BLZE earnings call analysis

NASDAQ:BLZE Q1 2026 Earnings Call Transcript Generated on 6/6/2026 Abby | Conference Operator: Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. And I would now like to turn the conference over to Mimi Kong, Head of Investor Relations. You may begin.

Thank you. Mimi Kong | Head of Investor Relations

Good afternoon, and welcome to Backblaze's first quarter 2026 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Mark Sweetan, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier. Statements on this call include forward-looking statements about our future financial results, the impact of our go-to-market transformation, sales and marketing initiatives, cost-saving initiatives, results from new features, the impact of price changes, our ability to compete effectively and manage our growth, and our strategy to acquire new customers, 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 most recent quarterly report on Form 10Q 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 8-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 on our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR, growth customer retention rates, and adjusted free cash flows. We will be participating in the Needham Technology Media and Consumer Conference on May 12th in New York. I hope to see many of you there. Thank you for joining us, and we'll now like to turn the call over to Cliff.

Gleb Budman | Co-founder, CEO & Chairperson

Thank you, Mimi, and thank you, everyone, for joining us today. Q1 was a strong quarter. We beat revenue and adjusted a bit of guidance. ending the quarter with $38.7 million in revenue, up 12% year-over-year with B2 growing 24%. We more than doubled our average sales deal size and drove 72% year-over-year growth in our 50K plus ARR cohort as we continue to move up market and are on track for our first full year of free cash flow positivity as a public company. What excites me most about Q1 goes beyond the numbers. AI is making storage increasingly important and our organization is gelling and executing better than ever to capture that opportunity. This is evidenced by more than one third of all new bookings coming from AI and the number of AI customers using our platform grown by 76% year over year. We entered 2026 saying we would build a more scalable, more predictable growth engine that serves the AI opportunities. Q1 started to show what that looks like. In AI, we are seeing demand from two parts of the market. One is companies building the infrastructure and tools that enable AI. The other is companies using that infrastructure to bring AI into products and workflows. We are winning in both. On the infrastructure side, there is a major replatforming happening in the market. For the first time in about two decades, the traditional hyperscalers are not the only place companies are building. They're also building on the neoclouds. Synergy Research estimates that the neocloud market was $25 billion in 2025 and growing to about $400 billion by 2031. In order for these neoclouds to support their customers AI workloads, they need to offer cloud storage. Some neoclouds have offered cloud storage built on Flash. It was fast and it worked, but as these platforms have scaled and AI workloads have grown, the economics have become increasingly difficult. Flash is now about 10 times more expensive per terabyte than hard drives. It works well for use cases requiring the lowest latency for smaller data sizes, but becomes unsustainable at exabyte scale. As a result, Neoclouds are now actively looking to introduce a cost-efficient hard drive tiered time flash to manage both performance and economics across their infrastructure. At Backblaze, we built an internet scale file system to optimize performance per dollar out of hard drives. and thus believe Backblaze is ideally positioned to provide exactly what these neoclouds need. We've seen support for that belief not only from the multiple signed neoclouds where we provide this for them already, but also the active engagement we're having with many of the top neoclouds. We estimate our opportunity to support neoclouds at $14 billion by 2030, and with the success we're seeing, we are aligning resources internally behind that opportunity. In addition to Neopods, we're seeing a significant opportunity for us supporting other AI infrastructure. For example, we're also seeing strong demand from companies supplying large datasets into the AI ecosystem because they need a place to store large datasets efficiently, but also be able to move them where they need to go rapidly. One recent example is a training data provider serving AI use cases that selected B2 to store large volumes of video data. A hyper-growth company, it was experiencing rate limits and bandwidth constraints with its existing provider and needed a solution that could scale quickly. Back boys won on both economics and technical fit. The deal closed in just 11 days at nearly a million dollars of ARR, underscoring how quickly these companies move when infrastructure becomes a constraint and how well Backblaze is suited to the infrastructure side of the AI opportunity. The other part of the AI market we're seeing is companies using infrastructure like ours to bring AI into their products. As AI models move from text to multimodal, incorporating video, audio, and images, the volume of data required to train and run those models grows by orders of magnitude. This is not a future trend. It's happening now. And it's creating significant and growing need for storage that can handle it economically and at scale. With the generative AI customers we have today, we are finding that price and performance get us in the door. But it is the experience that keeps them and grows them. Transparent pricing, responsive support, and a team that works with them rather than just selling to them. These customers are scaling fast, and they do not have time to manage infrastructure problems. With Backways, they don't have to. A good example from Q1 is an AI-powered video creation company that selected B2 to store data used to train its models. The customer had been running into cost and performance issues with its existing provider. The platform was difficult to manage, and the economics were not working at its scale. Stack Boys offered the best performance per hour and a platform that was easy to use and easy to scale. The initial deployment represents nearly half a million dollars of ARR and creates a clear path to expand into higher performance workloads over time. These customer wins are just examples of where we won in Q1 and are reflective of opportunities we have in pipeline going forward. It's clear that whether customers are building AI infrastructure or using AI in their products, they are scaling fast, that data is growing exponentially, and they need infrastructure that is performant, open, and cost efficient at scale. That is the moat we have spent 19 years building, and AI is making it more valuable, not less. To be the leading storage platform for AI, we are also meeting developers where they already work. We're embedding Backvoids into the AI ecosystem by integrating directly into the tools developers already use. For Hugging Face, which has 13 million users and over 2 million models, we shipped a tool that lets teams store and share model caches on B2. For Comfy UI, which recently raised at a $500 million valuation, we built a plugin to support generative AI workflows. For CVAT, which is used by tens of thousands of computer vision teams, B2 is now integrated as a backend for training data. And for MLflow, the most downloaded tool for taking AI projects from lab to production, with 16 million monthly downloads, B2 has now been added as an integrated artifact store. So the AI opportunity is making what we do increasingly critical. We're also stepping up to meet it. A year ago, we began a meaningful transformation of our go-to-market organization focused on three things, increasing awareness, driving greater pipeline consistency, and expanding revenue within our installed base. In Q1, we delivered progress on all three. On awareness, the flamethrower startup program is gaining real traction. We have now welcomed approximately 100 companies in under three months. half the time it would typically take. We've been added to the A16Z Founder Resource Program, the Launch Startup Showcase, and the Startup Grind Conference, all of which expand our reach with venture-backed startups. On pipeline consistency, we have completed our core go-to-market systems upgrade, giving our team better visibility and a stronger foundation for a faster, more disciplined revenue motion. And within our installed base, pipeline source from existing customers has nearly doubled year over year, reflecting our growing ability to land and expand with our customers. To accelerate this next phase, we welcomed Anuj Kumar as our chief revenue officer. Anuj has scaled go-to-market for cloud infrastructure and enterprise storage at NetApp, VMware, Red Hat, and Suzy. He brings a pipeline discipline and execution rigor this phase of our growth requires. And we believe his leadership will be a meaningful compliment to the upmarket momentum we have already built. We also saw encouraging new customer momentum during the quarter across a range of data-intensive use cases. That included a healthcare data company who selected us for disaster recovery, a cloud gaming platform that chose B2 to store video across multi-cloud environments, and an audio streaming platform migrating from self-managed infrastructure to B2. These wins reinforce a broader point. BackWave is winning where data is valuable, active, and operationally important. And this is why I am excited about the opportunity ahead. The shift to multimodal AI is driving exponential data growth. And the need for high performance, yet cost efficient storage has never been greater. The customers who are choosing Backways are exactly the kinds of customers that compound with us over time. We are stepping up to this opportunity with an up level team, a go to market transformation well underway, and a platform we have spent nearly two decades building and optimizing. AI is making everything we have built more valuable, and we are becoming the storage infrastructure that powers the AI economy. With that, I'll turn it over to Mark.

Mark Sweetan | Chief Financial Officer

Thank you, Gleb, and good afternoon, everybody. Our first quarter results reflect the strategy that we have been executing against. We exceeded the top end of both revenue and adjusted EBITDA guidance. The Q1 outperformance reflects stronger sales execution and the EBITDA BEAT demonstrates the operating leverage in the model. Let me walk through the quarter and then cover our outlook. We finished Q1 with revenue of $38.7 million, above the high end of our guidance of $38 million. The BEAT was broad-based across both B2 cloud storage and computer backup, with B2 remaining the primary growth driver. B2 cloud storage grew 24% to over a year to $22.4 million, And ARR grew 28% year-over-year, reflecting the underlying strength and momentum of the business. The Q1 revenue outperformance was driven by higher customer data consumption on the B2Cloud platform and computer backup coming in slightly more favorable than our forecasted decline. On bookings, which primarily affect revenue in future quarters, we closed multiple large deals for a strong quarter. We made several updates this quarter to improve the calculations of our ARR and RPO metrics. I will briefly walk through those changes as I cover the results. ARR increased by more than $5 million sequentially to $158 million, with B2 growing 28% over the year. This quarter, we updated our ARR methodology to improve comparability across periods, and the changes defined in the earnings presentation posted on our investor relations website. Under both the new and previous methods, the sequential AR improvement is approximately $5 million. We ended the quarter with 187 customers contributing over $50,000 in ARR, up 51% from a year ago, reflecting continued strong progress upmarket. We also updated our RPO methodology this quarter and described the change in our earnings presentation. The change is aligned to our peer group, and RPO is now a more important metric as we continue to move upmarket, shining both annual and multi-year customer commitments. Under the updated methodology, RPO increased by $6 million sequentially and by $31 million from the prior year period. Our gross customer retention metrics remain very healthy, with customers continuing to use both our B2 and computer backup solutions for nine years on average. Beginning this quarter, our reported net revenue retention reflects an in-quarter methodology, which we believe provides a more current view of our customer expansion and retention trends. In B2, net revenue retention was 110% up from 105% a year ago, reflecting continued expansion within the customer base. As a consumption business, B2 benefits from both the organic customer data growth and the cross-sell upsell sales motion. Q1 gross margin was 61% versus 56% in the prior year. The year-over-year improvement shows strong operating leverage continuing to kick in as we tightly manage costs and also from the extension of the useful life of our fixed assets. Total operating expenses were $29 million in Q1, roughly flat compared to Q4 and improved by approximately 600 basis points from the prior year as a percentage of revenue. reflecting strong operating leverage as we maintain our focus on cost management. Q1 adjusted EBITDA was $10 million, or 26% of margin, up from $6 million, or 18% in the prior year, reflecting strong operating leverage as revenue scales. Sequentially, margin declined modestly from 28% in Q4, primarily reflecting the one-time benefits we referenced in our last earnings call. Adjusted free cash flow was negative $1.8 million in Q1, reflecting earlier payments in the quarter. We are also pulling forward a portion of 2027 CapEx into 2026 in response to strong demand signals. Even with that pull forward, we continue to expect adjusted free cash flow to be positive for the full year, with improvements weighted towards the second half of the year. We have the capital in place to support the growth that we are seeing. We currently have more than $100 million in capital leasing capacity, with approximately half of that utilized. Based on our current operating plan, we expect to fund growth through operating cash flow and capital leases, and we do not anticipate the need to raise additional capital through follow-on equity offerings. In fact, we plan to continue to focus on reducing our dilution through our modest stock buyback in our next year settlements for RSU grants. Looking ahead, we introduce updated B2 pricing and packaging effective May 1. The change reflects the investments that we have made in our platform performance, our effort to further simplify pricing by removing API transaction fees, and the rising cost of hardware and data centers. On a net basis, we expect the pricing update to be accretive to revenue and margins, and that will be reflected in our guidance. So moving on to our guidance. For the second quarter, we expect revenue to be in the range of $39.8 million to $40.2 million. On our last earnings call, we said B2 growth in the second quarter would be 12%. Based on this new midpoint, the B2 growth in Q2 will be closer to 20%, which is a big improvement. The Q2 outlook includes a partial quarter benefit from the May 1 pricing update, along with variable usage from customers that we have already actualized in April. We are not assuming the same level of variable usage in the second half of the year. Adjusted EBITDA margin is expected to be in the range of 21 to 23% for Q2. The sequential step down from Q1 reflects the timing of investments as we continue to build for growth. Turning to the full year. We are raising our full year revenue guidance to $161.5 million to $163.5 million up $5 million from our prior midpoint of $157.5 million. That increase reflects two factors, stronger first quarter performance impacting the rest of 2026 and the benefit of the new B2 pricing and offering. Each contributes to approximately half of the raise. We are also raising our full year adjusted EBITDA margin guidance by 400 basis points to a range of 23% to 25% up from 19% to 21% previously. As a reminder, our guidance philosophy excludes individual deals greater than $500,000, high variable usage above contracted minimum, and incremental upside from our go-to-market transformation. As these elements become more predictable and repeatable, we will incorporate them into our forward guide and communicate that transition clearly. In summary, Q1 was a strong quarter across the board. Revenue beat. adjusted EBITDA B, B2 growth accelerating, and bookings improving. We remain focused on executing on our AI opportunity by driving forward our go-to-market transformation and scaling our B2 business. We look forward to your questions. With that, operator, please open up the line.

Abby | Conference Operator

Thank you, and we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, it is star 1 to join the queue. And our first question comes from the line of Mike Seekles with Needham.

Your line is open. Mike Seekles | Analyst, Needham & Co.

