Backblaze, Inc.
Q3 2021 Earnings Call Transcript

Published: 13 Dec 2021

[Operator:]

Thank you for standing by, and welcome to the Backblaze Q3 2021 Earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. James Kisner, Vice President of Investor Relations. Sir, you may begin.

[James Kisner:]

Thank you. Good afternoon, and welcome to Backblaze's third quarter 2021 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO, and Chairperson of the Board; and Frank Patchel, Chief Financial Officer. Today, Backblaze will discuss the quarterly financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements, of future financial results are goals and expectations regarding future revenue growth, profitability, use of IPO proceeds and investments in our business or anticipated capital expenditures and our estimates regarding our capital requirements. Our ability to acquire new customers and successfully engage and expand usage of our existing customers, the cost and success of our marketing efforts. Our ability to promote our brand, our reliance on key personnel and ability to identify, recruit and retain skilled personnel; our ability to effectively manage our growth, our ability to compete effectively with existing competitors and new market entrants and the growth rates of the markets in which we compete. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors that will be included in our Form 10-Q for the quarter ended September 30, 2021, in our recently filed S1 prospectus. 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'll also find a slide presentation related to our comments in the webcast viewer. The site is currently redirected to a static page while our general vendor is working the patch for the Log4j vulnerability that is broadly affecting many companies on the global Internet. We will post the presentation on the static page as well. I would now like to turn the call over to Gleb. Gleb?

[Gleb Budman:]

