Good. Okay, I think we're ready to get started. Hopefully, everyone's enjoying their lunch. Thank you for coming to the Citizens Technology Conference. For this session, we have Backblaze. I'm honored to have Marc Suidan, the CFO, join me on stage. Marc, great to have you here for the second year in a row now.
Thank you, Russ.
Okay. Marc, the company just reported fourth quarter results about a week ago, and I think you've been with the firm now for about just over a year and a half. To kick it off, just wanted to provide you an opportunity to sort of reflect on the changes and progress that have been made, maybe lessons that have been learned. A lot has happened from a product go-to-market and even guidance perspective. That'll hopefully illuminate this story for someone who may be newer to Backblaze.
Thank you, Russ. That's a good broad question since I've joined. You know, Backblaze IPO'd in 2021, and it, you know, it was same story as a lot of companies in 2021, "Let's invest, let's grow." At that time, 2021, it was like burn capital, right? When I arrived, it was still in free cash flow burning mode. We said for our B2 Cloud Storage, which is the growth part of our business, that now forms the majority of the business, we need to accelerate the revenue growth, which had been growing for the whole time, but just decelerating and hit a low of 21% in Q4 of 2024. At that time, our free cash flow margin was -13%.
Fast-forward a year, we said, "We're gonna fix the revenue growth." We took it from 21%-24%, and the free cash flow margin went from -13% to +11%. As I reflect on that, you know, what I would say is, and we achieved some good strides on the go-to-market side to drive more sales productivity, we wanted to do more, and we're currently in the process of implementing and doing more changes, and we're excited about the opportunity ahead. We did that while fixing up our free cash flow side. If you look at, you know, the Rule of 40 score, it went from 9% - 35% in a year, which is phenomenal, but we haven't fixed where we wanna go through yet. We really wanna get to a much better score.
You know, we believe B2 should be growing faster than what it is now, and have healthy economics.
Okay, great. appreciate the overview, and we'll touch on a number of those items, later on in the session. Just wanna touch on new products because since you've reported, you've highlighted that you've had some new developments on the product side for the computer backup product, which I know is not necessarily the focus, which is B2, but you brought about the Advanced Installer, and the Command Line Interface. Could you talk a little bit about what prompted those developments, and how can those new updates and other initiatives help bolster that business?
Yeah. On the computer backup side, it was historically a very consumer-oriented side of the business. And as we've been wanting to appeal for a while to businesses. To appeal for businesses, it's really small businesses, the biggest thing you gotta enable is MSPs. A lot of what we just released makes it more attractive for managed service providers that manage the typical kind of customer profile we got on the business side. Right now, roughly speaking, that computer backup is, like, 75% consumer, 25% business, but that business is on average businesses with 6-7 licenses. They're gonna be served by an MSP.
We just released something that's a lot more attractive for MSPs to manage here, 'cause our aim with the computer backup is just to stabilize the license count and the customer count. We, I mean, we have a churn of about 10% a year, but we're adding about 7% customers with a net of -3%. We'd like to just get that to 0% 'cause it's a very healthy cash cow.
Right.
We want it to be stable as we continue getting B2 into strong growth mode.
That's super helpful color in terms of just driving up that MSP motion for the backup side. Now just shifting to sort of the focus areas, kind of the big ticket, more exciting items. You've talked about on the earnings call your latest announcements with B2 Neo, which enables you to white-label your B2 service with the Neocloud providers. That led to your largest TCV deal to date with the company. I think it's important to note in that example that Neocloud actually had a storage solution in place. Let's talk a little bit about what do you think was the driver behind that decision for them to go with Backblaze?
Yeah, I mean, when you step back and you think about the term Neocloud altogether is a fairly new one in the market. It's a booming market. The report we reference has 200 Neoclouds. It's a market that's expected to grow 46% a year to something like $230 billion in 5 years. The portion of storage for Neoclouds is typically around 6%. The kind of storage we do specifically, right? It's not the flash part, it's the one we do. That translates to a $14 billion opportunity. These 200 or so companies, a lot of them have some kind of storage.
Right.
Typically, it's an open source solution that isn't as reliable for customers with limited functionality and features. There's no way the 200 are gonna be able to innovate at our pace and velocity for what we've been doing for a very long time with our track record of eleven nines of durability and performance levels. We're finding them very open to have that discussion, and that's why we said we already have numerous eoclouds already signed up, in addition to this really large one we announced. You know, we're having pipeline discussions with at least half a dozen. While these discussions take a bit longer 'cause there's a lot of co-solutioning.
