Backblaze, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Backblaze provides cloud storage and computer backup services, principally through B2 Cloud Storage and Computer Backup.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $19.5 million | $15.3 million | +27% |
| Gross profit / margin | $9.8 million / 50% | $7.5 million / 49% | Margin +1 percentage point |
| Operating expenses | $21.5 million | $10.3 million | +109% |
| Operating loss | $11.7 million | $2.8 million | Loss widened |
| Net loss | $12.5 million | $3.7 million | Loss widened |
| Net loss per share, basic and diluted | $(0.41) | $(0.20) | |
| Adjusted EBITDA (non-GAAP) | $(3.0) million | $2.1 million | Margin: (15)% vs. 14% |
| Operating cash flow | $(0.9) million | $2.5 million |
B2 Cloud Storage revenue rose 48% to $7.0 million, primarily from greater use by existing customers. Computer Backup revenue grew 18% to $12.3 million, attributed mainly to new customers and a September 2021 price increase. Gross margin improved modestly as revenue grew faster than cost of revenue.
Operating expense growth reflected increased hiring, stock-based compensation, advertising, professional services, insurance and other public-company costs. Stock-based compensation was $3.8 million, versus $0.9 million a year earlier. The filing reports no GAAP profitability and says the company does not expect to be profitable for the foreseeable future.
At March 31, cash and cash equivalents were $19.3 million and short-term investments were $79.8 million, totaling approximately $99.1 million. Investing cash outflow of $81.5 million was driven predominantly by $79.8 million of short-term investment purchases; it should not be read as equivalent operating cash burn. Finance lease and lease-financing liabilities totaled $34.1 million; operating lease liabilities were $5.1 million. No credit-facility borrowings were outstanding, with $9.5 million available at quarter-end. An April amendment increased the facility to $30 million. Management said available liquidity, operating cash and the facility should support working capital and capital spending for at least 12 months.
Operating indicators and material changes
- Company ARR was $79.0 million as of March 31, 2022, up from $61.7 million a year earlier. B2 Cloud Storage ARR was $28.4 million; Computer Backup ARR was $50.6 million.
- Overall net revenue retention was 112% versus 111%; gross customer retention was 91% in both periods. B2 net revenue retention was 129%, down from 133%; Computer Backup was 104% in both periods.
- Operating expenses increased substantially faster than revenue, and adjusted EBITDA shifted from positive to negative.
- The company adopted ASC 842 lease accounting on January 1, 2022, recognizing about $5.2 million of operating lease right-of-use assets and $5.6 million of operating lease liabilities. Comparative 2021 figures were not adjusted.
Outlook, risks and unusual items
- The filing provides no specific quarterly or annual financial guidance. Management expects continued investment in sales and marketing, research and development, personnel and infrastructure, and expects operating expenses to rise in absolute dollars.
- Key risks include sustained losses, intense competition, customer retention and acquisition costs, service outages or data loss, cybersecurity and privacy incidents, and dependence on a limited set of storage and backup offerings.
- Infrastructure supply constraints, hard-drive and semiconductor availability, and vendor concentration may affect costs or service capacity. A data-center provider, Sungard Availability Services, filed for Chapter 11 bankruptcy in April 2022; it continued operating the relevant location at the filing date, but disruption or relocation remains possible.
- The Russia-Ukraine conflict, sanctions, payment restrictions and potential energy or supply-chain cost increases could affect operations. The company waived service charges for Ukraine-based customers through June 1, 2022 and noted payment collection limits in certain regions.
- Disclosure controls were determined ineffective due to previously identified material weaknesses involving accounting review, revenue recognition, equity transactions, sales/VAT taxes, and IT access and segregation of duties. Remediation is underway but was not complete; management performed additional procedures and stated the financial statements fairly present the reported periods.
- Sales tax payable accrual was $1.2 million and VAT accrual was $3.0 million at March 31, 2022. Management did not expect current legal proceedings to have a material adverse effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether revenue and ARR growth, particularly B2 usage growth, continue and translate into durable customer retention and cash generation.
- Whether operating expense growth and stock-based compensation moderate, and whether adjusted EBITDA improves alongside GAAP results.
- Liquidity and infrastructure financing needs, including finance lease commitments, planned infrastructure investment, and use or terms of the amended $30 million credit facility.
- Progress in remediating material weaknesses and the effectiveness of financial reporting controls over a sustained period.
- Any developments affecting the Sungard data-center location, equipment supply, cybersecurity, or customer-data availability.
- The implications of the dual-class share structure: Class B shares carry ten votes per share, compared with one vote for Class A.