Q4 2023 Backblaze Inc Earnings Call

Good day and welcome to the back places fourth quarter and fiscal year 2023 earnings 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.

Operator: Good day, and welcome to Backblaze's fourth quarter and fiscal year 2023 earnings call. All participants will be in listen-only mode.

Operator: 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 the star key, then 1 on a touch-tone phone.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on a touchtone phone 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 Mimi Kong Investor Relations and corporate development. Please go ahead.

Operator: 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 Mimi Kong, Investor Relations and Corporate Development. Please go ahead.

Thank you good afternoon, and welcome to back lasers fourth quarter and fiscal year 2023 earnings call on.

Mimi Kong: Thank you. Good afternoon, and welcome to Backblaze's fourth quarter fiscal year 2023 earnings call. On the call with me today are Glenn Budman, co-founder, CEO, and chairperson of the board, and Frank Pachel, chief financial officer. Today, Backblaze will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new features and offerings, and the impact of price changes, partnerships, and sales and marketing initiatives, our ability to compete effectively and manage our growth, and our strategy to acquire new customers and retain and expand our business with existing customers. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included You should not rely on our forward-looking statements as predictions of future events.

On the call with me today are glad Buttoning co founder CEO and chair person of the board and Frank Patchell Chief Financial Officer.

Good day back ways will discuss the financial results that were distributed earlier this afternoon statements.

Statements on this call include forward looking statements about our future financial results use of our IPO proceeds results from new features and offerings and the impact of price changes partnerships and sales and marketing initiatives, our ability to compete effectively and manage our growth and our strategy to acquire new customers.

And retain and expand our business with existing customers.

These statements are subject to risks and uncertainties that could cause actual results to differ materially including those described in our risk factors are included in our annual report on Form 10-K, and our other financial filings.

You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by law.

Mimi Kong: 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.

Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our form 8-K filed today with the S E C.

Mimi Kong: Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was filed with our Form 8K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will also be posted to our investor relations page after the call. Please also see our press release or presentation for definitions of additional metrics, such as NRR, gross customer retention rate, number of customers, and our. Before I turn the call over to Gleb, I'd also like to mention that in the latter portion of our call, as in prior calls, we will be addressing questions from investors that we gathered through the Say Technologies platform. Thank you for joining us, and I would now like to turn the call over to G Thanks, Mimi, and thank you, everyone, for joining us today.

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 N. R. R.

Gross customer retention rate number of customers in <unk> b.

Before I turn the call over to Glen 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 gather do they say technologies platform.

You for joining us and I would now like to turn the call over to Glenn.

Thanks, Amy and thank you everyone for joining US today, we are very pleased with our Q4 results. We delivered new products features and accelerated revenue growth with beecher called storage, having particularly strong growth of 47% year over year.

Gleb Budman: We are very pleased with our Q4 results. We delivered new product features and accelerated revenue growth, with B2 Cloud Storage having particularly strong growth of 47% year-over-year. We also demonstrated continued financial strength as we reached adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash use. In addition, we are reiterating our forecast to exit this year with at least $20 million of cash on hand.

We also demonstrated continued financial strength as we reached adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage.

In addition, we are reiterating our forecast to exit this year with at least $20 million of cash on hand.

Gleb Budman: I want to take a moment to highlight some key results. First, we delivered significant innovation. Second, we've continued to move up in the mid-marks.

I wanted to take a moment to highlight some key results.

First we delivered significant innovation.

We've continued to move up in the mid market.

Gleb Budman: Finally, we've accomplished this while dramatically improving our financial position. We accelerated our overall growth rate to 25% in Q4, while at the same time improving our profitability and cash yield. We achieved adjusted EBITDA of 6%, beating the high end of our prior guidance of 3%. And we used just $2.4 million of cash, which is about $6 million less than we used in the prior quarter.

Finally, we've accomplished this while dramatically improving our financial position.

We've accelerated our overall growth rate to 25% in Q4, while at the same time, improving our profitability and cash usage we.

We achieved adjusted EBITDA of 6%, beating the high end of our prior guidance of 3%.

And we use just $2 $4 million of cash, which is about $6 million less than we used in the prior quarter.

Gleb Budman: These three achievements provide a strong foundation for the year ahead, positioning us to take advantage of a shift we're seeing in the market. I want to take a moment to talk about that shift. We're seeing larger businesses come to us because they want to build on the cloud providers that best suit their needs instead of being forced to stay in the traditional closed cloud platform. For some of these businesses, it's about unique functionality. They're able to optimize with specialized solutions fitted to their use; for others, it is financial.

These three achievements provide a strong foundation for the year ahead.

Turning now to take advantage of a shift we're seeing in the market.

I wanted to take a moment to talk about that shift.

We're seeing larger businesses come to us because they want to build using the cloud provider that best suit their needs instead of being forced to stay in the traditional closed cloud platforms.

For some of these businesses, it's about unique functionality theyre able to optimize with specialized solutions fit into their use case.

For others, it's financial they can achieve massive savings by migrating away from expensive and complex traditional cloud providers.

Gleb Budman: They can achieve massive savings by migrating away from expensive and complex traditional cloud providers. And for some, it's about trusting that providers won't compete with them indirectly. These are some of the reasons companies are increasingly wanting to use best-of-breed providers in an open cloud. Together with other cloud companies, we're well positioned to help drive that open cloud ecosystem, which is defined by interoperability, best-of-breed functionality, affordability, and the free movement of data. I want to share a great customer story that highlights the value companies are seeing with this open cloud approach. The customer is a media streaming service with over 22 million global users. Their previous solution was built on top of AWS, which was constraining their growth due to technical limitations and excessive download time.

And for some it's about trust the providers won't compete with them indirectly.

These are some of the reasons companies are increasingly wanting to use best of breed providers and an open cloud ecosystem.

Together with other cloud companies were well positioned to help drive that open cloud ecosystem, which is defined by interoperability best of breed functionality affordability and the free movement of data.

I want to share a great customer story that highlight the value of companies are seeing with this open cloud approach.

The customer is the media streaming service with over 22 million global users.

Their previous solution was built on top of AWS.

Which was constraining their growth due to technical limitations and excessive download fees.

Gleb Budman: Download fees, which are referred to as egress fees in our industry, are one of the restraints that traditional cloud providers use to keep customers from leaving their platform. Our commitment to free egress, our scalable and performance storage platform, and our easy integration with CDN partners convinced this customer to switch to Backblaze v2. By switching to Backblaze, this customer was able to develop and deliver features to their end customers that the previous platform couldn't support. Even more impressively, with Backblaze, they were able to save over $800,000 on egress a year.

Download fees, which are referred to as egress fees in our industry are one of the worst strengths the traditional cloud providers used to keep customers from leaving their platforms.

Our commitment to free egress, our scalable and performance storage platform and are easy integration with CDN partners convinced this customer to switch to backwards be too.

Switching to backwards this customer was able to develop and deliver features to their end customers that the previous platform couldn't support.

Even more impressively with backwards they were able to save over $800000 on egress a year.

$800000 each year that they can invest back into their business grow their customer base and in turn grow the data stored with back please.

Gleb Budman: That's $800,000 each year that they can invest back into their business, grow their customer base, and, in turn, grow the data stored with Backblaze. As for innovation, we are focused on providing the performance and functionality businesses need to move away from legacy solutions. For over 16 years, the Backblaze team has excelled at innovating on cloud storage by finding greater performance and greater efficiency in hardware and software. In Q4, we launched Shard Stash for Backblaze v2, which enables upload speeds up to 30% faster than Amazon S3.

Turning to innovation, we are focused on providing the performance and functionality businesses need to move away from legacy solutions.

For over 16 years, the back with team has excelled at innovating on cloud storage by finding greater performance and greater efficiency in hardware and software.

In Q4, we launched short stash for backwards, B chip, which enables upload speeds up to 30% faster than Amazon S. Three.

Gleb Budman: Also, in Q4, we introduced free egress up to three times the amount of data stored for every B2 cloud storage company, furthering our commitment to the open cloud. We are the only cloud storage provider of scale that is offering this to customers without hidden fees or gotchas. We believe Backblaze is uniquely positioned to be the de facto storage platform at the center of the open cloud ecosystem as we support customers to use their data where and how they choose.

