Backblaze, Inc. Q2 FY2023 earnings

Backblaze closed the second quarter of fiscal 2023 with revenue of $24.59 million, up 18.9% from the prior-year quarter, and year-to-date revenue of $47.98 million, up 19.4%. B2 Cloud Storage revenue grew 39% year over year while Computer Backup revenue grew 7%, so the infrastructure-as-a-service line keeps carrying the mix shift. Management credited most of the B2 gain to existing customers storing more data, with new customer additions and B2 Reserve contracts adding to it. Computer Backup's smaller increase came mostly from a price increase that began to take effect in September 2021, plus more licenses per existing customer.

Profitability moved the other way. Gross profit of $12.05 million rose 8.3%, well behind revenue, and gross margin fell 4.8 percentage points to 49.0%. Cost of revenue grew faster than revenue, driven by $1.6 million of added depreciation on infrastructure equipment and $1.3 million of co-location costs tied to new data centers and the expansion of an existing one. The operating loss widened 28.6% to $13.91 million, the net loss widened 23.9% to $14.34 million, and diluted loss per share was $0.41, wider than the prior-year quarter. Operating margin slid 4.3 percentage points to negative 56.6%. Research and development, sales and marketing, and general and administrative expense rose 18%, 18% and 19%, and research and development absorbed $1.1 million of restructuring charges from the January 2023 headcount reduction that removed 5% of the workforce. Adjusted EBITDA was negative $1.8 million compared with negative $1.9 million a year earlier, and non-GAAP net loss was $8.3 million compared with $7.2 million.

Cash remains the pressure point. Operating cash flow was negative $5.24 million for the quarter, up $2.06 million from a year earlier, while the six-month figure was negative $10.43 million, down 27.3%. Capital expenditures were $1.70 million in the quarter, up 72.0%, and $4.72 million year to date, up 214.4%, as the company kept buying infrastructure. Cash, short-term investments and restricted cash, non-current totaled $44.7 million as of June 30, 2023, against $69.7 million as of December 31, 2022. Deferred revenue was $25.80 million, up 1.6% from the prior-year quarter. The revolving credit facility had $7.8 million outstanding at quarter end, leaving $22.2 million available.

Operating metrics were mixed. Annual recurring revenue reached $97.3 million, up 18%, split between B2 at $43.5 million and Computer Backup at $53.8 million. Net revenue retention slipped to 110% from 114%. B2 net revenue retention was 121% against 127%, and Computer Backup was 103% against 107%. Gross customer retention held at 91%, unchanged from the prior-year quarter. Customers generating more than $50,000 in annual recurring revenue rose 54% to 74 from 48, and the company signed its largest computer backup contract ever with a leading global social media company. In July 2023 the dual-class share structure was eliminated when all Class B shares converted into Class A shares.

Guidance for the third quarter of 2023 puts the top line between $25.0 million and $25.4 million, with basic weighted average shares outstanding of 36.5 million to 37.5 million. For the full fiscal year 2023, the top line range of $98 million to $102 million is unchanged, and the adjusted EBITDA margin outlook improved against the prior range.

The risk list is long and mostly unchanged: competition from larger cloud providers, the difficulty of attracting and retaining increasingly large customers, cyberattacks, supply chain disruption, the loss of key employees, and litigation. Management also flagged banking sector disruption, noting that deposits above the $250,000 limit insured by the Federal Deposit Insurance Corporation could be at risk and that access to capital and investment yields could suffer. With depreciation and co-location costs running ahead of revenue, gross margin is the number to watch alongside the pace of additions of larger customers.