Backblaze Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

Key Takeaways

  • Backblaze beat Q2 guidance with 27% year-over-year revenue growth, 43% growth in B2 Cloud Storage, and delivered its third consecutive adjusted EBITDA profit at a 9% margin.
  • The company raised its full-year guidance, now forecasting $126.5 M–$128.5 M in revenue, a 40% growth rate in B2, and 9%–11% adjusted EBITDA margin for 2024.
  • Backblaze launched B2Live Read, a patent-pending cloud service that lets customers access files while they’re uploading, with early integrations by media leaders like Telestream.
  • Large-customer momentum accelerated, with a 55% increase in customers paying over $50k ARR, including AI rendering firms (saving ~$300k/year), a $250k ARR photo-app deal, and new NFL team partnerships.
  • Management changes include the appointment of Jason Wakeham as CRO to drive upmarket sales and Mark Sweden as incoming CFO, while CFO Frank Patchell retires after leading the finance team through the IPO.
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Earnings Conference Call
Backblaze Q2 2024
00:00 / 00:00

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Operator

Please note, this event is being recorded. I would now turn the conference over to Mimi Khong, Investor Relations. Please go ahead, ma'am.

Mimi Kong
Mimi Kong
Investor Relations at Backblaze

Thank you. Good afternoon, and welcome to Backblaze's Second Quarter 2024 Earnings Call. On the call with me today are Gleb Budman, Co-founder, CEO, and Chairperson of the Board, and Frank Patchell, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new features and offerings, 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 in our quarterly report on Form 10-Q and our other financial filings.

Mimi Kong
Mimi Kong
Investor Relations at Backblaze

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 and gross customer retention rate.

Mimi Kong
Mimi Kong
Investor Relations at Backblaze

Thank you for joining us, and I would now like to turn the call over to Gleb.

Gleb Budman
Gleb Budman
CEO at Backblaze

Thanks, Mimi. Good afternoon, everyone, and thanks for joining us today. We had a great second quarter with strong growth in both revenue and EBITDA, beating our guidance on both. Revenue grew 27%, with 43% growth for B2 Cloud Storage. As you may have heard, various tech companies have talked about a difficult macro environment that was negatively impacting their business. However, we are not seeing that impact on our business. As our numbers show, we beat our Q2 guidance, guided strongly for Q3, and raised guidance for the year. So let's talk about our business now. I'm going to start with three key areas of focus for us. First is our accelerated pace of innovation. In Q2, we continued to deliver new services that win us customers and open new markets with our launch of B2 Live Read. Second, we're growing our team in exciting ways.

Gleb Budman
Gleb Budman
CEO at Backblaze

I'll tell you more about Jason Wakeam, our new Chief Revenue Officer, and Marc Suidan, our new CFO, later in the call. But Jason is well-suited to help us accelerate our upmarket momentum and Marc to drive efficient growth. Finally, we are winning more deals with larger customers. I'll share stories from an AI company, an app developer, and an NFL team to explain how we're succeeding in our move upmarket. But for now, I'll quickly highlight that we grew the number of large customers we serve by 55% year-over-year. Now, let me tell you more about each of these areas of focus. First, I'll begin with innovation. So why is innovation important? It helps us solve our customers' problems, it expands our strategic value to current and future customers, and it differentiates us in the market. In June, we launched B2 Live Read.

Gleb Budman
Gleb Budman
CEO at Backblaze

This patent-pending cloud service lets customers access files while they're still being uploaded. Here's why this is really valuable for customers. Take, for example, a news reporter working in the field. If they want their in-house editors to work on the footage they're recording, like adding graphics or cutting something, the editors either need to be on-site to get direct access to the camera feed so they can edit it live, or they need to pay for some pretty expensive and complicated solutions to enable remote editing. With Live Read, all of that goes away. The footage can start to be uploaded to Backblaze, and producers anywhere in the world can start working with it before the event and upload is complete. No waiting, no complicated hardware or big price tags, no on-site producers necessary. We see a promising opportunity here.

