Q4 2023 Backblaze Inc Earnings Call

Participants

Mimi Kahn; IR; Backblaze, Inc.

Gleb Budman; CEO and Chairman; Backblaze, Inc.

Frank Patchel; CFO; Backblaze, Inc.

Chad Bennett; Analyst; Craig-Hallum Capital Group LLC

Jason Ader; Analyst; William Blair & Company

Victor Chui; Analyst; Raymond James Financial, Inc.

Erik Suppiger; Analyst; JMP Securities Pvt. Ltd.

Eric Martinuzzi; Analyst; Lake Street Capital Markets

Zach Cummins; Analyst; B. Riley Securities

Presentation

Operator

Good day and welcome to the pack blazers fourth quarter and fiscal year 2023 earnings call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to [Mimi Kahn], Investor Relations and Corporate Development. Please go ahead.

Mimi Kahn

Thank you. Good afternoon, and welcome to back Lisa's Fourth Quarter and Fiscal Year 2023 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Frank Patchel, Chief Financial Officer. Today, Budman will discuss the financial results that were distributed earlier this afternoon. Statements on this call include forward-looking statements about our future financial results, use of our IPO proceeds, results from new features and offerings and the impact of price changes, partnerships and sales and marketing initiatives our ability to compete effectively and manage our growth and our strategy to acquire new customers and retain and expand our business with existing customers.
These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our annual report on Form 10 K and our other financial filings you should not rely on our forward-looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by law.
Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form eight K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will also be posted to our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as our gross customer retention rate number of customers and RPU.
Before I turn the call over to Glenn, I'd also like to mention that in the latter portion of our call, as in prior calls, we will be addressing questions from investors that we gather through the, say technologies platform. Thank you for joining us, and I would now like to turn the call over to Glenn.