Mm-hmm.
'cause they're thinking about how does this replace what they have. When we say it's what they have, what they have may be in-source or maybe also with a third-party provider as well. We're finding it to be opportunity rich for us.
That's great. As you think about those 200 and that $14 billion TAM, what do you see as the lowest hanging fruit or maybe the ones that you could close the fastest? Is it someone who already has a storage solution in place and they're having challenges or they're experiencing the pain, or is it the ones who don't have that yet? Or is it that they all are already doing something there?
Yeah. It's a mix, by the way. I mean, some of them are hearing pain from their customers 'cause they use a solution that has its limitation in multi-tenancy. Others are using flash memory to charge hard drive equivalent prices when they could be charging way more for that memory 'cause the way it works is, if you're about to run a compute workload, the data's gotta come sit in that flash, NAND memory right there. When you're not running that workload, you want it to sit in a platform like ours. The economics are like almost 10x one off each other.
A lot of them not having access to more flash are like, "Jeez, we'd love to get rid and put it with you guys, so we could go charge a lot more for the data." There's a lot of really big opportunities, whatever way you spin it. Some are having the technical limitations, some see the economic opportunities. A lot of them, it's time to market. They're currently in a supply-constrained market, so they know that the faster they could grow, the more they establish their market presence and share, until this window of being in a supply-constrained world potentially flips to, you know, more normal demand-supply balance.
Right. Let's talk about that, the largest TCV deal. You mentioned that it's gonna bring 300 basis points of growth to fiscal year 2027, and that's just due to, you know, you have to ramp up on some development work. Can you double-click a bit on what kind of needs to happen with that customer, in order for that revenue to ramp?
I mean, this is a very large company, right? They spent a lot of time doing very deep diligence with us on what's required to make sure that this is seamless to their customer set. They and our engineering team really like the collaboration of working together. I would say pretty much, while we delivered a lot of the, call it, the eleven-nine durability, the performance, there were things they're looking for that just makes it a lot more relevant to them to be able to OEM this to end customers. If you think about, like, everything from billing capabilities to limit ratings, by customer sets and manageability. It's these kinds of things versus, like, kinda core performance.
Whatever we do here, I'd say, it's really not bespoke just for this customer. It would be very kind of well-purposed to serve all the other N eoclouds that we could go service afterwards.
That's great. You took my next question right with that answer right there. That's super helpful. This work will be beneficial to all the other customers, so perhaps shortening the time to revenue for future large deals if it's applicable.
Absolutely.
Just other than sort of the traction you've had with the large deals and multiple other Neoclouds being signed up, what do you think will be sort of another proof, earlier proof point that this is becoming sort of a repeatable motion? Would it be, you know, further POCs in terms of the pipeline development process or the sales cycle duration kind of compressing, or is it, you know, the reference ability from the largest Neocloud to others within that community to sort of benefit the sales motion?
Yeah, I mean, Russ, I would think it's gonna be a lot of those plus the, I'll call it, the NRR within that particular customer, because a lot of these customers are offering different kinds of storage solutions in different markets to a lot of customers. The more they gain confidence, frankly, the lowest hanging fruit is them expanding more, 'cause imagine, like, empowering their sales force where they get incented and they know, "Wow, it worked for that customer of ours. Let's go get it to another customer." To me, the real unlock happens when these large, you know, Neocloud providers, their field sales start feeling like they got something really good here. That takes time to trust, right? 'Cause first we're winning over the product management team, then we gotta win over the engineering team.
We gotta launch the first solution. They see how that solution works, and then within their sales force, they start getting the right training and incentive and enablement to start rolling out more. I would tell you that could be, just by itself, very powerful 'cause we already have numerous ones on board. When they start seeing that kind of momentum, I think you could see some really healthy expansions just within them.
That makes a lot of sense. If we were to, like, play this out and, you know, you've noted that this kind of business can carry lower gross margin, but at the same time, with lower OpEx, so yielding similar bottom line economics. Would there be a point at where you reach a certain scale in this business where you may want to incentivize the sales force to go towards B2, or is that sort of, you know, a good problem to have, so to speak, that you're not thinking about now?
You mean incentivize your sales force?
Your sales force too, because of just.
Interesting.
... the model, the model impacts.
Interesting. Yeah, yeah. Well, look, I mean, I think one thing we really like about B2 as it is today is the diversity of streams, right? First of all, if you think workloads, we get customers that use us for backup and archiving.