Gleb Budman
Gleb Budman
CEO at Backblaze

We innovated this technology, and we're the only company that offers it. We believe this functionality can help a broad set of customers, but we're initially focusing on media customers such as broadcasters, event producers, and news outlets. We already have several industry leaders in media and entertainment, including Telestream, who are integrating Live Read into their products to bring this benefit to their customers. Whether it's Live Read or event notifications, which we announced last quarter, or the integration we launched last month with Internet2, which gives large institutions easier and faster access to B2 Cloud Storage, or any of the numerous other innovations we've announced recently, we are delivering innovation that drives customer value. Along with enhancing our products and services, we're also strengthening our team to take advantage of these opportunities. I'm excited to welcome Jason Wakeam as our Chief Revenue Officer.

Gleb Budman
Gleb Budman
CEO at Backblaze

Jason has decades of experience building and guiding teams focused on helping customers with their data. He's led direct sales, channels, partnerships, and OEM groups at large tech companies, including HP and Microsoft, and at growth stage companies, Cloudera and SnapLogic. As CRO, he's bringing that experience to drive accelerated growth and upmarket momentum to Backblaze. As we mentioned on the last call, Nilay Patel, who previously served as our Vice President of Sales, will now lead our efforts on our AI opportunities. The great news is that the go-to-market teams are already generating significant momentum, especially when it comes to winning larger customers. At the end of the quarter, the number of customers contributing over $50,000 in ARR now stands at 115, a 55% increase over last year. Here's why these customers choose Backblaze.

Gleb Budman
Gleb Budman
CEO at Backblaze

First, whether you look at our performance or reliability or security or functionality, the strength of our platform and our continued innovation helps us win deals. Second, our support for open cloud solutions enables customers to build their businesses using the cloud services they prefer. And third, with free egress, no delete fees, no complex tiers, and pricing at just 1/5 the cost of traditional clouds, our total cost of ownership lets customers save a tremendous amount with which they can increase their margins or reinvest elsewhere in their business. Let me share a few examples of customers that chose Backblaze this quarter. In the AI space, companies have large volumes of data that they need to be able to park somewhere that is inexpensive, but that data has to be accessible immediately when it's needed.

Gleb Budman
Gleb Budman
CEO at Backblaze

It also needs to be transferable without egress fees to a customer's desired GPU cloud. The characteristics of Backblaze's platform make it ideal for these AI use cases. A good illustration of this from Q2 is a company that uses AI to render 3D landscapes for major gaming franchises. They previously used both AWS and Azure, but migrated all their data to Backblaze to simplify their storage platform, keep their data readily available, and decrease their storage spend by about $300,000 per year. We continue to win developer business also. In Q2, a photo storage and sharing app developer signed a $250,000 ARR deal with us. When this developer is designing products and features, a major consideration is how the data is accessed.

Gleb Budman
Gleb Budman
CEO at Backblaze

Because they were working within AWS's storage tiers, they had to worry about retrieval fees, timing, and egress fees, which meant product decisions were driven by AWS's complicated pricing structure instead of by what customers wanted. With Backblaze's performance and pricing, they can now focus on building features that solve their customers' problems instead of AWS's data retrieval and pricing puzzles. In the media and entertainment space, you may remember that we shared the story of an NFL team that we won last quarter. In Q2, we won another $50,000+ ARR deal with a different championship NFL team. This team had some footage in AWS, which had expensive retrieval fees, and had other footage locked up in an older storage platform that used proprietary formats. They migrated to Backblaze and now have all their data in one easily accessible place that works seamlessly with their tools.

Gleb Budman
Gleb Budman
CEO at Backblaze

Three last items before I hand off the call to Frank. First, I wanted to call out our recent inclusion in the Russell 2000 Index, which is another milestone in the company's growth. Second, as we announced in a press release just before the call, I'm happy to share that Marc Suidan will join Backblaze as our next CFO. Marc brings more than 20 years of financial and strategic leadership as a public company CFO and also as a senior partner at PricewaterhouseCoopers. His wealth of knowledge across tech, from identifying growth opportunities to driving strategic initiatives, is impressive, and we're all excited for Marc to help lead Backblaze forward. He'll be officially starting on August sixteenth. Finally, I want to give a special thanks to Frank ahead of his retirement. He built our finance team, led us through our IPO, and guided us successfully the following 11 quarters.