Gleb Budman

Thanks, Mimi, and thank you, everyone, for joining us today. We are very pleased with our Q4 results we delivered new products features and accelerated revenue growth with BE2 cloud storage, having particularly strong growth of 47% year over year. We also demonstrated continued financial strength as we reached adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage. In addition, we are reiterating our forecast to exit this year with at least $20 million of cash on hand, I want to take a moment to highlight some key results.
First, we delivered significant innovation. Second, we've continued to move up in the mid-market. Finally, we've accomplished that while dramatically improving our financial position. We've accelerated our overall growth rate to 25% in Q4, while at the same time improving our profitability and cash usage we achieved adjusted EBITDA of 6%, beating the high end of our prior guidance of 3%. And we used just $2.4 million of cash, which is about $6 million less than we used in the prior quarter.
These three achievements provide a strong foundation for the year ahead, positioning us to take advantage of the shift we're seeing in the market. I want to take a moment talk about that. We're seeing larger businesses come to us because they want to build using the cloud provider that best suit their needs instead of being forced to stay in the traditional closed cloud platforms for some of these businesses, it's about unique functionality.
They're able to optimize with specialized solutions fitted to their use case for others is financial. They can achieve massive savings by migrating away from expensive and complex traditional cloud providers. And for some it's about trust that providers won't compete with them indirectly. These are some of the reasons companies are increasingly wanting to use best-of-breed providers in an open cloud ecosystem, together with other cloud companies were well positioned to help drive that open cloud ecosystem, which is defined by interoperability, best of breed functionality, affordability and the free movement of data.
I want to share a great customer story that highlights the value companies are seeing with this open cloud approach. The customer is a media streaming service with over $22 million global users. Their previous solution was built on top of AWS, which was constraining their growth due to technical limitations and excessive download fees. Download fees, which are referred to as egress fees in our industry are one of the restraints that traditional cloud providers used to keep customers from leaving their platforms.
Our commitment to free egress, our scalable and performance storage platform and our easy integration with CDN partners convinced this customer to switch to backwards be too. By switching to backlogs, this customer was able to develop and deliver features to their end customers that the previous platform couldn't support even more impressively with backplanes, they were able to save over $800,000 on egress a year. That's $800,000 each year that they can invest back into their business, grow their customer base and in turn, grow the data stored with backplanes.
Turning to innovation, we are focused on providing the performance and functionality businesses need to move away from legacy solutions for over 16 years, the Barclays team has excelled at innovating on cloud storage by finding greater performance and greater efficiency in hardware and software. In Q4, we launched shard Stash for backwards B. two which enables upload speeds up to 30% faster than Amazon S3. Also in Q4, we introduced free egress up to three times the amount of data stored for every B. two cloud storage customer, furthering our commitment to the Open Cloud.
We are the only cloud storage provider of scale that is offering this to customers without hidden fees or garages. We believe BackWeb is uniquely positioned to be the de facto storage platform at the center of the open cloud ecosystem as we support customers to use their data where and how they choose We also recently launched computer backup enterprise control. This is a feature set that gives businesses greater administrative tools for an additional $2 per computer per month with enterprise control IT admins have the ability to meet their compliance requirements and easily manage backups for hundreds or thousands of computers.
We're only a few weeks into availability, but we're encouraged by the early feedback we've received from customers. I'm really proud of what our team has done, but have even more excited for what's next. Our team continually improves the performance of our platform and enhances our products to serve new use cases. For instance, while a number of AI companies are already succeeding with us and we're integrated with leading GPU compute providers, our team isn't resting on that success.
We continue to innovate on our storage architecture to better serve the increased demand and evolving workflows of AI related storage. We are also excited about the addition of David now as our new Chief Product Officer. David is the former CTO of Metallica at Humboldt and brings over 25 years of experience in the data storage and protection industry. David is coming aboard to help lead the team to bring even greater innovation and strategic leadership for our customers and partners. So we've delivered significant innovation and set ourselves up for more. Next, I'd like to talk about moving upmarket.
First, we continue to build our channel program. Working with our channel partners helps to both increase our velocity on smaller deals and to identify and close larger deals. A great example of the latter is a $100,000 plus deal that we closed in Q4. One of our channel partners identified an NFL team that was looking to update their approach to data storage. As many of you probably watched the Super Bowl last weekend, you can imagine the incredible amount of video and other data generated during professional football games. Working together with our channel partner. We helped this customer simplify and improve the way they work with all of that data.
Second, on the partnership front, we just launched our new powered by Barclays program, powered by lets businesses add BE two cloud storage to their product offerings without any of the hassle or complexity of managing cloud storage infrastructure. For example, early powered by customers include an edge compute platform provider and a transcoding cloud service provider. I'm excited for these types of partnerships because they help businesses expand their offerings, make it easy for their customers to get access to best-of-breed cloud storage and provide backlogs with access to new distribution channels and customers.
Finally, as I've discussed, we have been successfully winning deals with larger customers, and we are delivering the features and the performance larger customers are looking for as the company takes the next step toward winning these customers at scale, we're updating our sales approach accordingly, including growing headcount and adding new sales commission program. We will also be hiring a new SVP of Sales, Nilay Patel our current VP of Sales helps build the go-to-market for BE two cloud storage from the ground up and lead the efforts to open up the use cases.
We currently serve nearly and I agreed that now is the right time to pass the baton as the Company charges its path beyond $100 million, an executive search is underway during which Nilay will continue to lead the sales organization to ensure a smooth transition. Once the new head of sales is onboard, Neely will turn his focus to our AI initiatives. We are aimed to help support customers in managing the explosive growth of AI data and its use cases. I'm very proud of what we've accomplished in 2023 by continuing to innovate, moving upmarket and enhancing our go-to-market approach backwards is in a great position to help our customers reap the full benefits of the Open Cloud.
At the same time, we have dramatically improved our financial position as we accelerated revenue growth, achieved adjusted EBITDA profitability for the first time as a public company and dramatically reduced cash usage. I'll pass the call to Frank now to review our financial results.