Also in Q4, we introduced free egress up to three times the amount of data stored for every btu cloud storage customer furthering our commitment to the open cloud.

We are the only cloud storage provider of scale that is offering this to customers without hidden fees or gotcha.

We believe backwards is uniquely positioned to be the de facto storage platform at the center of the open cloud ecosystem as we support customers to use their data where and how they choose.

Gleb Budman: We also recently launched computer backup enterprise control, a feature set that gives businesses greater administrative tools for an additional $2 per computer per month. With Enterprise Control, IT admins have the ability to meet their compliance requirements and easily manage backups for hundreds or thousands of computers. We were only a few weeks into availability, but we were encouraged by the early feedback we've received from customers. I'm really proud of what our team has done, but I'm even more excited for what's next.

We also recently launched computer backup enterprise control.

This is a feature set that gives businesses greater administrative tools for an additional $2 for computer per month.

With enterprise control.

Admins have the ability to meet their compliance requirements and easily manage backups for hundreds or thousands of computers.

We're only a few weeks into availability, but we're encouraged by the early feedback we've received from customers.

I'm really proud of what our team has done but I'm, even more excited for what's next.

Gleb Budman: Our team continually improves the performance of our platform and enhances our products to serve new use cases. For instance, while a number of AI companies are already succeeding with us, and we're integrated with leading GPU compute providers, our team isn't resting on that.

Our team continually improves the performance of our platform and enhances our products to serve new use cases.

For instance, while a number of AI companies are already succeeding with us and we're integrated with leading GPU compute providers.

Our team is not resting on that success.

Gleb Budman: We continue to innovate on our storage architecture to better serve the increased demand and evolving workloads of AI-related storage. We are also excited about the addition of David Ngo as our new chief product officer. David is the former CTO of Metallic at Commvault and brings over 25 years of experience in the data storage and protection industry.

We continue to innovate on our storage architecture to better serve the increased demand and evolving workflows of AI related storage.

We are also excited about the addition of David know as our new Chief product Officer.

David is the former CTO of Metallica Commvault.

And brings over 25 years of experience in the data storage and protection industry.

Gleb Budman: David is coming aboard to help lead the team to bring even greater innovation and strategic leadership for our customers and partners. So we've delivered significant innovation and set ourselves up for more. Next, I'd like to talk about moving up markets. First, we continue to build our channel program. Working with our channel partners helps to both increase our velocity on smaller deals and to identify and close larger ones. A great example of the latter is a $100,000 plus deal that we closed in Q4. One of our channel partners identified an NFL team that was looking to update their approach to data storage. As many of you probably watched the Super Bowl last weekend, you can imagine the incredible amount of video and other data generated during professional football games.

David it's coming aboard to help lead the team to bring even greater innovation and strategic leadership for our customers and partners.

So we delivered significant innovation and set ourselves up for more.

Next I'd like to talk about moving upmarket.

First we continue to build our channel program.

Working with our channel partners helps to both increase our velocity on smaller deals and to identify and close larger deals.

Great example of the latter is a 100000 dollar plus deal that we closed in Q4.

One of our channel partners identified an NFL team that was looking to update their approach to data storage.

As many of you probably watched the Super Bowl last weekend, you can imagine the incredible amount of video and other data generated during the professional football games.

Gleb Budman: Working together with our channel partner, we helped this customer simplify and improve the way they work with all of that data. Second, on the partnership front, we just launched our new Powered by Backblaze program. Powered by Backblaze lets businesses add B2 cloud storage to their product offerings without any of the hassle or complexity of managing cloud storage infrastructure.

Working together with our channel partner, we helped this customer simplify and improve the way they work with all of that data.

Second on the partnership front, we just launched our new powered by back ways program.

Powered by let's businesses add beat your cloud storage to their product offerings without any of the hassle or complexity of managing cloud storage infrastructure.

Gleb Budman: For example, early powered by customers include an edge compute platform provider and a transcoding cloud service provider. I'm excited for these types of partnerships because they help businesses expand their business. It's great to be a part of it.

For example, early powered by customers include an edge compute platform provider <unk>.

And a transcoding cloud service provider.

I'm excited for these types of partnerships because they help businesses expand their offerings make it easy for their customers to get access to best of breed cloud storage and provide back ways with access to new distribution channels and customers.

Gleb Budman: Thank you. It will make it easy for their customers to get access to best-of-breed cloud storage and provide Backblaze with access to new distribution channels and customers. Finally, as I've discussed, we have been successfully winning deals with larger customers, and we are delivering the features and the performance larger customers are looking for. As the company takes the next step toward winning these customers at scale, we're updating our sales approach accordingly, including growing headcount and adding a new sales commission program. We will also be hiring a new SVP of sales. Neelay Patel, our current VP of Sales, helped build the go-to-market for B2 cloud storage from the ground up and led the efforts to open up the use cases we currently serve. Neil and I agreed that now is the right time to pass the baton as the company charts its path beyond $100 million, and executive searches are underway during which Newey will continue to lead the sales organization to ensure a smooth transition.

Finally, as I've discussed we have been successfully winning deals with larger customers and we're delivering the features and the performance larger customers are looking for.

As the company takes the next step toward winning these customers at scale, we're updating our sales approach accordingly, including growing head count and adding new sales Commission program.

We will also be hiring a new SVP of sales.

And the labor to how our current VP of sales helps build the go to market for Btu cloud storage from the ground up.

And led the efforts to open up the use cases, we currently serve.

The only and I agree that now is the right time to pass the baton as the company charts its path beyond $100 million.

And executive searches underway during which the way we will continue to lead the sales organization to ensure a smooth transition.

Gleb Budman: Once the new head of sales is on board, Nealey will turn his focus to our AI in the future, which is aimed to help support customers in managing the explosive growth of AI data and its use cases. I'm very proud of what we've accomplished in 2023 by continuing to innovate. Moving upmarket and enhancing our go-to-market approach, Backblaze is in a great position to help our customers reap the full benefits of the open cloud. At the same time, we have dramatically improved our financial position as we accelerated revenue growth, achieved adjusted profitability for the first time as a public company, and dramatically reduced cash use. I'll pass the call to Frank now to review our finances. Thank you, Gleb, and thanks, everyone, for joining us today.

Once the new head of sales is onboard Neely will try and his focus to our AI initiatives, which are aimed to help support customers in managing the explosive growth of AI data and its use cases.

I'm very proud of what we've accomplished in 2023.

By continuing to innovate moving up market and enhancing our go to market approach backwards is in a great position to help our customers reap the full benefits of the open cloud.

At the same time, we have dramatically improved our financial position as we accelerated revenue growth achieved adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage.

Pass the call to Frank now to review our financial results.

Thank you Glenn and thanks, everyone for joining us today.

Frank Pachel: Turning to our fourth quarter financial results, unless otherwise noted, I will be referring to non-GAAP metrics, and the growth rates mentioned are year-on-year. We remain focused on two key metrics, revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q4 revenue totaled $28.7 million, an increase of 25% year over year.

Turning to our fourth quarter financial results, unless otherwise noted I'll be referring to non-GAAP metrics and the growth rates mentioned are year on year. We remained focused on two key metrics revenue growth and adjusted EBITDA, which is defined in our earnings release.

Our Q4 revenue totaled $28 7 million, an increase of 25% year over year B, two cloud storage revenue was $14 million, reflecting 47% growth.

Frank Pachel: V2 cloud storage revenue was $14 million, reflecting 47% growth; computer backup revenue totaled $14.7 million, reflecting 10% growth. Quarter four represents the introduction of our pricing chain. The exact impact of the Q4 price increase cannot be determined for a number of reasons, including changes we made to the product or phrase.

Peter backup revenue totaled $14 7 million, reflecting 10% growth.

Quarter four represents the introduction of our pricing changes the exact impact of the Q4 price increase cannot be determined for a number of reasons, including changes we made to the product offerings. However, we believe without the price increase organic growth for both be to cloud storage and.