Gleb Budman
Gleb Budman
CEO at Backblaze

This is his last earnings call with us, and I'm grateful for all that we accomplished together. With that, I'll turn the call over to Frank. Frank?

Frank Patchell
Frank Patchell
CFO at Backblaze

Thank you, Gleb, and thanks to everyone for joining us today. As a reminder, unless otherwise noted, I will be referring to non-GAAP metrics, and the growth rates mentioned are year-over-year. We remain focused on two key metrics, revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q2 revenue totaled $31.3 million, above the high end of our guidance. The beat was driven by a faster than expected ramp-up in storage for new B2 deals signed in quarter one, better than expected renewals and expansions from B2 Reserve, and lower churn for Computer Backup. This represents an increase of 27% year-over-year versus 19% the same period last year. B2 Cloud Storage revenue was $15.4 million, reflecting 43% growth. Computer Backup revenue totaled $15.9 million, reflecting 15% growth.

Frank Patchell
Frank Patchell
CFO at Backblaze

Turning now to our net revenue retention, or NRR, total company NRR increased to 114% from 110% a year ago, with B2 Cloud Storage at 126% and Computer Backup gross customer retention was 90% overall, with 89% for B2 Cloud Storage and 90% for Computer Backup. Moving down the PNL, both adjusted gross margin and GAAP gross margin reached all-time highs at 78% and 55%, respectively, up from 75% and 49% last year. This improvement was driven by the price increase and data center optimization. The GAAP gross margin also benefited from low capital additions, causing nearly identical depreciation expenses to quarter one. This quarter marked our third consecutive adjusted EBITDA profit, this time rising to $2.7 million, or 9% of revenue.

Frank Patchell
Frank Patchell
CFO at Backblaze

Results were a new high and a 16-point improvement over the same period last year. It also was a 1-point beat to the top-end guidance, driven by the higher revenue performance and continued low operating expense growth, principally from prudent headcount management. Turning to the balance sheet, cash, investments, and restricted cash totaled $28.3 million at quarter end. Total cash usage for the first half was $5.1 million, an approximate 80% improvement from last year's first half. We continue to have strong confidence in our forecast for total cash of at least $20 million at year-end. Our improving total cash usage was impacted by a rise in accounts receivable, now at $1.8 million, a $1 million increase since the beginning of the year.

Frank Patchell
Frank Patchell
CFO at Backblaze

This increase reflects our move upmarket, as larger accounts are now billed with payment terms versus immediately collected by credit card. From the beginning of the year, cash was positively impacted by the increase in deferred revenue, stemming largely from computer backup customer renewals with 1- or 2-year terms paid for upfront. In the first half, deferred revenue increased $4 million, with Q1 at $3.2 million and Q2 moderating to $0.8 million. This fluctuation reflects the timing of customer renewals, which occur unevenly across the quarters and were in line with our expectations. Our finance lease liability, including long-term and short-term, decreased by $4.1 million since the beginning of the year. This reduction is due to leases concluding from our pandemic lease buildup three years ago, as well as fewer new leases required for new data center equipment purchases in Q2.

Frank Patchell
Frank Patchell
CFO at Backblaze

Looking ahead, we expect third quarter revenue to be in the range of $32.4 million-$32.8 million. Continuing our trend of increasing Adjusted EBITDA, third quarter margin is expected to be between 9% and 11%. For the year, we are raising our annual guidance and now expect total revenue between $126.5 million and $128.5 million, an increase from our prior guidance of $126 million-$128 million. We continue to see full-year growth for B2 at about 40%. We also now expect Adjusted EBITDA to be in the range of 9%-11%, an improvement over the prior guidance of 8%-10%. To conclude, I'm very pleased with our Q2 performance and our increase in the outlook for the remainder of the year.

Frank Patchell
Frank Patchell
CFO at Backblaze

Before I hand the call back to Gleb, I would like to take a moment to express my thanks. First, I want to thank Gleb and Backblaze for giving me this amazing opportunity. Thanks to our leadership team and board members for being great partners over these past four years, and to the entire Backblaze team for the incredible execution and teamwork. Now I'll turn the call back over to Gleb.