Thank you, James, and thanks to all of you for joining what is Backblaze's first quarterly earnings call as a public company. We had a strong Q3, and we'll delve into the details of the quarter in a moment. But since this is our first earnings call, I'd like to spend a few moments introducing our company to those who may be new to the story. Backblaze is building the leading independent cloud for data storage. And I'd like to explain why that's so critical. Today, for mid-market companies, the cloud storage offerings of the large diversified vendors are complex and expensive. Also, due to the breadth of those vendors, they attempt to lock in data to only using their services and they are increasingly in competition with their own customers and partners. Unlike those vendors, all we do is storage, and we don't compete with our customers. Customers are increasingly wanting to use their data with best-of-breed providers in a multi-cloud fashion. This is why we believe the future is being built on independent cloud platforms, and ours has been over 14 years in the making. For each major element of the tech stack, an independent cloud platform, such as our partners Cloudflare for networking or DigitalOcean for compute has emerged and built a large business, yet no one has done that for data storage. We believe that data storage is among the most critical of all of these elements since none of them would exist without data. We believe that we are well-positioned to be the independent trusted cloud platform that enables developers and businesses to use their data, how they want, with whoever they want at disruptively affordable economics. We have gotten to where we are today through the hard work and dedication of our incredible team of about 250 employees to whom we are incredibly grateful, especially during a very challenging global pandemic. We'd also like to thank our thousands of partners, our nearly 0.5 million customers, and the millions of you that read our blog. Thank you also to the many investors, big and small, who put your trust in us. We expect this is only the beginning of our journey together, and we appreciate your support of our company mission to make it astonishingly easy to store, use, and protect data. As I mentioned before, we had a strong Q3, which ended September 30, 2021. Both of our cloud services performed well, led by B2 Cloud Storage, which grew revenue rapidly at 59% and Computer Backup, which continued strong double-digit growth at 13%, resulting in total company growth of 25% to $17.3 million. B2 has higher growth rate, NRR, and other key metrics than our Computer Backup business. And as the mix shift continues toward B2, it drives even stronger metrics for the whole company. Importantly, nearly all of our revenues recurring, which provides good business predictability with annual recurring revenue, or ARR, totaling $71 million as of Q3. Before turning the call over to Frank to discuss the details of our financial and operational results, I'd like to share a little more about who we are, what we do, and our strategy for those on the call that may not be as familiar. First, I'll touch on our history and what makes us unique. Prior to Backblaze, I and the other 4 co-founders built and successfully sold 2 tech companies. We started Backblaze in 2007 and largely bootstrapped it with minimal outside funding. Today, 14 years later, we're all still working together to build and scale the company. In a world where many tech IPOs have already burned through hundreds of millions of dollars of outside investment prior to going public, we got here with less than $13 million in outside equity investment. We are excited by the opportunity to take the over $100 million in proceeds from our IPO and invest it towards our large and fast-growing market opportunity. Now, let's talk about that market. The market for data storage. It's a great market to be in because data is growing rapidly, and no one wants to delete anything. We all experience that every day, every one has become a data hoarder, and all of that data needs to be stored, used, and protected. That has resulted in an estimated $91 billion market for public cloud storage in 2025 according to IDC. Now what does Backblaze sell -- We have 2 storage-focused cloud offerings. Our original cloud offering was Computer Backup, which ended Q3 with $46 million of ARR. Computer Backup is a cloud service that protects data on all laptops and desktops for businesses and consumers. Computer Backup is a great service. It's completely unlimited and costs only $7 per month. Wirecutter, the product review section of the New York Times consistently selected it as the best backup service for most people. Our second cloud service, B2 Cloud Storage ended Q3 with $25 million of ARR. B2 is a storage platform for businesses and developers. It is a pay-as-you-go, storage-as-a-service, public cloud offering that serves a wide range of use cases including application development, ransomware protection, backup, and multi-cloud. While this market includes large diversified cloud vendors, namely Amazon Web Services, Google Cloud, and Microsoft Azure, they have increasingly focused on the largest enterprises with the most complex use cases. This has left a void where the mid-market is ignored and underserved. Backblaze can scale to any size organization as demonstrated by our two exabytes of data storage under management, which is over 10x the amount of data stored by Spotify when they went public just a few years ago. But we are optimized for the mid-market, which we define as companies with less than 1,000 employees and which IDC has estimated to be over 60% of the market or $55 billion in revenue opportunity in 2025. Built by developers, for developers, B2 Cloud Storage is differentiated because it's easy, affordable, and trusted. We're easy because we focus on just storage on cutting away all the complexity and on making simple-to-use products, which delivers third-party verified savings for customers of up to 92% of operational time. This can save developers and IT administrators potentially hours from their week to do more value-added tasks. We're affordable, charging just 1/5th of the diversified cloud platforms pricing, which we are able to do as a result of the software innovation we've achieved over 14 years of development on our storage cloud, and we're trusted. And trust is critical when you're talking about your data. Unlike the diversified card vendors, we do not aim to compete with our customers and partners. As an independent cloud, we don't lock in customer data through expensive egress fees to get their data out or through other . Customers increasingly want their data to not be trapped so that they can use it with best-of-breed services and also can rest assured that it won't be used against them competitively by their vendor. In addition to having differentiated products built on our storage Cloud, we have a unique go-to-market. It starts with our content and community. We have been publishing storage-focused content on our blog for nearly 15 years and built a community of over 3 million readers and fans. We have an entire go-to-market motion around this, including a head of publishing, publishing calendar and distribution through social and press. This content and engagement helps efficiently build brand awareness and love for the company, bringing qualified leads to our site and making our marketing efforts more efficient. With those efforts, we have 2 selling motions, self-serve and sales-assisted. Over 80% of our customers come to Backblaze via self-serve, which enables prospects to show up, try the service, enter a credit card and scale nearly infinitely without talking to a person. With sales-assisted, we have inside salespeople helping prospects along their journey, and they are typically working with customers with storage needs that are about 20x larger than that of our self-serve customers from a revenue perspective. Both of these motions are scaling and will further benefit from IPO proceeds. Another key aspect of our go-to-market strategy is our partnerships. We have developer partners and alliance partners. Developer partners tend to be cloud platforms with whom we work to jointly enable developers to build applications. Cloudflare is an example developer partner for us where customers moving away from Amazon Web Services build on us and our developer partner. Alliance partners are typically software that IT deploys to solve some specific use cases and through which customers select to have their data flow to Backblaze. Veeam, a data protection software company is an example of an alliance partner, where customers run Veeam software simply enter their Backblaze credentials and the customer's data flows to and is protected in our cloud. We also do joint go-to-market activities with these partners. And as they get more customers, as those customers have more data and as more of those customers choose to use cloud, all of these stack to drive more revenue for us. This unique content and community with our self-serve and sales-assisted motions and powerful partnerships is shared among both cloud services and it's how we drive efficiency and scale in our go-to-market. Now, let me highlight a few of our B2 customers and how they use our service. One such customer is a developer of a popular music app competitor to Spotify in Japan that came to us from Google Cloud and now stores over 0.5 petabyte in B2. We've become a critical part of this developer's technology stack. We also have many customers choosing Backblaze for their off-site backups to protect against ransomware. One notable customer was a school system in Illinois, they've been using a legacy on-premise storage system for years, and it was at the end of its life. They have to decide whether to spend tens of thousands of dollars paying to upgrade a technology that debuted in the 1970s or move to cloud storage. They decided to move to Backblaze B2 because it was easy and affordable. Another example, a university in the Midwest was told that they could receive a discount on their cybersecurity insurance premiums if they instituted an off-site immutable backup of their servers. They chose Backblaze because it was the easiest and most affordable service to get them that insurance premium discount. These are just 3 examples of the wide variety of use cases and opportunities that we have to help customers store, use and protect their data. If you'd like more examples, we share many more on the customer stories section of our website and periodically on our blog. I now want to highlight 3 important topics

