you're faring better than some of your peers in that regard?
spk16: Yeah, I think actually just to clarify, it's not just that we're not seeing as much of a negative impact. We've actually seen some benefit over the time period. Right, right, right. And I think that we look at that as likely the result of two things. One is that customers are trying to optimize their cloud infrastructure spend. And a great way to do that is to switch from traditional providers or on-premise infrastructure. And the other is because as an organization, I think we're continuing to become more effective and efficient.
spk21: Got it. That's helpful. Thank you.
spk25: Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.
spk03: Yeah, given the outlook for 2023, I was just curious if you could comment on the growth rates for the two different parts of the business. I know in 2022, we had the 46% growth from B2, but we had the price increase and the 17% growth from the computer backup business. Just for those of us modeling at home, I'm thinking that the B2 is probably still in that 40% range, but we could be in low single digits for computer backup?
spk13: Hi, Eric. We don't guide the product specifically, but when you use the guidance that we've provided and you kind of work with your model, you're going to get B2 in that low 40s with the difference coming into computer backup in the low single digits. Low to mid single digits.
spk03: Okay. And then, given the price differential that you guys have and the fact that you didn't see any of the deal elongation that a lot of other people saw in Q4, have you seen an increase in interest from large prospects? So, I wouldn't expect large prospects to have kind of pulled the trigger on Backblaze really fast. But just kind of a pipeline of larger transactions, how does that compare to, say, six months or a year ago?
spk15: I think we're always talking to companies of all sizes.
spk16: I don't think we have anything specific to say on the different sizes of organizations within the pipeline. Much of our business comes from the core of the mid-market for us. We are always in conversations with customers of different sizes, so I don't think I have anything really concrete to say on the shifts between the different parts of the pipeline.
spk03: Okay, and then the last question for me. On the B2, congratulations on that self-serve success. It's great to see kind of a new high here in January of 2023 on the self-serve sign-ups. What do you attribute that to? Is that the result of maybe an increased focus on sales, on channel development, on You know, enhancements at the web, the economy, what's the big driver there?
spk16: Yeah, so I think you remember we talked about how we have this efficient self-serve motion that includes generating good content and then bringing people to the website and then converting them through the website experience. And we've actually worked on both of those areas, both in terms of generating good content things like our drive stats, where we publish statistics around the hard drive reliability. That's been thriving. higher numbers on both total traffic on the drive stats and recent traffic on the drive stats. So it's driving interest from that front. And then also on the conversion side of it, we did invest last year in additional resources for the team who focuses on optimizing the website flow for customers, making it even easier. And so that then translates into additional people coming through the funnel once they come to the website. And this is an area that we continue to focus on this year. It's a continued, it's not a one and done. It's a continued focus that we'll be doing throughout the year.
spk13: It's also a great example. We've talked about how we moderate and measure our different investments, and that investment is one that we actually increased during the year because we were seeing good preliminary results. So I'm really pleased that that investment is coming to fruition.
spk21: Got it. Thanks.
spk25: Our next question comes from Zach Cummins with, Be Riley Securities. Please go ahead.
spk27: Yep. Hi, good afternoon, Gleb and Frank. Congrats again on the solved results and thanks for taking my questions. Gleb, could you go a little bit deeper into the traction you've seen so far with channel partners and your B2 Reserve product? Seems to be some pretty encouraging early progress and just curious how you're thinking about the potential growth from that channel in 2023.