Frank Patchel

Thank you, Glen, and thanks, everyone, for joining us today. Turning to our fourth quarter financial results, unless otherwise noted, I will be referring to non-GAAP metrics and the growth rates mentioned are year on year. We remain focused on two key metrics, revenue growth and adjusted EBITDA, which is defined in our earnings release. Our Q4 revenue totaled $28.7 million, an increase of 25% year over year B to cloud storage revenue was $14 million, reflecting 47% growth in computer backup revenue totaled $14.7 million, reflecting 10% growth.
Quarter four represents the introduction of our pricing changes. The exact impact of the Q4 price increase cannot be determined for a number of reasons, including changes we made to the product offerings. However, we believe without the price increase, organic growth for both BE two cloud storage and computer backup would have been similar to quarter three as a result of the price adjustment is common to see an increase in customer churn.
However, we did not see any incremental customer churn in quarter three at announcement or in quarter four at implementation. This is illustrated by our continued strong gross customer retention rate of 91% for the total company. We did see some incremental data and license reductions likely due to the price increase which was expected. We believe our consistent and strong customer retention rate speaks to the value of our services and how offering these popular features of three times free egress and extended version history further differentiates us from our competition.
Turning to our net revenue retention or and our total Company NRR was 109% with BE two cloud storage at 122% and computer backup at 100%, which have all improved over the prior quarter. Working down the P&L. Adjusted gross margin increased about 300 basis points sequentially to 77%, which was primarily due to the price increase across our products and to a lesser extent the higher utilization of prior data center expansions this quarter, adjusted EBITDA was a positive $1.6 million or 6% of revenue and beat the high end of our prior guidance of 3%.
This favorably compares to a loss of $2.5 million or negative 11% in quarter four of 2022. And as Glenn mentioned, this is the first time we have reached adjusted EBITDA profitability as a public company. This was the result of us significantly growing revenue with a limited increase in operating expenses. The Beat itself benefited from higher revenue due to lower than expected churn and headcount related savings.
Turning to the balance sheet, cash and short-term investments, including restricted cash, totaled $33.4 million at the end of Q4 2023 versus $35.8 million at the end of Q3 2023. Our cash usage for the quarter came in at $2.4 million, which represents a significant reduction of over 70% from $9 million of usage in quarter three.
Moving on to our guidance for the first quarter, we expect revenue to be in the range of 29.6 to $30 million. We expect Q1 adjusted EBITDA margin between 4% and 6%, reflecting continued strong performance in a quarter, which is typically a high quarter for expenses due to payroll taxes and other compensation related expenses. For the full year 2024 revenue guidance is one 26 to $128 million with the midpoint, reflecting 25% year over year growth.
The full year adjusted EBITDA guidance range is 8% to 10%. Because of our confidence in this guidance, we have narrowed the range for revenue and adjusted EBITDA for year end 2024, we project having at least $20 million in cash. This cash forecast includes principal lease payments on capital leases of about 15% of revenue. We also anticipate about $2.4 million in ESPP. proceeds and an additional amount from employees exercising stock options. For reference, we received $1.3 million from stock option proceeds in Q4. Looking beyond 2024, we continue to forecast cash flow breakeven by mid 2025. I will now pass the call back to Gleb.

Gleb Budman

Thanks, Frank. In summary, the team has done an excellent job delivering product innovation driving revenue growth and achieving adjusted EBITDA profitability. We are uniquely positioned to capture the massive market opportunity ahead and execute on our mission to help customers leverage the open cloud ecosystem Operator, we're now ready to take questions on our call.

Question and Answer Session

Operator

(Operator Instructions) Chad Bennett, Craig-Hallum.

Chad Bennett

Hello. Thanks for taking my questions, Tom, great job on the quarter. I mean the EBITDA number was phenomenally good to see that leverage playing out.
Just in terms of, you know, Frank, I know you talked about really minimal to nonexistent uptick in churn as a result of the price increases to date. I'm just thinking about, you know, the first blush at it, the fiscal 24 guide. Are you expecting that to change or any anything directionally there on churn on either side of the business? And then, you know, with respect to the two segments, is there any difference in kind of growth rates that you're factoring in in those two segments relative to what you just did in Q4 for fiscal 24?

Gleb Budman

Chad, thanks for the question, Bob. And let me address the churn first. The we were pleasantly surprised and very pleased with the churn rate because you would think when you have a price increase that you would have had some increase in churn and our our customer retention was exactly the same as in the prior Q. three. And we had expected to have some increase that announcement, which we didn't see and some increase at implementation, which we didn't have.
So that was very good. So we had now have over four months of experience with them with January over five. So we're not expecting any increase in that churn rates. So we think the customer retention will remain at that very high company, 91%, certainly in that range. And but we know what we did have if you look at it. If you if you look at the data and license reductions that we did see, we did have a relatively small reduction there of about 1% to 2% kind of.