Hey, guys. Thanks for taking the question here. Congratulations on the strong start to calendar 26. First question, I guess, is more for Gleb. But I just wanted to get more on the success that you guys are seeing with the AI customers following the go-to-market transformation initiatives we've put in place. Can you just talk to... the improved visibility you have for those AI customers in the pipe. And as you have more of these customers, I guess, begin to season, are you noticing, is there a significant departure as far as cohort behavior or sales cycles? And then I just have a follow-up.

Gleb Budman | Co-founder, CEO & Chairperson

Hey, Mike, thanks for the question. You know, I'll use actually the two customers that I referenced in my prepared remarks as a good example. So one of the customers came to us through the GTM motion that we're building, right? So the machine that we're building, the combination of outbound targeting, better systems, going to the AI events. And so we found them through that outbound process. The other one actually came to us as a referral from one of our existing AI customers who said that they were having a great experience. And specifically, they were saying that the combination of the performance that they were getting from our platform at the price point that they were getting was unmatched. And so they referred them over. And so we're seeing more AI companies coming to us. We kind of feel like the market is coming our way. And it's really from both of these Part of it is from the work that we're doing. Part of it is from the referrals in the market coming to us. So maybe that answers kind of the first part of that. In terms of the cohort part of it, maybe you can ask your question if I didn't completely get it. But one of the things we mentioned on the prior call is that we're seeing the AI companies growing much faster, about three times faster than our average customer. And that's just a function of their inherent data growth driven by their AI use cases. Did that answer the question you were asking?

It does. Mike Seekles | Analyst, Needham & Co.

It does. Thank you for that. And then for the follow-up, I think it might be more geared towards Mark, but I just wanted to double check on the B2 with the NLR of 110%. I know you said, hey, we drive that between two factors, right? You have the data consumption, which grows each year, and then you also have the cross-sell upsell. And I just wanted to see, can we unpack that a little bit more to get evidence of the go-to-market actually driving adoption, whether it is the cross-sell upsell motion? What are the drivers behind that B2NRR today? If I'm trying to unpack consumption growth versus go-to-market initiatives to expand wallet and drive additional offerings into the installed basis.

Mark Sweetan | Chief Financial Officer

Yeah, hey Mike. I'll start off by saying I think the best evidence of the GTM working is the RPO disclosure of committed contracts that change quarter over quarter. So for commitments of less than a year, it's up $3.4 million. You could see it on slide 19 of our earnings deck. So I think that's the best evidence of the performance. Now that is made up of both new logo as well as expansion sale. The expansion sale realistically does fluctuate. On the NRR, we did move to in-quarter reporting versus the training for quarter average, specifically to give you more visibility and to hold us accountable to explain what's happening. So there will be more fluctuation there from that perspective. So it's up to 110% from 105% a year ago. because a year ago was a quarter where we did talk about one large customer going away. I mean, since I've joined, that was the only time we've had to reference that. So that's what drove that improvement over a year. But it generally fluctuates around 110 on a stable basis, but there's going to be some ups and downs, and the expansion changes will be the biggest driver of that, because the organic growth tends to be incredibly stable and predictable.

Mike Seekles | Analyst, Needham & Co.

Excellent. Thank you so much, and congrats again on a strong start to the year.

Abby | Conference Operator

And our next question comes from the line of Itai Kidron with Oppenheimer.

Your line is open. Itai Kidron | Analyst, Oppenheimer

Thanks. Hey, guys, and congrats. Great solid numbers. I had a couple of things, maybe some review, Mark. Can you be a little bit more... Can you give us a little bit more color on the pricing update, the magnitude of this, how much of this you think you can capture? I'm just trying to think about your growth without the pricing update. How would your outlook would have looked without it? I'm just trying to get my hands around that.

Mark Sweetan | Chief Financial Officer

Yeah, absolutely, Itai. So in the $5 million rate for the year, half of it is from the pricing and packaging change. Half of it is from the strength of the business that we observed in Q1. So the bookings, the strong bookings in Q1. So if you look at that RPO number I referenced just a few moments ago, that kind of roughly equates to the raise from the organic health of the business for the rest of the year because that has no price increase in it. We continue to guide very prudently for the rest of the year. So the same philosophy we laid out last time, which is, No large customers, no go-to-market benefits, and not accounting for large variability of that large customer. What I would say also within Q2, I could give you a bit more color there. Last time we said Q2 would grow by, for B2, would grow by 12% over a year. Now it's 20%. That difference is more anchored on the organic health of the business because the price change took effect May 1, so it's not a full quarter. And we obviously actualized some of the things we saw in April in the business. And on the price, I mean, we could elaborate a bit more on that price change. It's not a flat price change. It's a pricing and packaging change. So, for instance, we are including now transaction API fees. So in the spirit of being the simplest billing model out there, we further simplified by no longer billing customers for transaction fees.

Itai Kidron | Analyst, Oppenheimer

Got it. Okay. And then as a follow-up, maybe one for each of you. Mark, for you on the computer backup, the net retention rate is now well below 100. So is this a business we should model towards decline now going forward? And for you, Gleb, on the go-to-market side, great to see the progress there. What else is left here? What is it that between now and Iran still needs to kick in that hasn't from your perspective?

Mark Sweetan | Chief Financial Officer

Yeah. So, Itai, just to reiterate, we're still thinking of computer backup as declining year over year 5%. And the NRR is going to be tightly tied to that because it's a subscription business, not consumptive, which would mean that B2... would grow 24% year-over-year. So the change in outlook is pretty much all on B2, and computer backup remains at a decline of 5% is what we're forecasting and guiding.

Gleb Budman | Co-founder, CEO & Chairperson

BJ, thanks for the question about the GTM transformation, what's done and what we have to do still. So what I'll say is I think we've made great progress this quarter. And there's still a variety of things that we want to get further, right? So we hired Anuj Kumar to run that organization. I've asked Jason, who's with us, to take on and focus most of his time on the NeoCloud opportunity. So Jason works for Anuj. And we see that as a $14 billion opportunity. So we're putting focus and resources on that specific part of the opportunity with Jason focusing on that. The awareness generation is off to a good start with Flamethrower, but it's only been a couple of months in. And so we've been moving faster than I think expected on that. And we've been invited to participate in some great organizations and partnerships with, you know, A16Z and Startup Grind and Launch. But it's, you know, there's a lot of opportunity there still between that and the open source developer efforts that we're doing. There's still a lot of opportunity to make sure that everyone thinks of Backboys as their first spot for their price performance storage. So there's, you know, there's a lot that we've done There's still, I think, a lot of opportunity that we have. I am excited that we're seeing pipeline growth stronger than we've seen in the past. We're seeing more of our sales team hitting their quota than we've ever seen in the past. So a lot of the right things are happening, but we're always going to keep working on it. I appreciate it.

Good luck. Thanks. Abby | Conference Operator

And our next question comes from the line of Eric Sepiger with B Reilly Securities.

Your line is open. Eric Sepiger | Analyst, B. Riley Securities

Yeah, thanks for taking the question. Congrats on a real good quarter. Can you speak to what portion of the neocloud market you're either servicing or at least engaged with? And then Where are you in terms of the hiring on the sales front? Are you adding additional salespeople at this point, or where are you from that perspective?

Gleb Budman | Co-founder, CEO & Chairperson

Yeah, thanks, Eric. So there are about 200 neoclouds. We went to GTC, the NVIDIA's premier conference, and had just a host of great conversations there at GTC. is that there was some noise on the online. So the what I would say is we're engaged with most of the top neoclubs as part of it. The part that we are servicing for them is this data lake layer, right? So if you think of the AI workflow, the GPUs themselves, there's the very low latency, high performance flash that you want adjacent to the GPUs. And then what you need is the place where you store all of the data. So you can almost think of it, if the whole AI workflow was a laptop, you've got your compute, your CPU, you've got the RAM, and you've got the hard disk or SSD. We are basically providing that hard disk layer. There's about half a dozen companies that provide that RAM layer. And then the base NeoCloud part is that CPU GPU part. So we're providing that large-scale, high-performance, not the highest performance, but high-performance per dollar data lake layer for them. And so we're a white-labeled provider for them. We're doing that, as we talked about in the last call, we've got the six-, seven-, and eight-figure deals that we've signed for that. We have others that are in the works, and we're engaged with a bunch of the neocons at this point.

Eric Sepiger | Analyst, B. Riley Securities

Can you give us a sense of what portion of the neoclouds out there, of the 200 that are out there that you're speaking to? Do you think it's a quarter? Any gauge on what penetration you've had?

Gleb Budman | Co-founder, CEO & Chairperson

So I think in terms of the conversations and engagement side, probably somewhere around that number. But I would say we're engaged with pretty much all of the top ones at this point. um and and having you know different levels of conversations and some in pocs etc um with them um on the on the sales side of it um you know we talked earlier this year that there were a number of different roles we wanted to fill at this point uh i'm excited to say we've we filled the you know the sierra role with anuj we filled the um rev ops role we filled the sales development role um and so we've got a very strong build out of that team now. Very good.

Thank you. Thank you. Abby | Conference Operator

And our next question comes from the line of Jeff Van Ree with Craig Hallam. Your line is open.

Jeff Van Rees | Analyst, Craig Hallum

Great. Thanks for taking my questions, guys. A couple. First, just maybe, Mark, help me with the guide and the outcome. I'm trying to understand the progression here. So, Ian, at the end of February, what, Feb 24, you took roughly $4 million out relative to the consensus, and now we're putting $5 back in. I'm trying to understand, you know, in the Feb 24 call, was the May 1st price increase in B2 already contemplated in the guide?

Mark Sweetan | Chief Financial Officer

Hi, Jeff. No, that was not contemplated in the guide. And in the $5 million increase we just did, half would be from the pricing increase half would be from the organic momentum and help of the business we saw in Q1. And the change is really, a lot of it is this guidance philosophy we spoke about, just a lot more prudent going forward. That's what drove the change.

Jeff Van Rees | Analyst, Craig Hallum

Did you, if you take the final month of the quarter, March and then April, was there a I don't know if radical is the right word to use, but did you see substantial improvement in close rate? Because it sounds like you're saying your conviction is coming both from improved bookings as well as usage. I'm trying to understand how Jan-Feb bookings were weakish, and then all of a sudden March-April really killed it. I know you've made some process change over time to sales, but it was just such a quick snap. Maybe you can just help me dial it in there a little bit.

Gleb Budman | Co-founder, CEO & Chairperson

Yeah, Jeff, I mean, this is Babo. Maybe I'll touch on and then Mark can also weigh in. So we certainly had a more back-ended quarter in Q1, and we started off Q2 strong. So there's definitely enhanced feel from the numbers that we're seeing, right? And then I think, you know, And we talked about, like, you know, the million-dollar-ish deal that, you know, closed in 11 days. You know, that started and closed toward the end of the quarter. But it wasn't the only deal, right? The pipeline itself has been building strongly this, you know, this April. And I think we're layering that on along with the execution that we're doing on our own side. So I think that that's kind of, I guess, the – conviction and emotion side of things based on the data and the execution. And then I'll let Mark, if you want to add anything beyond that on the guide side of things.

Yeah. Mark Sweetan | Chief Financial Officer

I mean, Q4 bookings, back in Q4 bookings were good, but, you know, we wanted to hit that 30% growth, Jeff. To hit 30% growth, you know, we'd have to be booking like $5 million a quarter. Okay. So we weren't at that rate rate yet. but it's been improving pretty much every quarter. And this latest Q1 is a further improvement and probably the closest we've gotten, frankly. And the demand signals are really strong. So the demand signals being really strong. Yeah, we're feeling good about the outlook, but we're still guiding with that prudence. And, you know, we'll use some of that price change to also fund some additional CapEx so we could have, further capacity in place to handle that demand because we don't want to be in a position where we're declining any revenue opportunities.

Jeff Van Rees | Analyst, Craig Hallum

Yep. Yep. Got it. Got it there. And just to follow up on that last piece, then in terms of the outlook for the year for CapEx for 26, I heard your reference it, but can you just give us a number there? What are you, what are you expecting? And then also on this.com.

Thanks. Mark Sweetan | Chief Financial Officer

Yeah. On the, on the, on the CapEx side, we're probably going to be around mid thirties as a percent of revenue and I would say there's three factors there. One, last quarter we spoke about that large customer. We've got a service next year, so we need to get that CapEx in place now. Two, all the strong demand signals. And three, the general equipment cost is 30% higher than it was on a per unit basis from a year ago. So for those three factors, we're beefing up our CapEx plan for this year, accelerating it from 2017 to this year.

Yep. Jeff Van Rees | Analyst, Craig Hallum

And your thoughts on Stockholm?

Mark Sweetan | Chief Financial Officer

I'd say pretty stable. If you look at our headcount, I mean, generally speaking, year over year, our headcount is actually coming down. So we're continuing to drive more efficiency out of the business. So Stockholm should be pretty stable in dollar terms. And as a percent of revenue, it does improve over time.