spk16: Sure. It is something that we're excited about. I think the combination of B2 Reserve and Channel is a great mix. And we've seen that because it's it solves the needs that the customers have so typically IT buyers solving backup archiving ransomware type use cases and it's and so it makes it easier for them to purchase because it's a prepaid fixed price amount it's predictable it's easier for them to go to their finance department their CFO and say this is what it's going to cost me which especially this year is something they're more focused on getting clear answers to. It's something where the channel is accustomed to selling the SKU so that it's a good way for the channels to sell. And so it's a good fit, product market fit on that front. B2 Reserve, as I noted, it's grown very rapidly over the last couple quarters. We've signed several national retailers and distributors. We signed another distributor just this quarter. And basically what we're doing is we've hired up additional people into the partnership team to go and pursue various strategies on primarily getting more traction with these large national resellers it's not so much a strategy of get lots and lots and lots of resellers and distributors it is a strategy of getting more traction increasingly with the ones that we're saying because they're major significant ones and so that's basically how we're looking at it we're putting people at it we're putting programs at it and we're aligning around core handful of strategies to speed down that price.
spk27: Understood. That's helpful. And final question for me is any sort of update you can give on the cloud replication product, any sort of feedback from early adopters? And do you think, I guess, standing up your East Coast data center is going to help drive further adoption of that product here in 2023?
spk16: Yeah, so for everybody to just remind, cloud replication is the functionality where a customer can keep their data in one region inside of Backblaze v2 and then choose to keep it in another region inside of Backblaze v2. So we launched that in the middle of 2022. It was a soft launch because the choices that the customers had were to keep the data in the US, West Coast region, and in Europe. And those were the two choices. At the end of this past year, we launched the East Coast Data Center, which now gives people the choice of keeping the data on the West and East Coast of the US, or also on the West and Europe, or East and Europe. We do expect that that is a benefit. to customers. We've certainly heard from customers who have said they do want to replicate, but they want to keep their data inside of the US, so they want to replicate it inside of the US. And that gives them the ability to do that. We've also actually started standing up additional programs for marketing cloud application, including functionality inside of the product itself that helps explain how to set it up for customers. as well as targeted outreach to customers that we have. to educate them on the ability for them to do this. So, like I've said before, we don't expect cloud application to be a hockey stick type of approach. It's something that we see as a value for customers, gives them the opportunity to keep data closer to wherever they want it to be. It lets them fulfill insurance requirements that allow often for data to be geographically distributed. It allows them to add additional resiliency, and it's something that we'll continue to see growth in, but we expect that to be continuing gradual growth in the offering.
spk27: Great. Well, thanks for taking my questions, and best of luck with the rest of Q1. Thank you so much. Thank you.
spk16: All right. Thank you for all those great questions from the cell site in this community. I would now like to read questions that come from investors that were submitted on the SAE Technologies platform. I want to thank those investors that submitted questions. I think we've kind of addressed some of them, and we're going to try to address some of the more popular ones right now. The first one is for Frank. Really, it's actually, we had a couple different forms of this question. You know, when can we expect to get paid dividends, Frank?
spk13: Well, we're a growth company and beyond that, a growth technology company. And we have so many growth opportunities in front of us. Remember that our core market is over 100 billion. So the best use of our cash right now is to invest in opportunities that, that get us parts of that market. And that's what we're doing. So we don't have any plan to pay dividends consequently, because these other opportunities can be so lucrative for us.
spk16: All right. Thank you, Frank. This is actually the combination of really think about five of the questions on the platform. In some form or another, folks are asking, you know, what are the main goals of the company, both in the next 12 months and, you know, and beyond? Like, what are we focusing on as a company? What goals and objectives have we set for the long haul? I'll ask Webb that question.
spk24: Thanks, James.
spk16: So, for the long haul, we talked about there are three phases of the cloud. We're entering the third phase, which is a focus on specialized clouds and the open cloud internet where customers get to choose how they want to work with the cloud, what services they want, and get the best of breed services. And we certainly intend to continue to lean into that opportunity and help customers with their data storage needs and really helping them to store and protect as well as use their actual data. In the shorter term, Some of the things that we've talked about are we want to focus on growing B2. We see this $100 billion opportunity ahead of us. We want to grow B2 and pursue that opportunity. Three core areas in which we're focusing that are channel and partnerships, focusing on the application storage use case, helping developers build on our platform along with our other technology partners. and optimizing the self-serve experience, continuing to make it increasingly easy for customers to adopt Backblaze for their needs. The other thing that we talked about is more of a financial company goal for the year, which is in Q4, we want to approach adjusted EBITDA break-even. So continuing to focus on growth, but also being cognizant of both macro environment and in general, our goal continues to build a strong and sustainable company by moderating the growth in our expenses.