Chad Bennett

And then just in terms of the two segments, Frank, and how you're thinking about that relative to fourth quarter growth rates?

Gleb Budman

Yes, the so as far as our growth rates go. We said we think our growth rate without the price increase kind of mirrored what was going on in quarter three. And so we were very pleased to see that growth rate of fee to at a high 30% range in organic and 40% or better with the price increase. And we're expecting that through fiscal year 24 and then the same on the computer backup, that organic side was in the low single digits. And with the price increase, we're in the low double digits. And that's how we're projecting it forward in 2024.

Chad Bennett

Got it. Thank you. And then maybe maybe one follow-up, if I could. For glad you highlighted a few times club on the call. The increase in deal sizes you're seeing and moving up, I think you characterize it in more into the mid-market. I guess is there just you cited a couple of very interesting wins, but can you just speak to whether it's B to reserve pipeline growth or are you know, or maybe it's actually additional use cases you're seeing in the mid-market that maybe you weren't seeing a year or two to go kind of any characterization of the magnitude of improvement or demand you're seeing from the mid-market?

Gleb Budman

Yes. Thanks for the question, John. And I would maybe just to say, I think Frank was talking about the growth rates of the businesses and said it's at high 30. And so I think just to make sure that came across through the audio, which is it 30 being a high number, not a not a high 30s, our organic growth rate. So just to just make sure that I heard correctly and we are we are still very excited about the fact that in 2024, we're seeing around 40% growth for me to which I think is obviously a very strong growth rate in terms of the market movement.
So we're seeing a market movement in various ways. We're seeing that in backup customers. We're seeing that in application of storage customers we're seeing that in medium term customers in general, we're seeing more of market movement and the application storage customers and committed contracts that we're seeing, in particular, some of the areas where we're seeing upmarket traction. These are customers that typically are on one of the traditional cloud.
They've gotten to some scale and they want to move off and do that for combination of savings on the storage. Often egress is an important component for them because they're using they're using other cloud providers like CDNs or compute providers. And they need the data to be able to exit from the storage and not be charged normally for that. And so the example I gave on the call a few minutes ago around the customer that saved $800,000.
That's an application developer into media streaming company, but it's an application and storage use case, and that's probably where we're seeing some more of the larger deal type traction. Got it.

Chad Bennett

Thanks much and nice job again, Bill, thanks for the questions.

Operator

Jason Ader, William Blair.

Jason Ader

Yes, thank you guys. First question for me is just for the media streaming use cases. You just talked about how you're finding these customers flat. Are they coming to you? Is it part of the some of the investments you've made in on in salespeople. Just give us a sense for how you're landing some of these of upmarket customers?

Frank Patchel

Thanks for the question, Jason. So media and entertainment is in a market use case that we started looking at a while ago because media companies have large volumes of data, video footage, photos, music, and they typically have workflows around those that benefit significantly from cloud storage as the way that that data flows. So we have media and entertainment customers that you've had that do their backups and archives with us. We also have media and entertainment companies that do their workflows with us where it used to be especially pre-COVID times that they would all sit in one place and do their production work together in a in an office that has become much more distributed, which means you need access to the all that media flow, all that media assets in a cloud environment so that they can access the data regardless of where they are.
And some of them are also taking that next step and actually doing distribution using our cloud storage offering. So we see it as as an evolution for them. The first most basic level is the backup and archive. And then it's a more active archive use case where they archive the data, but then they're pulling from us that it's in actually developing the then media production, leveraging our workflows and then finally, doing distribution. And so in terms of where we're finding them.
A lot of them continue to come to us through the same methods that we attract all of our customers, which is a combination of content and community, the blogs that we publish, which has millions of readers around it, a lot of those also end up being media entertainment customers. But we've also layered on some marketing motions, including events. So we have them. We present that media events such as MAD. in Las Vegas. We've been at other media events in New York and Amsterdam and other places.
And so that layers on top of that. And then we have the channel effort that we've been investing in is also a good partner for us where they have relationships with media companies, they find out that they need help. They want to transition off of off of the LTO, often on-premise systems or sometimes off of the traditional legacy clouds and they bring those jobs to us and then we work with them to support those customers.
Great. Great.

