BLZE earnings call analysis

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'

NASDAQ:BLZE Q2 2025 Earnings Call Transcript Generated on 6/6/2026 Danica | Conference Operator: Thank you for standing by. My name is Danica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze second 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 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. I would now like to turn the call over to Mimi Kong, head of IR. Mimi Kong | Head of Investor Relations: Please go ahead. Thank you. Good morning, and welcome to Backblaze's second quarter of 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 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 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 file today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will 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 rate, and adjusted free cash flows. And finally, we will be participating in the Oppenheimer Technology Internet and Communications Conference on August 11th. Thank you for joining us, and I would now like to turn the call over to Gilles. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Thank you, Mimi. Good morning, and thank you, everyone, for joining us today. SACWISE delivered a strong Q2, exceeding both the revenue and adjusted EBITDA guidance for the second quarter in a row. Total revenue was $36.3 million, up 16% year-over-year, B2 revenue was $19.8 million, up 29% year over year. Adjusted EBITDA margin doubled year over year to 18%. As we outlined last year, our focus has been to accelerate B2 growth and become adjusted free cash flow positive. We've accelerated year over year B2 growth from 22% at the end of last year to 29% this past quarter, and we remain on course to be adjusted free cash flow positive in Q4. This marks an important step as we continue our progress towards becoming a profitable Rule of 40 company. Now, what's behind these numbers is the value we provide to customers, our increased pace of innovation, our go-to-market transformation, and our incredible opportunity with AI. Regarding the customer value we provide, a recently published report we commissioned from independent analyst firm Enterprise Strategy Group found that Backblaze B2 is up to three times more cost efficient and takes up to 92% less time to manage data compared with competitors. Up to three times more cost efficient and up to 92% less time to manage. That is significant customer value. We also continue to hear from customers frustrated with other cloud providers for their surprise fees. In fact, over 80% of organizations using competitors report unexpected storage charges. In today's cost-conscious environment, can you imagine having to explain to your CEO, CFO, or board that you had significant cost overruns because your cloud provider has surprise storage charges? At Backblaze, Our predictable pricing and ease of use consistently set us apart. It's a key reason customers switch to us and stay with us. Now let's talk about our increased pace of innovation. On our last earnings call, we introduced B2 Overdrive, which delivers the highest throughput performance per dollar in the market. In early Q3, just two months after launch, we've already signed our first six-figure B2 Overdrive customer, a clear indicator of its strong product market fit, and we're thrilled to help customers with their high-throughput performance needs. We also announced a suite of new tools to help customers protect and manage their data. Anomaly Alerts uses AI to detect suspicious data transfers. helping customers spot potential data exfiltration or ransomware early. Enterprise Web Console with role-based access controls makes it easier for larger companies to manage access and stay aligned with zero trust principles. Finally, bucket access logs gives customers detailed visibility into how their data is used and accessed. As we move up market, These features continue the BackWay's tradition of making it astonishingly easy for customers to use and protect their data. These innovations provide customers a unique combination of performance and security, further differentiating BackWay as the leading cloud storage innovator. Now let me update you on our go-to-market transformation. We are seeing great results. as demonstrated by our B2 growth accelerating to 29% in Q2. The number of customers generating over $50,000 in ARR hit 150, a 30% year-over-year increase, thanks to our upmarket focus. We added yet another seven-figure customer. This marks the fourth quarter in a row where we have highlighted a customer of this scale. Compared to our average $270 per year customer, this speaks to our dramatic upmarket shift. Our pipeline has grown significantly year over year, and we've had a steadily growing increase in six-figure opportunities enter the pipeline quarter over quarter, a sign that the machine is gaining momentum. Some of the changes we made in our go-to-market include rebuilding account-based marketing, which requires significant systems and process work, but now enables us to more precisely target organizations for whom we should be an ideal fit when they're in market and to the broader buying committee. We also revamped our approach to customer success to better identify and expand use cases with existing customers. We added a field enablement function to further uplevel the sales team We deployed AI in various activities across the go-to-market motion, and of course, much more. The accelerated growth and upmarket momentum are encouraging results, and we are continuing to refine our go-to-market model to drive even greater growth. Earlier, I mentioned that a mere two months after launching B2 Overdrive, we won our first six-figure customer. Let me share the details behind that win. This customer is a generative AI video company and works with massive volumes of data to train models. They initially came to us because of the egregious egress fees they were incurring from the hyperscaler they were using. As we engaged with them, we learned