spk07: I have a couple questions really around the outlook for GLEB, I think.
spk16: What is the outlook for 2023? Do you expect any growth for this year? So we certainly expect growth for this year. I guess outlook can be a pretty broadly interpreted term, but in general, we're excited by that $100 billion opportunity in 2025 that we see. So we continue to capitalize on that. In 2023, we're excited about the opportunity to help customers reduce their cloud infrastructure spend by switching to B2. That's certainly a core focus for us and something that we think we're fairly uniquely situated to help customers with this year. From a financial outlook perspective, Frank gave the guidance for the year. At the midpoint, we intend to do $100 million in revenue, and at the midpoint, we're intending to have negative 8% adjusted EBITDA for the year. The next one's for Frank. At what point does the company expect to pivot to profitability?
spk13: Yeah, I'll have to comment a little bit on pivot. If you remember that Backblaze in its first 15 years had very little outside investment. So the company had to have the cash and good performance to survive since it wasn't depending on outside investors to sustain it. So even in our year that we went public in 2021, we had 5% positive adjusted EBITDA. The reason we have negative EBITDA today is that we've been investing in that big $100 billion market, principally in sales and marketing and in R&D expenses, and also the things that are needed to be a public company. So as we look forward, I think the key thing is that we see 2023 adjusted EBITDA approaching breakeven by quarter four, and that's an indicator of where we're headed overall.
spk16: Thank you, Frank. Next one's for Gleb. Are there any plans to leverage partnerships with other companies in the same service industry like Salesforce, Microsoft, or AWS? So partnerships are a strong source of business for us. We have over 100 technology partnerships, and we've mentioned that they're responsible for helping us generate over a third of all the revenue in Backlight v2. We partner with companies like Fastly and Cloudflare and DigitalOcean and Commvault and Veeam and many others. We are always looking to consider a wide variety of partnerships to drive sales and to enhance shareholder value. I'm happy to consider other ideas. If you have any specific ideas, certainly feel free to email us, partnercontact at backboys.com. Always happy to hear additional ideas. All right, another one for Gleb. Another couple of questions for Gleb along the same kind of topic. You know, is your team developing any artificial intelligence features or products to integrate in your cloud services? With AI becoming the focal point of the industry, you know, what is the plan to leverage this in your offerings to good customers? How will it affect the growth of the business going forward? So AI is a big conversation right now, and we certainly help many of our customers today that leverage AI for their products and platforms and for their customers. AI is used by a number of our partners for things like text-to-speech transcription, language translation, object recognition, celebrity recognition, many other use cases. We have partners who do these things and leverage us for the storage cloud component. So all of these things on which you do AI are data. And as a data storage provider, we're pretty well situated to benefit from the explosion in AI in general. AI requires a lot of data to get trained. AI also creates a lot of data. And BackWise stands to benefit from both of those trends. I'll say that we also, from a product functionality perspective, we highlighted on our blog not too long ago, one of our team members showed how to actually build an AI training model using AI tools that are out there and using Backlight V2 as the storage cloud for all the data sets for the training model. And it's all outlined on our blog, so you can try that for yourself if you want. It's called Stable Diffusion and Backblaze, Create a Masterpiece. from a bucket of your own images. So give that a shot if you're interested in experimenting with how you can use the Backblaze storage cloud along with some of the AI tools. As far as our only plans for building out functionality, we are certainly intrigued by the opportunities and look at some of the interesting possibilities there. To what extent is Backblaze used as a data lake, a central place for organizations raw data to be filtered into the places like Snowflake. Again, this one's for Web2. Yeah, we have many customers who use this as a data lake. I mean, even Daltics, which is a customer example that I gave earlier in this call, Daltics actually has a data lake of billions of files that they that they use and they mine and they analyze and that they're leveraging Back Boys for that data lake and they've called Back Boys an ideal solution for them for that purpose. So it's certainly something that we help customers with today and it's certainly something that we see as a growth opportunity in the future. As someone that went shopping for desktop hard drives to ship to Back Boys during the shortage, Does BackWays have plans to source more components from the U.S. as overseas market conditions and availability fluctuate? So, first of all, thank you for being one of the people who helped us do that back in, I believe that was 2011. So, thank you for helping us back then and being with us for over 10 years. We source from all three of the global manufacturers of hard drives to ensure that we have a diverse supply chain. So we worked hard to keep good relationships with all of them and buy from wherever they sell them food. So we're constantly ensuring that we work toward having a strong supply chain.
