Summary
Backblaze released preliminary third-quarter 2022 results on October 24, 2022, ahead of an investor conference. Management pointed to strength in B2 Cloud Storage, which grew more than 45% year over year, as the main driver. Preliminary revenue is expected between $22.0 million and $22.1 million, versus previous guidance of $21.4 million to $21.8 million. Preliminary adjusted EBITDA margin is expected to be in negative territory for the quarter, a better outcome than the previous guidance range. That outlook covers the third quarter of 2022, not the next quarter or the full fiscal year. Full third-quarter results are scheduled for November 9, 2022.
The GAAP numbers show healthy top-line expansion alongside a much deeper bottom-line loss. Revenue for the quarter ended September 30, 2022 was $22.05 million, up 27.3% from the prior-year quarter. Gross profit was $11.22 million, up 27.4%, and gross margin was 50.9%, flat versus the prior-year quarter. Operating loss was $12.06 million, and that loss widened from the prior-year quarter. Net loss was $12.80 million, a widened loss, and diluted EPS was negative $0.40, a wider loss per share. Operating margin was negative 54.7%, down from the prior-year quarter.
The expense lines explain most of the swing. Research and development expense rose $2.8 million, or 53%, for the quarter, driven by $1.3 million of stock-based compensation, $0.8 million of personnel costs from higher headcount, and $0.5 million of overhead. Sales and marketing expense rose $4.7 million, or 94%, on $2.1 million of personnel costs, $1.0 million of stock-based compensation, $1.0 million of advertising tied mainly to B2 Cloud Storage, and $0.5 million of overhead. General and administrative expense rose $2.3 million, or 74%, including $1.0 million of public company costs. Total stock-based compensation was $4.8 million for the quarter, compared with $1.4 million a year earlier. Adjusted EBITDA was negative $1.9 million, versus positive $841 thousand in the prior-year quarter.
Cash generation turned negative. Operating cash flow for the quarter was negative $2.45 million, down 172.5% from the prior-year quarter, and for the nine months ended September 30, 2022 it was negative $10.64 million, down 278.4% from the prior-year period. Capital expenditures were $2.56 million in the quarter, up 5.8%, while year-to-date capital expenditures of $4.06 million were down 40.9%. Deferred revenue was $25.50 million, up 4.1% from the prior-year quarter. Backblaze ended the period with cash, short-term investments and restricted cash, non-current of $80.0 million, and it states that these resources plus cash from operations and its revolving credit facility should cover working capital and capital expenditure needs for at least the next 12 months.
Business metrics were mixed on retention. Total annual recurring revenue was $88.0 million as of September 30, 2022, compared with $70.8 million a year earlier. B2 Cloud Storage ARR was $35.7 million, compared with $24.6 million, and Computer Backup ARR was $52.3 million, compared with $46.2 million. Total net revenue retention rate was 114%, compared with 110%. B2 Cloud Storage net revenue retention rate slipped to 123% from 131%, while Computer Backup improved to 108% from 101%. Gross customer retention rate was 91% in both periods. Backblaze says it serves more than 500,000 customers in over 175 countries.
The risk list is long and familiar. Backblaze flags market competition, including rivals with greater size, offerings and resources; managing growth; service disruption; loss of availability of customer data; cyberattacks; the ability to attract and retain customers; growth consistent with historical levels; delivering new features on time; material defects or errors in software; supply chain disruption; success with existing and new partnerships; remediation of material weaknesses in internal controls over financial reporting; inflation; the COVID-19 pandemic; and general market, political, economic and business conditions. The preliminary figures also carry execution risk, since closing procedures were not complete at the time of the release and final results could differ.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $22.1M | $20.7M | +6.6% | $17.3M | +27.3% |
| Gross profit | $11.2M | $11.1M | +0.7% | $8.8M | +27.4% |
| Gross margin | 50.9% | 53.8% | -3.0 pp | 50.8% | +0.0 pp |
| Research & development | $8.2M | $8.4M | -3.0% | $5.3M | +52.7% |
| Sales & marketing | $9.7M | $8.4M | +16.2% | $5.0M | +93.6% |
| General & administrative | $5.4M | $5.2M | +4.1% | $3.1M | +73.8% |
| Total operating expenses | $23.3M | $22.0M | +6.0% | $13.5M | +72.8% |
| Operating income (loss) | -$12.1M | -$10.8M | -11.5% | -$4.7M | -158.5% |
| Operating margin | -54.7% | -52.3% | -2.4 pp | -26.9% | -27.7 pp |
| Net income (loss) | -$12.8M | -$11.6M | -10.6% | -$6.0M | -113.6% |
| Net margin | -58.0% | -56.0% | -2.1 pp | -34.6% | -23.4 pp |
| Diluted EPS | -$0.40 | -$0.37 | -$0.03 | -$0.32 | -$0.08 |
| Customers | 500,000 | 500,000 | ±0.0% | — | — |
| Net retention rate | 114.0% | 113.0% | +1.0 pp | — | — |
Risks
The company has a history of cumulative losses and does not expect to be profitable for the foreseeable future. Net loss widened to $36.90 million for the nine months ended September 30, 2022 from $12.10 million in the prior-year period, and the accumulated deficit reached $73.2 million as of September 30, 2022.
The business is substantially dependent on mid-market organizations, which are more vulnerable to market fluctuations, have limited budgets, and are more likely to be significantly affected by economic downturns, requiring more expensive targeted sales campaigns to serve.
Management cites inflation recently hitting a four decade high in the United States and numerous indicators suggesting a potential recession, which could reduce sales, lengthen sales cycles, increase customer churn, and lower demand for cloud storage, which some customers may view as discretionary.
The cloud storage market is intensely competitive with relatively low barriers to entry. The company names Amazon Web Services, Google Cloud Platform, Microsoft Azure, and on-premises offerings from EMC/Dell and NetApp, many of which have greater resources and could apply pricing pressure.
The company has identified material weaknesses in its internal controls over financial reporting (four related to control activities as of December 31, 2019) and failure to remediate could prevent accurate or timely financial reporting and harm investor confidence.
Operations depend on a limited number of third-party data centers. One such vendor, Sungard Availability Services, filed for Chapter 11 bankruptcy in April 2022, and its colocation and network services business (including the company's data center lease) was sold to 365 SG Operating Company LLC in November 2022.
As a pure-play cloud vendor, the company depends on a small number of offerings, B2 Cloud Storage and Computer Backup, which have accounted for substantially all revenue, leaving no meaningful revenue from other sectors to offset a downturn in cloud storage demand.
Success depends on senior management including founders, whose equity awards are largely vested, which may reduce their incentive to remain now that there is a public trading market. Competition for experienced personnel in the San Francisco Bay Area is intense.
A December 2021 industry-wide zero-day Log4j vulnerability led the company to take systems offline briefly to patch, and a late March 2021 misconfigured marketing campaign inadvertently shared certain customer file metadata with Facebook. Breaches could harm reputation and require expensive litigation.
The platform relies on hard drives and semiconductors from limited sources, and prior global disruptions (such as the 2011 Thailand floods and the global chip shortage) have impacted availability. Shortages could increase costs, lease liabilities, and depreciation expense.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Total Customers
Annual Recurring Revenue (B2 Cloud Storage)
Annual Recurring Revenue (Computer Backup)
Annual Recurring Revenue (Total Company)
Net Revenue Retention (B2 Cloud Storage)
Net Revenue Retention (Computer Backup)
Summary, forecast, risks and KPIs are extracted from Backblaze, Inc.'s SEC filings for Q3 FY2022 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.