Q3 2024 Backblaze Inc Earnings Call
Good day and welcome to the back please third quarter 2024 earnings call. All participants will be in a 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 Touchtone phone and 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 MS. Mimi Kong head of Investor Relations. Please go ahead ma'am.
Thank you good afternoon, and welcome to back basis third quarter 2024 earnings call on the call with me today are glad button and co founder CEO and chair person of the board and Mark <unk> Chief Financial Officer today back waves will discuss the financial results that were distributed earlier. This afternoon statements on this call include forward looking statements.
About our future financial results.
Impact of our go to market transformation and cost saving initiatives use of our IPO proceeds results from new features 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 included in our quarterly report on Form 10-Q, and our other financial filings you should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based.
On assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by law.
Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results.
Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our form 8-K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will also be posted to our investor relations page after the call.
Please also see our press release or presentation for definitions of additional metrics, such as NR or gross customer retention rate and adjusted free cash flow.
Glenn: Thank you for joining us I would now like to turn the call over to Glenn.
Glenn: Thank you Amy and welcome everyone to the call we had strong third quarter results.
Glenn: Revenue grew 29% with Btu cloud storage from 39% and adjusted EBITDA margin came in at 12% our records since going public.
Glenn: Over the past few quarters I've shared product innovations that we have delivered.
Glenn: And I feel very good about the unique value proposition, we provide in the product roadmap we have in place.
Glenn: But today I want to focus on two new major initiatives.
Glenn: The first to drive revenue growth, particularly around beach, you cloud storage.
Glenn: And the second to drive cost efficiencies.
Glenn: In our prior call I introduced two new executives that we brought on Jason wake him as Chief revenue Officer, and Mark, Sweden, as Chief Financial Officer.
Glenn: They joined us with a clear mandate.
Glenn: Grow revenue faster and accelerate our path to being free cash flow positive.
I'll share details about the new go to market transformation that Jason is spearheading.
Glenn: And Mark will speak about aggressively tightening our cost structure.
Glenn: On the go to market front, Jason has hit the ground running and has brought a new sense of energy to the team.
Glenn: He's focused on three critical areas to drive greater growth.
Glenn: Going partnerships and sales plays.
Glenn: First upscaling.
Glenn: We identified that the team lacked a structured approach to qualify leads and execute larger deals in response, Jason setup, a repeatable process that gave the team clear objectives and focus while still early we've seen an immediate impact.
Glenn: The team booked a record amount of annual contract value wins in over a year.
Glenn: We also signed two multiyear deals each totaling approximately $1 million.
Glenn: And built a record pipeline, including the most seven figure opportunities in our history.
Glenn: Second.
Glenn: Our ships.
Glenn: We previously did a good job signing up resellers, but we realized that we spread ourselves too thin across unproductive partners.
Glenn: Jason prioritize the resellers with the most value and we are focusing on those relationships as.
Glenn: As a result pipeline opportunities coming from our reseller partners have more than doubled quarter over quarter.
Glenn: Third sales plays.
Glenn: Jason along with our marketing team are aligning on a core set of sales plays to streamline the activities and drive repeatability.
Glenn: The go to market transformation includes restructuring our marketing team, we appointed a new internal leader and are focusing the team on driving more large opportunities into the pipeline, while returning to our roots of driving efficient brand awareness via our content and community flywheel.
Glenn: The combination of the changes, we're making are focused on driving higher sales productivity, which enables us to deliver more rapid yet efficient growth.
Glenn: We're moving fast and transforming our go to market approach. We expect this transformation to be substantially completed by the end of Q1 with revenue growth accelerating out of Q2.
Glenn: Our plan to share more of our progress and new initiatives in our next earnings call.
Glenn: In addition to driving our revenue growth, we are aggressively driving efficiency with mark leading a robust expense management process to maximize ROI and improve our operating leverage.
Glenn: As a result, we have accelerated our path to profitability and intend to be free cash flow positive in Q4 of 2025.