spk13: And it is strong. I would say that our supply chain is in very good shape. We're sourcing from everyone. We get great cooperation, and we're not seeing the shortages or the elongated lead times that we saw during the beginning of the pandemic.
spk16: Next is going to be for either one of you, I suppose. What are your career plans when you're eventually replaced from leadership? So, frankly, I haven't given too much thought to a career after Back Boys or outside of Back Boys since I don't have any plans to leave anytime soon. Mostly, I'm excited about the opportunity we have ahead of us. We have, I think, this is a really interesting time in Back Boys history as the combination of this very large market, the fairly unique product market fit that we have to help customers, especially as they look to optimize their cloud infrastructure, and the opportunity we have to really help customers use their data in addition to storing and protecting it. So I'm excited about all that opportunity going forward.
spk13: I would just say Backblaze is a very exciting business. There's a lot going on in it, and that's my focus, is to try to keep up with all of that.
spk16: No plans to retire to a private island at this point. So, Webb, how can we better advertise the company to consumers? I think they're talking about how they themselves can. So it sounds like a shareholder, a customer, and someone that's interested in helping us more. I love every part of that. So we encourage you to refer your friends, including you can use our Refer a Friend program. If you go to backway.com, slash refer.html. You can learn about the Refer a Friend program. If you do that, if you refer someone to the service, they get a month free, you get a month free. So benefit for both. And your unique referral code is actually listed inside of your account. So if you just sign into your Backblaze account in left nav, you can get your unique code. And we would love for you to do that or in any other way that you want to refer. All right. So the next question is really about backup. You know, from the moment you arrive at Backblaze's website, it's B2 business options and support. It feels like personal backup has fallen to the wayside. Does Backblaze see personal data storage as a profitable space and Will there be any future efforts to enhance or advertise it? So Computer Backup was our original business. We started that back in 2007. B2 Cloud Storage is the newer business line that we introduced back in 2017. we are increasingly focused on Backblade v2 in large part because we can help so many more customers with so many more different use cases and really provide them the platform for all kinds of different storage needs and help them in a variety of ways. Having said that, we continue to love our computer backup service and the customers that use it. And we still continue to invest in that service. Just this year, we launched new version version 8.5 of the Mac and Windows applications. We launched a new mobile application on both iOS and Android or version 6.0 of that as well as a number of other enhancements and optimizations. So we absolutely continue to love that service and want to continue to support our customers on that. Any plans of expanding the company to the East Coast? That's funny. The question maybe got submitted just shortly before the announcement. So as we announced a little bit earlier, at the end of last year, we launched our East Coast Data Center region. It's live and available, so customers can sign up directly and use that. And you can also use a cloud application and keep your data in both West and East or East and Europe as you wish. What measures are being taken to circumvent cybersecurity concerns? This investor noted the last passed and Capital One data breaches. So security is always top of mind. We're constantly working to ensure customer data is secure. We have a really experienced chief information security officer who's part of our executive team. We have a security department that works for him. We employ a variety of measures. We encrypt data. We keep redundancy. We keep physical security. We have access controls. We have network security. We do continuous monitoring to protect customer data. We also use third-party services to attempt to breaches, so we also have third-party bug bounty programs, so we're constantly working to ensure the safety of customer data. When can we expect the company's stock to be back to its IPO level? You know, I wish I could predict the stock market as much as anybody else. Obviously, stock investing is uncertain and depends on market conditions, our performance as a company, sector or the industry performance, how