Frank Pachel: However, we believe without the price increase, organic growth for both B2 cloud storage and computer backup would have been similar to quarter three. As a result of the price adjustment, it is common to see an increase in customer churn. However, we did not see any incremental customer churn in quarter three at the announcement or in quarter four at implementation.

Computer backup would have been similar to quarter three.

As a result of the price adjustment is common to see an increasing customer churn. However, we did not see any incremental customer churn in quarter three at announcement or in quarter four it implementation.

Frank Pachel: This is illustrated by our continued strong gross customer retention rate of 91% for the total company. We did see some incremental data and license reductions, likely due to the price increase, which was expected. We believe our consistent and strong customer retention rate speaks to the value of our services and how offering these popular features of three times free egress and extended version history further differentiates us from our competition. Turning to our Net Revenue Retention, or NRR, total company NRR was 109%, with B2 cloud storage at 122% and computer backup at 100%, which all improved over the prior quarter. Working down the P&L, adjusted gross margin increased about 300 basis points sequentially to 77 percent, which was primarily due to the price increase across our products and, to a lesser extent, the higher utilization of prior data center expansion. This quarter, adjusted EBITDA was $1.6 million, or 6% of revenue, and beat the high end of our prior guidance of 3%.

This is illustrated by our continued strong gross customer retention rate of 91% for the total company.

We did see some incremental data and license reductions likely due to the price increase which was expected.

We believe our consistent and strong customer retention rates speaks to the value of our services and how offering. These popular features a three times free grass and extended version history further differentiates us from our competition.

Turning to our net revenue retention or in our our total company and our our was 109% with Btu cloud storage at 122% and computer back up at 100%, which have all improved over the prior quarter.

Working down the P&L adjusted gross margin increased about 300 basis points sequentially to 77%, which was primarily due to the price increase across our products and to a lesser extent the higher utilization of prior data center expansions.

This quarter adjusted EBITDA was a positive $1 6 million or 6% of revenue and beat the high end of our prior guidance of 3%.

Frank Pachel: This favorably compares to a loss of 2.5 million, or negative 11%, in quarter four of 2022. And, as Gleb mentioned, this is the first time we have reached adjusted EBITDA profitability as a public company. This was the result of significantly growing revenue with a limited increase in operating expenses. The company itself benefited from higher revenue due to lower than expected churn and headcount-related savings. Turning to the balance sheet, cash and short-term investments, including restricted cash, totaled $33.4 million at the end of Q4 2023 versus $35.8 million at the end of Q3. Additionally, our cash usage for the quarter came in at $2.4 million, which represents a significant reduction of over 70% from $9 million of usage in quarter three.

This favorably compares to a loss of 2.5 million or negative 11% in quarter four of 2022 and.

And as Glenn mentioned this is the first time, we have reached adjusted EBITDA profitability as a public company.

This was the result of a significantly growing revenue with a limited increase in operating expenses. The beat itself benefited from higher revenue due to lower than expected churn and head count related savings.

Turning to the balance sheet cash and short term investments, including restricted cash totaled $33 4 million at the end of Q4 2023 versus 35 8 million at the end of Q3 2023.

Our cash usage for the quarter came in at $2 4 million, which represents a significant reduction of over 70% from 9 million abuse stage in quarter three.

Moving onto our guidance for the first quarter, we expect revenue to be in the range of $29.6 million to $30 million.

Frank Pachel: Moving on to our guidance, for the first quarter, we expect revenue to be in the range of $29.6 to $30 million. We expect Q1 adjusted EBITDA margin between 4 and 6 percent, reflecting continued strong performance in a quarter which is typically a high quarter for expenses due to payroll taxes and other compensation-related expenses. For the full year 2024, revenue guidance is $126 to $128 million, with the midpoint reflecting 25% year-over-year growth. The full year adjusted EBITDA guidance range is 8 to 10 percent.

We expect Q1, adjusted EBITDA margin between four and 6% reflecting continued strong performance in a quarter, which is typically a high quarter for expenses due to payroll taxes and other compensation related expenses.

For the full year 'twenty 'twenty four revenue guidance is $1 $26 million to $128 million with the midpoint, reflecting 25% year over year growth.

The full year adjusted EBITDA guidance range is 8% to 10%.

Frank Pachel: Because of our confidence in this guidance, we have narrowed the range for revenue and adjusted EBITDA. For year-end 2024, we project having at least $20 million in cash. This cash forecast includes principal lease payments on capital leases of about 15% of revenue.

Because of our confidence in this guidance, we have narrowed the range for revenue and adjusted EBITDA.

Our year end 'twenty 'twenty, four we project, having at least $20 million in cash.

This cash forecast includes principal lease payments on capital leases of about 15% of revenue.

Frank Pachel: We also anticipate about $2.4 million in ESPP proceeds and an additional amount from employees exercising stock options. For reference, we received $1.3 million from stock option proceeds in Q4. Looking beyond 2024, we continue to forecast cash flow break even by mid-2025. I will now pass the call back to Gladys.

We also anticipate about $2 4 million in E. S. P. P proceeds and an additional amount from employees exercising stock options.

For reference we received $1 3 million from stock option proceeds in quarter four.

Looking beyond 'twenty 'twenty four we continue to forecast cash flow breakeven by mid 2025.

I will now pass the call back to go up.

Gleb Budman: Thanks, Frank. In summary, the team has done an excellent job delivering product innovation, driving revenue growth, and achieving adjusted EBITDA profitability. We are uniquely positioned to capture the massive market opportunity ahead and execute on our mission to help customers leverage the open cloud ecosystem. Operator, we're now ready to take questions on our call. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key.

Thanks Frank.

In summary, the team has done an excellent job delivering product innovation driving revenue growth and achieving adjusted EBITDA profitability. We are uniquely positioned to capture the massive market opportunity ahead and execute on our mission to help customers leverage the open cloud ecosystem.

Operator, we're now ready to take questions on our call.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question comes from Chad Bennett with Craig Hallam. Please go ahead.

Our first question comes from Chad Bennett with Craig Hallum. Please go ahead.

Hey, Hello, Thanks for taking my questions.

Chad Michael Bennett: Hey, hello. Thanks for taking my questions. Great job on the quarter. I mean, the EBITDA number was phenomenal. Good to see that leverage playing out. Just in terms of, you know, Frank, I know you talked about really minimal to nonexistent uptick in churn as a result of the price increases to date. Just thinking about, you know, the first blush at the Fiscal 24 Guide, are you expecting that to change or anything directionally there on churn on either side of the business? And then, you know, with respect to the two segments, is there any difference in the kind of growth rates that you're factoring in in those two segments relative to what you just did in Q4 for Fiscal 24? Hi Chad.

Great job on the quarter I mean, the EBITDA number was phenomenal good to see that leverage playing out.

Just in terms of.

Frank I know you talked about really.

Minimal to nonexistent uptick in churn as a result of the price increases to date.

Just thinking about you know.

The first blush at at the fiscal 'twenty four guide.

Are you expecting that to change or any anything directionally there on churn on either side of the business and then you know with respect to the two segments.

Is there any difference in kind of growth rates that you're factoring in in those two segments relative to what you just did in Q4 for fiscal 'twenty four.

Hi, Chad Thanks for the question.

Frank Pachel: Thanks for the question. Let me address the churn first, we were pleasantly surprised and pleased with the churn rate because you would think when you have a price increase that you would have had some increase in churn and our customer retention was exactly the same as in the prior Q3 and we had expected to have some increase at announcement which we didn't see and some increase at implementation which we didn't have so that was very good so we now have over four months of experience with it and with January over five so we're not expecting any increase in that churn rate so we think the customer retention will remain at that you know very high company 91% certainly in that range. And, but, you know, what we did have, if you look at, If you look at the data and license reductions that we did see, we did have a relatively small reduction there of about one to two percent. Got it.

Let me address the churn burst.

We were pleasantly surprised and very pleased with the churn rate because you would think when you have a price increase that you would've had some increase in churn in our customer retention was exactly the same as in the prior Q3, and we had expected to have some increased out of now.