that in addition to needing a cost-effective solution, they really needed speed, reliability, and availability. And speed is something customers are willing to pay more for. because it unlocks opportunities for them. We introduced B2 Overdrive to provide the high-performance customers like this need, and their excitement around our performance was palpable. We are so happy to be partnering with this cutting-edge AI company and thank them for trusting us to help them scale. This B2 Overdrive customer I just talked about is an AI customer, but they're obviously not the only one. Let me share how impactful AI is to the market we sell into overall, to our products, and to our internal initiatives. To highlight the AI market opportunity for us, one year ago, we had no AI companies in our top 10 customers. In Q2, three of our top 10 customers are AI companies. This quarter, the number of AI customers grew 70%. and data stored by these customers grew 40 times year over year. AI use cases drove the outperformance on our financial metrics this quarter, and this is by far the most data-hungry industry we have witnessed, and we're confident that AI will significantly drive our market opportunity. In our products, we launched V2 Overdrive targeted at AI use cases, and we are using AI to offer new products such as those in our security offerings. Internally, we're actively embracing AI across our organization, not just to drive efficiency, but to unlock new opportunities for innovation and growth. Leading this effort is our Chief Human Resources Officer, which reflects how we see AI as a company-wide culture shift, not just a technology initiative. His role puts him at the heart of how we work. making him uniquely positioned to embed AI into our daily operations and mindset. In closing, I'm so proud of our team's accomplishments. We innovated for our customers with the launch of B2 Overdrive and a suite of security-focused functionality. We made great progress on our go-to-market transformation, which was visible in our accelerated B2 revenue growth. We've leaned into our incredible opportunity with AI. And overall, we delivered strong revenue adjusted EBITDA, and cash flow numbers, putting us well on our way to our Rule 40 target. With that, over to you, Mark. Mark Sweetan | Chief Financial Officer: Thank you, Gleb, and good morning, everyone. We are excited by our second quarter results, with both revenue and adjusted EBITDA beating the high end of our guidance. This is the second consecutive quarter of beating guidance on both revenue and adjusted EBITDA. The combination of our zero-based budgeting exercises Our go-to-market transformation and the AI revolution, including a significant AI customer, is driving these strong results. It's hard to believe, but next week marks my one-year anniversary with the company. Looking back, I'm incredibly proud about the results that we have achieved. When I started, I conducted a thorough assessment of the situation, consulted with our leading analysts and with investors, and worked with Gleb and the board to lay the groundwork for, one, solidifying our balance sheet, two, making Backblaze a sustainably profitable company, three, accelerating revenue growth. The good news is we've addressed all three of these objectives at an incredible pace. Here's a quick summary of our achievements. First, on solidifying our balance sheet, we aggressively reduced the cash usage and recapitalized the balance sheet with a secondary offering in November of 2024. We also established a new line of credit this quarter, giving us further financial flexibility. Second, on being a sustainably profitable company, we shifted our focus from adjusted EBITDA to adjusted free cash flow, which incorporates your capital expenditures. We conducted a zero-based budgeting exercise, freeing up $8 million in expenses for 2025 and strategically redeploy nearly half of those funds to drive more productive growth. We remain on track to achieve our guidance of becoming free cash flow positive in Q4 of this year. Our subsequent aim will be to achieve GAAP net income positivity as operating leverage kicks in. Third, on accelerating revenue growth, we launch a go-to-market transformation. This has resulted in two consecutive quarters of increased B2 revenue growth including a significant 600 basis points acceleration in Q2 over Q1. While these are phenomenal results, I consider this just the first phase of our transformation with plenty more to come. We're continuing to focus on growing B2 in the future and are incredibly proud of the team's success in moving the needle so quickly. These pillars of our transformation set the foundation for Backblaze to become a rule of 40 company. Now, turning to our results for the quarter. Revenue finished strong at $36.3 million, a 16% year-over-year increase. B2 revenue growth climbed to 29% as we continue our momentum with another quarter of increased growth. This outperformance was driven by solid direct sales bookings bolstered by strong AI tailwinds, including a significant AI customer. Our Q2 investor presentation, available on the IR website, outlines the four drivers behind the B2 revenue growth, which comes from net organic data growth, direct sales cross and up selling, new logos from self-serve, and new logos from direct sales. This chart provides clarity on what drives our revenue growth. Computer backup revenue grew 4% year over year, driven by the October 2023 price increase, of which the benefit has largely ended. In the second half of 2025, we see computer backup declining in the low to mid single digits on a quarterly basis. We continue to see areas for growth and are exploring options to improve the business, but at this point, we feel it is prudent to provide this outlook. Moving on to Net Revenue Retention, or NRR, for the quarter, overall NRR was 109% versus 114% the same period last year. For B2 Cloud Storage, NRR was 112% compared to 126% the prior year and 117% in the prior quarter. As a reminder, the decline is mainly due