Gleb Budman | Co-founder, CEO & Chairperson

One thing I would also just mention, since you bring up supply chain and supply chain constraints and all that, what's interesting is we have to buy the equipment, so we have to spend more on some of that side of things. But the interesting thing is also we get two tailwinds from the supply chain being constrained. On the GPU side, because the supply chain is constrained on the GPU side, customers are saying, well, I need to go and have access to wherever the GPUs are available. And so we regularly talk with customers who say, I have to have my data somewhere that I can send it to whichever Neo cloud has the GPUs available. And on the memory side, which is also obviously heavily constrained, the Neo clouds that offer cloud storage have been building out often on flash and that becomes really expensive, especially now with the constraints there. And so it's driving additional interest from the neoclubs in working with us on that data lake tier. So on the one hand, we have to deal with pre-buying ourselves on the equipment side for CapEx, but on the other side, we have these two tailwinds to the business.

Jeff Van Rees | Analyst, Craig Hallum

That's helpful.

Mark Sweetan | Chief Financial Officer

Jeff, just to step back on StopConf, I mean, if you look at the statement of cash flows, Q1, obviously, stock comp is higher as we settled some of our annual bonuses in equity as well. But you'll notice this year's stock comp was actually lower than last year's.

That's helpful. Jeff Van Rees | Analyst, Craig Hallum

Great. Thanks. Congrats on the turn, guys. Thanks, Joe.

Abby | Conference Operator

And our next question comes from the line of Jason Ader with William Blair.

Your line is open. Jason Ader | Analyst, William Blair

Yeah, thanks. Good afternoon. I just wanted to get a better sense on the neoclouds. What are the size of some of these deals? I know you talked about the eight-figure deal that's coming in, I believe, next year, but maybe just more detail on some of the other deals that you've landed or are in the pipeline. Are we talking about household neocloud names that are contracting with you for potentially further kind of eight-figure deals? I mean, just I think gauging kind of how significant an impact you might have from some of these neocloud opportunities would be helpful.

Gleb Budman | Co-founder, CEO & Chairperson

Yeah, thanks, Jason. So first of all, we estimate that our opportunity in the neocloud market by 2030 is $14 billion. And that is just the data lake here that we provide, right? So that's not the entire storage footprint. The deals that we have signed, the six, seven and eight figure deals that we've signed, I'll say two things. One is you would recognize them, right? They are companies that you would know. And two is that all three of those are initial deals. So all three of them are ones where the companies look at it as the way to start, not the total opportunity. So I think there's, frankly, I can see a path where the six and seven figure deals could become eight figure deals themselves. The eight figure deal can certainly scale from where it is once it's ramped. So that's kind of a little bit of that side of the opportunity. The other conversations that we're in, you know, many of them are assuming they move forward are of that same scale. You know, some of the conversations are, you know, we may want to start with a six-figure or seven-figure deal, but many of them, the scale of the opportunity is eight figures at round.

Jason Ader | Analyst, William Blair

Okay, helpful. Thanks. And then just on the I guess the risk potentially that the neoclouds add a lower cost storage tier, and then, you know, you guys are helping them for a little bit, but then, you know, they kind of insource it.

Gleb Budman | Co-founder, CEO & Chairperson

You know, I mean, it's always possible, but it's a little bit like, you know, for the first almost two decades of Backblaze, one of the questions we were always asked was, what happens if AWS ends up lowering their price to match you? And we're two decades in and that hasn't happened. I think that the challenge is it's not easy to build the type of IP that we have built up over the last two decades. It requires scale and expertise and a focus over a long period of time to get it really honed and right And the thing for the neoclubs is they have a lot of things they need to do, right? There's opportunities around GPUs and GPU scaling and optimization and how do you make tooling better for inferencing and all kinds of things, spending all their resources to try to replicate what we have built over the last two decades is probably not the best place for them to invest their own resources when they can when time to value is so much faster by using Backblaze okay great and then Mark for you just a couple of quick ones um so the with the higher CapEx are you still guiding for free cash flow positivity this year Mark Sweetan | Chief Financial Officer: Yeah, so the second half of the year, we're still guiding for that to be free cash flow positive. For the whole year, I mean, Q1 was minus 1.8 million. Q2 should be somewhere around neutral. And the second half of the year should be positive. So net-net for the year, we should be, you know, neutral or very, you know, 1% of revenue free cash flow positive, despite the acceleration of the capex.

Jason Ader | Analyst, William Blair

Okay, great. And then just on the gross margin, just last question from me, sorry. It's sort of, as I look at it over the last few years, I'm looking at just the, not the adjusted gross margin, but the reported non-GAAP gross margin. It was like mid-50s for a few years. And then last year was 62, roughly, 62 in Q1. Can you just remind us of like what caused the kind of the significant increase in the gross margin and then maybe some puts and takes going forward on that gross margin line?

Mark Sweetan | Chief Financial Officer

Yeah, sure, Jason. So if you go about a year ago, we reviewed the estimated useful life of our fixed assets. And it turns out we're using all our fixed assets for typically six years onwards. so we moved all the depreciation to six years so that drove a big benefit to gross margin second all other lines like if you think about all the labor or payment fees or everything else that fits to our cost of sales we've managed really tightly year over year so it's kind of staying flat in absolute dollars pretty much and improves as a percent of revenue We're looking at everything within our gross margin now to further drive optimization, but I would say between the price increase, which benefits gross margin, but the accelerated CapEx, which will push on gross margin now, it should stay flat around where it is now. We're not getting through any major changes in gross margin through the rest of the year.

Jason Ader | Analyst, William Blair

Okay, thank you very much. Thanks, guys.

Abby | Conference Operator

And our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

Your line is open. Eric Martinuzzi | Analyst, Lake Street Capital Markets

Yeah, I was just curious about the timing of the price increase. I went back and looked it up. I guess it was October of 2023 was the last time you raised the price on B2, and you really hadn't raised it since you rolled out the product back in So we're at about the two and a half year mark here with the price increase. Was this something that you felt like, hey, we're delivering more value, we need to capture more value? Or was there competitive issues where competitors were raising price and kind of provided an umbrella for you to do the same?

Gleb Budman | Co-founder, CEO & Chairperson

Yeah, thanks, Eric, for the question. So, you know, we periodically reevaluate what the pricing and packaging of the offering should be. When we were looking at it, there were a few things that came together. One is that we've been investing more into the performance of the platform. More of our customers are using us in these hot use cases where we're driving high throughput, high IOPS. We made egress free before, and one of the things that that's enabled is not just that it's less expensive for the customers, but it allows them to actually run more frequent training of their models in the AI use cases. So it's actually unlocking their ability to innovate, but it's free for them. It costs us money to provide that. So we've been working to increasingly provide more and more value to these higher performance, more active use cases. And we also wanted to simplify the pricing by removing transaction fees. So the pricing and packaging combination, along with, as Mark said, the underlying costs of the components have been increasing. So taking all of that together, we decided this was the right time to do that.

Eric Martinuzzi | Analyst, Lake Street Capital Markets

Okay. And with regard to competitors, I mean, historically, you guys have thrown out the, hey, we're 80% cheaper than Amazon. This is obviously you're raising... I think what I saw was about a 15%, 16% per terabyte per month. Does that shrink that gap now, or do you still feel like there's a delta?

Gleb Budman | Co-founder, CEO & Chairperson

We are still dramatically more cost efficient than the alternatives out there. I was literally actually just talking to one of our account execs a couple of days ago who was talking about a customer who has been ramping on our platform. And they said that they moved over a lot of their data and they're continuing to move over more of their data, more of their use cases, because on the one hand, we're more affordable on the storage side, right? So just at the base level of storage. But where they were getting hit dramatically at their prior provider was that each time they egressed the data out from their provider to one of the other Neocloud providers, they were getting hit with massive egress fees, one. And two, the transaction fees were actually costing them three to four times more than the cost of the storage at their private provider. So when you put it all together, they were more than 5x more expensive at their prior provider, and they were literally wondering whether that was going to even be affordable for them to stay in business. So the scale of total cost of ownership that we provide on a benefit basis is still quite dramatic.

Eric Martinuzzi | Analyst, Lake Street Capital Markets

Thanks for taking my question.

Gleb Budman | Co-founder, CEO & Chairperson

Thank you.

Abby | Conference Operator

And our final question comes from the line of Rustam Kanga with Citizens.

Your line is open. Rustam Kanga | Analyst, Citizens

Great. Go ahead, Mark. Thanks for taking my question. Nice, clean set of results here. Just one on B2Neo. As workloads begin to shift more towards inferencing from training, will that lead to improving predictability and visibility? And then to that end, could you potentially share what percentage of neo-business on average or even directionally represents inference versus training workloads?

Thanks. Gleb Budman | Co-founder, CEO & Chairperson

Sure. It's a good question. And the first part of the answer is yes. As things move toward inferencing, it does make it easier to be more predictable. Today, more of the use cases that we're seeing are related to model building, and that's That makes sense, because a lot of the data sets right now that are very large and that need to be moved are related to the model building, and we're a great service for that. But I'll give you an example. In the GenAI media space, I was talking to a customer about their data flow, and the data flow is they accumulate a lot of data. They store that data, they annotate that data, then they find a GPU provider that is available, and then they run iterative model building on the different GPU providers. So they use us to store that large data set, and as they acquire new data sets, they use us to store more of those large data sets. They love the fact that they can store those efficiently and then send them quickly and for free to the GPU provider that they want. So they're using us in this whole model building process. Now, as they do that, the other side of their business, the actual thing that they offer and they charge for is generating videos. That's all the inferencing side. And so they're looking at us for the outputs of all that video because every single time a user generates new video, that video then gets stored basically forever. And each version and each iteration gets stored forever. And so we've become a great place to store that. And that inferencing side, is a much more smooth and predictable site. So the short answer is yes, it will be more predictable as we get more inferencing. Today, the bigger workloads that we see are related to model building because we're great for that, but we are seeing more inferencing startup on our platform.

Rustam Kanga | Analyst, Citizens

Okay, great. Thank you. Thanks, Ross.

Abby | Conference Operator

And that concludes our question and answer session. I will now turn the conference back over to Gleb Budman for closing remarks.

Gleb Budman | Co-founder, CEO & Chairperson

Thank you, everybody. Q1 was a proof point. We beat on revenue, beat on EBITDA. B2 is growing 24%. The deal size is more than doubled. The AI customer is up 76% year over year. We are not just riding the AI wave. We're building the infrastructure that supports it. We are key for the neoclouds, key for the AI builders, and we've had nearly two decades of optimizing performance per dollar at scale, which makes us ideal for the needs of AI. We raise guidance. We're on track for our first full year of free cash flow positivity as a public company, and we're picking up steam. Thank you to our customers, our partners, and thank you to our amazing team that's making all this happen. Thanks for joining our Q&A call, and we look forward to connecting on the next one.

Bye-bye. Abby | Conference Operator

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect. jsPDF 3.0.3 D:20260606090014-00'00'

NASDAQ:BLZE Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Please stand by. Good day, everyone. Welcome to the Backblaze fourth quarter and full year 2025 earnings call. Just a reminder, this call is being recorded. I would now like to hand the call over to Ms. Mimi Kong.