Now, which we didn't see a some increase at implementation, which we didn't have so that was very good. So we now have over four months of experience with that and with January over five so we're not expecting.

Any increase in that churn rates. So we think the customary change will remain at that you know very high company, 91% certainly in that range.

And but you know what we did have.

If you look at.

If you if you look at the data and life fitness.

<unk> reductions that we did see we did have a relatively small reduction there of about 1% to 2%.

Okay.

Got it and then just in terms of the two segments, Frank and how youre thinking about that relative to fourth quarter growth rates.

Gleb Budman: And then just in terms of the two segments, Frank, and how you're thinking about that relative to fourth-quarter growth rates. Yes, so as far as our growth rates go, we think our growth rate without the price increase kind of mirrored what was going on in quarter three. So we were very pleased to see that growth rate of V2 in the high 30% range organically and 40% or better with the price increase, and we're expecting that through fiscal year 24. And then the same on the computer backup side, that organic side was in the low single digits, and with the price increase, we're in the low double digits. And that's how we're projecting it forward in 2024. Got it? Thank you. And then maybe one follow-up question, if I could, for Gleb.

Yes.

So as far as our growth rates go we say, we think our growth rate without the price increase.

Kind of mirror, what was going on in quarter three.

We were very pleased to see that growth rate of the two at the high 30% range in organic and 40% or better with the price increase and we're expecting that through fiscal year 'twenty four and then the same on that computer backup that organic side was in the low single digit.

And with the price increase were in the low double digits and that's how we're projecting it forward in 2024.

Got it. Thank you and then maybe maybe one follow up if I could for glad I E. You highlighted.

Gleb Budman: You highlighted a few times, Gleb, on the call the increase in deal sizes you're seeing and the move up, but I think you characterized it more as the mid-market. I guess, is there just – you cited a couple very interesting wins, but can you just speak to whether it's B2 reserve pipeline growth or, you know, or maybe it's actually additional use cases you're seeing in the mid-market that maybe you weren't seeing a year or two ago? Kind of any characterization of the magnitude of improvement or demand you're seeing from the mid-market? Yeah, thanks for the question, Judd.

A few times club on the call the increase in deal sizes, you're seeing and moving up I think you characterized it in more into the mid market.

Is there just you cited a couple of very interesting wins.

But can you just speak to whether it be to reserves pipeline growth or or or.

Or maybe it's actually additional use cases, you're seeing in the mid market that maybe you weren't seeing a year or two to go kind of any characterization of the magnitude of improvement or demand youre seeing from the mid market.

Yeah. Thanks for the question, John and maybe just to say it because I think.

Gleb Budman: And by the way, maybe just to say, I think Frank was talking about the growth rates of the businesses and said high 30, and so I think just to make sure that came across through the audio, which is 30 being a high number, not a high 30s organic growth rate, so just to make sure that was heard correctly. We are still very excited about the fact that, in 2024, we're seeing around 40% growth for B2, which I think is obviously a very strong growth rate. In terms of the upmarket movement, we're seeing an upmarket movement in various ways. We're seeing that in backup customers, we're seeing that in application storage customers, we're seeing that in media and entertainment customers, in general. We're seeing more upmarket movement.

Frank was talking about the growth rates of the businesses and said.

It said high 30, and so I think just to make sure that came across through the audio which is it.

<unk> being a high number not not a high thirty's.

Organic growth rate. So just just to make sure that was heard correctly. We are we are still very excited about the fact that in 2020 four we're saying around 40% growth for me too, which I think is obviously, a very strong growth rate.

In terms of the upmarket movement. So we're seeing.

Market movement in various ways, we're seeing that in backup customers, we're seeing that an application.

Storage customers, we're seeing that in media and entertainment customers in general we're seeing more upmarket movement.

Gleb Budman: The application storage customers and committed contracts that we're seeing in particular are some of the areas where we're seeing upmarket attraction. These are customers that typically are on one of the traditional clouds, they've gotten to some scale, and they want to move off and do that. For a combination of savings on storage, often egress is an important component for them because they're using other cloud providers like CDNs or compute providers, and they need the data to be able to exit the storage and not be charged an RMLA for that.

The application storage customers and committed contracts that we're seeing in particular or are some of the areas, where we're seeing upmarket.

Good traction.

These are customers that typically are on one of the traditional clouds, they've gotten into some scale and they want to move off and do that for a combination of of savings on the storage often egress is an important component for them.

Because they're using a <unk>.

Other cloud providers, like <unk> or compute providers and they need the data to be able to exit from the storage and not be charged and hormel late for that and so the example, I gave on on <unk>.

Gleb Budman: The example I gave on the call a few minutes ago about the customer that saved $800,000, that's an application developer. It's a media streaming company, but it's an application storage use case. That's probably where we're seeing some more of the larger deal type traction. Got it. Thanks much. Nice job again.

On the call a few minutes ago around the customer that $800000. That's an application developer and for media streaming company, but it's an application storage use case, and that's probably where we're seeing some more of the larger deal type traction.

Got it thanks, so much nice job again.

Gleb Budman: Thanks for the question. The next question comes from Jason Adair with William Blair. Please go ahead. Yeah, thank you guys. My first question is just about the media streaming use case that you just talked about. How are you finding these customers, Gleb? Are they coming to you?

Thanks for the questions.

The next question comes from Jason Adair with William Blair. Please go ahead.

Yeah. Thank you hey, guys.

First question for me is just for the media streaming use case that you just talked about how are you finding these customers gloves are they coming to you is it part of the.

Gleb Budman: Is it part of some of the investments you've made in salespeople? Just give us a sense of how you're landing some of these upmarket customers. Yeah, thanks for the question, Jason. So media and entertainment is a market use case that we started looking at a while ago because media companies have large volumes of data, video footage, photos, and music, and they typically have workflows around those that benefit significantly from cloud storage as the way that that data flows. So we have media and entertainment customers that do their backups and archives with us. We also have media and entertainment companies that do their workflows with us. Where it used to be, especially pre-COVID times, that they would all sit in one place and do their production work together in an office, that has become much more distributed, which means you need access to all that media assets in a cloud environment so that they can access the data regardless of where they are. And some of them are also taking that next step and actually doing distribution using our cloud storage offerings. So we see it as an evolution for them.

Some of the investments you've made in and salespeople just give us a sense for how you're landing Sotheby's upmarket customers.

Yeah. Thanks for the question Jason.

So.

Its attainment is.

Hey, Mark can use case that we started looking at a while ago because media companies have large volumes of data video footage photos music and they typically have workflows around those that benefit significantly from cloud storage as the way that that.

Datas flows so we have media and entertainment customers that you did that do their backups and archives with US. We also have a media and entertainment companies that do their workflows with us where it used to be especially pre COVID-19 times that that they would all sit in one place and do their production.

And work together in a in.

In an office that had become much more distributed which means you need access to that all of that media flow all that media assets.

Even in a cloud environment, so that they can access the data regardless of where they are and some of them are also taking that next step and actually doing distribution using our cloud storage offering. So we see it as an evolution for them. The first most basic level is that the backups.

Gleb Budman: The first, most basic level is backups and archives. Then there's a more active archive use case, where they archive the data, but then they're pulling from it. Then it's actually developing the media production, leveraging our workflows, and then finally doing distribution. And so, in terms of where we're finding them, a lot of them continue to come to us through the same methods that we attract all of our customers, which is a combination of content and community. The blog that we publish, which has millions of readers around it, a lot of those also end up being media entertainment customers. But we've also layered on marketing activities, including events. So we have, we present that at media events, such as NAD in Las Vegas. We've been at other media events in New York and Amsterdam and other places.

Then it's a more active archive use case, where the archives of data, but then they're pulling from that it's actually developing the them.

Immediate production leveraging our workflows and then finally doing distribution and so in terms of where we're finding them a lot of them.

Continue to come to us through the same methods that we attract all of our customers, which is a combination of content and community.

Blogs that we publish which has millions of readers around a lot of those also end up being media entertainment customers.

But we've also layered on.

Marketing motions, including events. So we have a we present that media.

Such a N a D a.

In Las Vegas.