Glenn: Through a combination of this focus on accelerating revenue growth.
Glenn: And driving free cash flow, we aim to become a rule of 40 company overtime.
Glenn: Now turning to business how it.
Glenn: First we've announced the opening of a new data center region for Canada, which complements our existing regions in the U S and Europe.
Glenn: This is an exciting next step in backwards its growth story as it opens back police services to customers wanting to keep their data in Canada and to serve Canadian customers data sovereignty requirements. We expect this new data region will be live and available for customers in Q1.
Glenn: In concert with the opening of this data region I'm excited to announce that we have joined forces with op Tonight, the largest beam managed service provider in Canada opt.
Glenn: <unk> helps customers with managed cloud services that include security backup and disaster recovery and backwards will support the cloud storage needs for those use cases.
Glenn: Another highlight I want to mention is around AI.
Glenn: The end of the quarter the amount of data stored with us by AI customers has more than doubled year over year.
Glenn: Three a customers recently migrated to backwards and are paying us a total annual revenue run rate of over half a million dollars. These.
Glenn: These customers came to backwards, because we provide a cost effective solution to store their theater and simultaneously allow them to use that data with any specialized GPU cloud they wish.
Glenn: We believe we're providing the best underlying platform for the Gen. AI industry. One of these large customers said and I quote Barclays as an amazing solution for AI training data, we looked at a number of options and backwards seriously the best.
Glenn: In closing I'm incredibly excited for our future. The changes underway are driving us to better capture the $55 billion cloud storage opportunity in front of us now.
Glenn: Now I will turn it over to Mark. So we then our new CFO Mark.
Mark Sweden: Thank you Glenn and good afternoon, everybody. It's hard to believe that it's been three months since I joined but as Glenn noted, we've been pretty busy planning the future.
Mark Sweden: When I first joined I had three major hypotheses about Barclays first Barclays offered an incredible product with a unique competitive advantage price at 80% below the traditional cloud service providers.
Mark Sweden: A go to market model, they needed reinvigoration and third a cost structure that can be right sized to increase operating leverage.
Mark Sweden: So three months into the job I would say that my original hypotheses those pad and had been further reaffirmed.
Speaker Change: As Glenn noted Jason has been leading a transformational change in our go to market activities supported by a product that customers love.
Speaker Change: On the cost structure side, we did kick off a comprehensive zero based budgeting exercise.
Speaker Change: Most companies expect to have automatic year over year increases from inflation vendor price increases in salary raises.
Speaker Change: Despite those expected cost increases I'm happy to announce that our year over year run rate costs are expected to go down by over $8 million.
Speaker Change: This is coming from a variety of actions, including a 12% reduction enforced that took place. This month, an aggressive process of putting all our external spend out to bid and stopping activities that do not align with our future strategy.
Speaker Change: This allows us to invest some of those savings into revenue generating sales capacity, which would offset some of the above savings.
Speaker Change: Let me now turn to the results of the quarter.
Speaker Change: Q3 revenue was $32.6 million, representing 29% year over year growth and in line with the midpoint of our guidance.
Speaker Change: <unk> cloud storage revenue was $16 2 million, reflecting a 39% increase over the same period last year.
Speaker Change: <unk> growth was strong, but lower than we would've liked and this was primarily due to churn happening early in the quarter and large deals closing late in the quarter.
Speaker Change: Computer backup revenue totaled $16 $4 million, reflecting 20% growth exceeding our expectations due to better than expected retention.
Speaker Change: Net revenue retention or enter or for the total company was 118% compared to 108% last year the.
Speaker Change: The year over year improvement, mainly benefited from the price increase that we put in place in Q4 2023.
Speaker Change: The total gross customer retention was 90% in the quarter compared to 91% in the prior year.
Speaker Change: The high end or our end customer retention demonstrates the strategic importance of our product offerings to our customers.
Speaker Change: Continuing onto the income statement adjusted gross margin was 78% maintaining the all time high seen in the last quarter.
