Backblaze, Inc. (BLZE) Earnings Call Transcript & Summary

Good day, and welcome to the Backblaze to discuss updated 2023 guidance conference call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Mimi Kong, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Backblaze's conference call to discuss updated 2023 guidance. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Frank Patchel, Chief Financial Officer. Today, Backblaze will discuss the financial outlook that was distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results; potential results from our pricing changes and product updates, sales and marketing initiatives; our ability to compete effectively and manage our growth and expenses and our ability 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 -- to differ materially, including those described in our risk factors that are included in our Annual Report on Form 10-K and our other financial filings. You should not rely on our forward-looking statements as 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 most recent earnings release, which was furnished with our Form 8-K filed on August 8, 2023, with the SEC. I would now like to turn the call over to Gleb. Gleb?

Thank you, Mimi, and thank you all for joining us today on short notice. Today, we announced pricing increases and product upgrades for B2 Cloud Storage and computer backup that help our customers and further improve our revenue, EBITDA, cash flow and overall financial position. Details on our pricing and product changes can be found in our blog post at backblaze.com. Frank will cover the financial impact of these changes later in the call. As a brief summary on the pricing side, the monthly B2 Cloud Storage pay-as-you-go price increases from $5 to $6 per terabyte. And we will now provide 3 egress to our B2 Cloud Storage customers, up to 3x the amount of data they store with us every month. The monthly price per computer backup increases from $7 to $9, with similar changes to our annual and 2-year pricing. And we will also now provide customers our 1-year extended version history feature at no additional cost. On the product upgrade side, for computer backup, we announced the upcoming launch next month of Version 9.0, which includes a highly requested new local restore experience and upcoming enhancements for IT administrators looking for a world-class business backup product. And for B2 Cloud Storage, we have continually innovated to offer more value to customers, including improving platform performance and adding features to help customers with ransomware, compliance and more. We're excited to continue adding value this fall in the form of upload performance upgrades, expanded integrations and more partnerships. B2 Cloud Storage continues to be the best high-quality and low-cost alternatives to traditional cloud providers like AWS. We invest in making Backblaze B2 a better cloud storage provider every day. A price increase further helps us continue doing so into the future. Additionally, offering 3 egress furthers our commitment to breaking down the barriers that traditional cloud service providers rely on to lock in their customers and hold them back from using their data however best suits their business. We believe customers should have the freedom to reach the full benefits of choosing the best combination of cloud providers for their specific needs. I'm proud of what we have accomplished to date, and I'm excited to continue building for the future. Now I'll hand the call over to Frank. Frank?

Thanks, Gleb. We view the changes Gleb described as very positive for our financial position, including revenue, EBITDA, gross margin, cash flow and cash balances. I would like to first cover our updated 2023 guidance and then provide detail on how the recently announced price increases and product upgrades strengthen our financial position. Before speaking about our full year 2023 guidance, we are reiterating third quarter 2023 revenue guidance of $25 million to $25.4 million and adjusted EBITDA margin of negative 8% to negative 4%. The announced price changes take effect on October 3 and will not affect quarter 3 numbers. Moving on to our full year 2023 guidance. Full year guidance has been updated to $100 million to $102 million, which raises the midpoint of guidance to $101 million from $100 million previously. Full year 2023 adjusted EBITDA margin was also raised to negative 6.5% to negative 4.5% from negative 8.5% to negative 4.5% previously, reflecting improved profitability of 1 percentage point at the midpoint. Now I'd like to speak to our expected cash position and cash flow. We are targeting $20 million in cash balance at the end of 2024 and to return to being cash flow positive by midyear 2025. With the added cash generated from these changes and cost savings we described on our previous earnings call, we are even better positioned to pursue our market opportunities without accessing equity capital markets. While it is too early to provide our 2024 outlook, I want to provide some additional context on how we are thinking about 2024. B2 price increases will occur on the effective date for all pay-as-you-go customers who make up a significant portion of our B2 Cloud Storage revenue. Computer backup price increases will take effect based on their monthly 1- and 2-year renewal days, so the revenue benefit will continue to phase in over the next 2 years. Partially offsetting the revenue increase would be potentially elevated churn rates and the elimination of B2 egress fees. We will share more about the impact of these changes on our next earnings call in November, and we will provide full 2024 guidance in February. I will now pass the call back to Gleb. Gleb?

Thanks, Frank. Today's announced pricing and product updates help improve our ability to serve our customers, invest in further innovation and support the financial strength of the company. As Frank shared, we are targeting a $20 million ending cash balance in 2024 and returning to being cash flow positive by mid-2025. Finally, I want to thank our customers for entrusting their data with us. We're honored to serve them. Operator, we're now ready to take any questions from the sell-side analysts on the call.

[Operator Instructions] And today's first question comes from Eric Martinuzzi with Lake Street.

Yes. So congratulations on the raise to the guidance for 2023. Curious to know, is this -- is the upward revision here? You talked about kind of a reiteration of Q3. But are we talking about -- does this give us a view into the kind of mid-quarter where we are for Q3 that there hasn't really been any change in the macro and that the Q4 and that the 2023 uplift is entirely due to the price increases?

Yes. Eric, that's right. The -- we don't really give additional mid-quarter updates, but the fact that we reiterated quarter 3 guidance really tells you that. And the reason we picked and upgraded the $1 million at midpoint was reflecting the price changes.