Gleb Budman
Gleb Budman
CEO at Backblaze

Thanks, Frank. I want to take a moment to thank our whole team for working together to build Backblaze and to serve our customers. I also want to thank our investors and customers for putting your trust in us. We're excited to see many of you at the Oppenheimer conference next week and Lake Street Conference in September. With that, I'd like to open it up for questions. Operator?

Operator

Yes, thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you'd like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble the roster. Today's first question comes from Ittai Kidron with Oppenheimer & Co.

Ittai Kidron
Ittai Kidron
Equity Research Analyst at Oppenheimer & Co.

Hey, guys, great quarter, and Frank, congratulations and good luck. It's been a pleasure. So maybe I'll start with you, Frank, then if you can, I appreciate the color around B2. I mean, it's clearly you're seeing extremely good traction over there. Is there a way for you to break down the upside into the components that you mentioned with respect to lower churn, better expansion activity? How do you think the breakdown of the upside, how would you allocate it between the different buckets?

Frank Patchell
Frank Patchell
CFO at Backblaze

Well, we've had as far as our upside in to our guidance, Ittai?

Ittai Kidron
Ittai Kidron
Equity Research Analyst at Oppenheimer & Co.

Yes. Yes.

Frank Patchell
Frank Patchell
CFO at Backblaze

Yes. It actually was strength across a number of areas. The largest was the fact that our churn rate remains very good, and it was above our expectations, our forecast and budget. So I would say that's number one, and that's really referring to Computer Backup. And then, on the B2 side, B2 Reserve, which is our channel product, has had excellent renewal rates, above what we had originally thought, so that's partnering with our resellers. And they also have been renewing for more storage than they previously had. So that had a nice impact as well. And then the third part, yeah, the third part was just how quickly our major accounts are coming onto service.

Frank Patchell
Frank Patchell
CFO at Backblaze

These are from the sales of quarter one, which were largely in the very end of the quarter, and they came onto service very quickly. So, that was a nice, it was nice to see that as well.

Ittai Kidron
Ittai Kidron
Equity Research Analyst at Oppenheimer & Co.

Yeah. Maybe on that last point, Gleb, maybe you can add some color on the move upmarket. How do you think about, you know, when you look at the logos you're adding here now versus a year ago, how would you compare or contrast either by vertical, company size, use case? Help me understand how this push upmarket is translating into a different customer profile for you.

Gleb Budman
Gleb Budman
CEO at Backblaze

Yeah, thanks, Ittai. So I think one way I would say to look at it is, when we went public, we were almost entirely a self-serve driven company with an ARPU that was just slightly over $100, and we now have 115 customers paying us over $50,000 each. So that's a dramatic difference from the way the company looked just a couple years ago. The team that we've assembled, we hired up the mid-market enterprise-focused AE team in the first and second quarters. We expect that team to be fully ramped by the end of this year. And we've got Jason joining us as an experienced CRO to lead that upmarket momentum.

Gleb Budman
Gleb Budman
CEO at Backblaze

So I think we've materially shifted what the company looks like in terms of its customer adoption from the public time and also for the go forward.

Ittai Kidron
Ittai Kidron
Equity Research Analyst at Oppenheimer & Co.

Got it. Maybe last one for me on the B2 Live Read that you've talked about, Gleb, in your prepared remarks. First of all, how do you collect—what's the business model around this? If you could, is this just more compute or more storage that's needed to power this, or there's a special different pricing model for this? And then second, relating to this, you've talked about a few examples of certain verticals or use cases that would be interested. If you had to look at your customer base, how applicable or how broadly applicable is this capability to your base? You know, what percent of your base you think would be highly interested in this?

Gleb Budman
Gleb Budman
CEO at Backblaze

Yeah, we're excited about Live Read. It's, it is new. It's, we expect it to come out of preview mode and into GA by the end of this year. So it's still, it's still quite new, but it's, it serves an important set of customer use cases because it enables anyone who is working with large and growing files to take advantage of it. In terms of the verticals, we're starting with the broadcast and media focus because it's the one that's most closely attributable to, seeing value directly from this functionality. It, it is part of our overall strategy that innovation is a key goal for us, both because it provides value to customers and it differentiates us, and so Live Read is a good example of that. In terms of the business model, we charge for usage of Live Read.