Been at other media event in New York and Amsterdam in other places.

Gleb Budman: So that layers on top of that. And then the channel effort that we've been investing in is also a good partner for us, because they have relationships with media companies. They find out that they need help; they want to transition off of LTO, off of on-premise systems, or sometimes off of traditional legacy clouds. And they bring those deals to us, and then we work with them to support those customers. Great, great.

So that layers on top of that and then the.

Channel effort that we've been investing in is also a good partner for us where.

They have relationships with media companies they find out that they need help they want to transition off of off a L. P O awful on premise systems or sometimes off of the traditional legacy clouds and they bring those deals to us and then we work with them to support those customers.

Great Great. That's helpful. And then just second quick question.

Gleb Budman: That's helpful. And then just a second quick question for you, Gleb, is when you talk about Backblaze or B2 being used for some of the AI-related use cases, I guess I always thought that AI required flash storage just because of the need for speed, especially on the inferencing side. So can you just talk about whether it's just kind of a misperception on my part?

For your glass is when we talk about.

Back ways would be to be used for some of the AI related use cases.

I always thought that.

AI required flash storage, just because of the need for.

Speed.

Especially on the inferencing side. So can you just talk to.

I'm wondering if that's just a kind of thing.

A misperception on my part.

Yes, it's a good question and obviously a.

Gleb Budman: Yeah, it's a good question, and obviously, AI has a lot of different aspects to it. And we've published, including on our blog, some of the workflows that companies use with AI. There's the development of the training models, which start with a lot of data. And then the workflow is to run multiple, multiple iterations at high speeds on that data to build the model. That generally requires very high-performance storage, closely located to the compute. That's not the optimal use case for us, at least not today. But a lot of the other workflows are actually really good fits.

I have a lot of different aspects of it and we've we've published a including on our blog, we published some of the workflows that companies use with AI.

There is the development of the training models, which starts with a lot of data and then the.

The work flow is to run multiple multiple iterations at high speeds on that data to build the model.

That generally requires very high performance storage closely located to the compute that.

That's not the optimal use case for us at least not today.

But a lot of the other workflows that are actually really good fits and so the workflow types that we've seen customers follow is where they will often upload information sometimes it's from a.

Gleb Budman: And so the workflow types that we've seen customers follow are where they will often upload information, sometimes it's from cameras, sometimes it's from existing assets they have, sometimes it's from systems that are generating data. That data flows into Backblaze. It's stored in B2.

Camera or sometimes it's from existing assets. They have some exits from systems that are generating data that data flows into back plays it's stored in and be too.

Gleb Budman: Then they use our combination of free egress and partnerships with other GPU clouds to send the data to those locations for processing, and then that processed data then gets put back into Backblaze V2 for a combination of, one, being served up as part of the application itself to customers, and two, for longer-term retention around backups and archives of that AI data. We also have some customers that use this as the original place where they store the data before it gets used for model training. So there are some use cases for which object storage in the cloud is a great fit and some for which it's not, but there is a tremendous amount of data that is being generated out there for AI, and we think that we're, you know, we think AI is still definitely in the early innings of the opportunity that we all have to help there. Gotcha. All right, thanks. Good luck! The next question comes from Simon Leopold with Raymond James. Please go ahead. Hi guys, this is Victor Chiu on behalf of Simon Leopold.

And then they use our combination of free egress and partnerships with other GPU clouds.

To send the data to those locations for processing and then that processed data. It then gets put back into and give back what would be true for a combination of one being served up as part of the application itself to customers and two for longer term retention around back.

An archive of that AI data.

Also have some customers that you're just as the original place where they store the data before it gets used for model training. So there are some use cases for which object storage in the cloud is a great fit and something for which it's not but it's a tremendous amount of data.

That is being generated out there for AI and we think that we're in.

We think AI is still definitely in the early innings of the opportunities that we all have to to help there.

Gotcha alright. Thanks.

Good luck. Thank you.

The next question comes from Simon Leopold with Raymond James. Please go ahead.

Hi, guys. This is.

Victor Chu in for Simon Leopold just wanted to follow up on that.

Victor Chiu: I just want to follow up on that AI question. Did you guys say that you have some AI-specific functions and initiatives kind of in the works, or were you just mentioning that you know the use cases currently for AI? I just want to elaborate on specifically your exposure to AI and kind of what your AI, solutions, and focus features are. Yeah, thanks for the question, Victor, and this is Glenn.

My question did you guys.

Say that you have some.

AI kind of specific functions and initiatives kind of are in the works.

Or would you just mentioning that that.

The use cases are currently.

Just want to elaborate on on specifically your exposure to kind of what your AI.

Solutions.

Focus features are.

Yeah. Thanks for the question Victor So the and this is.

So the short answer is yes to both.

Gleb Budman: So the short answer is yes to both. If you look back at some of what we did in the last year, the first part of it is making sure that we have a durable, high-performance, available storage platform that's affordable. A key component of providing value to customers who want to service their AI data, right? So fundamentally, making sure that we're providing them a top-tier storage platform for all of that AI data that needs to be stored somewhere, needs to be delivered to other locations, So we've been investing in that platform, and in Q4 we launched ShardStash, which would be a higher-performance way for BQ to work, which is a helpful piece of continuing to add value to that platform. So that's kind of step one.

If if you look back at some of what we did in in the last year.

First part of it is making sure that we have a durable high performance available storage platform. That's affordable is a key component of.

Providing value to customers, who want to serve at their AI.

Data needs right, so fundamentally making sure that we're providing them a top tier storage platform for all of that AI data that is that it needs to be stored somewhere needs to be delivered to other locations and it needs to be delivered to customers.

We've been investing behind that platform and in Q4, we built launched Sharps dash, which was the.

Higher performance way of the Beach work, which is a helpful piece of continuing to add value to that platform. So that's kind of step one step two is making sure that we're.

Gleb Budman: Step two is making sure that we're supporting our customers in understanding how to run these different workloads and how to use object cloud storage as part of that. And so we've been working on, you know, like I mentioned on our blog, there are stories and case studies around the different workloads and how to use them, and understand that landscape better. The third thing is partnerships. We mentioned that we partnered with Corweave. We partnered with Vulture.

Supporting our customers in in understanding how to run these different workflows and how to use object cloud storage as part of that and so we've been working on.

Like I mentioned on our blog there are stories and case studies around the different workflows and how to use them.

And understanding that that landscape better.

The.

Third thing is partnerships, we mentioned that we partnered with core we've partnered with Volcker. We so we have these GPU clouds that we partner with and we make it easy for customers to move their data between us and them.

Gleb Budman: So we have these GPU clouds that we partner with, and we make it easy for customers to move their data between us and them as part of this open cloud ecosystem supporting their AI. And then the last part of it is that, as I mentioned, our head of sales, once we hire a new head of sales, is going to be focusing his entire area of focus on our AI initiatives, which includes both the go-to-market thing, some of which I talked about, but also the product platform side. And David Ngo, who's our new chief product officer, is also looking at product roadmap opportunities to help customers. At core, there's a tremendous amount of data getting generated. There are a lot of use cases around that.

As part of this open cloud ecosystem supporting their AI usage.

And then the last part of it is that as I mentioned, our head of sales. Once we are hiring a new head of sales is going to be focusing.

His entire area of progress on our AI initiatives, which includes both the go to market things some of which I talked about but also the product platform side and David No who's our new Chief product officer.

He is also looking at the product roadmap.

Opportunities to help customers at core there's a tremendous amount of data getting generated theres a lot of use cases around that just providing a really robust platform for all of the data. We believe it is the kind of most important job one, but then we do see opportunity to help customers in additional ways beyond that.

Gleb Budman: Just providing a really robust platform for all that data, we believe, is the most important job one. But then we do see an opportunity to help customers in additional ways beyond that. Great, that's very helpful.

Great that's very helpful.

Gleb Budman: And I guess I just have one more kind of general industry question. More recently, we've heard commentary from a number of cloud providers who have kind of noted an industry-wide trend around cloud cost optimization and kind of increased scrutiny around public cloud spending from their entire customer base. So I'm just kind of curious if you've observed any similar dynamics. And if not, why do you think that's the case?