Speaker Change: This is a meaningful increase from the 74% in the same period last year as we continue to build scale.
Speaker Change: Adjusted EBITDA continues to improve at $3 $7 million or 12% of revenue driven by revenue growth and cost management.
Speaker Change: This is a very meaningful improvement from minus 3% in the prior year, representing a 1005 hundred basis points increase.
Speaker Change: As a broader picture of our P&L and our operating leverage our variable costs are about 25% of revenue.
Speaker Change: This includes key components tied to scaling such as hardware span datacenter operating costs and other smaller variable cost.
Speaker Change: So as our revenue increases about 75% should be flowing through the bottom line. This represents great operating leverage.
Speaker Change: Turning to the balance sheet.
Speaker Change: Cash investments and restricted cash totaled $25 $6 million at the end of the quarter.
Speaker Change: Take this opportunity to reiterate that we are on track to end the year with at least $20 million.
Speaker Change: Our cash flow from operations for the past nine months or $10 $3 million, a dramatic improvement from cash use of $10 $6 million for the same period last year.
Speaker Change: This represents a $29 million improvement over the prior year.
Speaker Change: As for free cash flows we are starting to disclose our adjusted free cash flows and our earnings release, and we define that as our operating cash flows less purchases of PP&E capitalized software costs principal payments on capital and financing leases and nonrecurring charges.
Speaker Change: We are disclosing and emphasizing our adjusted free cash flows because we are laser focus on being a growth company that is free cash flow positive.
Speaker Change: Our adjusted free cash flows year to date were negative $16 million compared to negative $38 million in the same period last year.
Speaker Change: Showing a dramatic improvement of $22 million.
Speaker Change: As it relates to cash we have sufficient liquidity to run the business as we transition to be free cash flow positive how's.
Speaker Change: However of course, we will always look at opportunities to improve our capital structure.
Speaker Change: Moving to our guidance, we expect Q4 total revenue to be within the range of $33 five to $33 $9 million. As a reminder, we lap our price increase in Q4, which helped drive the revenue increases of the past year for.
For the full year total revenue was on track to be $127 million to $128 million.
Speaker Change: We expect Q4, adjusted EBITDA margin to be in the range of 12% to 14%, which excludes the onetime restructuring costs.
Speaker Change: For the full year, we expect adjusted EBITDA margin to be 9% to 11%.
While we will provide full 2025 guidance in Q1 as usual I'd like to share some thoughts about 2025, we plan to exit Q4 of 2025 with an adjusted EBITDA margin of approximately 20%, which is about double where we plan to finish this year.
Speaker Change: And in Q4 of 2025, we expect to be adjusted free cash flow positive from there on we expect the operating leverage will kick in to help us grow free cash flows in a healthy way given our low variable costs.
Our long term objective is to be a rule of 40 company based on revenue growth and adjusted free cash flow margin.
Speaker Change: In summary, we are excited about the path ahead and the momentum that is already in place.
Speaker Change: And with that let's take your questions.
Speaker Change: Operator.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you're using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: Anytime your question has been addressed and you would like to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Jeff Van <unk> with Craig Hallum Capital Group. Please go ahead.
Speaker Change: Great. Thanks for taking my questions a couple for you guys.
Speaker Change: First of all I'm glad I'm not on the Beatrice I'd talk for a second about the you said some churn late in the quarter just expand on that because you had pretty good though you had some expansion in the net retention number from 114 118. So it sounds like you thought it was going to be even better, but just talk a bit about that and then secondarily, you're getting some big deals here in.
Speaker Change: On the Btu side, and clearly moving up market in terms of realizing how far.
Speaker Change: Upmarket you can stretch maybe just talk about how far upmarket beat two goes you know who do you who do you see as the ideal addressable market for.
Speaker Change: For that for that product capability.
Speaker Change: Hey, Jeff Thanks for the questions I appreciate it.