Gleb Budman
Gleb Budman
CEO at Backblaze

So we charge $15 per TB uploaded, and then the storage is at standard B2 list prices. So the nice thing with it is, it provides unique and differentiated value to customers, and at the same time, it's a higher margin offering for Backblaze.

Ittai Kidron
Ittai Kidron
Equity Research Analyst at Oppenheimer & Co.

Got it. Excellent. Thank you, guys. Good luck.

Gleb Budman
Gleb Budman
CEO at Backblaze

Mm-hmm. Thank you.

Frank Patchell
Frank Patchell
CFO at Backblaze

Thank you.

Operator

Thank you. The next question comes from Simon Leopold with Raymond James.

Victor Chiu
Victor Chiu
Equity Research Analyst at Raymond James

Hi, guys. This is Victor Chiu with, for Simon Leopold. I just wanted to follow up on that last question. For the Live Read, how did you guys identify this specific function as an opportunity? Is this something that, you know, existing customers have inquired about, you know, previously or, or, you know, something that you recognized, you know, as a common need, you know, that would be an opportunity for you? I guess, you know, kind of how did you guys identify this opportunity and kind of develop this opportunity?

Gleb Budman
Gleb Budman
CEO at Backblaze

... Yeah, thanks, Victor. I, I'll say that we identified in probably the ideal way that this comes about, right? Which is our, our team talks to customers and prospects all the time. A lot of times when the customers or prospects say something, they'll sometimes they'll ask for a specific feature or functionality, but oftentimes their team is trying to get in tune with what challenges are they struggling with in their businesses, without them necessarily being able to offer a direct solution. And that was the, the case with Live Read.

Gleb Budman
Gleb Budman
CEO at Backblaze

Our team was talking with some customers and understanding what they're struggling with, and they were talking about their challenges with having to wait until files were fully uploaded into the cloud with any solution they were using, to before they could work with them, or having to have on-premises equipment to deal with it. And so as our team started talking about the customer challenge and ways it could potentially be solved, they came up with this innovation of being able to actually enable customers to start leveraging the files while they were growing in the cloud, without waiting for it to be completed. So it was kind of the best approach of coming up with a unique solution.

Victor Chiu
Victor Chiu
Equity Research Analyst at Raymond James

Okay, that's helpful. You know, guys, I know you guys have noted, you know, that Backblaze is fairly resilient to the broader-based macro headwinds that typically have a much more material impact on, on your competitors. You know, does this still hold true for periods that, you know, where we could see, you know, more severe contractions, and especially given the heightened concerns over the last couple of weeks?

Gleb Budman
Gleb Budman
CEO at Backblaze

Yeah, it's a good question, 'cause we've seen other customers and/or other companies talking about the macro challenges and the impact it's had on them. I think for us, we have not seen that as you know, as you saw in the you know, we beat our Q2, we guided strongly for Q3, we guided up for the year. So we're not seeing the same things they're seeing. And I think that what we believe is that the reason for that is our customers are seeing strong product value from the product and platforms we're offering. They also get strong TCO. And so in an environment where they may be concerned about the macro, they're actually potentially looking for ways to do more with less, which we enable them to do.

Gleb Budman
Gleb Budman
CEO at Backblaze

I would say that finally, you know, there are other products and offerings that customers can choose to not invest behind, but as long as they have data, they need to store it, they need to use it. It's not optional. So I think we are more insulated from any potential macro concerns.

Victor Chiu
Victor Chiu
Equity Research Analyst at Raymond James

Okay, that's, that's helpful. You haven't observed any changes or, you know, changes in demand trends so far?

Gleb Budman
Gleb Budman
CEO at Backblaze

I think as you've seen from the results in the guidance, I would say no. And moreover, you know, on—we, we layer on top of that our execution. So in Q2, our sales team actually beat our internal forecasts for closed one deals. And so—and that was, you know, with the still newer AE team and with Jason not even having been on board yet. So we're enthusiastic about being able to leverage that AE team once it's fully ramped with Jason fully on board.

Victor Chiu
Victor Chiu
Equity Research Analyst at Raymond James

Okay. That's great. That's very helpful. Thank you.

Gleb Budman
Gleb Budman
CEO at Backblaze

Mm-hmm.