to the price increase lapping, and it will continue to roll off the next quarter as we calculate the NRR with a trailing four-quarter average. Computer backup NRR is 106% compared to 105% in the prior year. Gross customer retention continues to be strong at about 90% across B2 and computer backup. Gross margin improved to 63% from 55% in the prior year. As we disclosed last quarter, we evaluated the estimated useful life of our fixed assets based on more recent operational data and found that our hardware lasts an estimated six years instead of the three to five years estimate that we previously were using. This change better reflects our business operations and accounts for most of the gross margin improvements this quarter. The remainder of the margin expansion was from our technical operations team, driving more benefits of scale across our infrastructure. As a result, adjusted gross margin improved to 79% from 78% last year. Our operating expenses continue to decrease as a percentage of revenue as operating leverage kicks in. Operating expenses improved to 82% as a percent of revenue from 86% in the prior year. We expect continued improvement as we scale further. Q2 adjusted EBITDA margin doubled over the prior year to 18% and beat the high end of guidance of 16% by 200 basis points. Adjusted free cash flow for the quarter came in at negative 11%, a 1,000 basis points improvement from negative 21% a year ago. We are on track to be adjusted free cash flow positive in the fourth quarter. Both adjusted EBITDA and adjusted free cash flow margins benefited from stronger revenue performance and robust cost controls. Looking at the balance sheet, we ended the quarter with $50.5 million in cash and marketable securities. In June, we announced a new $20 million line of credit with Citizens Bank. This new facility comes with industry standard covenants related to EBITDA attainment and maximum debt leverage ratios. We plan to use this facility for equipment capital expenditures outside the U.S., where leasing rates are comparatively much higher, resulting in interest expense savings. Last quarter, we outlined steps to reduce our rate of equity dilution through RSU net cash settlement. This quarter, we are announcing an additional initiative. Our board has approved a stock repurchase program of up to $10 million over the next 12 months. The proceeds for this buyback will come from exercise stock options and the employee stock purchase plan. This cash neutral move will help us improve our dilution trajectory. Our combined actions are expected to reduce our projected path of stock-based compensation dilution by approximately 15 to 25%. Until our cash flows permit, this is a cost-effective way to manage equity dilution. Over the long term, Our goal is to reduce dilution from stock-based compensation down to zero. Before discussing our guidance, I'd like to provide some color around B2 revenue growth for the back half of the year. As mentioned, our Q2 beat was helped by a large AI customer who ramped up data storage in a short period of time. But we want to be mindful of the potential variability. Regardless, I'd like to reiterate that we continue to expect B2 revenue growth to exit the year with at least 30%. Looking ahead, we are guiding Q3 2025 revenues to be in the range of $36.7 to $37.1 million, with B2 revenue growing in the range of 28% to 30%. For adjusted EBITDA margins, we are guiding Q3 to be in the range of 17% to 19%. For the year, we are raising our revenue guidance to be in the range of $145 to $147 million from the previous range of $144 to $146 million. This is due to better than expected B2 performance. As for adjusted EBITDA guidance, we reiterate the 17 to 19% range. To wrap up, in Q2, we continue to accelerate revenue growth while also delivering operating efficiency gains. Looking forward, We believe that we are well positioned to continue delivering durable and efficient B2 revenue growth as we set the course to being a Rule of 40 company. Now, I would like to turn it over to the operator so we can open it up for questions. Danica | Conference Operator: At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Jeff Van Ree with Craig Hallam. Please go ahead. Jeff Van Ree | Analyst, Craig-Hallum Capital: Great. Thanks. Good morning, guys. Just two or three for me, if I could. I'm the seven-figure customer that you talked about in the quarter. Just curious, a little more background on that deal. Was that a displace? And if it was, who was it? Maybe just a little more color there. And then secondarily, on the B2 overdrive, maybe you could just expand a little bit, obviously quick out of the gate to get a six-figure customer. Can you put a little finer point on kind of how that pipeline is building any quantitative measures? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, thanks, Jeff. Appreciate the question. So on the seven-figure customer, they were an existing customer that was smaller before. They've been with us for a handful of quarters at this point. And effectively, their data has been just growing very significantly. And it's an AI company. It's greenfield data. It's data that didn't exist before. And we're seeing this with more AI companies that the data is actually getting created for them. So we're absolutely doing displacements. The B2 Overdrive is an example of a displacement where we took the data away from a hyperscaler. But in the case of a lot of the A companies, they're actually creating new data, whether it's for model building or because of the generative nature of AI. In terms of the Overdrive customer, so this was a customer that we actually connected with before we announced Overdrive. they had been with a hyperscaler, they were getting killed by egress fees, and they started looking for an alternative where they could save costs on their data storage for their usage, especially because they were doing model building and they needed to move the data from where it was being stored to one of the NeoCloud providers in order to build their