Speaker Change: On the churn side the churn that we saw what happened early in the quarter, we expected it but it happened earlier in the quarter. So the we still had like you said, we still had very strong and our arm. We had a strong gross customer retention. It's just a couple of customers that churned out earlier than than later in the quarter.
Speaker Change: In terms of the market side of things we.
Speaker Change: We don't really see a specific limit to how far it can go we've got multiple extra bytes worth of storage under management already that's a.
Speaker Change: Large enough to handle any workload.
Speaker Change: We've signed those couple of roughly 1 million dollar multi year deals that we talked about so those are quite significant size. The size of opportunities. We think we have the opportunity to go above and beyond that as well, we do want to build repeatability into more of that go to market motion. So you know that the if you think.
Speaker Change: About the hot where we came from in 2021 when we went public the average customer was paying us $124. So moving up to 115 customers paying us over $50000 that we announced last quarter and these two customers paying us about $1 million each is quite the trajectory.
Speaker Change: You're already yes.
Speaker Change: Yeah for sure and and maybe just last for me you commented, obviously youre, making some substantial.
Changes in the go to market, while while managing for free cash flow are an interesting comment coming out of Q2 'twenty five year looking for accelerated revenue growth just talk about just to be clear are we talking overall revenue growth or are you just speaking specifically there to be too.
Speaker Change: You know.
Speaker Change: Hey, Jeff This is Mark Sudan.
Speaker Change: I know, it's my first earnings call as a high to you and everybody on them.
Speaker Change: Jeff what I would say is.
Speaker Change: In the short term I mean, obviously as we lap the price increase RMB two year over year revenue for the full year will probably be mid to high Thirty's I think what's important here is where we're headed to and is glad made in his comment is once once we come out of Q2 of next year is when the law.
Speaker Change: Leading indicators, which are translating to the Aladdin lagging indicators, leading indicators now obviously went through Q4 with record sales pipeline.
Speaker Change: Because these seven figure type of deals and got more of those so we're very excited about the momentum but these are leading indicators that then will translate into a revenue.
Speaker Change: Okay I'll leave it there thank you.
Speaker Change: Thanks, John The next question will come from <unk> Kidron with Oppenheimer and company. Please go ahead.
Speaker Change: Hey, guys.
Speaker Change: The electronic pack here.
Speaker Change: Maybe you can just mark following on on your answer here I mean look I gave was very clear on two Q acceleration and if youre lapping.
Speaker Change: The price increases on the computer backup.
Speaker Change: We'll have to be beat to the acceleration I would just pure math.
Speaker Change: Okay.
Speaker Change: Yeah listen that's that's fair right di I mean, that's a b.
Speaker Change: B two is definitely the long term growth play for us and we continue to see that happening I mean, it's a market that grows at about 19% were already growing above market, but to be honest.
Speaker Change: It's not good enough for US right, we got to be growing at a faster rate and I'm talking about post price increase.
Speaker Change: Coming out of that phase right, because that's not a permanent benefit so coming out of price increase we want to see that these two number year over year would be a lot healthier be higher I think that go to market transformation. We said is it.
Speaker Change: It takes about three quarters to do work order into it and that's why I've said coming out of Q1, you'll see the benefit in Q2 in the second half of next year, we have all the right indicators coming into it in fact.
Speaker Change: We like them so much the early indicators of our sales efficiency.
Speaker Change: Part of our savings of $8 million were injecting it into more sales capacity to further accelerate that growth.
Speaker Change: Got it.
Speaker Change: <unk>.
Speaker Change: With regard today, 12% workforce reduction can you be a little bit more specific in what areas.
Speaker Change: You you were cutting.
Speaker Change: So yeah.
Speaker Change: So it's a comprehensive zero based budgeting exercise head.
Speaker Change: The head count.
Speaker Change: Payroll is our biggest class, but we have other cost drivers do so we went and we just took a fresh look at everything so I would say in general it's kind of across the board.
Speaker Change: So that we could create capacity of where we want to invest which would be sales capacity one area, where we probably did more than others is our marketing.