Operator

Thank you. And the next question comes from Jason Ader with William Blair.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Hey, guys. Thank you. And congrats to you, Frank, for on your retirement. I wanted to talk a little bit about the second half and just kind of the breakdown of the business in the second half. First and foremost, given the 40% B2 guidance that you gave for the year, that imputes a growth rate in the computer backup business of around 13%. And I just wanna make sure my math is correct there. And you had originally said single-digit growth in computer backup this year, so w-what, what changed?

Frank Patchell
Frank Patchell
CFO at Backblaze

Did you, did you say, could you repeat the percentage that you said, Jason?

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Yeah. I think you said in the script that you expect 40% growth in B2, so I just kind of... And then you gave guidance for obviously the full revenue line. So I just imputed computer backup growth in the kind of low double digits versus the single-digit original guidance that you had given for the year.

Frank Patchell
Frank Patchell
CFO at Backblaze

Okay. So the 40% is correct. And then what's happening in the end of the year, remember, is that we lapse our price increases, so that's the kind of difference.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Yeah, but that would—why would that be new? I mean, you're gonna grow faster than you originally guided to. That's what I'm trying to figure out on computer backup.

Frank Patchell
Frank Patchell
CFO at Backblaze

Oh, okay. Yes, that has been happening. The reason for that is that in our budgets and forecasts, we had expected a higher churn rate, given our price increase last year. And remember that we have customers constantly renewing. That's gonna happen over, you know, a two-year period. But what we've actually experienced is a very solid, retention rate above our expectations, and that has caused our growth to be a little bit higher.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Okay. So basically, better renewals, less churn?

Frank Patchell
Frank Patchell
CFO at Backblaze

Yes.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Okay. And then for the Q4, also imputed guidance just based on what you gave for Q3 and for the year. The growth rate for Q4 is gonna be about 17% year-over-year, which is quite a bit below where, you know, you've guided to and where you've been in the first half of the year. I just wanna understand, is there a-- is there something anomalous in the year-over-year comparison? Like, was there anything one time in Q4 of twenty twenty-three, which is making for a tougher comparison?

Gleb Budman
Gleb Budman
CEO at Backblaze

Hey, Jason, this is Gleb. So I think first of all, just the, you know, obviously, we're not guiding Q4 today. In general, we expect B2 in Q3 to grow about 45%.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Okay.

Gleb Budman
Gleb Budman
CEO at Backblaze

And so that's for Q3, and we still feel good about the 40% growth rate for the year for B2. The Q4 is the full lap, the full lapse of the price increase from both B1, both Computer Backup and for B2, and so there's that piece of it. You know, in general, we've had you know, strong Q1, strong Q2, you know, we've got a very strong Q3 and full year. I think there's two things we're also just paying attention to. We have two transitions. The one is the sales transition with Jason Wakeam coming on board, and you know, we're all enthusiastic about him and the ramping of the AEs, but we wanna be cognizant of timing implications of that transition.

Gleb Budman
Gleb Budman
CEO at Backblaze

And then the other is, for some of the larger, pay-as-you-go customers, one of the things we've been doing this year is starting to move some of them to committed contracts. We're doing that because it establishes longer-term relationships with them, more opportunity for longer-term upsells with them, more visibility and line of sight into revenue forecasting, but some of those are also at some discount as we put them on these longer-term committed contracts. So we're just being sensitive to those two transitions happening through the end of this year.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

Gotcha. Okay, so then just Q4, you're not guiding specifically to Q4, but you're trying to be, let's call it conservative, just based on some of these factors.

Gleb Budman
Gleb Budman
CEO at Backblaze

I'd say we're cognizant of them.

Jason Ader
Jason Ader
Partner and Equity Research Analyst at William Blair

All right. Thank you. Good luck, guys.

Gleb Budman
Gleb Budman
CEO at Backblaze

Mm-hmm. Thanks, Jason.

Operator

Thank you. The next question comes from Zach Cummins with B. Riley Securities.

Ethan Widell
Ethan Widell
Senior Research Analyst at B. Riley Securities

Hi, this is Ethan Widell calling in for Zach Cummins. Thanks for taking my questions, and congrats, Frank, on your retirement.