investors feel, you know, not a guess I can really venture. What do you see as the main selling points in competing with major cloud providers such as AWS, Microsoft, and Google? So main selling point, backwards B2 is one-fifth the price point of those traditional cloud providers. That's always a great value for customers, but especially in the current backward environment where customers are looking to say, how can I reduce the costs of running my business or running my application while continuing to do the things I need to do? That makes it even more valuable and more also dramatically easier to use. There was a fairly recent market report that found that customers save over 90% of their time by using Backblaze. And so especially as everyone feels increasingly busy, saving all that time for them is critical. And then we also are part of the open internet. We are a specialized cloud provider that enables customers to use the data the way they want it, where they want it, with who they want it. We don't try to lock you in to only using our services as the traditional cloud providers do by charging egregious ego speeds. So those are some of the key ways in which we believe we provide a lot of value versus the traditional cloud providers. All right. Given Backblaze's extremely competitive pricing for cloud storage, what's stopping large cloud customers from moving to B2? It's a good question. Fundamentally, we believe that the primary thing stopping larger customers from moving to B2 is just awareness. We need more of them to look at it and say, I know BackWay B2 exists. I understand that it is compatible with S3. I understand that it's not hard for me to switch. And I understand that I will save four-fifths of my bill on storage plus dramatically, dramatic savings potentially on egress fees and, you know, kind of getting awareness of that. So, we've signed customers of all sizes, including the roughly $1 million contract we announced in Q2. And with over 2,000 petabytes of data under management, we can support basically any site customer. So we think it's largely an awareness issue, and we're working on that with the additional go-to-market efforts that we've talked about. All right, just the last couple more. I'm going to squeeze in, I think, any plans to implement a Glacier-style storage option? So Backpoint B2 is cloud storage that is roughly the same price as Glacier, but without all the cost penalties and all the complexity of that offering. So we think B2 is a really attractive option for all of the various storage use cases, including for the subset that is just archival data that something like Glacier could use for. We offer really low cost while preserving the ability for the data to always be accessible and available, which we think is key since so much of the data, a lot of times customers think, oh, I'm just going to archive this. They don't need it. And then later find out that they actually do need it. We've had many customers who switched over to Backways because of feeling the frustration of getting stuck inside of Glacier when they actually turned out that they needed access to their data. So, we believe we provide the benefits of S3 at roughly the cost of Glacier. I'm going to ask maybe one more at a time here. When do you expect BackWay to be the leading cloud storage? When do you expect BackWay to lead the cloud storage industry? So while we do not have the revenue scale of the traditional cloud providers, we believe we are the leading specialized cloud for data storage today with one of the largest storage clouds out there. And we grew about twice the rate of AWS this past quarter. Considering the cloud market is entering this third phase with customers wanting these open cloud solutions, wanting the best free services, we believe we're well positioned to continue down this path. All right, thanks, Gleb, for those answers. So before I pass it back to Gleb to close the call, I just want to comment that we're going to be at a couple of institutional investor events this quarter, first being at the GMP Securities Technology Conference in San Francisco on March 7th, and the second is a virtual conference with William Blair, the Tech Innovators Conference. So we hope to see some institutional investors there. And with that, I'll hand back to Gleb to just close up the call briefly. Thanks, James, and thanks to all of you for your interest and for listening to our updates. We look forward to talking with you again in February. Actually, on our next call in May, operator, we're now ready to end the call. Thank you.
spk25: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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