Mm-hmm.
We get customers that use us for hot, live storage and streaming solutions. We get customers who use us to aggregate data to run training and inference models. It's diversified from that lens. If you think about the customer cohorts, we have 119,000 self-serve that come in through the PLG, right? They're just through our viral marketing, they're showing up. There's just zero inertia there.
Right.
It's a net of 1,000 per month that sign up and start using us. We showed our numbers of 50k plus customers, which generated 73% more ARR in that cohort year-over-year. Frankly, I love the diversity, right? I'm not sure I would yet move away from that model and say, "Hey, let's just go purely on that one." You also have to see how the industry evolves. That's what I said earlier. I mean, just going back a few years ago, we said Neocloud, you'd be like, "Who's Neocloud?" Now you run on 101. I mean, boy, they're all advertising, right? I mean, they're all over to 101.
You could feel like you're just in the heat of it now, where a lot of them are in hyper growth mode.
Sure. That makes a ton of sense to maintain that optionality at this early stage. Shifting a bit to the other B2 based offerings. You know, you talked about B2 Overdrive, I wanted to touch on that. It's the highly performant version of your product, specifically for AI and ML use cases. If you think about between Overdrive and Neo, which one sort of excites you more in terms of the TAM or the potential, and which one is perhaps most differentiated?
Yeah. Well, 'cause Neo is a business model.
Right.
... and they could be selling Overdrive or B2 standard. What's interesting is, I mean, Backblaze was a company who did start up in the backup space, and a lot of people have trouble understanding that B2 is hot storage, right? I mean, there's different kinds of hot storage out there. Sometimes there's benefits to having a brand recognition, but it's really hard to reposition your brand-
Right.
... to something new. Everybody knew Backblaze for backup, and you're talking about decision makers in engineering org. I mean, a lot of them know Backblaze, but they all know it as a backup solution. When we launched Overdrive, I would tell you the single biggest benefit of Overdrive, 'cause Overdrive could go up to, you know, 1,000 GB per second of throughput, right? There are companies, including Neocloud providers out there that would list their blistering fast speed of 25 GB per second. What... When we say it's like real Overdrive and it's performant, that's what we mean by it, right? It is really. If others consider 25 GB, you know, blistering fast, well, our B2 standard is 80 GB.
It's interesting that it does meet the needs for most, but I would tell you, launching Overdrive, the single biggest benefit has been the almost like the re-anchoring of the brand as a performant platform that's actually helped core B2 more than anything else, which I think is a big benefit, right? The other things we did last year that helped with that re-anchoring is we started publishing. We've always published statistics around hard drive failures.
Right.
Well, now we got into performance stats and network stats, which if you're, if you're a decision maker thinking of, you know, where do I go? Where is there better network statistics or performance statistics between different cloud providers? That I think frankly is a lot more relevant for where we're going and you and differentiate in the market. Once again, it's another push to say like, "We're here." It's very well known 'cause that drives statistics. I mean, the amount of attention that gets is incredible. It's got a huge following. Those, while early days are getting a lot of recognition. That goes back to that, just that re-anchoring, which helps with B2 standard more than anything else.
The third one I would add, which is interesting, is Flamethrower. Hope you like all our naming conventions, right? We just launched that, you know, two weeks ago.
Right.
That's a startup credit program. Once again, it's all about getting stuff out there without heavy customer acquisition cost, which really helps, right? In that whole sales and marketing, because it is a big part of our spend. About a third of our spend is a % of revenue, the more you make that efficient, the better. Flamethrower is actually off to a pretty good start. I mean, just within 2 weeks, getting a lot of good press, a lot of good recognition. We're getting incubators and VCs reaching out and lots of startups applying. I think it's just about getting the message out so we could get a lot more virality going around the consumption of the core platform.
That makes sense. That's a great point on the anchoring of B2 there. Appreciate that. I don't wanna hog the mic too much, so I'll open it up to any Q&A from the audience, but otherwise I could proceed on any questions at this time. All right, we'll keep going. Shifting the gears a little to the go-to-market. You've talked about the go-to-market transformation. In 2024 you had $15 million in pipeline. 2025 got to $30 million, and the goal is again to double that to $60 million in 2026. As we sort of think about that and what you guys are doing from a go-to-market perspective, can you help characterize like that, is that your base case scenario getting to that?
