Backblaze, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Backblaze provides cloud storage and computer-backup services; substantially all revenue is recurring. Amounts below are in U.S. dollars, with financial statement amounts generally in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $17.3 | $13.8 | $48.8 | $39.2 |
| Gross profit / margin | $8.8 / 51% | $6.7 / 49% | $24.5 / 50% | $20.4 / 52% |
| Operating loss | $(4.7) | $(1.1) | $(11.2) | $(1.2) |
| Net loss | $(6.0) | $(1.9) | $(12.1) | $(3.2) |
| Adjusted EBITDA, non-GAAP | $0.8 | $2.8 | $4.4 | $9.1 |
Q3 revenue grew 25% year over year; nine-month revenue grew 24%. B2 Cloud Storage revenue rose 59% in Q3 and 60% year to date, while Computer Backup revenue rose 13% and 12%, respectively. Q3 gross margin improved year over year, but the nine-month margin declined as infrastructure costs grew faster than revenue.
Operating expenses increased substantially: Q3 research and development rose 62%, sales and marketing 70%, and general and administrative 104%. Management attributed the increases chiefly to hiring and, for sales and marketing, higher advertising and stock-based compensation. Net loss per share was $0.32 in Q3 and $0.64 for the nine-month period, versus $0.10 and $0.17, respectively, in 2020.
Cash flow: For the nine months, operating cash flow was $6.0 million, down from $9.6 million; investing cash outflow was $9.9 million, up from $3.9 million; financing cash flow was $2.5 million, compared with a $5.4 million outflow. Capital expenditures were $6.9 million and capitalized software costs were $3.0 million. Cash declined to $4.7 million from $6.1 million at December 31, 2020.
Balance sheet at September 30: Current assets were $8.8 million and current liabilities $40.9 million. Total liabilities were $72.5 million, including $29.2 million of capital lease liabilities and lease financing obligations and $10.4 million of SAFE notes; no revolving-credit borrowings were outstanding. Deferred revenue was $24.5 million. Stockholders’ deficit was $14.9 million.
Changes, outlook and notable items
- Revenue growth reflected new customers in both principal offerings and a Computer Backup price increase effective in Q3. Management reported no material retention impact from the July 2021 price increase.
- Net revenue retention at September 30 was 110% overall (129% for B2 and 103% for Computer Backup), compared with 116% (139% and 109%) a year earlier. Gross customer retention was 91% overall versus 90%.
- ARR was $70.8 million, up from $55.3 million a year earlier. The filing cautions that ARR is a non-GAAP operating metric, not a forecast or guarantee of future revenue.
- Management expects to continue investing in sales and marketing, product development, and infrastructure, and expects public-company costs to add to general and administrative expense. No specific revenue or earnings guidance is provided. Management said cash, operating cash flow, and credit availability were expected to support working capital and capital expenditures for at least 12 months.
- Subsequent to quarter-end, the November 2021 IPO raised approximately $103 million net. The $10 million SAFE notes converted into approximately 725,000 Class A shares. In October, Backblaze entered a $9.5 million revolving facility with City National Bank, maturing in September 2024, and terminated its HomeStreet facility.
- The $2.3 million PPP loan was forgiven in June and recorded as a gain. The company noted that an SBA review could still challenge eligibility or forgiveness; it had not been notified of a review and had recorded no related liability.
- COVID-19 created customer and supply-chain uncertainty. Backblaze said it had not experienced a material adverse impact as of the reporting date, while noting possible delayed customer purchases or usage reductions and risks obtaining infrastructure equipment.
- Disclosure controls were not effective at quarter-end because of four previously identified material weaknesses involving transaction review and reconciliations, revenue recognition, equity accounting, and sales/VAT accounting. Remediation was underway but not complete.
- A March 2021 advertising configuration issue may have exposed certain file metadata of fewer than 2% of customers to Facebook; the company said no customer files, contents, or account information were shared. Management said pending legal matters were not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
Key investor verification points
- Track whether strong B2 growth and customer additions continue, and whether retention and ARR trends stabilize or improve.
- Assess whether revenue growth can outpace infrastructure costs and expanding operating expenses, supporting improved GAAP margins and profitability.
- Review cash generation, capital spending, lease commitments, and the post-IPO use of proceeds; distinguish the September 30 liquidity position from cash raised afterward.
- Monitor remediation and testing of the four material weaknesses and whether disclosure controls become effective.
- Evaluate exposure to hardware and data-center suppliers, service availability and cybersecurity risks, and the unresolved potential for tax or PPP-related liabilities.
- Consider the dual-class voting structure: Class B shares carry ten votes per share, concentrating voting control with pre-IPO holders.