googlec12d31fe43ce9e91

Brief Overview

Backblaze makes data storage easy, safe and convenient. Backblaze is a leading cloud platform focused on data storage only. The company is primarily focused on serving the mid-tier and lower-tier markets.

Backblaze offers two core products:

• Computer backup for backing up personal laptops and desktops
• On-demand storage for developers to build applications and IT people to back up organization systems and files

Basic Company Info

• Name – Backblaze

• Year Founded – 2007

• Ticker Symbol – (NASDAQ: BLZE)

• Website – https://www.backblaze.com/

• Headquarters – San Mateo, California

• Number of employees – ~250

• Sector – Technology

• Industry – Software – Infrastructure

• Market Cap (11/26/2021) – $784 million

• IPO Date – 11/11/2021
• WACC: 8.1%

What does Backblaze Do?

According to the company website: “Backblaze makes storing, using, and protecting data astonishingly easy.” Backblaze is a play on the cloud computing market but is focused specifically on disrupting the Storage-as-a-service market within the industry. The amount of data being created is growing rapidly. It is important to remember that behind every application, the data behind the application is stored somewhere which has affected its stock price in Excel.

The public cloud infrastucture-as-a-service storage is a large market. According to a report from IDC, the public cloud IaaS storage market will reach $91 billion by 2025, of which 60% of spend will come from mid-market sized businesses:

The large, diversified cloud providers: Amazon, Microsoft and Google who has great DCF valuation and impressive intrinsic value, all offer many cloud computer services including storage. Backblaze distinguishes itself by being an independent cloud platform focused only on data storage.

Within the major elements of the cloud computing tech stack: networking, compute, communication and storage, independent cloud platforms have emerged over the years despite strong competition from the large cloud providers. Backblaze unabashedly compares itself to major independent cloud companies like Cloudflare and Twilio, whose market caps are approximately 60x and 50x larger:

What Problem is Backblaze Solving?

According to the CEO Gleb Budman, the idea to start the company came about when the cofounders realized that everything was going digital and no one was focused on making the management of that data easy.

Backblaze solves a number of problems for SMBs and individuals looking to store their data. Backblaze specifically targets these markets for a number of reasons. At a high level Backblaze distinguishes itself from the competition by offering:

• Simplicity
• Affordability
• Neutrality

At their core, besides their high stock price in Excel, large cloud providers like AWS, Azure and Google Cloud Platform are designed to tackle complex use cases at the enterprise level. SMBs and individuals need a simpler storage platform designed for them:

The large cloud providers are not only complex, but they are demonstrably more expensive. Backblaze’s storage rate $/GB/month of $0.005 is 1/4 the cost of Amazon S3 at $0.021. The download rate is also significantly cheaper at $0.01 $/GB (and is sometimes even free, more on this later in the article):

Affordability is also an issue in terms of dowloading data has become a hot button in the industry. Egress fees, or data transfer (bandwith) pricing, refers to money paid to send data to external networks. Many cloud companies make it free to input data but charge fees to discourage. AWS in particular has been accused of this practice. Cloudflare CEO Matthew Prince openly criticized AWS on Twitter about this topic:

In the above tweet, Prince embedded a scathing article on Cloudflare’s blog written by Prince and a colleague. The blog post accused Amazon of charging huge markups to transfer data ranging anywhere from 3.5x Amazon’s cost in South Korea to 80x their cost in the U.S. and Europe:

Egress fees not only lead to high cloud bills, but they are difficult to predict. Cloud computing enables a company to scale quickly, and if suddenly a company experiences massive growth, a massive bill may shortly follow due to high egress fees. Backblaze provides a great case study of how they helped a gaming company, Nodecraft, that experienced this very problem.

Nodecraft is a multiplayer gaming service known for offering fair, fixed prices. Nodecraft built their game distribution on Cloudflare’s cloud network platform and stored game and server files on Amazon S3. Nodecraft launched a new product that allowed customers to play multiple games from their hosted servers. It was a tremendous success but ironically hurt the company financially. Customers were able to play and store multiple games on Nodecraft’s hosting servers. Nodecraft’s storage costs were increasing because game swapping created more data files to store for each customer. Nodecraft’s egress fees simultaneously were increasing because customers were accessing saved version of their games.

This was clearly not sustainable, so Nodecraft ultimately decided to partner with Backblaze. Not only are Backblaze’s storage costs 1/4 the cost of Amazon S3, but Backblaze did charge any egress fees since the company is a member of the Bandwith Alliance. The Bandwith Alliance, founded by Cloudflare, is comprised of a group of companies that are committed to lowering or eliminating egress fees. Nodecraft’s decision to partner with Backblaze resulted in savings of 85%!

Lastly, more companies are choosing to work with more than one cloud provider. One of the reasons companies chose a multi-cloud approach is to avoid vendor lock-in, or the fear that a company will be unable to use another vendor without substantial switching costs or operational impact. Another reason is that companies are increasingly needing multiple clouds for regulatory, compliance, insurance and data resiliency reasons. Backblaze links to a survey conducted by IDG, stating that more 55% of organizations currently use multiple public clouds and 21% saying they use three or more. Companies can securely store their data with Backblaze and run their applications on the cloud provider of their choosing.