Speaker Change: We found our marketing over index.
Speaker Change: On payroll and as we're seeing our sales velocity increase we need to see that more demand generation. So we want to shift frankly from head count through demand generation budget. There. So that's where you're seeing a big part of that 12%, but I'd say, it's pretty much across the board because we took a fresh look.
Speaker Change: And everything and as you can imagine some things you could be locked into for a while it will take longer to realize but the 12%.
Speaker Change: Is effective immediately.
Speaker Change: I appreciate that and then.
Speaker Change: Hi, its great to see the positive free cash flow target for the fourth quarter of 'twenty five.
But.
Speaker Change: Can you give us a rough estimate and what would you think your existing cash balance would be at that point.
Speaker Change: Okay.
Speaker Change: Well.
Speaker Change: Youre asking me for a numbers, we haven't given what I will tell you is this much I mean, we would aim to do not have any change in cash, meaning you know Q1 and Q2.
Speaker Change: We will likely continue a bit of a negative free cash flows.
Speaker Change: And at some point getting through Q4 will be free cash flow positive, but when you add the other things like option exercises and other sources of cash you know.
Speaker Change: Chances are there wouldn't be much change next year in cash balance, but then we'd come out of it.
Speaker Change: And our free cash flow positive way. So when we were headed into 2026, you're talking about you know higher hopefully a higher revenue growth for beef too right and then operating leverage we're at 75 cents of X every extra dollar coming then would flow to the bottom line right.
Speaker Change: And then I want to say one thing I'll say is for.
Speaker Change: Everybody has to it you know one of the things that I've been excited about with having mark join on board as he is taking a very thorough look across our spend broadly so the zero based budgeting approach I mean, putting putting all the existing vendors out to bid.
Speaker Change: And negotiating on the contracts on the on the subscriptions et cetera. So it's a pretty comprehensive process and I think it's going to drive good efficiency for us going forward.
Speaker Change: Got it and then I guess going for you then on the self evolution, but Jason as he was implementing all.
Speaker Change: Now all of the points that you mentioned, how it's changing things makes a lot of sense I guess my question is more of.
Speaker Change: Oh time to productivity number one and say Ken when you look at the talent that you have.
Speaker Change: Clearly you're I'm sure in the work force reduction, perhaps there was some changes over there as well, but do you believe that the talent that you have can adjust appropriately adjust to the changes that Jason is implementing or.
Speaker Change: You will need to continue.
Speaker Change: Continue to kind of waving then we've out as you go in order to kind of get this right I mean, not all of the steps are seem very logical I'm. Just you know too to call already that you're thinking too cute there'll be acceleration.
Speaker Change: You mean in giving yourself six nine months to see that transformation. It's you could kind of get tight I guess.
Speaker Change: So help me get my hands around your confidence level here and what else will need to change there.
Speaker Change: Yes, so Jason has been on for a for a few months now right. So we've seen the steps that he has taken an.
Speaker Change: I guess the reason that I have a good level of confidence and I think we have just internal enthusiasm is the early indicators of that engagement.
Speaker Change: So Jason it brought on a VP of sales and head of partnerships that we announced recently they've hit the ground running the the team that he has he's evaluated who's on his team and has made some changes on that front, but also been excited about many of the people that he has on there so I.
Speaker Change: He's got a good team, where we're planning to invest like like Mark said in some additional capacity for the sales team based on beer and those good early indicators and just the fact that we even with the short time, he's been on and even with the short time. He has had to make a make changes we've already seen.
Speaker Change: Both the early indicators of success things like pipeline growth, but also our actual early successes like the closed one deals so.
Speaker Change: That gives me some confidence that he he and we together are going to be able to achieve some good results got it appreciate it thanks guys.
Speaker Change: Yeah.
Speaker Change: Again, if you have a question. Please press Star then one our next question will come from Eric Martin Newsy with Lake Street Capital markets. Please go ahead.