Please go ahead. Mimi Kong | Head of Investor Relations

Thank you. Good morning and welcome to Backblaze's fourth quarter and full year 2025 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Mark Sweetan, chief financial officer. Today, Backblaze will discuss the financial results that were distributed earlier. Statements on this call include forward-looking statements about our future financial results, the impact of our go-to-market transformation, sales and marketing initiatives, cost savings initiatives, results from new features, the impact of price changes, our ability to compete effectively and manage our growth, and our strategy to acquire new customers, 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 quarterly report on Form 10Q 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 8K filed today with 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 NRR, growth customer retention rate, and adjusted free cash flows. And finally, we will be participating in the Citizens Technology Conference on March 2 in San Francisco. Thank you for joining us and I would now like to turn the call over to Gleb.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Thank you, Mimi, and welcome everyone to the call. We finished 2025 with solid fourth quarter results. Revenue came in line with guidance and adjusted EBITDA margin reached 28%, doubling over the prior year. We also deliver adjusted free cash flow profitability for the first time as a public company, a major milestone demonstrating the inherent operating leverage in our business model. For the full year, total company revenue grew 14% year-over-year, with B2 cloud storage growing 26%. Today, I want to focus on three things. First, the strength and durability of our core business. Second, an update on the meaningful progress of our go-to-market transformation. And third, how we're positioning Backblaze to take advantage of the AI opportunity. Let me start with the core of our business. As data creation accelerates exponentially, Backblaze addresses a large and growing market where long-term demand for scalable, cost-effective storage compounds over time. Our business compounds within that market as we add new customers and retain them for an average of nine years. B2 net revenue retention of 111% reflects consistent expansion within our installed base, reinforcing durable, long-term growth. We've proven our ability to grow in that market, delivering an annualized growth rate of 21% since IPO. Being a cash-generating business is an important financial milestone. Year over year, we meaningfully improved profitability, demonstrating how we are building a sustainably durable company one that can invest in growth while maintaining financial strength. Now, let me talk about our investment in growth and the progress on our go-to-market transformation. While we didn't achieve our budgeted Q4B2 growth rate, we made meaningful progress and have positioned ourselves for success. More importantly, the underlying fundamentals of the business remain stable, and the investments we've made position us for durable growth going forward. Including the highly variable growth of the large AI customer we previously mentioned, we stabilized on a baseline of around 20% B2 revenue growth in each of the last five quarters. Now we've shared our goal of moving up market. We ended the year with 168 customers generating more than $50,000 in ARR each, up 35% year on year. The ARR of this cohort increased 73% year-on-year to $26 million of ARR. We're very proud of this upmarket progress. We've also launched three key initiatives. Number one, increasing awareness. We launched Flamethrower, our startup program designed to engage high-growth companies early and establish back blades as their long-term storage infrastructure partner. Number two, driving greater pipeline consistency. We're upgrading our top of funnel systems and scaling demand generation programs to drive higher velocity sales motion. Number three, expanding revenue within our installed base. We are implementing processes to proactively identify and capture additional share of wallet across our more than 119,000 B2 customers. People are the cornerstone of our success and we continue to strengthen our leadership bench to support these initiatives. We have already hired the co-founder of an edge compute company to drive our flamethrower program, a business systems leader for our systems work and a head of customer success to build out that expansion effort. We will keep up leveling our leadership and talent. For instance, We are also in the final stages of hiring a sales development leader to drive pipeline and a revenue operations leader to drive tighter coordination and accountability across the entire go-to-market organization. Scaling into this next phase requires even greater execution discipline. To support that, Elias Mendoza joined us as strategic transformation leader. He previously served as partner and COO at private equity firm Cirrus Capital and held leadership roles at IBM and Morgan Stanley. In these roles, he's helped companies drive strong strategy to execution. Under his leadership, we also established a go-to-market advisory committee of operators who have scaled enterprise and platform businesses to a billion in revenue and beyond at companies such as Okta, Snowflake, ZoomInfo, and Carta. Their role is to bring pattern recognition, pressure test key decisions, and provide external perspective as we scale. We have made meaningful progress in our go-to-market transformation, and I'm excited about the team we're putting in place to drive it forward. Now let's talk about how we're positioning Backboys to take advantage of the massive AI opportunity ahead. We all understand there's a lot happening in AI today, but sometimes the scale is still hard to fully comprehend. I saw a report recently that capital spending on AI as a percent of GDP by just the hyperscalers in 2026 is forecast to be five times larger than the entire spend to create the U.S. interstate system. Ten times larger than the Apollo space program. AI capex spending accounted for 92% of all U.S. GDP growth. it's hard to hyperbolize AI. With AI, a big focus is who's disrupting and who's getting disrupted. We believe Backblaze is one of the disruptors, participating in this infrastructure replatforming as a storage backbone for the next wave of cloud infrastructure. So while like any major new innovation, there will be market volatility, We are firm believers in the long-term growth opportunity and are leaning into it. We're doing that with two growth vectors. Number one, on the supply side of AI, Neal Clouds and other AI tooling companies are building the platforms for AI workflows. Our opportunity is to be the storage backbone of those platforms. And number two, on the demand side of AI, Companies are using AI to build everything from anomaly detection to zonal forecasting. These companies are using and generating large data sets. Our opportunity is to be the storage of choice for their developers and use cases. And we are uniquely positioned to be the glue between these, creating a virtuous cycle. Developing a platform that can deliver massive performance with large scale data sets while providing that cost efficiently is a significant technical challenge. Backblaze has done that and AI is driving an increasing need for this technology. On the supply side, roughly 200 neoclubs have sprung up and industry estimates project that market to reach $237 billion within the next five years. These companies provide GPUs as a service, and most will need cloud storage to fully service their customers. We've already signed multiple of these multibillion-dollar neoclouds with not only six- and seven-figure deals, but our company's first eight-figure TCV deal, an over $15 million deal. And we believe all of these have material upside potential and we're in discussions with more than half a dozen others. By our estimates, NEO cloud storage for our solution alone represents a $14 billion opportunity by 2030. To further pursue our NEO cloud opportunity, this morning we launched B2NEO, a high-performance white label storage offering specifically designed for NEO clouds. Developed in collaboration with our Neo Cloud customers, B2 Neo allows Neo Clouds to offer a top tier storage solution without the massive capital costs or years of engineering required to build a storage backend from scratch. On the demand side, the growth in AI developers is exponential. GitHub disclosed they were adding on average a new developer every second. Hundreds of AI companies countless individual AI developers already use B2. For example, one of our customers uses AI to generate audio. They just launched a year ago and already have multiple petabytes with us signing a six-figure annual deal with us. As they add new users and those users generate more audio, that data grows exponentially. Our self-serve platform where we added 12,000 customers this year alone is a great enabler for this class of AI developers who just want to get going. We launched our startup program called Flamethrower and a developer relations initiative to ensure developers are building with Backblaze. To drive our roadmap forward for the AI opportunity ahead, we strengthened our product and engineering leadership. Dan Spragans joined as SVP of engineering and Rhett Dillingham as SVP of product, bringing deep experience in AI and high-performance cloud infrastructure. We also added Russ Arts, co-founder and former head of R&D at Computer Associates as an advisor. Together, this team strengthens our ability to scale the platform for larger, more complex AI-driven deployments. We enter 2026, with a strong and growing business, a rapidly improving go-to-market motion, and a tremendous AI opportunity with a targeted B2 Neo offering and a strong product team. AI is reshaping how data is created and scaled, and storage sits at the center of that transformation. Across Neo Cloud platforms and AI native developers, we are building the foundation for the next generation of data infrastructure. Durable growth and massive AI potential are the hallmarks of our opportunity. With that, I'll turn the call over to Mark. Mark?

Mark Sweetan | Chief Financial Officer

Thank you, Gleb, and good afternoon, everyone. We grew revenue while achieving adjusted free cash flow profitability in Q4. This is a significant milestone and an important step forward in our profitability journey. This progress was not driven by short-term cost actions, but by the inherent leverage in our operating model as revenue scales. For the quarter, total revenue was in line with guidance at $37.8 million and adjusted EBITDA exceeded the high end of our guidance by approximately 600 basis points. In the fourth quarter, B2 revenue grew 24% year-over-year, up from 22% in the prior year. This is modestly below the range that we outlined last quarter. We delivered record bookings this quarter. As Gleb noted, we closed our largest contract in the company's history with over $15 million in total contract value. We're excited about this eight-figure deal. This deal validates the product market fit at scale. We don't expect to see meaningful revenue in 2026 as we complete certain development work. In 2027, We expect this customer to contribute over 300 basis points to B2 revenue growth. This customer helped drive our RPO up 60% year over year to $66 million. In quarter B2 NRR was 111% compared to 116% in the prior quarter. The sequential decline reflects variability from the large customer that we mentioned in our past two earnings calls. Factoring out that one customer, the underlying retention and expansion trends remain stable. Moving to the income statement, Q4 gross margin was 62%, flat sequentially and up from 55% in the same period last year. Adjusted gross margin was 80% compared to 78% last year. Margins remain stable despite higher data center costs reflecting continued efficiency in our infrastructure and discipline management of our operating model. Looking ahead, we anticipate some pressure on gross margins driven by increased costs. In response, we are proactively launching a gross margin optimization initiative focused on structural improvements across pricing, packaging, and infrastructure. Our Q4 adjusted EBITDA margin was 28%, doubling year over year. The adjusted EBITDA outperformance was primarily driven by non-recurring items, including variable compensation alignment and office restructuring savings. Excluding those one-time items, adjusted EBITDA would still have been above the 22% high end of our guidance. Adjusted free cash flow was positive $4 million in the quarter, representing a margin of 11%, exceeding our outlook of being adjusted free cash flow neutral. We ended the quarter with $51 million in cash and marketable securities. Based on our current operating plan, we expect to fund our growth through operating cash flows and capital leases. We do not anticipate a need to raise additional capital. We will continue to evaluate opportunities to optimize our capital structure over time in a disciplined manner. To improve accountability and further align management incentives with shareholders, we are shifting part of the compensation to performance-based stock units. These awards are tied to clearly defined performance objectives. Turning to our guidance for the year, our objective is to provide a clear, incredible baseline that reflects the most predictable portions of our business. While pipeline activity remains healthy, Larger customer wins and usage-driven workloads can introduce variability in timing and revenue recognition. To maintain forecast discipline, we have de-risked our outlook by excluding large swing deals and anchoring guidance on opportunities with more predictable demand characteristics. For customers with high variable usage patterns, our assumptions reflect contractual minimum commitments rather than potential upside consumption. Our outlook is therefore based on continuing expansion within our existing customer base and steady adoption of B2 across core use cases consistent with recent operating trends. We believe this approach provides a prudent and reliable foundation for the year while preserving upside as deployment timing and usage visibility improve. For the first quarter of 2026, we expect revenue to be in the range of $37.6 million to $38 million, with adjusted EBITDA margins in the range of 18 to 20%. For the full year, we expect revenue to be in the range of $156.5 million to $158.5 million. Full year adjusted EBITDA margins are expected to be 19 to 21%. We expect adjusted free cash flows to be roughly neutral for the year with normal quarterly variability. Due to the difficult comp from last year's large variable customer, we expect B2 year-over-year growth in Q2 and Q3 to be in the range of 12% to 19% and approximately 20% for the full year. To wrap up, over the past year, we made meaningful progress towards becoming a Rule of 40 company with our combined B2 revenue growth and free cash flow margin improving from 9% to 35%. As we look toward 2027 and beyond, we believe Backblaze is well positioned to grow efficiently. Our platform is already built, our infrastructure scales with discipline, and incremental revenue increasingly translates into profitability and cash generation. This capital efficient model allows us to pursue the massive AI-driven opportunity ahead while maintaining financial discipline, expanding margins over time, and building a durable, self-funding business. With that operator, let's open it up for questions.

Operator | Conference Operator

Thank you, sir. And everyone, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 if you have a question today. We'll take the first question from Atai Kidron from Oppenheimer.

Atai Kidron | Analyst at Oppenheimer & Co.

Hey, guys. Solid numbers, and thank you very much for the risk and the outlook for the year. It's hopefully a very smart move. Gleb, I wanted to dig, of course, into the NeoClouds and the large deal. First of all, just from a big picture standpoint, are demand patterns any different? Can you explain how your B2 NeoCloud solution, how is it different than B2? In what way are the demands different, the pricing different, the margin different? And if you could elaborate also why this deal is going to take a year before we start seeing revenue, I would appreciate that.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Yeah, thanks, H.I. All good questions. So one thing I'll say, first of all, is our pursuit of the neoclouds is one part of the business pursuit. There are about 200 of these neoclouds. We do think it's a large number. an important opportunity for us. Just our part of the Neocloud opportunity we view as about $14 billion, so it's important. And we are really well suited for it. The hyperscalers are not the key competitors here because they are competing with the Neoclouds as opposed to being vendors for them the way that we are. So it's a good opportunity which we're well positioned for. In terms of what B2 Neo is, it is a white label offering. So B2 is generally sold directly to the end customer. B2 Neo is a white label offering that they can build in directly into their service. It provides a lot of the same functionality that B2 provides. It's high performance, it's low cost, it's durable, it's scalable, but it also provides them the ability to manage that storage on behalf of their customers through APIs with API integration, single sign-on, et cetera. So it's really leveraging all of the technology that we've built over the last 17 or so years for the company, and then layering on top of that technology to make it simpler for them to integrate natively and make it easy for them to manage and offer that storage offer. So that's what B2Neo is. Now, in terms of why it's going to take a year for this one Neocloud provider to start seeing the benefits of it, it's a combination of work we need to do and work they need to do. So they have an existing storage offering that they're going to be switching to use B2Neo instead. And so it's basically, we have some work to do to make it so that it's even easier and more robust to automate and natively integrate for them. One thing I'd like to make clear is all the work that we're doing for them is useful for other neocloud providers and also other companies but not required for most so we have multiple neoclouds that have already signed up that don't need this work and we think that there's a large number of them that won't need any of this work but the work that we're doing is broadly useful uh for others as well okay appreciate it and then i i guess first of all the tcv 50 million that's great but can tell us the the duration of the contract and Atai Kidron | Analyst at Oppenheimer & Co.: Is the margin profile of this business, you know, as you ramp up the meal clouds, Gleb, is there a potential upfront cost hit to you as they ramp before margin normalizes on these businesses?

Mark Sweetan | Chief Financial Officer

Yeah, I mean, hi, Itai, this is Mark. I can take that question. We do have to accelerate some capital expenditures, right? That would impact that and other things happening in the market would impact our gross margin by a few hundred basis points to help us prepare for this because it's obviously a large deal. We need to have the capacity in place.

Atai Kidron | Analyst at Oppenheimer & Co.

Okay. And then lastly on computer backup, Mark, can you comment on the expectation? I mean, this business is, you know, the number of customers is now declining here. I guess, help me think about a framework for this business for 26. How should I think about the quarterly cadence and the annual cadence of this business? Is there a different long-term outlook for this?

Mark Sweetan | Chief Financial Officer

Yeah. I mean, I'll start off by the coming year, Itai. We see this business declining 5% year over year. Currently in Q1, that's more like a minus 3% that builds up throughout the year and averages out for the end of the year at a minus 5%.

Okay. Atai Kidron | Analyst at Oppenheimer & Co.

And long-term, is there any reaction? Should we just continue to expect this business to slowly decline?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

What I would say on that one is we have programs that we've put in place and are putting in place to stabilize the business. We would like to get it to a place where it is flat and possibly even slowly growing. We don't think this is a fast growth business, as you know, but it would be good for it to not be a declining business. But it's a little too early for us to have confidence in those programs getting to that place. So for this point, we're estimating it at that shrinking rate, but we are putting effort into getting that to be flat to slightly growing.