Jason Ader

That's helpful. And then just second quick question for you, Glenn, is when we talk about the stack ways would be to be used for some of the AI related use cases. I guess I always thought that a I required flash storage just because of the need for speed, especially on the inferencing side. So can you just talk to some whether that's just a kind of a a misperception on my part?

Frank Patchel

It's a good question. And obviously, AI has a lot of different aspects of it. And we've been we've published, including on our blog, we've published some of the workflows that companies use with AI. and there's there's the development of the training models, which starts with a lot of data. And then the way the work flow is to run multiple multiple iterations at high speeds on that data to build the model. And that generally requires very high-performance storage closely located to the compute. That's not the optimal use case for us, at least not today, but a lot of the other workflows are actually really good steps.
And so the workflow types that we've seen customers follow is where they will often upload information from them that's from a backup. Sometimes it's from existing assets. They have some assets from systems that are generating data that data flows into backplanes. It's stored in B. two, then they use our combination of free egress and partnerships with other GPU clouds to send the data to those locations for processing. And then that processed data then gets put back into into backlog be to for a combination of one being served up as part of the application itself to customers and to for longer-term retention around backup and archive of that at AI data we also have some customers that use us as the original place where they store the data before it gets used for model training.
And so there are some use cases for which object storage in the cloud is a great fit and some for which start. But it's a tremendous amount of data that is being generated out there for AI. And we think that we wouldn't think AI. So definitely in the early innings of the opportunity that we all have to to help there.

Jason Ader

Got it. All right. Thanks. Good luck.

Operator

Victor Chiu, Raymond James.

Chad Bennett

Please go ahead.

Frank Patchel

Hi, guys.

Jason Ader

This is Victor Chiu in for Simon Leopold. I just want to follow up on that AI. question. Did you guys say that you have some AI kind of specific functions and initiatives kind of in the works or you're just mentioning that debt down, you have the use cases are currently for a I'm just want to elaborate on specifically what your exposure to Asia and kind of what your AIM. solutions kind of focus features are?

Frank Patchel

Yes. Thanks for the question, Victor. So this is Glenn. So the short answer is yes to both blowout. If you look back at some of what we did in the last year. And the first part of it is making sure that we have a durable, high performance available storage platform that's affordable is a key component of providing value to customers who want to service their AI data, right? So fundamentally, making sure that we're providing them a top tier storage platform for all of that AI. data that is that needs to be stored somewhere needs to be delivered to other locations, and it needs to be delivered to customers.
So we've been investing behind that platform in Q4. We built on our launch short Stash, which was the higher-performance wave for B to torque, which is a helpful piece of continuing to add value to that platform. That's kind of step one step two is making sure that we're supporting our customers in understanding how to run these different workflows and how to use object cloud storage as part of that. And so we've been working on. And like I mentioned on our blog, there are stories and studies around the different workflows and how to use them and understanding that that landscape better.
And the third thing is partnerships. We mentioned that we partnered with core. We've been partners with vulture. So we have these GPU clouds that we partner with and we make it easy for customers to move their data between us and them in as part of this open cloud ecosystem supporting their AI use. And then the last part of it is that, as I mentioned our Head of Sales.
Once we hire a new head of sales, he's going to be focusing his entire area of focus on our AI initiatives, which includes both the go to market things, some of which I talked about, but also the product platform side. And David Knowles is our new Chief Product Officer, and he's also looking at the product roadmap opportunities to help customers at core. There's a tremendous amount of data getting generated. There's a lot of use cases around that, just providing a really robust platform for all the data. We believe is the kind of most important job one. But then we do see opportunity to help customers in additional ways and beyond that.

Jason Ader

Great. That's very helpful. And I guess I just have one more kind of general industry question and more recently, we've heard commentary from a number of cloud providers who have kind of noted an industry wide trend around cloud cost optimization and kind of increased scrutiny around public cloud spending from their entire customer base. So on just kind of curious if you've observed any similar dynamics and if not, what why do you think that's the case?