And I guess I just have one more kind of general industry question.

More recently, we've heard commentary from a number of cloud.

Writers, who have kind of noted an industry wide trend around cloud cost optimization and kind of increased scrutiny around public cloud spending from their entire customer base. So I'm just kind of curious if you've observed any similar dynamics and if not why do you think that's the case.

So I think that we are different.

Gleb Budman: So I think that we are different in that, with a lot of the traditional clouds, and we've certainly seen that commentary as well, and we've seen the impact on them for that. With a lot of the traditional clouds, their offerings are priced highly, high prices, and it's been complicated and confusing for customers to understand what they're paying for. And so we've heard from many customers that they were surprised by their cloud bills. They were unsure where the dollars were going and what they were spending on.

In that with a lot of the traditional clubs and we've certainly seen that commentary as well and you've seen the impact on them for that.

With a lot of the traditional cloud.

They they have their offerings are priced highly high priced and they are often been it's been complicated and confusing to understand where the customers what is.

What they're paying for it and so we've heard from many customers say that they were surprised by their cloud bills.

We're unsure where the dollars were going and what they were spending on and and so I think that one of the differences is backwards, there's always been transparent.

Gleb Budman: And so I think that one of the differences is that Backblaze has always been transparent. We've always made it easy to understand what you're paying for, and we've always been very affordable at our price point. So I think that, as a result, our customers have always been optimistic as part of that. Now, as Frank mentioned, we did see a one to two percent incremental reduction in licenses and data in Q4, which we believe is largely attributed to the price increase execution that we did. And this is Frank. I've got one for you. Yeah, this is Frank.

We've always made it easy.

To understand what you are paying for it and we've always been very affordable and our price point, So I think that effectively our customers have always been optimized.

As part of that and so I think as a result.

We're not subject to some of the same trends that they're seeing now as Frank mentioned, we did see a 1% to 2% incremental reduction in licenses and data in Q4, which.

Which we believe is largely attributed to the price increase execution.

Execution that we did.

And this is Frank.

Yeah.

Yeah. This is Frank I would add one item of course.

Frank Pachel: I would add one item, of course, this greater scrutiny and attention on data storage costs benefits us because we have such a good value play in the market. So we really appreciate that attention and that commentary. Thank you. The next question comes from Eric Suppager with JMP. Please go ahead.

This greater scrutiny and attention on data storage cost benefits.

Benefits us.

Because we have such a good value play in the market. So we really appreciate that that attention and that was that commentary.

Okay.

Okay. Thank you.

The next question comes from Erik <unk> with JMP. Please go ahead.

Yeah. Thanks for taking the question.

Eric Martinuzzi: Yeah, thanks for taking the question. First off, do you have a sense for what portion of your installed customer base is on the new pricing? I believe you have a mixture of month-to-month customers and annual contract customers. And I'm just curious how much of it was on that month-to-month.

First off do you have a sense for what portion of your installed over your customer base is on the new pricing I believe you have a mixture of.

Month to month customers and annual.

The annual contract customers I'm, just curious how much of it is was on that.

Most of the month and then secondly for these larger customers are.

Frank Pachel: And then secondly, for these larger customers. Are they typically customers that are on the likes of AWS or Azure? And then they're moving off completely, they're moving their applications off. If they're doing AI applications, they're moving those off completely. Or are they just migrating their storage off of those hyperscalers? Hi Eric, this is Frank.

Are they typically customers that are on the likes of AWS or azure.

And then there theyre moving off completely they're moving their applications off if.

If theyre doing AI applications and moving those off completely or are they just migrating their storage off of off of those hyperscale.

Right.

Gleb Budman: I'll take the first part of the question. Who's on the new pricing? So on our B2 side, the group that is on it is the pay-as-you-go customers. The rest of our client base is on community contracts or they're the B2 Reserve Group, which pay in advance, so they were unaffected by the price. But they all went on immediately.

Eric This is Frank I'll take the first part of the question who's on that new pricing. So on our beaches died the group that is that it is the pay as you go customers. The rest of our client base or I can read contract or the B two reserve grew which pay in there Dan.

So they were unaffected by the price increase.

But they all went on immediately so that pay as you go group of US immediately affected at the beginning of the quarter.

Frank Pachel: So that pay-as-you-go group was immediately affected at the beginning of the quarter. Then, as far as the computer backup group is concerned. 25% of them are approximately monthly, and they immediately had the increase, and then 75% are either one-year or two-year, and they are graduating upon retirement. And then, Eric, to your other question about, for upmarket customers and the simple web, are you asking whether they're fully migrating off of the traditional cloud providers or whether they're moving their data off? And I will say it is a mix of both. We've actually seen both types.

As far as the computer backup group.

5% of them approximately are monthly and they immediately had the increase and then 75% are either one year or two year and they are graduating and upon renewal.

And then to your other question about for the upmarket customers and it's in club.

Whether they're wholly migrating off of the traditional cloud providers or whether they're moving that data off and I will say it is a mix of both.

We've absolutely seen both types. So one one scenario that we've seen is customers who.

Gleb Budman: So, one scenario that we've seen is customers who don't have a million different things they're doing inside of the traditional cloud. And really, they need a handful of significant, important services, storage being obviously one of them. Often, it's storage, compute, and networking. And so, they'll use us for storage. They'll use companies like CloudFlare, Fastly, and Bunny for networking.

Have they.

Don't have a million different things, they're doing inside of the traditional cloud and really they need a handful of significant important services storage being obviously one of them.

Often it's storage compute and networking and so they'll use us for storage.

Use.

Companies like cloud for Fastly Bunny.

At for networking and they'll use someone like a core wieberg vulture digital ocean for a for the compute and the they'll migrate fully out of that and go full on open cloud get have freedom of their data.

Gleb Budman: And they'll use someone like CoreWeaver, Vulture, or DigitalOcean for the compute. And they'll migrate fully out of there and go full on, open cloud, and have the freedom of their data as part of their stack. We've also seen the other side, where they continue to leverage traditional clouds for some of their other services, but they use us for storage. And I'll, you know, give you an example of one customer. They actually kept their storage in AWS, but they added Backblaze, and they actually made us the default, and they were able to increase their durability that way, but they then also decreased their bill by half overall because they were paying so much for getting the data out of Amazon to their preferred network provider that by switching to us, they were able to save enough money to add us and still cut their bill, their whole entire infrastructure bill, in half. So we see both; it kind of depends on what they're trying to do with their infrastructure. So as you move up the market, is this going to create more opportunities for you to work with the Bandwidth Alliance and to strengthen that partnership? Yeah, I think so.

They're stuck we've also seen the other side, where they continue to leverage the traditional cost for some of their other services, but they use us for storage.

Yeah.

One customer if you're an example, they actually kept their their storage in the AWS, but they added back plate and they actually made us the default.

And they were able to increase their durability that way, but then also decreased their bill by half overall, because they were paying so much for getting the data out of Amazon to their preferred network provider that by switching to us they were able to save enough money to.

US and still cut their bill the whole entire infrastructure build in house. So we see both it kind of depends on what they're trying to do with their infrastructure.

Okay.

So as you move up market is this going to create more opportunities for you to work with.

Bandwidth alliance to strengthen that.

The partnership.

Yeah, I think so in part because.

Gleb Budman: In part, because we're in the higher market, we're doing more of a consultative discussion with these customers. And so, as you know, we have a large self-serve business, and those customers are doing what they choose to do. And many of them are moving off of the traditional cloud providers also, but they're doing that without having conversations with us.

We're in the upmarket we're doing more.

A consultative discussion with these customers and so as you know we have a large self serve.

And those customers are are doing what they choose to do and many of them are moving off of the traditional cloud providers also but there, but they're doing that without having conversations with it.

Gleb Budman: With the higher market ones, we're having more of a discussion of what makes sense in a strategic sense for you, Mr. Customer, as you go forward in your future, and how do you want that infrastructure to work for you long-term. All right, good.

With the market once it where we're having more of the discussion of what makes sense in a strategic sense for you Mister customer as we as you go forward.