[Francis Patchel:]

Thank you, Gleb, and thanks, everyone, for joining us today. I'll start by providing a brief overview of our financial model and then review our third quarter results, concluding with our guidance for the fourth quarter. We provide cloud-based storage solutions using our proprietary global software platform. Our products, B2 Cloud Storage and Computer Backup utilize our shared storage cloud technology platform. They also share the same go-to-market motions with nearly 80% of our revenue generated from the self-serve motion. Our revenue is nearly 100% recurring, primarily paid via credit card. Computer Backup clients have monthly 1- and 2-year subscriptions with the 1 in 2 years build in advance and recognized ratably over the subscription period. Our B2 customers are billed monthly in arrears based upon the actual storage used. B2 customers tend to have ever larger invoices since data storage is cumulative and seldom purged. Before I discuss the financial highlights, I want to comment on the impact of the COVID pandemic on our business. Over the long term, we believe that pandemic can serve as an accelerator for the adoption of public cloud solutions like ours. But over the short term, the impact can cause some variability in the amount of the new data created in stored in B2, as well as the number of new subscriptions needed for Computer Backup customers. We remain fortunate that today these impacts have been limited. Turning to our Q3 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 2 key metrics

[Gleb Budman:]

Thanks, Frank. We're very excited about the opportunity to be the leading independent cloud for data storage. Our strong Q3 financial results and other accomplishments highlight our building momentum, and we're thrilled to be at this inflection point. Operator, we're now ready to take questions.

[Operator:]

Thank you. Our first question comes from Ittai Kidron of Oppenheimer & Company.

[Ittai Kidron:]

Congrats on the first quarter out of the gate, well done. Gleb, I wanted to spend some a little bit of time on your go-to-market motion, especially on B2 and your investment in the direct sales force. Maybe you can talk about the hiring over there, in what pace are you moving, and perhaps more importantly what if you've seen as far as productivity gains and the adjustment to this new model, how would you characterize progress overall here and how that's driving perhaps more visibility from a pipeline standpoint for your B2 business? A - Gleb Budman Ittai, good to hear from you. Thanks for the questions. So we have the 2 different go-to-market motions. It is the self-serve motion and the sales-assist motion. On the sales-assisted motion, we are -- we had started in the beginning of 2021, we started the outbound sales effort and it’s an insight team reaching out using e-mail and phone calls to reach out to prospective customers. And we also started our customer success management team toward the beginning of 2021. We've been scaling those through 2021, and there are definitely areas that we are scaling faster with proceeds. So, we are actively doing that now. We also have our partnership team, which we started a couple of years ago, and it is another area of investment with proceeds. So, we have both of those components of the sale-assisted model are ones which we're excited about the opportunity to grow faster with the proceeds that we've just closed.

[Ittai Kidron:]

Can you perhaps elaborate on the investments you've made before the proceeds? And how have you seen productivity improve through this time frame? Is it developing to your expectations?

[Gleb Budman:]

Yes. We -- when we started the outbound sales effort at the beginning of the year, we started carefully, we hired one person at the very beginning of the year just to run that experiment. We saw that -- we thought it might take a few months. We actually saw that the pipeline was being built quicker, and so we ended up hiring 2 additional people. And as we saw additional pipelines being built with those 2, we hired another 2 people. And so, we've been excited by the -- what we call opportunity potential that, that team is scaling up, and it's actually been, we believe, we're quite successful in doing that. That group, the sales-assisted group overall drives customers that are about 20x the size of our self-serve customers. And so, we're excited by the fact that as the sales assist motion scales, it brings more of the larger customers on to the platform, and the sales-assisted motion in particular with our outbound efforts and our customer success efforts are ones where more directly, we can put dollars behind people to generate output.