Putting it all together Backblaze is easy to use, demonstrably cheaper, trusworthy and will not compete with you:

How Does The Business Model Work?

Backblaze offers two cloud services:

• Computer Backup – backup for businesses and personal laptops and desktops
• B2 Cloud Storage – on-demand storage for developers to build applications and IT people to back up organization systems and files

Computer Backup is the first business line created 15 years ago and represents 2/3 of their business. Computer Backup is a simple business model. Backblaze charges a flat fee of $7/month (or $70/year) for unlimited backup of personal computers.

B2 Cloud Storage (also referred to as B2), created only 5 years ago, represents the remaining 1/3 of the business and is the “hypergrowth jewel”. B2 was designed for developers and IT people requiring on-demand storage. B2 is easily scalable and cheaper than the large cloud providers. As mentioned above, all web/mobile applications require behind-the-scenes data storage.

B2, while accounting for less revenue presently, has better operating metrics including a higher NRR (Net Retention Ratio) at 130% and higher ARPU (Average Revenue Per User) of $325.

The company has publicly stated that B2 will be the overall growth driver for Backblaze. There are several reasons for this:

• On-demand cloud storage market is larger and growing faster than the computer backup market
• B2 charges on a consumption basis while Computer Backup charges a flat fee
• Rollout and upsell of new product Cloud Replication which enables customers to keep data in multiple regions.

The main growth drivers for both businesses are highlighed below.

Looking at its stock price in Google Sheets, CEO Budman states that there are 13,500 customers currently utilizing both services on their ‘Storage Cloud’. Total storage under management is currently ~2 exabytes. Altogether the company currently has 200,000 hard drives in 5 data centers spread across regions.

Partnerships

Backblaze has developer partners and alliance partners. Developer partners work together to help developers build applications and alliance partners utilize Backblaze to send and store data.

As discussed above, Backblaze is a member of the Bandwith Alliance and one of Backblaze’s developer partners:

Cloudflare CEO Matthew Prince appeared in the Backblaze roadshow to discuss their partnership. Prince reiterates a number key points made by CEO Glubman about Backblaze’s advantages:

• Backblaze provides consistently reliable storage that is incredibly affordable for any of their customers to use.
• Large cloud providers have many different businesses. If you are a customer don’t know if data being used against you.
• Backblaze is independent cloud. You pay them reasonable rate for services, and they will not compete against you some day. Big cloud providers make it easy to check in data but getting data out is not easy

Some of their partners are:

• Apple 10K
• Tesla 10K
• Netflix 10K
• Microsoft 10K
• Amazon 10K
• Google 10K
• Apple 10Q
• Tesla 10Q
• Netflix 10Q
• Microsoft 10Q
• Amazon 10Q
• Google 10Q

Leadership

CEO Gleb Budman is one of five co-founders of Backblaze. This group has worked together for 20 years and successfully exited 2 prior tech companies. Budman is 46 years of age, so it is impressive to have already successfully exited prior companies and remain interested in building somethign new. CTO Brian Wilson also worked with Budman at the two previous tech companies and also has experience working for Apple.

The company receives a a really high Glassdoor rating of 4.9/5.0 stars. CEO Budman receives 100% approaval rating as CEO. Backblaze was also recognized as a gret place to work according to Inc. Best Workplaces, Inc., 2021.

It is great to see that the co-founders all remain in senior leadership positions at the company and that they have a history of shared success. Also interesting to note is that the company was also almost entirely bootsrapped. Backblaze only took in <$3 million in outside equity investment before going public.

Competition

Backblaze breaks down its competition as falling into 3 categories:

• Diversified public cloud companies like AWS, Google Clould Platform and Azure
• Legacy on-premise storage vendors like Dell EMC
• Smaller clould storage competitors

The competition with B2 against the major cloud companies was largely covered above. Backblaze is targeting mid-market companies requiring simpler simpler solutions. Additionally, companies are increasingly pursuing a multi-cloud strategy for regulatory and compliance reasons, which should be a tailwind for Backblaze.

Interestingly, Cloudflare, a developer partner and IPO roadshow promoter with high stock price in Excel,  recently launched Cloudflare R2 Storage, a storage service aimed at eliminating egress bandwith fees. Cloudflare announced that it will charge $0.015 $/GB/month, which is still 3x more expensive than Backblaze. This puts Cloudflare in direct competition Backblaze. Tech companies, particularly larger ones, often become “frenemies” and encroach on each other’s turf while still remaining partners. According to Prince, Cloudflare is trying to compete against Amazon rather than competing against smaller players like Backblaze.

In the personal backup market, Backblaze competes with popular services like Dropbox, Google Drive and Apple iCloud. Wirecutter, a product review website owned by The NY Times, recently reviewed storage backup providers and ranked Backblaze as the best option. Backblaze notes that compared to Google Drive, Backblaze is not only cheaper but they offer additional features such as data recovery by mail and private encryption key.

