Backblaze, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Backblaze provides cloud storage and computer backup services through B2 Cloud Storage (consumption-based) and Computer Backup (subscription-based). This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the same 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $22.1 million | $17.3 million | $62.2 million | $48.8 million |
| Gross profit / margin | $11.2 million / 51% | $8.8 million / 51% | $32.2 million / 52% | $24.5 million / 50% |
| Operating loss | $12.1 million | $4.7 million | $34.6 million | $11.2 million |
| Net loss | $12.8 million | $6.0 million | $36.9 million | $12.1 million |
| Adjusted EBITDA (non-GAAP) | $(1.9) million | $0.8 million | $(6.8) million | $4.4 million |
| Operating cash flow | Not separately presented for the quarter | $(10.6) million | $6.0 million |
- Q3 revenue grew 27%; B2 Cloud Storage revenue rose 48% to $8.8 million and Computer Backup rose 17% to $13.1 million. Nine-month revenue increased 28%.
- Q3 operating expenses rose 73% to $23.3 million, outpacing revenue growth. For the nine months, operating expenses increased 87% to $66.7 million. Management attributed increases principally to hiring, stock-based compensation, advertising, and public-company costs.
- At September 30, cash was $24.8 million, short-term investments $52.6 million, and restricted cash $2.7 million; together these totaled about $80.0 million. Current assets were $84.5 million and current liabilities $54.2 million.
- Total liabilities were $80.4 million. Finance lease liabilities and lease financing obligations totaled $36.8 million; the company also had $4.9 million of operating lease liabilities. The $2.5 million credit-facility borrowing was secured by an equal amount of restricted cash.
- Cash, restricted cash, and restricted cash non-current declined by $77.5 million during the first nine months. Investing cash outflow was $62.0 million, substantially reflecting purchases of short-term investments net of maturities, as well as infrastructure and software spending. Financing cash outflow was $4.9 million, including $11.6 million of lease and financing principal payments.
Changes, operating indicators, and outlook
- Growth was driven by new customers in B2 Cloud Storage and by Computer Backup pricing changes, new customers, and more licenses per existing customer. Nine-month gross margin improved to 52% from 50%, which management attributed to revenue growing faster than infrastructure depreciation costs; Q3 gross margin was unchanged at 51%.
- At September 30, total ARR was $88.0 million, up from $70.8 million a year earlier. Total net revenue retention was 114% versus 110%; gross customer retention was 91% in both periods. B2 ARR was $35.7 million and Computer Backup ARR $52.3 million. The filing cautions that ARR is not a forecast or a guarantee of future revenue.
- Management expects to continue investing in sales and marketing, research and development, infrastructure, and international growth. It believes cash, short-term investments, operating cash flows, and the revolving credit facility will support working capital and capital expenditures for at least 12 months. The filing provides no specific revenue, earnings, or cash-flow guidance.
- Management reported a $1.9 million net operating cash outflow for the first nine months, attributing the deterioration from 2021 partly to higher research and development and sales and marketing spending. The company states it does not expect to be profitable for the foreseeable future.
Risks, contingencies, and unusual items
- Management concluded disclosure controls and procedures were not effective because of previously identified material weaknesses in financial reporting controls, including transaction review, revenue recognition, equity accounting, indirect taxes, and IT access and segregation of duties. Remediation measures are underway, but the weaknesses were not yet fully remediated.
- Investors in the $10.0 million 2021 SAFE demanded a refund in July 2022. They withdrew the demand without prejudice in August; the company stated a loss could not be estimated. No related court action was known to the company.
- A colocation provider, Sungard Availability Services, entered bankruptcy proceedings. The filing says its U.S. colocation and network-service business sale was completed as of November 1, 2022, and normal operations were expected to continue at the relevant data-center location.
- The company waived service charges through December 31, 2022 for customers based in Ukraine and said payment restrictions affected its ability to collect from customers in certain regions, including Russia and Belarus. It also cited potential energy-cost and supply-chain effects from geopolitical tensions, inflation, and COVID-19-related disruption.
- Material risks include competition, customer retention and acquisition costs, service outages or data loss, cybersecurity and privacy incidents, dependence on a limited number of suppliers and data centers, infrastructure capacity and equipment availability, continued losses, and potential need for additional financing.
- Other notable commitments include $12.7 million of operating leases not yet commenced and $6.2 million of non-cancelable purchase commitments payable in 2022 and 2023. The company reported no legal proceedings it believed likely to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue growth and retention continue, especially B2 Cloud Storage growth and Computer Backup expansion.
- Whether operating-expense growth moderates and gross margin improvements translate into better operating results and cash generation.
- Cash consumption, investment maturities, infrastructure spending, lease obligations, and the availability and terms of credit-facility borrowings.
- Progress and testing results for remediation of the material weaknesses in internal controls.
- Developments concerning the withdrawn SAFE investor demand, the colocation-provider transition, and supply-chain, geopolitical, security, and customer-demand risks.