Atai Kidron | Analyst at Oppenheimer & Co.

Appreciate it.

Thank you. Operator | Conference Operator

The next question will come from Jeff Van Re from Craig Hallam Capital Group.

Jeff Van Re | Analyst at Craig-Hallum Capital Group

Great. Thanks for taking the questions and congrats on the free cash flow. Great to see it. A couple for me. Maybe if you could just start in terms of B2 coming into Q4, came in a bit below expectations. Just expand a bit more on what missed their And then, you know, as you're looking at the annual number, I didn't catch what you had guided it for in Q1, so if you could just fill in the gap. I think we can back into it, but maybe you could just share it. So what happened in Q4 and what do you think in Q1?

Mark Sweetan | Chief Financial Officer

Yeah, hi, Jeff. Good to hear from you. This is Mark. So... On the Q4-25, we were expecting, when we set our guide, quite a few deals to close in November. They came in very late in the quarter, so they didn't benefit Q4. That's why we've adjusted our guidance philosophy going forward, where we said, going forward, we're going to factor out the swing deals because they're less predictable in timing of closing. So that feeds into the guide going forward. And we said for B2 year over year, it will be 20% in 2026. The ranges that we provided of 12 to 19, a lot of that has to do with the comps of that high variable customer in 2025. So Q2 would be the low end of that range, and Q3 would be about the higher end of that range. And overall, the year would average up to 20%. Does that answer your question?

Jeff Van Re | Analyst at Craig-Hallum Capital Group

Yeah, I think it does. And so the growth is, if I do the quick math, maybe in Q1 looks like it's 9% if I have it right on year-over-year, and you're decelerating to 8% for the overall year. So it actually looks like maybe you're assuming some deceleration in the year. I'm sure there's a little bit of lumpiness from the large customer. But generally speaking, you had some pretty good momentum in sort of phase one of the sales build and build out. And it sounded like you felt like you had some early good signs on phase two, but the numbers are painting a picture of deceleration. So just help me reconcile the two.

Mark Sweetan | Chief Financial Officer

Yeah. I mean, the deceleration that you're seeing is largely driven by that one monthly customer. If you go to slide 21 of our earnings deck and you factor out that one month, customer, you could see that it pretty much, we've been stable around the low 20s. So if you recall factory on any price increase, B2 growth rate has always been growing, but decelerating for five years, we've managed to stabilize it in the low 20s. So now with this new guidance philosophy, we're saying 20 year over year, and that includes the lumpiness that I described in Q2 and Q3. But then with all the phase two changes we're doing, Gleb could elaborate on that. That will then afterwards come drive benefits.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

I think also, Jeff, I think you were talking about the whole company, not just B2, right? And so part of what's driving that is that computer backup was growing in part due to the price increase before and it's, as Mark said, we expect it to shrink about 3%. So it's putting some downward pressure on the overall company in Q1. On the GTM transformation, I think some of the things that we look at is, you know, in terms of progress, there is progress that we're making in terms of actions, things like we've hired the VP of revenue operations, we've made material progress in moving the systems forward and expect that to be largely completed at the end of this quarter. We've gotten pretty far down the path with some sales development leaders to bring in. We've made a number of improvements. And then you can also see some of the outcomes, like the 73% growth in ARR from customers over 50K and this eight-figure deal. So I think we've made progress on the GTM side. Obviously, we all want more work to be done there.

Jeff Van Re | Analyst at Craig-Hallum Capital Group

Great. Maybe just one last one, if I could. On the large NeoCloud win, can you just expand a bit on what the competitive landscape looked like there? Maybe the finalists, the two or three that it came down to at the end of the day, and if there were specific features, capabilities that were the deciding factors for your win there?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Yeah, it's interesting because this NeoCloud, they have their own storage. They started realizing from their customers that that the source that they had wasn't going to provide what they needed for this next phase of evolution. And so they started thinking about how to handle that. a number of their internal engineering and business leaders were actually familiar with Backblaze from prior roles in other places. And they knew that Backblaze had a really strong reputation for providing a great storage platform, that it was trusted. Basically, we built a moat around this idea of high performance, but predictable economics and low cost storage. And so we were the top of their list for consideration. Now, When they went and evaluated, you know, they wanted to make sure because they were going to be basically placing their brand on the line for saying, you know, they're going to use us for this underlying platform for all of their customers. So they wanted to make sure it absolutely worked. They did, you know, pretty detailed technical due diligence. and then chose us. So, you know, the why, I think, came in part because we had established a lot of credibility over many years that we are a great storage platform, and then we met their technical requirements for both performance, scale, affordability, and openness. Okay, great.

Operator | Conference Operator

Your next question today comes from Mike Sikos from Needham.

Mike Sikos | Analyst at Needham & Company

Hey, great. Thanks for taking the questions here, guys. If I could just come back to the gross margin comment on this expected headwind that we're up against. I guess it's a bit of a two-parter here, but when I think about the headwind we're facing this year, is that really tied to customer success initiatives or deployment in advance of recognizing revenue from this large neocloud agreement that we're talking to today, or is there potentially an ongoing presence or multi-year factor we need to consider when evaluating corporate growth margins on a go-forward basis?

Mark Sweetan | Chief Financial Officer

Yeah. Hey, Mike, it's Mark. There's a few factors in there, right? First of all, data center cost and equipment have gone up. That combined with us needing to accelerate some CapEx does reduce our gross margin this coming year by a few hundred basis points. That's why we said we're doing that gross margin optimization initiative to look for opportunities to offset that. Now, in terms of business model, when you go after a white label, large scale solution like that, generally speaking, the gross margin will be a bit lower and the OPEX will be lower as well because you have to spend less on sales and marketing. So that's up to the same economic model for us, but that's the P&L benefit, if that makes sense.

Mike Sikos | Analyst at Needham & Company

It does. It does. Thank you for that. And I just wanted to come back again to this de-risk guide that we're talking through here and appreciate the commentary and the prepared remarks. But just to better understand, these swing factor deals or the idea that we're only going to underwrite minimum contract commitments from customers, is that really tied to in yield clouds when thinking about those swing factor deals? Or is it maybe the move up market? Is there anything else you could provide that's creating that dynamic? And then secondly, Okay, I'll answer this one and then you can ask your next question if you want.

Mark Sweetan | Chief Financial Officer

So moving up market, I mean, there's different sides of up markets, but when you look at the average deal size of those 168 customers, it has grown quite a bit. But I think the even larger ones, and let's call larger ones $500,000 in AR and greater They do take longer to close. So there's less predictability for us to factor that into our guide. So that's why we factored them out. Doesn't mean they won't happen. It's just harder for us to guide on them. So I think it's less around the neocloud. I mean, the neoclouds are big deals, too, and they have similar attributes, right, where you got to take longer to do the technical feasibility and make sure you went over the POCs. So that's what's driving that side of it.

Mike Sikos | Analyst at Needham & Company

And then I guess the final follow-up on my side, but for those, let's say, half a million plus deals that you're signing, can we start bifurcating the extent to which those sales cycles are longer versus your more typical run rate business? And then final piece, but for this calendar 26 guide, is there any way you can give us some pointers as far as the NLR that you're You're thinking about when we look at this calendar 26 guide, and that's all on my side.

Thank you so much. Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

In terms of in terms of the bifurcating the size of the deals in the length of time, when we look at those, they certainly are longer sales cycle ones, but it's interesting because. They're not dramatically longer. So some deals, like the eight-figure deal that we talked about, that did take the better part of a year, in part because they had to look through their own systems. They had to understand what it would take to switch out to a different system, what integration that would require, et cetera. A number of the other NEO cards didn't take anywhere near that long. And many of the other larger customers, especially ones that are $50K, $100K, $200K, actually moved quite quickly. But certainly, some of the largest of those deals, they did take, call it, some of them took six months or so to close, whereas we've seen a lot of the deals close in sub-90 days.

Mark Sweetan | Chief Financial Officer

Yeah, and then I could jump in and discuss the NRR outlook. You know, due to the lumpiness of that large customer in 25, we factored out any usage above their minimum commitment level in our guide for 26. So assuming that that's what materializes, the NRR, just like the revenue growth rate for B2 and just like the overall growth rate of the company, will be lower in Q2 and Q3. An NRR could go down to closer to 100% for one or two quarters, but our overall growth rate of 20%, which is where we should be finishing the year, and year-over-year overall, should equate to an NRR that's closer to 110%, so pretty much where we are now, plus or minus 200 to 300 basis points.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Mike, one thing actually I'll mention also on NRR that I think I find quite exciting. We have a broad base of customers, but we're leaning in heavier to the overall AI customer type, not just the neoclubs. And we have hundreds of those customers that are using us for AI workflows specifically. we've seen a growth rate of 75% in the number of those AI customers. But one of the things that I find even more exciting is that the growth rate of those customers is about three times faster than the growth rate of our average customer. So as we sign up more of these AI customers, we see the opportunity for NRR to go up over time as well because they are generating data at a faster rate than your average customer. Thank you again. Thanks, Mary.

Operator | Conference Operator

Up next, we'll go to Jason Ader from William Blair.

Jason Ader | Analyst at William Blair

Thanks. Good afternoon, guys. I wanted to first ask about your comment club that most NeoClouds don't have storage. I think that's what you said. I just wanted to understand why that might be, and then also your comment that the eight-figure win was for the neoclassic did have storage, but the storage wasn't going to handle what they needed. Maybe just if you could elaborate on why they wouldn't be able to handle what their customers needed.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Yeah, thanks, Jason. Both good questions. So with these 200 NeoClouds that have come up, they almost all started with GPUs, right? So the need that happened was for these AI use cases, they needed the GPUs first, right? The second thing that they need is they need a place to keep the data to feed these GPUs. So initially, they set up data centers. A lot of them set up data centers that were more specifically designed for GPUs, which are very power hungry. Oftentimes, they want liquid cooled environment. They don't need nearly the square footage in the data centers that they need. They need more power in the space, et cetera. So they built these. providers focused on the GPU opportunity. What they realized then is customers who want to use the GPUs need a place to keep the data. They needed the place to keep their data to build the models, and then they need the place to keep the data when they're doing inferencing for the outputs. And so what some of them have done, many of them have not done anything on that front yet, they've just stood up the GPU side of things, but what some of them have done is said, okay, well, we can do something And they some of them have used open source projects for for to stand up their own infrastructure or some of them have set up a storage infrastructure using flash systems, the problem is what they found is you know the flash systems are incredibly expensive. to operate. And so for large scale data sets, that becomes very quickly unaffordable. The open source towing is difficult to manage. You have to have experts ongoingly working to tune it, operate it, et cetera. And they're really not designed to scale to exabyte scale. Most of those open source projects were designed for potentially handling a single enterprises scale. And so once they started seeing some movements and success, they start reaching the limitations of those projects. So the opportunity for us is that there are these 200 providers. They've built out the GPUs. They're starting to realize that they need storage. They're not going to get that from the hyperscalers for the most part because those are their direct competitors. And the solutions that they have are either really expensive, really complicated, or don't scale.

Jason Ader | Analyst at William Blair

Gotcha. OK. And Neocloud that you announced, or they talked about the eight-figure win, can you say if that is a publicly traded company?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

They are a publicly traded company, yeah.

Jason Ader | Analyst at William Blair

Yeah, okay, great. And then last one for me, just, what's your confidence level that you could win additional deals like the one that you announced on the call tonight?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

I mean, I'm very confident that we can do additional deals. The timing is obviously always uncertain, but it's not like this NeoCloud is the only NeoCloud that we have won. We've got others that are six figures and seven figures already. Those that we've already signed as six and seven figure deals, I think they themselves have the opportunity to become eight figure deals because as they roll this out to more of their customers and more scale, they're big enough that they could become eight figure deals for us themselves. And we're currently in discussions with about a half a dozen other new cloud providers that are somewhere in this same scale of, of size of organizational opportunity. So, um, you know, timing is obviously a question for us, but, uh, our ability to be a good fit for these kinds of customers and the discussions we're in, give me a lot of confidence.

Jason Ader | Analyst at William Blair

And I may have missed it, but did you say how the duration of that?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

A figure one was that one's a three year deal.

Jason Ader | Analyst at William Blair

three-year deal. Okay. Thanks very much. Good luck, guys.

Thank you. Operator | Conference Operator

Eric Martinuzzi from Lake Street Capital Partners has the next question.

Eric Martinuzzi | Analyst at Lake Street Capital Partners

Yeah, you mentioned the revenue impact from the eight-figure transaction really doesn't start to hit until 2027. Is that based on your answer about the three-year duration and over $50 million, is that to say then that we're, you know, small amount, maybe the end of 2026 and the bulk of it split between 27 and 28?

Mark Sweetan | Chief Financial Officer

Yeah, that's correct, Eric. And for now, honestly, we're not factoring anything into 2026 for that.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

By the way, Eric, I just want to make sure that it sounded like you said $15 million. It's $15 plus million, $1.5?

Eric Martinuzzi | Analyst at Lake Street Capital Partners

Gotcha.