In your future and how do you want that that infrastructure to work for you long term.

Gleb Budman: Thank you. Mm-hmm. The next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Hey, good thank you.

Mhm.

The next question comes from Eric Mark to Newsy with Lake Street Capital markets. Please go ahead.

Eric Martinuzzi: Yeah, good quarter and outlook. I was curious to know on the 2024 view, where do you expect the gross margin to range for the full year? Yes, we had previously said that our gross margin was going to be in the mid-70% range, and now we're very comfortable to say it's going to be in the upper 70% range, non-GAAP. So we're seeing that as about, you know, approximately a four percentage point improvement, and about half of that is attributed to the price. Gotcha. And then I did see a decline in computer backup customers as of year-end. You were down to 431,745 versus 436,080.

Yeah, good quarter and outlook I was curious to know on the 'twenty 'twenty four view, where do you expect the gross margin ranging for the full year.

Yes, we had previously hired Frank where previously saying that before that our gross margin was going to begin mid 70% range and now we're very comfortable to say, it's going to be in the upper 70% range non-GAAP. So we're seeing that it's about.

Approximately a four percentage point improvement in about half of that is attributed to the price increase.

Gotcha.

And then I did see a decline in the computer backup customers as of year end here, we're down to 431745 versus 436000 080. So what is the explanation there.

Frank Pachel: So what is the explanation there? Thanks for the question. This is Gleb.

Yeah. Thanks for the question. This is club so the the so first of all it's Frank.

Gleb Budman: So first of all, as Frank mentioned earlier, I think we saw a 1 to 2 percent license usage decline in the quarter. So the number that you're talking about is the customer number, which stayed consistent at that high gross customer retention rate. What I will say is that that number, in general, is something that we're looking at, whether it's a relevant metric going forward into the future, because it's so heavily influenced by the number of consumer customers on that product line, whereas we're increasingly focused on going into self-servicing businesses, and in particular, more upmarket businesses. And so you can imagine that that number is driven by – one consumer customer is treated the Yeah, I get it.

You mentioned or wherever I think the we saw a 1% 2%.

License usage decline.

Decline in quarter so.

The the number that Youre talking about is the customer number which stayed consistent at that high gross customer retention rate, what I will say is that.

That number in general is something that we're looking at whether it's a relevant metric going forward into the future because its so heavily influenced by the number of consumer customers on on that product line, whereas we're increasingly focused on going into servicing.

Servicing businesses and in particular more up market businesses and so you can imagine.

That that number is driven.

Driven by.

One consumer customer is treated the same as you know one customer that pays a six figures.

And stuff.

Gleb Budman: That's where I was headed with it. It sounds like, you know, especially given the guide, that not all customers are creative people. Exactly. Yeah.

Got it.

It sounds like just especially given the guide it's not all customers are created equal.

Exactly yeah, and as we mentioned that we just launched enterprise control, which is a functionality to help the larger customers manage all of their licenses and computers again not relevant for an individual consumer customer and the individual consumers are what drive the pure number of customers metric.

Gleb Budman: And as we mentioned, we just launched enterprise control, which is a functionality to help the larger customers manage all of their licenses and computers. Again, not relevant for an individual consumer customer. And the individual consumers are what drive the pure number of customers. Alright, thanks for taking my questions. Thank you. The next question comes from Zach Cummins with B Riley Securities. Please go ahead.

Got it thanks for taking my questions.

Thank you.

The next question comes from Zach Cummins with B Riley Securities. Please go ahead.

Zach Cummins: Hi, good afternoon, Gleb and Frank. Congratulations on the quarter and the guide. Just a few questions for me. Gleb, you were talking about initiatives for moving up the market and potentially changing some of the commission structure for some of your salespeople. So can you talk about potential changes as you move up market and any sort of incremental investments you need to make outside of the leadership change that's ongoing right now? Yeah, so we've been taking steps down this path.

Yes, Hi, good afternoon club and Frank Congrats on the quarter on the guide.

Just a few questions for me Glenn you were talking about initiatives of moving up market and potentially changing some of the commission structure for some of your salespeople. So can you talk about maybe potential changes as you move upmarket and any sort of incremental investments you need to make outside of the leadership change that's ongoing right now.

Yeah, So we've been taking steps down this path.

Gleb Budman: So you probably remember when we went public; 80% of all of our business was from self-serve. And we had talked about how the sales-assisted customers were larger, and it was a somewhat nascent emotion for us, but we were seeing larger deals and customers liking that service that we provided. And so we said we were going to be using some of the proceeds to stand up a sales team and start putting more focus behind the sales effort. And so some of the things that we've done over that time were we set up an SDR team, which is an outbound team. We staffed up some of the sales team in terms of SDRs, BDRs, account executives, and solutions engineers and built out that team. We've also divided the groups up into territories.

You probably remember.

When we went public we were 80% of all of our business was from self serve and we had talked about how the sales assisted.

Customers were larger than we were somewhat nascent motion for us, but we were seeing larger deals and customers liking that service that we provide and so we said we were going to be using some of the proceeds to stand up a sales team and start.

More focus behind the sales effort and so some of the things that we've done over that time was we stood up an SDR team, which was an outbound team we staffed up some of the.

Sales.

Jim in terms of Str's DDR as account executives.

Our solutions engineers and built out that team. We've also divided the group's up into territory. We've changed some of the way that we structure and guide leads through the funnel to them.

Gleb Budman: We've changed some of the way that we structure and guide leads through the funnel to them and some of the sales operations aspects of it. Introducing B2 Reserve and the ability to sell committed contracts were two important steps that allowed us to actually have the sales team sell as opposed to only assist in a self-serve type motion, and then adding the channel motion helped the sales team as well. So those are, you know, a number of changes we've been making over the last two years to help enable the sales team to sell to organizations and sell to larger. Then, we're looking for the new head of sales.

And some of the sales operations aspect of it.

You know introducing vitro reserve and the ability to sell committed contracts with two important steps that allowed us to actually have the sales team sell as opposed to only assist in a self serve type motion.

And then adding the channel motion helped the sales team as well. So those are a number of changes we've been making over the last two years to help enable the sales team to sell to organizations and sell to larger organizations that we're looking for the new head of sales. In addition to that we are.

Gleb Budman: In addition to that, we have a number of open positions who are on the sales team for senior account executives to sell to those larger organizations. We have the commission program that we talked about, and so these are just some of the things that we have done and some of the things that we are doing as part of continuing to move up market. And, you know, there are things around other organizations, you know, marketing, customer support, cloud operations, and others are also being supportive of that kind of entire company focus on moving up market. And the final question for me is just around cash usage. Nice to see the reaffirmed $20 million target at the end of this upcoming year. Frank, aside from the improved profitability in the business, can you walk me through just some of the other key inputs in terms of expectations for CapEx and some of your principal payments for capital lease obligations? Sure.

Or have we have a number of open reqs wanted the sales team for a senior account execs.

To sell to those larger organizations, we have the commission program that we talked about and and so these are.

Just some of the things that we had them in some things that we are doing as part of continuing to move up market and you know there are there things around the other organizations marketing customer support our cloud operations and others are also being supportive in that kind of entire company focus.

Moving up market.

Understood and final question for me is just around cash usage.

Nice to see then reaffirmed $20 million target at the end of this this upcoming year.

Frank aside from the improved profitability in the business I mean could you walk me through just some of the other key inputs and in terms of expectations for Capex and some of your principal payments for capital lease obligations.

Sure the on the Capex side.

Frank Pachel: On the CapEx side, for example, we're expecting to incur about $16 to $18 million in new equipment there. And if you recall, that is slightly less than what I had been saying previously at the $18 to $20 million range and the reasons for it, and actually very similar to what we spent at the midpoint this year. And the reason that that is flat and or slightly declining is that we're still using up the pandemic buffer when we built up additional equipment during the pandemic time. So we're still using that in our data centers, which will be largely done after quarter one. And then on the innovation side, where our engineers are continuously improving the platform, one of the areas that we expect to get a benefit from this year, especially in faster deletions. So anytime you can delete data quicker, you can store new data on the same hard drive. So that's driving some of that. The other, so that's on the CapEx side.