Okay. All right. And then I want to go into kind of the expectations that were baked in on the increase, first on the B2 side and then on the computer backup side. This is kind of the first time you're going through this on the B2 side with the increase $5 to $6. Did you do any testing as far as a sample set? Or did you run this by larger customers? Or is it all hitting everybody at the same time here?

Yes. Thanks, Eric. This is Gleb. So we have some experience with price increases from the computer backup price increases that we've done in the past. We didn't see very significant levels of churn when we did those in the past. This is the first one that we've ever done in 7 years on B2, and it's on the pay-as-you-go customers only. So customers that are on B2 reserve or customers that are on committed contracts, this doesn't affect them. This does put pay as you go closer to in line with the same price point as the B2 reserve customers are. And so we have some analysis and feedback as part of the fact that we've had B2 reserve now for about a year at this roughly similar price point. And so we've done some modeling around what potential implications are. But obviously, we'll have to watch it, and we'll share more updates around customer reception and impact in the November call.

Okay. And back to the computer backup, when was the last price increase on computer backup?

It was a little over 2 years ago.

And our next question comes from Zach Cummins with B. Riley FBR.

I guess just starting off, can you give us a sense of the timing as of why now for the price increases? Just curious around timing. Was it really just aligned with the product road map? Or just curious of your thoughts around that.

Yes. Thanks, Zach. So it's something that we've been talking about for a while. We've been evaluating different pricing implications, different products and packaging implications. Certainly, we did a price increase on computer backup 2 years ago and one 2 years before that roughly. And we were talking about should we consider doing another one. We decided that we didn't want to just increase prices on computer backup. But one of the things that we did see was extended version history is something that customers liked and was popular. And it was something that we felt all customers should ideally adopt. And so it was a simple -- way to simplify the product experience, which is important to us for customers. And so we've been evaluating different possibilities around that. Similarly, we've been evaluating the investments we've been making in B2 in the platform and the upgrades and in performance and functionality, et cetera, and wanting to continue to do that. And so we look at it, we're still about 1/5 the price point of the traditional cloud providers. So it's still a tremendous value for customers. And the decision to remove fees on egress for all the customers is leaning into our belief that customers want to use the open cloud. And so it was, again, evaluating the different choices and decided to move forward with it in that pricing and packaging way.

Understood. And just my one follow-up is really on the egress fees. Can you clarify the difference of what you're being offered now versus who was getting any sort of egress fees, I guess, wipe the way in your prior approach?

Yes, absolutely. So in the prior approach, we charged $0.01 per gigabyte for egress or for downloads. And for those customers who sent their data out to partners of ours, such as some of the CDN and edge compute providers, we waived egress for those customers for that data transfer. What we're doing now is extending that to customers sending it to anywhere, out to the open internet, out to other providers that we don't partner with, down to their own infrastructure, wherever that data goes for all customers, they get that free egress up to 3x the total amount of data that they start with us on a monthly basis.

Understood. Well, congrats on the raised outlook.

[Operator Instructions] Our next question comes from Nick Mattiacci with Craig-Hallum.

This is Nick on for Chad Ben. So maybe if you could speak to just how you feel about your sales and marketing productivity. I know you guys have invested a lot there since IPO and kind of made some optimization efforts. So maybe if you could kind of talk about that along with your general confidence of being able to win new business, especially in B2 at this narrower price gap to your competition?

Yes. Thanks, Nick. So I would say that we're not -- this updated call is not a focus on the general -- much on the general business. We talked about in the earnings call a couple of weeks ago that we're excited about the upmarket momentum that we're seeing, the traction we're seeing with larger customers, the engagement that we're seeing there. And so we're enthusiastic about that. We also are continuing to view our channel efforts and our self-serve efforts is important. So this change, this shift in terms of the pricing and packaging, I think is something we believe is a good thing for customers. Obviously, nobody wants to pay more on the base functionality. But the fact that it includes free egress, I think, is an important benefit for customers that makes it both simpler for them to understand and adopt it as well as competitively against the traditional cloud providers and provide an additional level of benefit. So I think this is -- from our sales and marketing team, I think this is a positive -- viewed positively in terms of their ability to win customers.

Got it. And then maybe if you could expand on the decision not to increase price on B2 reserve. I know it's relatively newer, but just should we think about the price increase on pay as you go? And could that have any influence on more customers going to purchase through a channel partner and sort of accelerate that mix shift towards more B2 reserve business within B2.

Yes. It's a good question. And I think we believe that there is the possibility that will happen. One of the things that we've certainly heard from some of the sales team up until this point is that the delta in the pricing between the pay-as-you-go offering and the B2 reserve led some customers to choose pay as you go, even if they would have preferred to buy B2 reserve. And so this narrowing of the gap, I think, makes it more friendly for customers because they get to say, "I prefer pay-as-you-go or I prefer a B2 reserve style purchase" and either one makes financial sense for them. So I think as a result of that, we may see more customers shifting to B2 reserve.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Thank you, everybody, for taking the time and jumping on, on short notice, and that concludes our call, and we look forward to talking with you in November. Operator, you may now end the call.

Yes, sir. Thank you. This concludes today's conference, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.