Thanks for clarifying that. Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

I'll look forward to a $50 million deal in the future, but we're not there just yet.

Eric Martinuzzi | Analyst at Lake Street Capital Partners

The other thing I wanted to ask about was your comment regarding the adjusted free cash flow. You talked about it being neutral for the year, and I'm just wondering, given the investments you're making to have the infrastructure in place here, it seems like it's sort of front half loaded. Is that to suggest then that the adjusted free cash flow positive is We're Q4 for sure and potentially Q3. Is that the right way to think about it, quarter by quarter?

Mark Sweetan | Chief Financial Officer

Yeah, Eric. I mean, generally speaking, the first half of the year is our cost base increases. It starts kicking into Q1. And our OPEX lines honestly should not be really increasing that much other than maybe around 500 basis points, not as a percent of revenue, just off the dollar baseline from last year on a non-cap basis as it relates to just basic inflation, salary raises, and so on. Other than that, we're keeping our OPEX model pretty tight. I spoke about the gross margin being set back by a few hundred basis points. So when you combine all those factors and accelerating some of the expenditures to prepare for these customers, that's why we're free cash flow neutral for 2026. It is lumpy during the year. Usually Q2 is also where we have the least of our computer backup renewals. So Q2 is usually the worst set, and the second half of the year is in better shape. And that would be a nice improvement from the minus $5 million for 2025 as a year and the minus $20 million in 2024. So I think we're pretty well set on exiting the phase of cash burn, and our aim is to stay here and get better.

Eric Martinuzzi | Analyst at Lake Street Capital Partners

Got it.

Thank you. Operator | Conference Operator

And everyone, just a reminder, it is Star 1 if you have a question today. Up next is Zach Cummings from B-Rally Securities. calling for Zach Cummins\ Hi there, Ethan Wydell calling in for Zach Cummins. Thank you for taking my question. I guess to start with NeoCloud and with there being a high portion of leverage there to AI and HPC, how would you define, I guess, the incremental revenue opportunity or overlap, whether it be, you know, like customer base or function or revenue opportunity versus B2 Overdrive?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Yeah, thanks, Stephen. It's a good question. So B2 Overdrive was initially actually developed because we heard from customers saying they wanted to use high-performance storage, high-throughput storage that would enable them to send their data to B2. the NeoClouds when they needed them or two other hyperscalers, for example. So B2 Overdrive is not a white label offering. It's designed for end customers to actually use themselves. B2 Neo is specifically designed as a white label offering for the NeoClouds to then themselves offer storage to customers. So they're largely serving different sides of the market, but both serving the needs of AI and HPC-type use cases. calling for Zach Cummins\ Understood. That's helpful. And then the large CTV deal, can you clarify whether that was from an existing customer? And generally, is the revenue upside from existing customers there based on increasing usage?

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

So the $15 million plus TCV deal is a new customer, completely new to us. However, what I would say is if you look across the million-dollar-plus deals that we've had over the last year-ish, it's roughly half-half. Half of them are net new customers to us that came in, evaluated, considered, tested, and then signed a seven-figure deal with us. And the other half are customers that started off small. Some of them started off self-serve. Some of them came in as just smaller sales deals, got familiar with the platform, liked the platform, and then expanded into seven-figure deals.

Mark Sweetan | Chief Financial Officer

Yeah, and Ethan, this is Mark. What I would add, if you look at slide 17 of the earnings deck, it breaks down the new versus expansion from the existing. And it starts at half and half. So it's pretty well distributed because the self-serve product-led growth is about half of that as well. And then the larger direct sales customers are half. And each one is of breaks out into a half by itself of what is expansion versus new logo so it's basically that's why if you look at the stacked bar it's like four quarters uh it's pretty well diversified in terms of how it comes through got it well i appreciate the color yeah maybe maybe one other piece of color just to add in terms of um so one of the things we look at is as a as a forward leading indicator is pipeline Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board: And in 2024, we generated about $15 million of pipeline. And in 2025, we roughly doubled pipeline to about $30 million. Our aim with our continued GTM transformation is to get to a run rate of about double that. So, you know, with our industry leading win rates, pipeline transfers into AR quite efficiently. And so, you know, we're not there yet, but that's, you know, we made meaningful progress in 25 and aim to make more meaningful progress on that in 2026. Understood. calling for Zach Cummins\ That's very helpful.

Thank you. Operator | Conference Operator

The next question is from Rustam Kinga from Citizens.

Rustam Kinga | Analyst at Citizens

Good afternoon, Mark and go ahead but congrats on the RPO acceleration just building on another question that you answered mark glad where you kind of mentioned that. B2 Overdrive versus B2 Neo are serving two different sides of the market. And, you know, as we sort of think about the build out of the pipeline for B2 Neo, is it fair to say that these opportunities are going to be anchored towards larger deals, albeit maybe not as large as this one that you've just put up in the quarter? But is it fair to say that this is kind of the larger opportunity and is that likely to sort of Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board: lead to you know higher asp engagements as you look towards this opportunity yeah it's a good question so one of the ways i would look at it is the the market for the neoclouds if you take just the uh hard drive based storage opportunity inside of those 200 providers that market is estimated at about $14 billion in the next five years. So with 200 players representing $14 billion of opportunity, every single one of those deals on average is going to be a large deal. So the short answer to your question is yes. The B2Neo deals we see as large opportunity deals. The ones that we've signed so far are six and seven and now eight figure opportunities on those. Some of those I imagine may start smaller just as they start getting familiar with it. But I think all of them have the opportunity to get quite large Rustam Kinga | Analyst at Citizens: Great. That's helpful. And then just kind of thinking about the investment cycle for next year, is there any sort of relative color that you can share with us in terms of the level of CapEx investment that you guys are thinking about for 26?

Mark Sweetan | Chief Financial Officer

Yeah, Ross. This is Mark with Hear From You. Our CapEx will be higher next year as a percent of revenue. When you look at our PP&E at the end of the year, it should be in that high 20s percentage of revenue. We typically finance our CapEx through capital leases and we're fully set up to do that. And that would be the principal lease payments on a statement of cash flows. which is around mid-teens of revenue, right? Because you're buying today, but financing over five years over a growing revenue base. That mid-teens, I mean, over the past few years has actually improved from our side as we continue to optimize our cost of capital.

Rustam Kinga | Analyst at Citizens

Great. Appreciate the call. Thanks, guys.

Operator | Conference Operator

And everyone, at this time, there are no further questions. I would like to hand the conference back to Gleb for any additional or closing remarks.

Gleb Budman | Co-founder, Chief Executive Officer & Chairperson of the Board

Thank you. We have a strong and durable core business, made meaningful progress in our go-to-market transformation, and have a tremendous opportunity in AI. We drove growth while becoming adjusted free cash flow positive. We launched B2Neo and signed multiple Neoclouds, including this $15 million plus deal. We also launched Flamethrower, our program for high-performance startups. In just the last few days since the launch, it's exceeded expectations, growing faster than the kickoffs at other leading companies that our leader for that has driven. We've had about a dozen startups that have applied been evaluated, accepted, and given credits, including ones from Andreessen Horowitz and Y Combinator. And we've bolstered our team overall to take advantage of this tremendous opportunity. I'm really excited about the year that we have upcoming together. I want to thank our employees, our customers, and our investors for taking this journey with us. And we'll look forward to chatting with you next quarter.

Thank you. Operator | Conference Operator

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect. jsPDF 3.0.3 D:20260606090015-00'00'

NASDAQ:BLZE Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Tiffany | Conference Operator: Hello and thank you for standing by. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze third quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. I would now like to turn the call over to Mimi Kong, Investor Relations. Mimi, please go ahead.

Mimi Kong | Investor Relations

Thank you. Good morning, and welcome to Backblaze's third quarter of 2025 earnings call. On the call with me today are Gleb Budman, co-founder, CEO, and chairperson of the board, and Mark Friedan, chief financial officer. Today, Backblaze will discuss the financial results that were distributed earlier. Statements on this call include forward-looking statements about our future financial results, the impact of our go-to-market transformation, sales and marketing initiatives, cost-saving initiatives, results from new features, our ability to compete effectively and manage our growth, our strategy to acquire new customers, retain and expand our business with existing customers, and the impact of previous price changes. These statements are subject to risk and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our quarterly report on Form 10Q 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-GAP FINANCIAL MEASURES. THESE NON-GAP MEASURES SHOULD BE CONSIDERED IN ADDITION TO AND NOT AS A SUBSTITUTE FOR OUR GAP RESULTS. RECONCILIATION OF GAP TO NON-GAP RESULTS MAY BE FOUND IN OUR EARNINGS RELEASE WHICH IS FURNISHED WITH OUR FORM 8-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 NRR, gross customer retention rates, and adjusted free cash flows. And finally, we will be in New York to participate in the Craig Howland Alpha Select Conference on November 18th and the Needham Tech Week one-on-one event on November 20th. Thank you for joining us, and I would now like to turn the call over to Glenn.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Thank you, Mimi, and welcome everyone to the call. We delivered strong results this quarter. In Q3, revenue and adjusted dividend margin both came in above the high end of guidance, and we continue to be on track to be adjusted free cash flow positive in Q4. Overall company revenue grew 14% year-over-year, and B2 cloud storage delivered strong results, growing 28%. Now I'd like to take a step back and share how we see the AI industry evolving because AI is becoming central to both our customers and our opportunity ahead. AI is built on models, compute, and data. While just a couple of years ago, models were the domain of only a few large providers, today they are widely available with literally millions of open source options. So models are no longer a bottleneck for AI innovation. The next component of AI is compute. The GPUs that make up compute have become increasingly available, but access of scale remains challenging, and the market has also become quite fragmented with approximately 200 neoclouds, such as Corweave and Nebius, offering GPU capacity for rent. That brings us to data, the key differentiator for AI success and where Backvoiz helps companies win. Data sizes are exploding as AI expands beyond text to images, audio, and video, driving massive storage and performance needs. The teams leading in AI aren't just the ones with the most data. They're also the ones who can aggregate, clean, and organize it for today's workloads, move it to whichever neocloud they choose, all while preparing it for tomorrow's architectures. Backwise has already built one of the largest fastest and most cost-effective storage clouds on the planet, offering throughput of up to one terabit per second and priced at about one-fifth that of traditional cloud offerings. Add to that our free egress and universal data migration that allow customers to easily move their data from other cloud providers where they may feel locked in and then freely send their data to one of the 200 NeoClouds or anywhere else they needed to go. Then layer on our team actively supporting customer success, and it becomes clear why hundreds of AI companies are treating Backblaze. Highlighting this, Backblaze recently received industry recognition in both cloud security and technology innovation, including an award for B2 Overdrive. These honors reflect the strength of our technology and the pace of our innovation. Now let me share a few customer examples that bring this to life. This past quarter, we signed a new six figure deal with an AI startup focused on large scale vision language models. The team was small, but scaling rapidly and racing to finish key projects. They couldn't predict how their data volumes might grow and needed a high performance and cost effective solution that could scale with them. They started self-serve and later engaged our sales team to access even higher performance. B2 Overdrive gave them the performance they needed, and our team made it easy, freeing them up to focus on their critical projects. Another AI customer in the surveillance space expanded their commitment by almost 10x to a seven figure TCV deal. We won this customer away from a hyperscaler whose platform limited how they could automate their workflow. Our platform offers a valuable multi-file upload that streamlined their workflows. They expanded their commitment with us because we offered a predictable and cost-effective way to scale easily. Finally, we had another six-figure win. It powered by Backblade's white label deal with an app developer in the media space. This was another competitive win from a hyperscaler. The customer was growing fast and needed storage that could support millions of users. After being hit with a surprise roughly $100,000 charge for moving data with the hyperscaler, they came to Backvoice for predictable pricing and scale. Backvoice is now their storage platform and they will join our 100,000 customers who collectively serve hundreds of millions of end users to our platform. Across all these examples, the reasons customers choose Backvoice are consistent. Performance, that rivals the biggest clouds, predictable and fair pricing, and people who make it easy to get things done. Whether it's the startup training models, immediate team moving petabytes, or an enterprise scaling to millions of users, the story is the same. Faster, simpler, more affordable, and supported by a team that actually helps. Now I'll share how we see our growth opportunity. In Q3, we grew B2 28%. And for Q4, we now expect B2 to grow in the range of 25 to 28% year over year. We're proud of our growth, but this is below the 30% target we set for ourselves at the beginning of the year. To help reach our growth goals, we're launching phase two of our go-to-market transformation, focused on accelerating the velocity of both our self-serve and direct sales motions. For self-serve, We're proud of the consistent growth engine we've built. Now we're going to scale it by making it more frictionless for data heavy AI use cases and by kicking off robust developer relations. These steps are aimed to deepen our connection with the developer community and make it even easier to adopt our platform. For direct sales, we're building on the progress we've made over the past year. We're adding talent and upgrading our core systems in order to better target customers and improve sales efficiency. To accelerate this, we're also partnering with advisors and a consulting team who has helped both Snowflake and Databricks in their go-to-market execution. We're reinforcing our sales and marketing engine and remain confident in our ability to deliver consistent, durable growth over time. With that, I'll turn it over to Mark to take us through the financials.