Frank Patchel

So I think that we are different in that with a lot of the traditional clouds, and we've certainly seen that commentary as well. And we've seen the impacts on them for that. And with a lot of the traditional cloud, they they have their offerings are priced slightly high grades, and they've often been it's been complicated and confusing to understand the customers, what is what they're paying for. And so we've heard from many customers say that they were surprised by their cloud bills. They were they were unsure where the dollars were going and what they were spending on.
And so I think that one of the differences is that belief has always been transparent. We've always made it easy to understand what you're paying for. And we've always been very affordable in our price point. So I think that effectively our customers have always been optimized. And as part of that. And so I think as a result, we're not subject to some of the same trends that they're seeing. Now, as Frank mentioned, we did see a 1% to 2% incremental reduction in licenses and data in Q4, which we believe is largely attributed to the price increase execution that we did.
Yes. And this is Frank. I guess that's very helpful Yes, this is Frank. I would add one item. Of course, this greater scrutiny and attention on data storage cost benefits because we have such a good value play in the market. So we really appreciate the attention and that commentary. Thank you.

Operator

Erik Suppiger, JMP.

Chad Bennett

Please go ahead.

Victor Chui

Yes, thanks for taking the question. First off do you have a sense for what portion of your installed base of your customer base is on the new pricing? I believe you have a mixture of have month to month customers and annual contract customers. And I'm just curious how much of it is was on that from month to month? And then secondly, for these larger customers, are they typically customers that are on the likes of AWS or Azure, and then they're they're moving off completely moving applications off if they're doing AI applications and moving those off completely or they just migrating their storage off of off of those hyperscalers, it hurt by higher.

Frank Patchel

Ed, this is Frank.

Erik Suppiger

I'll take the first part of the question who's on the new pricing. So on our B2B side, the group that is that is the pay as you go customers. The rest of our client base are on committed contract or the B to reserve group, which of pay in advance. So they were unaffected by the price increase, but they all went on immediately. So that pay as you go group, it was immediately affected at the beginning of the quarter. The as far as the computer backup group, 25% of them approximately are monthly and they immediately had the increase and then 75% are either one year or two year, and they are graduating and upon renewal.

Frank Patchel

And then, Eric, to your other question about for the upmarket customers. And this implies you're asking whether they're fully migrating off of the traditional cloud providers or whether they're moving that data up. And I will say is a mix of both. We've seen we've actually seen both types. So one one scenario that we've seen and is customers who have don't have a million different things they're doing inside of the traditional product and really they need a handful of significant important services storage being obviously one of them and often it's storage, compute and networking. And so they'll use us for storage. They'll use companies like Cloudflare, Fastly, bunny for networking, and they'll use someone like a core. We were a vulture distortion for them for the compute and those migrate fully out of them and go full on Open Cloud, get to have freedom of the data as part of their stack. And we've also seen the other side where they continue to leverage the traditional box for some of their other services that they use us for storage. And I think one customer example, if they actually kept there's their storage in AWS, but they added back blades and they actually made the default and they were able to increase their durability that way. But they then also decreased their bill by half overall because they were paying so much for getting the data out of Amazon to their preferred network provider that by switching to us, they were able to save enough money to add us and still cut their bill, the whole entire infrastructure go in-house. So we see both. It kind of depends on what they're trying to do with their infrastructure.

Victor Chui

So as you move up market, is this going to create more opportunities for you to work with your the bandwidth alliance and to strengthen that partnership?

Frank Patchel

Yes. I think so in part because we're well in upmarket, we're doing more of a consultative discussion with these customers. And so as you know, we have a large self-serve business and those customers are doing what they choose to do, and many of them are moving off of the traditional cloud providers also but they're but they're doing that without having conversations with them.
Will it with the market once we're having more of the discussion of what makes sense in a strategic sense for you, Mr. Customer as we as you go forward in your future and how do you want that? Is that infrastructure to work for you on long term?

Jason Ader

Very good.

Frank Patchel

Thank you.
Yes.

Operator

Eric Martinuzzi, Lake Street Capital Markets.

Chad Bennett

Please go ahead.

Victor Chui

Yes, good quarter and outlook.