There are several smaller clould storage companies that compete against B2 such as Wasabi. Wasabi has raised $224 million in total financing as of May 2021 and was named one of ‘The 20 Coolest Tech Startups of 2020’ by CRN. Wasabi notably does not charge egress fees, while Backblaze does charge egress fees unless their customer uses a compute or CDN partner that is part of the Bandwith Alliance. Wasabi appears to be one of B2’s most direct competitors in terms of target market, product offering and pricing.

Financials & Growth

From the best investing websites, the company emphasizes that it has 3 characeristics that make it a good long term bsuiness:

• Almost all revenue is recurring
• Product shift to B2 Cloud Storage
• Strong customer retention.

As of the most recent quarter Q2 2021, ARR was $65 million the combined NRR was 110%. Revenue grew 32% in FY 2020:

CFO Frank Patchel stated that Q2 2021 revenue growth appears weak due to an unfavorable comparison from the previous year that coincided with a price increase in Computer Backup. This unfavorable comparison will reverse starting in Q1 2022 and growth should accelerate for at least the next two years.

For the first half of 2021 revenue grew 24% YoY, a decline of 800 basis points compared to the 32% growth witnessed in FY 2020. Breaking out the revenue contributions between B2 and Computer Backup in H1 2021, one can see that B2 is growing much faster and supports the narrative from management that B2 is where the future is headed:

Margins took a hit in H1 2021. While Adj. Gross margin, which excludes stock-based compensation and D&A, remained stable, Adj. EBITDA margin was noticeably weaker due to increased investments investments and fees to prepare for IPO in 1H 2021:

The CFO also highlighted that growth has been very consistent in dollars spent per customer and number of customers served. This number of dollars spent her customer has increased 45% between Q1 2019 and Q1 2021 due to growth in data stored in B2 and Computer Backup, upselling and price increases. The number of total customers is up 90,000 during this time frame:

Backblaze prides itself on an efficient go-to-market sales model with over 80% of their revenue in 2020 coming from self-serve customers, or customers who simply sign up online without speaking to a sales rep (sales reps handle the remaining 20% of deals that are typically much larger). Thus it is highly regarded by the best stock research websites.

Conclusion

According to form 8k, Backblaze as a whole is not is not experiencing hypergrowth, but B2 is experiencing rapid growth. Investors are buying shares in Backblaze for exposure to B2 and growth in storage-as-a-service. Below is the chart showed earlier comparing the growth and certain metrics of each segment. The 130% NRR is particularly encouraging given that management argues that B2 is the future of the company. The upcoming launch of Cloud Replication, which enables customers to keep data in multiple regions, along with the growth of data in general, will hopefully help to increase ARPU over time:

Historically, data storage companies have not performed well – just look at the stock performance of Box (dark blue line) and Dropbox (light blue line) compared to the Nasdaq (purple line):

Is Backblaze’s product truly differentiated to sustain long term growth rates? Fortunately, as noted above, the public cloud IaaS storage market is large and mid-market companies will account for a good chunk of that. Backblaze has this tailwind behind it along with the rise in businesses adopting multi-cloud strategies. The public cloud IaaS storage market is large enough for many players to be successful.

There is some speculation that the large cloud providers might get rid of egress fees, which may lower Backblaze’s value proposition. Backblaze currently charges much lower egress fees as noted above and is already part of the Bandwith Alliance so presumably many of their customers do not pay any egress fees already. Backblaze is part of a trend of independent cloud companies that continue to nip at the heels of the major cloud providers. The question is will Backblaze have a differentiated enough product to sustain their growth. So far it appears yes based on their steady growth in dollars spent per customer and increase in total customers. Backblaze has customers in 175 countries which indicates that there is global demand for their product.

According to its 13f filings, Backblaze management notes that customers on average have grown their spend more than 2x since being onboarded:

The company is not profitable as it continues to invest for growth. GAAP gross margin was 50%; this is noticeably less than the 75% Adj. gross margin that management touts achieving in FY 2020 and 1H 20201. On a TTM basis, operating margin was (17%) and negative net margins was (19%). Again the Adj. EBITDA margin varied considerably from the GAAP reported measure:

Operating cash flows for the last 12 months were positive at $8.4m. Free cash flow was negative at ($539k) and FCF margin was (1%):

Backblaze leases and maintains data centers so the company will never achieve high gross margins on a GAAP basis like other top SaaS companies. The biggest driver of the difference between GAAP and Non-GAAP margins is capex depreciation, which is a non-cash expense:

Today Backblaze’s market cap sits at ~$784 million. With TTM revenues of ~$60 million this puts the TTM P/S ratio at 13x. This is not a company that will ever sport high gross margins like Datadog or Zscaler, and the fastest growing part of the business only accounts for 1/3 of ARR. Backblaze will report it’s first quarter as a public company on 12/13/2021. There are not many independent, publicly traded companies focused solely on data storage, which is a crucial part of the tech stack. The cloud does not exist without data being stored somewhere. B2 appears poised for rapid growth as more companies seek alternatives to the major clould providers and the company addresses unfulfilled demand in the mid-tier market. As the company continues to grow hopefully its earnings reports will show continued growth in B2 to justify the valuation.

Welcome to Rice University Blogs.

Either start blogging right away or take a few minutes to turn your blog into a normal web site!