Frank Patchell
Frank Patchell
CFO at Backblaze

Thanks.

Ethan Widell
Ethan Widell
Senior Research Analyst at B. Riley Securities

So you mentioned that you're seeing the same headwinds that are out there for other companies, but are you seeing any incremental changes in churn?

Frank Patchell
Frank Patchell
CFO at Backblaze

Churn is very slightly lower. You can see gross customer retention. but it's above our original budget and above our updated forecast. So, it's there, but we're just very pleased that it's been, you know, a lesser driver for us.

Ethan Widell
Ethan Widell
Senior Research Analyst at B. Riley Securities

Got it. Makes sense. And then, secondly, can you maybe elaborate a little bit on your new CRO hire and maybe how Jason clicks in with your longer-term growth aspirations?

Gleb Budman
Gleb Budman
CEO at Backblaze

Yep, this is Gleb. So I'm very excited about him joining. He brings with him an upmarket set of experiences, which is where we're headed and where we've been headed. So he brings that expertise with him. He also is really unique in having direct sales, channels, partnerships, and OEM experience, so which are the different ways that we go to market. So he brings all of that expertise with him. And the combination of being at larger organizations like HP and Microsoft and seeing how to move large-scale revenue momentum, but also in Cloudera and SnapLogic, being in smaller, more nimble companies and making them getting them ramped quickly, I think are great sets of experiences that he brings to us.

Gleb Budman
Gleb Budman
CEO at Backblaze

He's, he's only been on board for, you know, a brief moment here, but he's already been having an impact, as we've seen in the organization in terms of structuring, planning, and driving that effectiveness. So I'm, I'm really excited about having him on board.

Ethan Widell
Ethan Widell
Senior Research Analyst at B. Riley Securities

Got it. Thank you. Appreciate the color.

Gleb Budman
Gleb Budman
CEO at Backblaze

Operator, do we have any more questions from others?

Operator

Yes. Yes, we do have one from, Jeff Van Rhee with Craig-Hallum Capital Group.

Jeffrey Van Rhee
Jeffrey Van Rhee
Managing Director and Senior Equity Research Analyst at Craig-Hallum Capital Group

Yeah, great. Thanks for taking the questions. Congrats, guys, and great to see the margins ticking up. Just looks great across the board. A couple for me, Gleb. Maybe just start with the AI impacts. Can you give a little better, a little more finely tuned sense of the magnitude of the AI impacts, or trajectory of those impacts? You referenced it as a driver. Just trying to get a sense of magnitude and trend.

Gleb Budman
Gleb Budman
CEO at Backblaze

Yeah. So I think I would say two things. One is that it's obviously a large opportunity in terms of just market size, right? All the AI efforts that are happening out there are driving data creation, data usage, and those are things we fundamentally help with. So I think that that's kind of the first part of it. And the related part of it is that companies are needing to use different GPU clouds for their AI use cases, and we are well positioned to help them with that because you can store the data with us and then use the data in these different GPU clouds.

Gleb Budman
Gleb Budman
CEO at Backblaze

And the example that I shared in the call earlier of the AI customer, you know, they, they are saving $300,000, $300,000 just by switching to us. So that's a huge savings for their AI use cases. But also, they're actually becoming more effective as an organization because they were being limited and constrained by AWS not having enough GPU capacity for their needs at that moment and needing to use another provider. And this allows them to have diversity of GPU providers while keeping their data somewhere that is accessible. So I think we're really well-positioned to help customers with their AI use cases.

Gleb Budman
Gleb Budman
CEO at Backblaze

The other thing that I'll mention is that a lot of the discussion right now that I've seen out in the industry is companies are ramping up CapEx dramatically to service the AI use case and saying it's gonna take years and years potentially to get a return on that. That's not the case for us, because they're spending CapEx on GPU build-outs. We're not a GPU company. We're enabling AI use cases, including how and where they can use those GPU pods. So we're not having the same CapEx requirements, while we do get the benefit of supporting those use cases.

