Backblaze, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2023, compared with the same periods in 2022. Backblaze provides cloud storage and computer backup services through B2 Cloud Storage and Computer Backup. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $25.3 | $22.1 | $73.3 | $62.2 |
| Gross profit / margin | $11.8 / 46% | $11.2 / 51% | $34.8 / 47% | $32.2 / 52% |
| Operating loss | $(15.6) | $(12.1) | $(46.3) | $(34.6) |
| Net loss | $(16.1) | $(12.8) | $(47.5) | $(36.9) |
| Adjusted EBITDA (non-GAAP) | $(0.8) | $(1.9) | $(5.5) | $(6.8) |
- Q3 revenue increased 15%; nine-month revenue increased 18%. B2 Cloud Storage grew 31% in Q3 and 37% year to date; Computer Backup grew 4% and 6%, respectively.
- Gross margin declined as cost of revenue grew faster than sales, reflecting new and expanded data centers, infrastructure equipment, and related depreciation. Adjusted gross margin was 74% in Q3 and for the nine-month period, versus 76% in both prior-year periods.
- Operating expenses rose 17% in Q3 and 21% for the nine-month period. Stock-based compensation expense was $8.0 million in Q3 and $18.7 million year to date, compared with $4.8 million and $13.0 million.
- Nine-month operating cash outflow was $10.6 million, roughly flat with 2022. Investing activities provided $22.1 million, primarily reflecting maturities of short-term investments; capitalized internal-use software costs were $11.1 million and property and equipment purchases were $5.1 million. Financing activities used $7.6 million.
- At September 30, cash and cash equivalents were $9.0 million and short-term investments were $20.7 million. Restricted cash was $6.1 million and collateralized the same amount outstanding under the revolving credit facility; the company reported $23.9 million of remaining borrowing availability. The facility matures in September 2024 and its rate was 7.4% at quarter-end.
- Finance lease and lease-financing liabilities totaled $33.3 million; operating lease liabilities totaled approximately $10.5 million. Current assets were $44.9 million and current liabilities were $61.0 million. Stockholders’ equity was $47.4 million.
- Management said cash, cash equivalents and short-term investments, together with operating cash and the revolving facility, should fund working capital and capital expenditure needs for at least 12 months. It also said additional financing may be needed to support growth and infrastructure investment.
Changes, outlook, and risks
- Retention and recurring revenue: Total ARR was $100.9 million, up from $88.0 million a year earlier. Total net revenue retention was 108%, down from 115%; gross customer retention was 91%, unchanged. B2 Cloud Storage ARR was $46.8 million and Computer Backup ARR was $54.1 million.
- Pricing and investment outlook: Price increases for both core offerings took effect October 3, 2023, phased by plan and renewal timing. Management expects a favorable revenue and gross-margin impact over the next 12 months and does not expect a significant cost change solely from the increases. It also expects infrastructure equipment purchases of a similar magnitude over the next 12 months. These are expectations, not formal financial guidance.
- Restructuring: Workforce reductions initiated in January were substantially completed by June. Nine-month costs were $3.6 million; $12,000 remained accrued at September 30 and was expected to be paid in Q4.
- Internal controls: Disclosure controls were deemed ineffective due to three outstanding material weaknesses: review of significant accounting transactions and reconciliations, accounting for certain equity transactions, and controls over the going-concern assessment. Management described remediation efforts but stated the weaknesses were not yet fully remediated. Management nevertheless concluded the financial statements fairly present the company’s financial position and results.
- Other notable items and risks: Class B shares converted into Class A shares in July, ending the dual-class structure. The filing identifies competition, customer churn and price sensitivity, cybersecurity or service disruptions, dependence on data-center and hard-drive suppliers, financing access, and execution of control remediation as material risks. No current legal proceeding was identified as likely to have a material adverse effect; the filing reports a $1.0 million accrued VAT liability.
Important facts for investors to verify
- Whether the October price increases improve revenue and margins without weakening retention, usage, or new-customer growth.
- Whether gross-margin pressure and infrastructure spending moderate as capacity expands, and whether cash burn remains consistent with management’s liquidity assessment.
- The timing and terms of any refinancing or additional financing, given the September 2024 facility maturity and the need to fund continued investment.
- Progress in testing and remediating all three material weaknesses, particularly the going-concern assessment controls.
- Trends in B2 and Computer Backup retention, ARR, and customer expansion; ARR is a company-defined metric and is not a revenue forecast.