For example, we're expecting to.

[noise] incur about $16 million to $18 million.

New equipment. They are and if you recall that is slightly less than what I had been saying previously at the $18 million to $20 million range and the reason for that actually is very similar to what we spent at the midpoint. This year and the reason that that is.

Flat and slightly declining is that we're still using up the pandemic buffer when we built up.

Additional equipment joined the pandemic time, so we're still using that in our data centers, which will be largely done after quarter. One and then on the innovation side, where our engineers are continuously improving the platform one of the areas that we expect to get a benefit in this year, especially is it faster.

Deletes. So anytime you can delete data quicker you could store new data on the same hard drives so that's driving some of that.

The other so that's on the Capex side.

And then you had also asked on.

Frank Pachel: And then you asked about the leasing side. And what's really driving that part is, if you look at our total leases, you would notice that the total amount of leases, long and short term, together is actually declining. So what's basically happening is that we have a larger fall off in leases than we have new leases being added. And it's for the same two reasons.

The leasing side.

And what's really driving that part is if you look at our total leases you would notice that the total amount of leases long and short term together is actually declining. So what's basically happening is that we have a larger fall off and leases that we have new leases being added and.

For the same two reasons that that 10 P.

Frank Pachel: The pandemic leases are falling off because a lot of them came on three years ago, and they continue to fall off very quickly now, and the new leases that we're adding for the new CapEx are just not as great as what's falling off. So that's why we're getting a kind of a flat, slightly declining payment pace on those leases. So they're undecided.

Pandemic leases are falling off because there.

Well I didn't came out three years to go and they continue to fall off very quickly now and the new leases that we're adding for the new capex or just not as great as what's falling off so that's why we're getting a kind of a again a flat to slightly declining.

Payment.

The pace on those leases.

But they are underserved.

Frank Pachel: Yep, I think that answers all of it. Oh yeah, thank you so much for the question. This concludes our question and answer session. I would like to turn the conference back over to Mimi Kong.

No.

That answers all of it.

Oh, yeah. Thanks for the question sure.

This concludes our question and answer session I would like to turn the conference back over to Mimi Kong.

Thank you.

Mimi Kong: Thank you. At this time, I'd like to go over some of the questions submitted to us from Say Technologies. Looks like we might be able to get one in, and this one's for you, Gleb.

This part at this time I'd like to go over some of the questions submitted to us from St technologies. It looks like we might be able to get one in and this one's for you glad and last year, Microsoft made a change to how one thinks files, resulting in <unk> no longer being able to backup fold areas such as das.

Gleb Budman: Last year, Microsoft made a change to how OneDrive syncs files, resulting in Backblaze no longer being able to backup folders, such as Docs, Desktop, and Pics, when they are set to backup sync. Carbonite has an M365 backup option. What is Backblaze's solution, given how popular OneDrive Sync is? And another part of that question is, what would the cost and share price implications be for launches similar but improved equivalents to Microsoft and other leading backup and storage programs? Okay, so the way that that question sounds, it sounds like Microsoft did something specific to make it so that we can't back that up. To be clear, that's not what happened.

Desktop X when they are sent to back that stink.

Knight has and $3 65 backup option what is back wages solution given how popular one dry sync is in another part of that question is what would the cost and share price implications for lunch at similar but improved equivalent to Microsoft and other leading backup and storage program schemes.

Okay. So I think the way that that question it sounds like it sounds like Microsoft did something specific to make it. So that we can back that up to be clear that that's what what happened. So what Microsoft did was our customers keep files on their computer and what one drive did was it.

Gleb Budman: So what Microsoft did was customers put files on their computer. And what OneDrive did was it enabled customers to put some of their files in the cloud and not on their computer. So our computer backup service is designed to protect all of the data on your laptop or desktop. And so we back up everything that is on your laptop or desktop. We back up everything that's on your external hard drives.

Enabled customers to put some of their files and in the cloud and not on the computer. So our computer backup service is designed to protect all of the data on your laptop or desktop and we so we back up everything that is on your laptop or desktop we back up everything that's on your external hard drives as we do that for consumers, we do that for businesses.

Gleb Budman: We do that for consumers. We do that for businesses. But if the data does not exist on your computer because it's in the cloud, our computer backup service does not protect that data.

The data does not exist on your computer because it's in the cloud our computer backup service does not protect that data.

Gleb Budman: And so there are actually two things on that front. One is that we are very focused on continuing to grow computer backup. We think it's a good growth business. It's grown every single quarter since the start of this company.

So there so I'll say two things on that front.

One is that we are very focused on continuing to grow computer back up we think it's a good growth business. It's grown every single quarter since the start of this company and we aim to continue to provide value to our customers with that service.

Gleb Budman: And we aim to continue to provide value to our customers with that service. The customers that we are focused on trying to add more functionality and features to are, especially, on the business side. And the enterprise control functionality that we added is an example of that.

The customers that we are.

Focus on trying to add more functionality and features to our especially on the business side and the enterprise control functionality that we've added is an example of that but we're very much listening to customers and seeing what else they want from us.

Gleb Budman: But we're very much listening to customers and seeing what else they want from us with that option. The other thing that I will say is that with our B2 cloud storage, we serve a variety of use cases. Backing up SaaS applications, data that's in other cloud services, data that's in Microsoft Office 365 and OneDrive are things that our customers absolutely do. They do that with B2, as the cloud storage destination, and leveraging our partners for the different use cases. So some of those use cases are served by partners of ours like Veeam and Veritas and Commvault and others, where they take care of the software side of backing up those different file types and applications, and customers can then put that data into v2 and have that be the destination.

With that offering.

The other thing that I can say is that with our <unk> cloud storage, we serve a variety of use cases.

Backing up the SaaS applications data and other cloud services.

David It's in Microsoft Office, 365, onedrive or things that our customers absolutely do they do that would be too.

As the cloud storage destination and leveraging our partners for the different use cases, so some of those use cases.

Served by partners of ours, like beam, and Veritas, and Commvault and others, where they take care of the software side of backing up those different types of applications and the end customers can then put that data into b, two and have that be the destination. So so.

Gleb Budman: So I would say we currently service those use cases. We service them along with our partners. And then this would probably be the last question for today. Gleb, what is the single most impactful strategy over the next couple of quarters? So I'm not sure if I would call it the single most impactful, but as we talked about, moving up market is certainly a key component for us, along with the channel efforts that we're doing. The innovation that we've done and continue to do is something that we believe will provide a lot of value to customers and deliver growth for us.

So I would say.

We currently service don't use cases, we service them along with our partners.

And then this would probably be the last question for today, but what is the single most impactful strategy over the next couple of quarters.

So I'm not sure if I caught it seemed almost impactful, but as we talked about moving up market is certainly a key component for us along with the channel efforts that we're doing the innovation that we've done and continue to do it is something that we believe will provide a lot of value to customers and deliver growth for us.

Gleb Budman: And then we believe this trend of the open cloud is a key step. So, in terms of impactful strategies, those are the key things that we're leaning into. The other one, obviously, is AI. At some level, we're selling, effectively, the picks and shovels of the AI age. And I think that that is going to be a significant long-term opportunity.

And then we believe this trend of the open cloud is the key steps. So in terms of impactful strategies. Those are the key things that we're leaning into the.

The other one obviously as you know we've talked about AI at some level, we're selling effectively the picks and shovels.

AI age and I think that that is going to be a significant long term opportunity for us.

Gleb Budman: All right, and that's it for those questions. I'm going to hand the call back to Gleb. All right. Thank you, Mimi. Thank you, everybody, for the questions. Thank you to our investors who asked questions about the State Technologies Platform, to the analysts that joined us, and to the operator. We're now ready to end the call. See you next week. The conference is now concluded. Thank you for attending today's presentation.

Alright, that's it for those questions I'm going to hand, the call back to Glenn.

Alright. Thank you Mimi. Thank you everybody for the questions. Thank you to our to the to our investors ask questions of the C technologies by a friend to the analysts that joined us.

And operator, we're now ready to end the call.

See you next week.

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