Mark. Mark Friedan | Chief Financial Officer

Thank you, Gleb, and good morning, everyone. We delivered a strong third quarter with results coming in above the high end of our guidance for both revenue and adjusted EBITDA. We have solidified our balance sheet, improved our path to be free cash flow positive, and accelerated revenue growth. We're focused on getting B2 to a rule of 40, and we are on track to roughly triple our score this year. Now let me walk you through the details of the quarter. Starting with revenue. Total revenue exceeded expectations. It came in at $37.2 million compared to the high end of guidance, which was $37.1 million. This represents a 14% year-over-year overall growth. B2 grew 28% year-over-year compared to the organic growth of 19% in the same period last year. This represents an acceleration of about 900 basis points this quarter. This improvement was driven by the first phase of our go-to-market transformation. As mentioned last quarter, usage from one of our larger AI customers has been variable as the customer's data storage needs have fluctuated for their business. Overall, industry-wide demand for data storage is expected to grow rapidly, and our platform is well positioned to support those expanding needs. We're also seeing diversification within B2 across our core use cases, which are live application hot storage, backup, media, and AI-related workloads. In computer backup, revenue is flat year over year, reflecting the final roll-off of the price increase implemented in 2023. Turning to net revenue retention, overall, The trailing four-quarter company NRR for Q3 was 106% compared to 109% in the second quarter. Going forward, we believe it's clear to show in-quarter NRR versus the previously reported trailing four-quarter average. As an example for Q3, in-quarter NRR for B2 improved to 116% from 109% in Q2, and this was driven by a large AI customer we discussed last quarter. You can see that dynamic on slide 11 of the earnings presentation. Moving on to gross margin. It was 62% up from 55% a year ago, reflecting operating leverage and the benefit from our recent useful life study. Adjusted gross margin was 79% compared to 78% last year. Overall, margin performance remains stable. Data center costs are generally rising, however, They are being offset by scale and labor, greater code efficiency, and lower amortized R&D as a percentage of revenue. Operating expenses were 71% of revenue, an improvement from 92% a year ago. This reflects the structural changes that we made last year through our restructuring and zero-based budgeting process. R&D spending held steady in dollars but declined as a percentage of revenue from 33% a year ago to 30% this quarter. When you combine the R&D expense and capitalized R&D, the improvement is even more pronounced at 35% of revenue, down from 43% a year ago. Sales and marketing came in at 24% of revenue, down from 36% a year ago. We're focused on improving efficiency in our go-to-market model including reallocating funds to strengthen our top-of-funnel programs and investing in operational go-to-market talent, all while maintaining the same cost discipline you've seen from us over the past year. G&A was 17% of revenue, down from 23% last year. We continue to drive efficiencies across our corporate functions and general administrative spend. Operating results. Gap net loss was $3.8 million, A 70% improvement from a loss of $12.8 million in the prior year. On a non-GAAP basis, net income was $1.9 million compared to a loss of $4.1 million last year. Adjusted EBITDA margin reached 23%, almost doubled the 12% from a year ago and a quarter ahead of our outlook. That performance reflects continued financial discipline and the operating leverage we've built into the model. We're focused on building a company that delivers durable and profitable growth. In Q3, adjusted free cash flow was negative $3.5 million, improving by roughly half a million dollars year over year. As we discussed last quarter, we used $2.5 million of our line of credit to fund capital expenditures outside of the U.S. so we can cut our international borrowing rate in half. Balance sheet. We ended the quarter with $50 million in cash and marketable securities, largely unchanged for last quarter. We believe the balance sheet remains strong and provides flexibility to support continued growth and investment. As we announced last quarter, we initiated a modest share repurchase program. In Q3, we repurchased $1.2 million of shares as part of our ongoing work to manage equity dilution. Guidance. For the fourth quarter, We expect revenue in the range of $37.3 million to $37.9 million. We're slightly widening this range to account for the variability we see in certain large customers. B2 growth in Q4 is expected to be between 25% and 28%. We continue to focus on driving operating leverage and remain on track to be adjusted free cash flow positive in Q4. To close, our financial transformation is progressing well. We're reducing equity dilution through our repurchase program, on track to achieve positive adjusted free cash flow in Q4, and continuing to build operating leverage towards gap profitability. While we haven't yet reached our 30% B2 growth goal, we expect the next phase of our go-to-market transformation to drive stronger growth. Together, these efforts are building a stronger, more efficient company, one that's on path towards operating at a rule of 40 profile. Just looking at B2, we started the year with a rule of 40 score of 9 and are on track to roughly tripling that in Q4 of this year. Operator, please open it up for questions.

Tiffany | Conference Operator

At this time, if you would like to ask a question, press star, then the number 1 on your telephone keypad. To withdraw your question, simply press star 1 again. We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeff Van Rees with Craig Hallam Capital Group.

Please go ahead. Jeff Van Rees | Analyst, Craig Hallam Capital Group

Great. Thanks. Thanks, guys. Thanks for taking the questions. Just a couple here. In terms of the sales evolution and phase two, talk to me about how you were envisioning the sales sort of evolution. I think you commented last quarter that most reps were more than halfway through the ramp. Are the existing reps ramping the way you had expected, or was there something you experienced in the sales process that led to you sort of implementing this second phase?

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Hey, Jeff.

Jeff Van Rees | Analyst, Craig Hallam Capital Group

This is Glenn. Thank you for the question.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

So what I would say is that in the first phase, one thing we talked about was that our goal was to move upmarket And so you could see that we've definitely moved up market with the multiple six and seven figure deals that we've consistently announced over the year. The phase two for us is about driving the velocity of the execution velocity. So it's a slightly different focus. We want to continue to move upmarket and support those larger deals, but we're spending more time focusing on moving things through the funnel more explicitly and more actively. In terms of the reps themselves, most of the reps were hired at the beginning of the year or earlier, so they are largely through their ramps as part of their onboarding.

Jeff Van Rees | Analyst, Craig Hallam Capital Group

Okay. And just revisit, if you would, on the B2. You had the 30% goal for Q4, and I heard a little bit of commentary there, but just expand on that a bit more. What specifically was it that you thought was going to play out that didn't play out, and when do we get to that 30%?

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

So from our last earnings call, basically two things happened. One is we had a large customer that we talked about in the prior call that in Q2, the outperformance was in part driven by the variability of a large AI customer. As we look toward Q4, the variability in part is driven by this same large customer trimming more than we expected. The other thing that drove that is just the larger deals as we move up market, a number of them have taken longer to execute. And so the combination of those two things have changed our expectations for Q3 somewhat. That's why we're doing phase two of the GTM transformation. We love that we've been able to move up market. It's proven that the platform supports these larger customers. It supports these larger use cases. And we also want to have more core predictability in the business. So it's interesting because before we used to have lots and lots of small deals and having lots and lots of small deals provided really great predictability. And we were able to go public on lots of $300 and $2,000 type deals. The challenge with those was it was harder to significantly outperform, significantly rapidly accelerate growth. The bigger deals in moving up market allow us to do that, but we want to focus on increasing that core base of smaller deals to drive that consistency also.

Jeff Van Rees | Analyst, Craig Hallam Capital Group

One last quick one, if I could. On the data variability, I'm glad you mentioned several times on the call. Talk about how that variability is maybe different than what you had expected from these customers, obviously, as you're getting AI workloads. Some new experiences here as to how people are going to use you both in that moment as well as over time. Just a bit more about the variability on the data usage would be helpful.

Thanks. Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah, the AI use cases are obviously all evolving very rapidly, and we're trying to support the customers where they are. So the different use cases that we see across AI are the things that we are supporting and learning along with the customers. This particular customer that we talked about, as their business, goes up and down in terms of their needs for their data, that we support them with that. So the way that we work with customers is many of our customers are pay as you go. They enter a credit card and they just sign up and go. Some of our customers, we sign contractual commitments with. And for a number of the contractual commitments, they'll often sign a contractual commitment and then have the ability to scale up above that. And with some of these larger AI customers, they'll sign a contractual commit and then they'll ramp up even faster than that because their business is growing faster than they expected. And then sometimes they need to do some pullback. So that's what we're seeing with some of these The nice thing, obviously, is we have 100,000 customers on B2. We're distributed across a variety of use cases. So it's not all variable AI customers. We still have a lot of core predictability in our business. But we do want to lean in with the AI use cases because we do see that that is transformative for the industry and where we see a lot of opportunity ahead. Got it. Thanks so much. Thanks, Jeff.

Tiffany | Conference Operator

Your next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets, LLC.

Please go ahead. Eric Martinuzzi | Analyst, Lake Street Capital Markets

Yeah, I'd like to touch on, I know you haven't given a guide for 2026, but I just wanted to learn your expectations for the two sides of the business going forward. Obviously, we've got good growth, but not the 30% you wanted in B2. And then we were flat here in Q3 on the CBU as we got through the last of the price increases. But to put it in broad strokes, you know, we're looking at a year in 2025 where combined we're at about 14% growth. I know I'm looking for that 14% growth to persist into 2026. But what do you think about for a longer-term growth rate for B2 and CBU?

Mark Friedan | Chief Financial Officer

Yeah. Hi, Eric. Good morning. This is Mark. So 2025, right, for B2 is on track to be in that mid-20s year-over-year growth rate. 2026, we don't want to give guidance yet, but we feel pretty comfortable it's going to be in that range given what we're seeing now as well as that second phase of that go-to-market transformation. And those larger deals Gleb spoke about, if those come in, I mean, it could bring that number higher when they come in in those specific quarters. On the computer backup, just like we said last time, it would be low to single, mid single digits, the contraction of that business. We're obviously taking action to try to stabilize that. We probably need more time to come back and report a different outlook there. But for now, those are the right assumptions for B2 and computer backup.

Eric Martinuzzi | Analyst, Lake Street Capital Markets

Okay. And then the restructuring that you announced this morning as well, just curious to know, where are we? You talked about some facilities, but it also talked about severance. Where are we cutting back on the headcount that we had versus the end of September?

Mark Friedan | Chief Financial Officer

Yeah, that listen, that that is how we're funding the next phase of our go to market transformation. We talked about needing that mid market high velocity deal volume to improve. It's done really well over the past year, but we want to, we think it should be way better than where it is. And that's the key formula to get to that 30%. So a lot of that restructuring cost is to transform our go-to-market practices. It's to bring on new talent on board. We have started that. So it's a lot more around, you know, getting talent that's a lot more operational in their go-to-market skills, know how to use the technology, the data science behind it. So I would say that it's more of a reinvestment versus a cost-cutting exercise.

Eric Martinuzzi | Analyst, Lake Street Capital Markets

Thanks for taking my questions.

Tiffany | Conference Operator

Your next question comes from the line of Itai Kedron with Oppenheimer. Please go ahead. covering for Itai Kedron\ Hi. This is Nolan Genovine on for Itai. Thanks for taking my questions. First, I just want to sort of double-click on these seven-figure customers. You know, you're clearly showing traction in selling to enterprises now, and you've added yet another seven-figure customer this quarter. How many seven-figure ARR customers do you have now, and then how has their expansion dynamics evolved in recent quarters versus sort of the smaller cohort? I'm going to have a follow-up.

Thanks. Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Hey, Nolan. Thanks for joining us, and thanks for the question. One clarification I would say is we have these seven-figure deals. The interesting thing is they're not all enterprises. They're heavy users of data. And so one of the things that we've seen is that customers are generating large volumes of data and needing high performance for those data sets. The AI powered video surveillance customer that I mentioned, they're not an enterprise company, but they're a seven figure deal. And that actually I think bodes well for us for the future because these smaller mid-market companies that have high data needs are generally faster moving than the traditional enterprises, and there's more of them out there. So that's one thing I would just say in terms of outlook and opportunity for us. In terms of the number of them, we've generally announced one or two per quarter over the last year. So, you know, it's not a large number of these seven-figure deals, but it's, you know, considering that in our first roughly 15 years of the company, we signed one. And in the last year, we've highlighted at least one a quarter, I think is a great proof point to say that when we said we were moving up market, we moved up market.

Mark Friedan | Chief Financial Officer

Yeah, and you know what I'll add, Nolan, is Last quarter, we shared the number of customers with $50,000 plus ARR. It was up in Q2 30% over a year. In Q3, it was up 41%. So we're maintaining good momentum on that front as well. covering for Itai Kedron\ Got it. That's very helpful. And then I know you're not giving 26 guidance, you know, but how should we think about the potential catalyst heading into the next fiscal year things like overdrive ramping, this sort of phase two of the go-to-market transformation. Could you just maybe put a finer point on what you think could maybe drive upside or downside just to the sort of current growth rate?