Speaker Change: Yeah I wanted to ask about the gross margin we had a good quarter here with the 78% gross margin, but given the investment and the new data center in Canada should we be looking for that gross margin to maybe take a step down in Q4 or what are we what are we thinking about for gross margin trajectory given the <unk>.
Speaker Change: Right.
Speaker Change: Hi, Eric.
Speaker Change: Yeah, I don't I don't see I don't see that much impact to the gross margin in those expansion as you know there.
Speaker Change: Co locations and then we lease out the hardware so it kind of blends in over a few years as we wrap it up so I would say the.
Speaker Change: The adjusted gross margin going from 74% to 78%.
Speaker Change: Benefited well from the price increase which is a permanent shift so I don't I don't see that changing in any meaningful way in the short term.
Bill: Okay, and then back to the top line you talked about a record pipeline Bill are we changing those large deals obviously is where we're trying to get increased build.
Speaker Change: If they build that you're seeing are reflective of changes that have taken place since Jason came aboard or is this kind of.
Speaker Change: These deals were in the hopper prior to his arrival.
Speaker Change: Yeah, you know, Eric one of the things that actually.
Speaker Change: Jason did when he came in was he scrubbed the pipeline that we had and instituted some more rigorous controls around what what qualifies as pipeline. So I actually would say that the quality of the pipeline. In addition to the size of the pipeline. The sales pipeline has increased but I think the quality of the pipeline that is in.
Speaker Change: That has actually increased because he's put more rigor around that.
Speaker Change: Got it thanks for taking my question.
The next question will come from Zach Cummins with B Riley Securities. Please go ahead.
Speaker Change: Hi, this is deep and wide all calling in for Zach Cummins. Thanks for taking my questions to start with the Op Tonight partnership can you maybe elaborate a little bit on up.
Although my eight facilitate your move up market or allows in Sam expansion for the new the new data region.
Sure Yeah.
Speaker Change: So oftentimes in the largest beam MSP are in Canada, and they have customers globally. So they service their an MSP they service customers with a variety of I T needs, including backup and security and disaster recovery and they they use beam and other.
Speaker Change: Hum products to provide those services the back end of those products need storage right. So when you're using a product for backup a product for disaster recovery of product for ransomware protection, you need those products need day, there somewhere and they're going to be using us.
Speaker Change: For the data storage for their customers are going forward and so it's it's an opportunity that one is not specifically about upmarket movement, although they have customers medium and large customers as well, but that is more about a regional and partnership focused expansion.
Speaker Change: With them.
Speaker Change: Got it makes sense. Thank you.
Speaker Change: And it sounds like you have a.
Speaker Change: Some good early traction with your expanded sales team are you still looking to build out your sales team at this juncture I'm bouncing out with your cost efficiency initiatives.
Mark Sweden: Yeah, Jason this is mark.
Mark Sweden: You know like I said, the <unk>, we've we had $8 million over $8 million of year over year savings in our fixed costs, we will reinvest some of that to expand sales capacity.
Mark Sweden: The good thing about our sales team now is.
Mark Sweden: Whatever is set in there in terms of channel management account management that kind of stuff I would say that you know should be revenue generating but it is not as much as it's a sales rep. The reinvestment is all going into sales rep expansion in that kind of skill set.
Mark Sweden: So really yes. So it's really about is as Jason has pretty much well underway of fixing of the productivity of that team now adding into it along those models is what we're doing.
Speaker Change: Got it thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Glenn Butman for any closing any closing remarks. Please go ahead Sir.
Thank you everybody for the questions.
Speaker Change: I also want to take a moment to say that while we believe that the reduction in force was the right decision to align our spending with where backwards is going in the future. It was a difficult decision because we.
Speaker Change: Do you care about all of our employees.
Speaker Change: I want to thank our whole team for all the work and the dedication to both our customers and to our company.
Speaker Change: And I am excited to have the opportunity to work together in our next chapter thank.
Speaker Change: Thank you everybody for joining the call and we'll talk to you next time.
Speaker Change: Alright.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].