Jason Ader

I was curious to know on the 2024 view where do you expect the gross margin ranging for the full year?

Erik Suppiger

Yes, we had previously a higher as Frank. We are previously saying that our before that our gross margin was going to be the mid 70% range. And now we're very comfortable to say it's going to be in the upper 70% range non-GAAP. So we're seeing that it's about approximately a four percentage point improvement and about half of that is attributed to the price increase.

Jason Ader

That's a thought.

Eric Martinuzzi

And then I did see a decline in the computer backup customers as of year end, you were down to 431,007 45 versus 436,000 zero eight zero.

Frank Patchel

So what is the explanation there yes. Thanks for the question. This is Glenn. So the so first of all, as Frank mentioned, or where we think the we saw a 1% to 2% and license usage and decline in quarter one. So that the number that you're talking about is the customer number which stayed consistent at that high gross customer retention rate. What I will say is that that number in general is something that we're looking at, whether it's a relevant metric going forward into the future because it's so heavily influenced by the number of consumer customers on on that product line, whereas we are increasingly focused on going into self servicing businesses and in particular, more upmarket businesses. And so you can imagine what that number is driven by one consumer customer is treated the same as one customer. That pays us six figures. And so now that I want to get a full turnaround ahead of it, it sounds like just especially given the guide, it's not all customers are created equal?
Exactly.

Zach Cummins

Yes.

Frank Patchel

And as we mentioned that we just launched enterprise control, which is a new functionality and tools that help the larger customers manage all their licenses and computers. Again, not relevant for an individual consumer customer and the individual consumers are what drives the pure number of customers metric but thanks for taking my questions.
Thank you.

Operator

Zach Cummins, B. Riley Securities.

Chad Bennett

Please go ahead.

Frank Patchel

Yes, hi, good afternoon.
Glad and Frank. Congrats on the quarter and the guide.
Just a few questions or a glib. You were talking about initiatives of moving up market and potentially changing some of the commission structure for some of your salespeople. So can you talk about maybe potential changes as you move upmarket and any sort of incremental investments you need to make outside of the leadership change that that's ongoing?

Erik Suppiger

Right now?

Frank Patchel

Yes. So we've been taking steps down this path. So you probably remember when we went public, we were 80% of all of our business was from self-serve. And we had talked about how the sales assisted our customers were larger and we were with them somewhat nascent in motion for us. But we were seeing larger deals and customers liking that service that we provide. And so we said we were going to be using some of the proceeds to stand up a sales team and start putting more focus behind the sales effort. And so some of the things that we've done over that time was we stood up an R team, which is an outbound team. We staffed up some of the sales team in terms of SDRs, BDRs account executives, solutions engineers and built out that team. We've also divided the groups up into territories. We've changed some of the way that we structure and guide leads through the funnel to them. And so the sales operations aspect of it introducing B2B reserve and the ability to sell committed contracts were two important steps that allowed us to actually have the sales team sell as opposed to only assist in a self-serve type motion and then adding the channel motion helped the sales team as well. So those are a number of changes we've been making over time over the last two years to help enable the sales team to sell to organizations and sell to larger divisions. The we're looking for then the new head of sales. In addition to that, we are have we have a number of open recs well on the sales team for a senior account execs to sell to those larger organizations. We have the commission program that we talked about. And so it is just some of the things that we have been. That's something that we are doing as part of continuing to move upmarket. And there there are things around the other organizations, marketing, customer support, cloud operations and others are also being supportive in that kind of entire company focus moving upmarket.
Understood. And final question for me is just around cash usage. Nice to see that reaffirm $20 million target at the end of this upcoming year. But Frank, aside from the improved profitability in the business, I mean, can you walk me through just some of the other key inputs in terms of expectations for CapEx and some of your principal payments for capital lease obligations.

