Backblaze, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Backblaze operates a single-segment cloud storage platform, primarily through B2 Cloud Storage and Computer Backup.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $23.4 million | $19.5 million |
| Gross profit / gross margin | $11.0 million / 47% | $9.8 million / 50% |
| Operating loss | $16.8 million | $11.7 million |
| Net loss | $17.1 million | $12.5 million |
| Net loss per share, diluted | $0.50 | $0.41 |
| Adjusted EBITDA / margin | $(2.9) million / (12)% | $(3.0) million / (15)% |
| Operating cash flow | $(5.2) million | $(0.9) million |
- Revenue grew 20% year over year. B2 Cloud Storage revenue rose 42% to $10.0 million; Computer Backup rose 8% to $13.4 million.
- Gross margin declined three percentage points as cost of revenue grew 28%, driven mainly by colocation and data-center costs and infrastructure depreciation.
- Operating expenses increased 29% to $27.8 million. R&D and sales and marketing rose 33% and 32%, respectively; both included restructuring costs.
- Cash, cash equivalents, and short-term investments totaled $49.6 million at quarter end, excluding $7.3 million of restricted cash pledged against the credit facility. Total cash and restricted cash was $11.5 million.
- The company had $7.3 million outstanding on its $30 million revolving facility, with $22.7 million available; the balance was due in September 2024 and bore 6.6% interest at quarter end. Finance lease and lease-financing liabilities totaled $31.7 million.
- Investing activities provided $7.3 million, primarily reflecting net maturities of short-term investments; cash capital expenditures were $3.0 million and capitalized software costs were $3.4 million.
Material changes and operating metrics
- Total ARR increased to $95.9 million from $79.0 million a year earlier. Company net revenue retention was 111% versus 113%; gross customer retention was 91% in both periods.
- B2 Cloud Storage ARR was $41.7 million, with 120% NRR; Computer Backup ARR was $54.2 million, with 106% NRR.
- Management attributed B2 growth mainly to greater usage by existing customers and new customers. Computer Backup growth reflected pricing, additional licenses per customer, and new customers.
- Share-based compensation rose to $5.8 million from $3.8 million. Class A shares outstanding increased while Class B shares declined; the company has a dual-class voting structure.
Outlook, risks, and unusual items
- No specific quarterly or full-year financial guidance is provided in the supplied filing text. Management expects cash, investments, operating cash flows, and the revolving facility to support working capital and capital expenditures for at least 12 months, while noting future financing needs could arise.
- Management expects continued investment in R&D, sales and marketing, and infrastructure; it also cautions that the company does not expect to be profitable for the foreseeable future.
- A workforce reduction initiated in Q1 is expected to finish in the first half of 2023. Estimated total costs are $3.6–$4.0 million; $2.46 million was incurred in Q1.
- The company settled a dispute with SAFE investors in February 2023 for $1.5 million, including $0.3 million paid to a holder that owned more than 5% of the company.
- Disclosure controls were not effective at quarter end because two previously identified material weaknesses remained: insufficient review of significant accounting transactions and reconciliations, and inadequate controls over certain equity transactions. Management reported remediation work in progress and additional review procedures for the financial statements.
- Key risks include persistent losses and cash use, competition, service outages or data loss, cybersecurity and privacy events, dependence on a limited number of offerings and suppliers, banking-system disruption, and execution of growth and cost-control plans. Management reported no current legal proceeding likely to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and ARR expansion continue, particularly as B2 NRR declined year over year.
- Whether gross margins stabilize as data-center and infrastructure costs rise.
- Cash consumption, investment balances, restricted collateral, lease obligations, and use of the revolving facility.
- Actual restructuring costs and whether expected savings follow the workforce reduction.
- Progress in remediating the material weaknesses and achieving effective financial reporting controls.
- Potential dilution and voting-control implications of equity awards and the dual-class share structure.