Backblaze, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Backblaze provides cloud storage and computer-backup services through B2 Cloud Storage and Computer Backup.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $24.6 million | $20.7 million | $48.0 million | $40.2 million |
| Gross profit / margin | $12.1 million / 49% | $11.1 million / 54% | $23.0 million / 48% | $20.9 million / 52% |
| Operating loss | $13.9 million | $10.8 million | $30.7 million | $22.5 million |
| Net loss | $14.3 million | $11.6 million | $31.5 million | $24.1 million |
| Adjusted EBITDA loss | $1.8 million | $1.9 million | $4.7 million | $4.9 million |
Q2 revenue grew 19% year over year: B2 Cloud Storage increased 39% to $10.8 million, while Computer Backup rose 7% to $13.8 million. Management attributed B2 growth mainly to greater existing-customer storage, plus new customers and B2 Reserve; Computer Backup growth was largely attributed to prior price increases. Gross margin fell five percentage points in Q2 as infrastructure and colocation costs grew faster than revenue. Q2 net loss per share was $0.41, versus $0.37.
Operating cash flow: Cash used in operations was $10.4 million in the first half, versus $8.2 million a year earlier. Investing activities provided $17.0 million, chiefly reflecting $38.5 million of investment maturities, partly offset by $7.1 million of capitalized software development and $4.7 million of capital expenditures. Financing activities used $3.9 million, including $9.7 million of finance-lease and lease-financing principal payments.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $5.9 million and short-term investments were $30.9 million, compared with $6.7 million and $58.7 million at year-end 2022. Restricted cash was $7.8 million, pledged against an equal credit-facility borrowing. Current assets were $44.7 million and current liabilities $51.0 million. The company reported $7.8 million of long-term credit-facility debt, plus $32.8 million of current and non-current finance-lease liabilities and lease-financing obligations. The $30 million revolving facility had $22.2 million available and matures in September 2024; the outstanding balance carried a 7.1% rate at quarter-end. Management said available cash, investments, operating cash flow and the facility should cover working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook and risks
- Revenue growth remained 19% for both the quarter and first half, but gross margins narrowed and GAAP losses widened. First-half operating cash use also increased.
- June 30 ARR was $97.3 million, versus $82.7 million a year earlier. Total net revenue retention was 110%, down from 114%; B2 Cloud Storage NRR was 121% versus 127%, and Computer Backup NRR was 103% versus 107%. Total gross customer retention remained 91%.
- A workforce-reduction program initiated in January was substantially completed; first-half charges were $3.6 million, with $0.6 million of related liabilities remaining at June 30. Management described the measures as intended to improve cost efficiency and align strategic initiatives.
- No specific quarterly or annual financial guidance is provided in the supplied filing text. Management expects continued investment in product development, sales and marketing, infrastructure, and international growth; it does not expect profitability in the foreseeable future.
- In July, all outstanding Class B shares converted into Class A shares, eliminating the dual-class voting structure. Also after quarter-end, the company signed an office lease with approximately $8.3 million of commitments through 2029 and approved approximately 3.0 million RSUs, with expected stock-based compensation of about $14.3 million over vesting periods.
- Disclosure controls were deemed ineffective because of two outstanding material weaknesses: insufficient timely review of significant accounting transactions and reconciliations, and inadequate controls over certain equity transactions. Management reported remediation work underway; the weaknesses were not yet considered remediated. Management said additional analyses and procedures supported fair presentation of the filed financial statements.
- Key disclosed risks include continuing losses, intense competition, customer retention and usage trends, service outages or cyber incidents, dependence on data-center and hardware suppliers, banking and funding access, and execution of internal-control remediation. The filing reports no current legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether B2 growth and ARR gains can continue as NRR declines in both product lines.
- Whether infrastructure-cost growth moderates enough to stabilize or improve gross margin.
- Cash burn, unrestricted liquidity, finance-lease obligations, and availability and terms of the revolving facility.
- Progress and tested effectiveness of remediation for the two material weaknesses.
- The dilution and expense effects of the expanded equity plan and post-quarter RSU awards.