Jeffrey Van Rhee
Jeffrey Van Rhee
Managing Director and Senior Equity Research Analyst at Craig-Hallum Capital Group

Mm-hmm. Great. That's helpful. Back to Jason Wakeam joining the company. You touched on his skills, but I wonder if I could get you to kind of come at it maybe from a different direction, and just talk about what the B2 selling motion is now, and broadly speaking, what you envision it to be in 12 months.

Gleb Budman
Gleb Budman
CEO at Backblaze

Sure. So when we started, when we were going down the path originally, we were almost entirely self-serve. So the selling motion at the time was people finding out about Backblaze through various different channels, showing up to the website and entering an email address, password, clicking Create Account, trying it, entering a credit card, and then starting to use the service. That was.

Jeffrey Van Rhee
Jeffrey Van Rhee
Managing Director and Senior Equity Research Analyst at Craig-Hallum Capital Group

Mm-hmm.

Gleb Budman
Gleb Budman
CEO at Backblaze

how 80% of the business existed at the time of IPO. It's still a significant driver of new business for us today, and we still, and we've made investments and continue to optimize the self-serve part of the go-to-market motion. On top of that, then, we layered a direct selling motion. Direct selling motion is, people coming to the, the company either because they've heard about us through our blog, PR, events, and other, places, or by our outbound SDRs, reaching out to targeted verticals and targeted use case, and, bringing leads into the pipeline that the account executive team then works to close. We then layered on top of that a channel motion, working with resellers, companies like CDW and others, and, in order to drive channel business.

Gleb Budman
Gleb Budman
CEO at Backblaze

And then, most recently, just earlier this year, the last few months ago, we layered on Powered By, which was a new technology that enabled us to make ourselves part of other people's offerings. So we talked about companies, edge compute companies, media and transcoding companies, and cloud service providers that are starting to integrate B2 into their products as part of their go-to-market. So those are the ways that we've been going to market in the layering, and I believe that Jason will continue to drive all of those sales-led ones, not the self-serve, but the sales-led ones. But the increasing efficiency and effectiveness and success of those motions, as well as moving up into the larger sizes of the organizations that are taking us up on those motions.

Jeffrey Van Rhee
Jeffrey Van Rhee
Managing Director and Senior Equity Research Analyst at Craig-Hallum Capital Group

Got it. Very helpful. Thanks so much.

Gleb Budman
Gleb Budman
CEO at Backblaze

Mm-hmm. Thank you, Jeff.

Operator

Thank you. The next question comes from Mark Hagen with Lake Street Capital Markets.

Mark Hagen
Managing Director and Institutional Equities at Lake Street Capital Markets

Hi, guys. Congratulations, Frank, and for Eric. So just was wondering, looking at the 2025, we're kind of looking or expecting sort of cash flow positive mid-2025, and then with the addition of Jason and any changes that may happen there or new sales hires. I'm just wondering if there's any change to that or if that's still kind of your thoughts there.

Frank Patchell
Frank Patchell
CFO at Backblaze

Yeah, as far as our cash, so we're really pleased, of course, that we have an 80% reduction in total cash usage for the first half of this year versus the first half of last year. We continue to project year-end cash balance at $20 million, and that we will be total cash usage break even by the middle of 2025 or the second half of 2025. So... And remember that we define total cash and total cash usage, it's cash from operations, financing, and investing. But shortly thereafter, in 2025, we also expect to be free cash flow positive as well.

Mark Hagen
Managing Director and Institutional Equities at Lake Street Capital Markets

Got it. Well, thank you. Appreciate it.

Operator

Thank you. And if that does conclude the question and answer session, I would like to return the floor to Gleb Budman for any closing comments.

Gleb Budman
Gleb Budman
CEO at Backblaze

So I wanna thank, Frank, for helping us, for these past years, and I wanna thank all of you for joining us on this call. I also wanna send a big thank you to everybody at Backblaze for the work, that they put into building the company and supporting us, in supporting our customers. And finally, to thank our investors and customers for putting your trust into us. We are excited to also see many of you at the Oppenheimer conference next week and Lake Street Conference in September. So with that, I'd like to, say thank you, operator, and we can close the call.

Operator

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

Executives
    • Frank Patchell
      Frank Patchell
      CFO
    • Gleb Budman
      Gleb Budman
      CEO
    • Mimi Kong
      Mimi Kong
      Investor Relations
Analysts
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