Thank you. Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah, it's a good question. So the go-to-market transformation phase two is certainly something that we're leaning into heavily, right? We're putting a lot of focus in terms of talent, system upgrades, leveraging advisors, and the consulting team. We believe that there's a lot of opportunity in driving the ability and execution for us to get to market and faster with the products that we have. In terms of B2 Overdrive, We announced that product line fairly recently. We've already closed multiple six-figure deals on there, which is, I think, a great sign that it has product market fit. We believe it's the highest throughput per dollar offering on the market, and that's a great fit for customers that really need that performance. One of the other things that we've seen on OverDrive, which has been interesting, is we've seen customers come to us because of OverDrive. They'd heard about OverDrive, they'd heard about the performance availability, and they came to us for that. And then when they showed up, they realized that our B2 standard offering is actually quite a high performance offering and it was sufficient for them. So I think it's changed some of the perception around what we offer And so even customers that aren't signing up for OverDrive are often coming to us with these higher performance needs, which is a great direction for us as we become a more strategic partner for them. OverDrive provides up to one terabit per second of throughput. So it's a blistering fast offering for them. So I do think that the GTM transformation is, is the thing that we look at as key, the overdrive offering. The other thing that I would just mention is I don't want to undersell the phase one transformation that we did. The phase one transformation was all about moving up market, and that is continuing to be an important catalyst for us, including for 2026. Mark mentioned that the big deals are something that can accelerate us even further. And that's something that we're excited about. The last thing I just mentioned is that the GTM phase one transformation, it doubled pipelines, it doubled bookings, it doubled channels. So it did help quite a bit. And so we're excited for phase two of that. Got it.

Thank you so much. Tiffany | Conference Operator

Your next question comes from the line of Simon Leopold with Raymond James.

Please go ahead. Simon Leopold | Analyst, Raymond James

Thank you very much. I wanted to ask about the Space 2 initiative in that I don't imagine they're free lunches and have to assume that there's some investment involved. I know earlier you talked about sort of reallocating, but if we think about it, your sales and marketing been running between roughly 21% and 23% of revenue. What are you budgeting for next year? How should we think about either a dollar basis or percent of revenue basis, but some metrics to try to get an understanding of what investment you're making for this phase two initiative?

Mark Friedan | Chief Financial Officer

Yeah. Hi, Simon. Good morning. It's Mark. The percentage of revenue for sales and marketing should stay stable as a percent of revenue. The funding is going twofold. The restructuring allows us to fund the one-time cost that's not in that percent of revenue that allows us to drive the transformation work, which is really rejigger all our go-to-market systems to make them work better together, cleanse the underlying data, and drive that data science capability I was talking about. The talent refresh we're doing is within existing OPEX budget, right? As one of you highlighted earlier, yes, there are severance costs that are one-time charges that fit into the restructuring, but on a recurring basis, when we finish this as a percentage of revenue, it should be pretty stable.

Simon Leopold | Analyst, Raymond James

Great. And then in terms of the outlook for B2, slight downtick, nothing to be embarrassed about, high 20% growth, but what changed in your mind versus your expectations when you set the goal? What's different?

Mark Friedan | Chief Financial Officer

Well, we set the goal all the way back when we launched our first phase of that transformation, which was exactly a year ago. That was a while back. That is our aim. Frankly, it remains our aim. And our phase one, as Gleb said, delivered, you know, doubled our pipelines, doubled our bookings, doubled our channel business. what we noticed candidly is our inbound motion is really strong, right? Like we addressed a lot of our technical marketing content, our blogging. We started doing more events and webinars, and all that really improved our inbounds. I mean, our inbounds are up substantially. The inbound pipeline is up 100% year over year. Our outbound motion is newer to the company so that that muscle is newer. That's the muscle we're working on fixing now in this next phase of this transformation. And it's unfortunately one of these things, like, until you get into it, you don't know how much you don't know. And we're realizing it's a muscle that needs to be a lot stronger to make it successful. and we're hard charging at it now. Our aim is when we do our Q4 earnings release in February to give a lot more details around what makes up that phase two go-to-market transformation, when should you expect a change in the outcome from it, an improvement, and how that would address the year-over-year B2 revenue growth.

Simon Leopold | Analyst, Raymond James

Great. Thank you for taking the questions.

Tiffany | Conference Operator

Your next question comes from the line of Zach Cummings with B Reilly Security.

Please go ahead. Hi. Zach Cummings | Analyst, B. Riley Securities

Good morning. Thanks for taking my questions. Gleb or Mark, either one. I was wondering if you could give a little more context around some of the larger deals in the pipeline. It sounds like maybe those were pushing a little to the right, but when it came to the B2 side of the business. So any additional context around just the pipeline that you're seeing with some of these larger deals and maybe the reason that some of them pushed to the right?

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah, thanks for the question. So, you know, one thing I'll say is When I looked at some of the deals and dug into it with Jason on the sales side, frankly, there wasn't any pattern in them. They were kind of random reasons. A signer got sick, a different project internally came up that had to take priority, et cetera. So there wasn't any kind of clear pattern for why, but it just spoke to us about that in the small deals, a lot of times what happens is it's one person who is the person that's interested, the decider, the buyer, the purchaser, the user, and they go and they make a decision and they go. In these larger deals, it's just more complex where you have a buying committee, you have the various different oftentimes security compliance reviews, There are sometimes different departments that need to be involved for how it's going to get used, how the migration is going to happen, et cetera. So it's just one where as we're moving up market, we're closing these bigger deals, and that's fantastic. And at the same time, we want to be realistic about that some of them take longer than I think we were seeing. Because we also have seen some large deals closed very quickly. You know, the BT Overdrive deal at the beginning, the first one that we announced last quarter, you know, closed, you know, incredibly quickly. Some of the customers that I talked about in my prepared remarks, you know, when I was looking at them, you know, they're six-figure deals that from start to finish were, you know, three months. And that's quite quick for a six-figure deal from the first conversation to fully onboard it. But we're also realizing that not all deals move that quickly.

Zach Cummings | Analyst, B. Riley Securities

Understood. And in terms of the phase two of the transformation, I'm sure we'll get much more detail in your Q4 earnings call, but can you give us a sense of some of the things you're looking to improve within the self-serve motion? Is this largely targeted towards some of these faster moving, higher data usage customers and reducing the friction there or anything you can provide there would be helpful.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah, it's interesting because we built the company basically on the self-serve motion. When we went public, almost the entire business was driven by self-serve. We had a very, very nascent sales motion at the time. And so the, you know, the great thing was that we built a, you know, a blog that a few million people a year would read that drove a lot of inbound interest into the company. We had people be able to sign up, enter, you know, enter their email address, enter a password and go and then try it and then get a credit card and sign up. And, you know, as we moved up markets, we had said concretely at the beginning of the year that our focus was going to be on that upmarket move and we were not going to be doing a lot to change the self-serve motion. But at the same time, our team was focused on that the whole SEO world was changing with the way that companies and individuals were searching was changing and moving to AI use cases where people would look on Chachapati or Anthropic or whatever to find information. And so they actually leaned in on making sure all the content was updated and positioned well to be read by these applications. And one of the things we saw was that our self-serve account creation is actually up 56%. As you look to a lot of the companies out there for whom they're self-server or driven by inbound type content, a lot of them were down quite a bit because they hadn't adjusted to the new AI chat type of search algorithms. So the team leaned in and supported that quite well. Going forward in this phase two, one of the things that we're doing is really focusing on how these new AI native startups and developers build themselves and ensuring that we're well integrated through the whole lifecycle of those workflows and making sure that it's really easy for them to learn about it and then adopt the platform. So it's a lot of work in terms of Making sure that the content, the guides, but also the flows and the integrations are all there to support those data-heavy use cases. One thing I'll mention, one of the customers I gave on the call, they came in as self-serve. They started just by themselves, and then as they wanted even higher performance, even larger deals, They requested to reach out to the sales team, and they had a conversation with us, and then they bought B2 Overdrive, and, you know, that's a motion that we love to see.

Zach Cummings | Analyst, B. Riley Securities

Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter. Thanks, Eric.

Tiffany | Conference Operator

Your next question comes from the line of Mike Kikos with Needham.

Please go ahead. Jeff Hopson | Analyst on behalf of Mike Kikos, Needham

Hi, this is Jeff Hopson on for Mike because thanks for the question. I just wanted to see if there's any more info on how the power or the powered by white label solution is going. Obviously, Neo clouds are coming more popular trend. And seems like that could be a good place for that or any sort of partnership to offer their customers more flexibility. So maybe just any info on that opportunity.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah, thanks, Jeff. Good to have you on. So we're actually pretty excited by the Power Buy. As you saw in my prepared remarks, one of our largest deals this quarter was a Power Buy deal. We also have seen some of our channel partners actually adopting powered by, where instead of trying to resell and integrate at the customer level, they actually build it into their own offering and offer it directly. And then same, like you said, with the Neoclouds, we have various discussions that are in progress around that. It's certainly an exciting opportunity. There's about 200 of them out there. So they all have GPUs and they all have storage needs. So we engage with them today in a variety of ways where we service our customers using the NeoClouds by providing this open platform, free egress, high throughput, but also are in conversations with some of them to help them with their storage needs directly.

Jeff Hopson | Analyst on behalf of Mike Kikos, Needham

Perfect. Thank you for that. And maybe hardware storage has been on the top of investors' minds recently as AI video generation comes into the forefront. And I know you guys called out some AI video wins with customers. Just curious if you're seeing an actual uptick in AI video companies just in the past six to nine months. as those models have kind of become more popular.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

I'm sorry. Can you repeat the very first part of the question? Did you say hardware storage?

Jeff Hopson | Analyst on behalf of Mike Kikos, Needham

Yeah. We've seen in the market hardware storage has become, yeah.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Yeah. Initially, AI was all about text, right? It was generative AI for text. Then it became generative AI for images, then audio, and now video. Obviously, each of those is an order of magnitude bigger in terms of the data sizes. So video is a very data-heavy file format. So we absolutely are seeing customers signing up for that. One of the interesting gen AI video companies was a recent customer this quarter. There was another large one the prior quarter. And we have hundreds and hundreds of AI companies. So obviously, I don't know all of them, but just as they come up, I see ones that catch my attention. It's something where they create models for the video that requires a lot of data on the front end. Then it requires the data to generally get sent to one of the NeoCloud providers for the model creation. And then the inferencing itself, where they're generating the video, that video needs to go somewhere. And so we're supporting customers on the various fronts. One thing I'll tell you is that AI in general is a space that we're seeing significant adoption. Today, about a quarter of all of our new business is coming from AI companies. Over time, it's going to become harder to say what is an AI company and what is just a company using AI. But today, about a quarter of that new business is actually coming from companies that are specifically in the AI space. So it's an area that we're excited to lean into. Perfect, thank you.

Tiffany | Conference Operator

Your next question comes from the line of Rustam Kanga with Citizens.

Please go ahead. Rustam Kanga | Analyst, Citizens

Go ahead, Mark, Mimi. Thanks for taking my questions and great to see the outperformance and new high watermark on the net income and adjusted EBITDA there. Mark, given your prepared remarks, it sounds like there's going to be a lot more honing in on the operational go-to-market skills in phase two. You know, given the success from phase one, moving up market, getting these larger deals, perhaps you have some better picture on the talent most equipped for what you're looking for in phase two. Is that, you know, reps with a prior focus on cloud computing and storage or more well-versed in for lack of a better term, the language of AI, ultimately any insights you can share on what kind of reps have been the most successful on the direct sales front and that you might be looking to replicate in phase two.

Thanks. Gleb Budman | Co-founder, CEO, and Chairperson of the Board

This is actually Gleb. I'll start and then Mark can join in if he wants to add as well. So first of all, what I'll say is in terms of talent, a lot of the talent is actually on the systems and operational side of it. So we're looking for a top tier rev ops. person, the consulting firm that we're working with, we're doing a large project around both the systems transformation as well as the sales enablement and execution side. So, you know, Mark mentioned that we have a success with inbound. At the same time, what we see is there's a lot of stuff that comes at the very top of the funnel, and then there's a lot of opportunity to be more efficient and effective in having it go through the funnel. And then On the outbound side of it, one of the things that we've realized is that we can do better with targeting the right types of customers for our ideal customer profiles, both in terms of identifying them and also in terms of how we reach out to them. So a lot of the work in the transformation isn't even specifically about the different reps. It's about the infrastructure of people and systems around the reps to help them.

Mark Friedan | Chief Financial Officer

Yeah, I mean, Russ, this is Mark. Our reps have done well. Our win rate is 30% from opportunity to close, which is a very healthy win rate. So we just want to be flowing more opportunities through that team. And then as that opportunity flows through that team, you start expanding capacity and optimizing capacity within. So as Gleb said, there's a lot more around. you know, making things available to every stage of the process in a way where people are following up at the right time, they got the right content, the right messaging, the multimodal approach to the customer, when you place advertising versus email versus text message. So there's just an incredibly scientific way of doing that these days. And I mean, the people helping us are people who help companies like Snowflakes and Databricks. they bring the best in class on that process. And we just, we don't, we want to adopt it and drive a lot more volume through there.

Rustam Kanga | Analyst, Citizens

Super helpful. That makes a lot of sense.

Thanks guys. Thank you. Tiffany | Conference Operator

That concludes our question and answer session. I will now turn the call back over to Gleb Budman for closing remarks.

Gleb Budman | Co-founder, CEO, and Chairperson of the Board

Thank you everyone for joining us with a double beat this quarter. how well we're positioned to help companies with AI workloads. We're enthusiastic about our opportunity ahead. I want to thank our employees, our customers, our partners, our investors for being on this journey with us as we build this core storage backbone of the internet. For our investors, we'll look forward to seeing you at the Needham conference and at the Craig Hallam conferences this month and chatting with all of you next quarter.

Thank you. Tiffany | Conference Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect. jsPDF 3.0.3 D:20260606090017-00'00'