Is it something that, you know, it's a reasonable planning assumption, but still execution in the year ahead, or it's more of, you know, something that you and Gleb are viewing as an aspirational goal?
Definitely hope it's not just aspirational. I mean, big picture, if we deliver $60 million of pipeline with a reasonable industry standard conversion rate, of which we're very comfortable at today and even beating, that would fuel the part of the new direct sales logo and expansion that gets us to that 30% and above growth rate relative to where we are today, right?
Right.
As the business grows, you're gonna need more pipeline obviously. Relative to where we are today. Once we hit that run rate, you know, you know, and the way to think about the sales cycle is you generate the pipeline, the next quarter, you get the booking, the next quarter, you get the revenue. Our business model is such that it would be like two quarters later, you would start getting that benefit. We're not committing for a timeline of when we'll get there, but I would tell you, this is pretty much what we're tracking daily, right?
Mm-hmm.
The when we want to get there, we want to get there fast. You know, it is new muscle building because the history of the company, is one that was, remember, consumer...
Right.
...for backup, computer backup, that then went self-serve PLG, did not spend on any marketing, it was just attracting people to its website. This B2B, sales and marketing, where you're outbounding and you know, getting customers to get interested when they don't even know who you are is a new muscle, right? You could see who's successful at it or not. I think we've done some great strides, right? That's why we shared those numbers.
Right.
...where we did double pipeline and we did double bookings. We effectively gotta double it from where it is to get to that 30% mark, which is where we want to get to and above.
Great. You know, you've talked about the large deals, as you've changed your financial guidance, those deals that are $500K in ARR plus, they're a little bit longer sales cycle and harder to predict, so they've been sort of omitted from your forward outlook. My question is, what's the biggest lever from a go-to-market perspective to help compress those sales cycles? Is it something that's a function of just as you go up market, it becomes more complex and it's more on the customer, or is it more on Backblaze and the sales team to do it, or a combination of both?
Yeah. I mean, what I would say, Russ, is once you get into that size of... There's gonna be a lot more, the contracting effort is bigger. The security review is bigger. You run POCs, you run testing. I don't think there's an issue with the sales cycle. I just think it's the nature of that kind of sales motion. While we'd love to accelerate it, I wouldn't say... That's not gonna be our immediate lever, right? Our immediate lever is gonna be, one, you close two of those in a quarter, you may not close any of the following quarters. From a predictability standpoint, that's why we said, "Okay, let's just exclude it from our guide," right?
'Cause we didn't wanna get into the business of, "Okay, we think it's gonna come in, let's bet on it, give a guide on that, and then miss that guide." We don't wanna be in that business. That's number one. Number two, they are rich opportunities 'cause we've been winning a lot of them. I mean, in fact, when you look at our large customers that we say are $50K and above, I mean, if you look at the average customer in there. Just take the ARR divided by the number of customers, and it went from something like $106,000 - $150,000 a year. We are getting more of those, but just less predictability takes longer, so we will exclude them.
At the demand generation we're trying to create, I would say, is both at the smaller deal and in the larger one. I'd say it's across the spectrum.
Mm-hmm.
Once you get to the very big one, it's different 'cause those are a lot more like kind of executive-to-executive outreach. I think we've got a better handle on that, interestingly enough, so that's where we're closing these really big deals. Which tells you this platform, if it serves those really big ones, it's gonna serve everybody else. Thus you just gotta build the repeatability and the muscle around getting more of those opportunities. Once you get more opportunities, you could start relying on half a million dollars plus a minimum amount per quarter, but we're just not there yet.
Right. What would you say has to happen this year for you to call the go-to-market initiative phase two a success?
I mean, I think the best leading indicator, and that's why Gleb shared on the call, is the pipeline. Right? If you have enough pipeline, our conversion rate is really good. Right? We have two kinds of pipeline. There's a new customer pipeline, and then there's expansions. Expansions are even way higher pipeline generation, and we're building that muscle, too. It's doing well now, but it should be doing a lot better. I think it boils down to that's the leading indicator. You get into, okay, great, what's the indicator before that? You know, and that includes everything from effectiveness of ads and campaigns and events to site visits to contact forms. You get into metrics about, okay, is everything being turned around in a very timely way with the right sequence?
You get to a very granular set of metrics, but the uber one is pipeline. Once you get the pipeline, reasonable conversion, that gets to a booking. Once you get to booking, that gets to revenue.
Okay, great. I think that brings us to time. Thank you so much, Marc.
Thank you, Russ. Really appreciate you having us.