Erik Suppiger

So are the on the CapEx side, for example, we're expecting to come I incur about 16 to $18 million of new equipment there. And if you recall, that is slightly less than what I had been saying previously at the 18 to 20 million range. And the reasons for that actually is very similar to what we spent at the mid point this year. And the reason that that is from flat and or slightly declining is that we're still using up the pandemic buffer when we built up on additional equipment during the pandemic times. So we're still using that in our data centers, which will be largely done after Q1.
And then on the innovation side where our engineers are continuously improving the platform. One of the areas that we expect to get a benefit in this year, especially is in faster delete. So anytime you can delete data quicker. You can store new data on the same hard drives. So that's driving some of that and the other. So that's on the CapEx side. And then you had also asked on the leasing side. And what's really driving that part is if you look at our total leases, you would notice that the total amount of leases long and short term together is actually declining. So what's basically happening is that we have a larger fall off in leases that we have new leases being added and it's for the same two reasons, the pandemic and pandemic leases are falling off because there are a lot of them came on three years ago, and they continue to fall off very quickly now and the new leases that we're adding for the new CapEx are just not as great as what's falling off. So that's why we're getting a kind of a again, a flat to slightly declining on payments pace on those leases.

Victor Chui

But there are other items right now.

Jason Ader

I think that answers all of them.

Frank Patchel

But yes.
Thank you, Simon.

Erik Suppiger

Thanks for the question.

Zach Cummins

Correct.
This concludes our question and answer session. I would like to turn the conference back over to Mimi Kahn.

Mimi Kahn

Thank you. At this spot at this time, I'd like to go over some of the questions submitted to us from CA Technologies. It looks like we might be able to get one in and this one's for you. Glad last year, Microsoft made a change to how OneDrive six files resulting in backlog is no longer being able to backup folders such as docs desktop picks when they're set to backup sync. Carbonite has three 65 backup option. What is backlogs a solution given how popular one drives think is? And another part of that question is what would the cost and share price implications to launch a similar, but improved equivalent to Microsoft and other leading backup and storage PROGRAM speeds.

Frank Patchel

Okay. So it's the I think the way to that question, Sam. But obviously, it sounds like for Microsoft. It's something specific to make it so that we can back that up to be clear that that would happen.
So what Microsoft did was the customers keep files on their computer. And what OneDrive did was it enabled customers to put some of their files in the cloud and not on the computer. So our computer backup service is designed to protect all of the data on your laptop or desktop. And we so we backup everything that is on your laptop or desktop back of everything that's on your external hard drives. We do that for consumers. We do that for businesses. And if the data does not exist on your computer because it's in the cloud, our computer backup service does not protect that data. And so there it's also two things on that front. One is that we are very focused on continuing to grow computer backup. We think it's a good growth business. It's grown every single quarter since the start of this company. And we aim to continue to provide value to our customers with that service and the customers that we are focused on trying to add more functionality and features to our, especially on the business side and the enterprise control functionality that we added is an example of that. But we're very much listening to customers and seeing what else they want from us with that offering.
The other thing that I will say is that with our BE two cloud storage, we serve a variety of use cases and backing up SaaS applications data that's in other cloud services and data that the Microsoft Office three 65 hundreds are things that our customers absolutely do. They do that would be too as the cloud storage destination and we're leveraging our partners for the different use cases. So some of those use cases are served by partners of ours like Veeam and Veritas and comm Vault and others where they take care of the software side of backing up those different file types and applications and the end customers can then put that data in QB two and have that be the destination. So from so I would say we currently service those use cases, we service them along with our partners and then this would probably be the last question for today split, what is the single most impactful strategy over the next couple of quarters?
So I'm not sure if I would call it a single most impactful. But as we talked about moving upmarket is certainly a key component for us along with the channel efforts that we're doing, the innovation that we've done and continue to do is something that we believe will provide a lot of value to customers and deliver growth for us. And then we believe this trend of the Open Cloud it is a key step. So in terms of impactful strategies, those are the key things that we're leaning into. And the other one, obviously, we've talked about AI at some level we are selling effectively the picks and shovels of the AIH. And I think that that is going to be a significant long-term opportunity for us.

Mimi Kahn

All right. That's it for those questions. I'm going to hand the call back to Glenn for a.

Frank Patchel

Thank you, Maria, and thank you, everybody, for the questions. Thank you to our to the to our investors that ask questions for the C Technologies platform to the analysts to join us. And operator, we're now ready to end the call you next exports.
The conference has now concluded Thank you for attending today's presentation. You may now disconnect.