models. When we announced OverDrive, just shortly after we started engaging with them, they got very excited and said they actually need more performance if it's available, and they decided to test it and do a proof of concept. Their eyes lit up, and they just started testing and got very, very excited very quickly and moved forward because with the AI companies, the GPUs are very expensive and time is money, and so being able to use B2 Overdrive for that performance is very impactful for them. Yeah, that's great. Great coming out of the gate that strong. And then you, Jeff, you, sorry, I think you also asked about the pipeline. So what I would say is, you know, it's a new product, right? So it's still quite early, but we've got about a dozen companies who we're in pretty good discussions with at this point around overdrive use cases. And, you know, what I would say is, you know, obviously we have about half a million customers. So on the one hand, a dozen doesn't sound like a lot. On the other hand, Every one of these has to be a multi-petabyte size customer and at a more premium pricing. Jeff Van Ree | Analyst, Craig-Hallum Capital: Very helpful. Last one for me then maybe on the channel front. Just any update on channel efforts? I know you were leaning in there, making some moves to get a little deeper, get a little tighter. Just where are you there and how's that mapping to your expected progress? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, the, on the channel side of things, you know, we're seeing a consistently increasing number and value of both leads and then, and then closed ARR business. It's, you know, we, we've, we, um, focused in, as we talked about before on, on a smaller number of channel partners to drive more meaningful business with, and that's been working as a good strategy. I will say that because the AI companies tend to buy direct, a lot of the bigger opportunities have actually been through the direct side of things, but the channel has been an important component for us. Jeff Van Ree | Analyst, Craig-Hallum Capital: Yeah, great. Real nice quarter. Thanks, guys. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Thank you. Danica | Conference Operator: Our next question comes from the line of Etow Kidron with Oppenheimer. Please go ahead. Etow Kidron | Analyst, Oppenheimer & Co.: Thanks, guys. Nice quarter as well. Maybe you were running too far ahead here, Glib, but what percent of your B2 customers do you think can be overdrive customers? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, it's a good question. I think that one of the things that we see, obviously, is that AI use cases we think are going to continue to increase and become a bigger and bigger part of the overall. There's no reason why the AI alone at some point isn't a billion dollar opportunity for storage. A lot of those AI companies need the performance because the GPUs are so expensive that the faster they can get the data to the GPUs when they're actually ready, it makes sense. I think that any of the companies who are building models, OverDrive is a good value for them. We also see other use cases where they're doing high performance computing and some of the media workflows where moving lots of data is also important. So I think at this point, OverDrive is only being offered for multi-petabyte customers, so that's got to be on the larger set. But in general, we think that OverDrive is potentially available for anybody who's doing significant AI workload. And as you can imagine, AI is potentially a huge opportunity for us. Etow Kidron | Analyst, Oppenheimer & Co.: that makes a lot of sense. I guess, you know, I'm just kind of eyeballing your website, for example, right now, and the pricing is more than double for overdrive, so clearly this is a huge opportunity for you. But I guess it also begs the question on whether you should have another price tier somewhere in the middle for hybrid, you know, just in a way to touch on a broader set of your customers faster. Does that make any sense? Is there a way to better, not maybe better, but add tiers to your current pricing plans to kind of better peel out more value out of your customers? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, I mean, I think that, you know, as we go forward, we're going to try to keep that good balance of providing a lot of value to the customers, but also keeping things simple. And so, you know, one of the areas that we've won historically with customers is that some of our competitors have, you know, eight different pricing tiers and 13-page pricing documents in six-point font. And, you know, you need a PhD to understand what you're going to get charged, which is part of why they also get these, you know, why we said 80% of customers get these surprise storage fees. So we want to make sure that we keep things simple for companies. At the same time, you know, we are listening to customers to hear what needs do they have. And so, you know, OverDrive came because, We heard from customers saying, you know, I love the performance. I love the durability. I love the availability. By the way, the GPUs are so expensive. If we could get the data there even faster, we'd pay more for that. So we'll listen to the customers and see what it is that we can do to provide value. But I think that there's certainly opportunities for us to introduce other things for them to subdivide and support their workloads. Etow Kidron | Analyst, Oppenheimer & Co.: That's great. Last one for me, Mark, on the computer backup. Solid quarter, actually. And you have very good retention rates. I hear your guidance now that we're lapping the price increase. I guess the question is, with good gross retention here, how do you think about the puts and takes in a decision whether to raise price again or just keep things as is and Let this slightly decline over time. Help me think about your thought process here. What are the triggers to think about over the next 12 months in this business? Mark Sweetan | Chief Financial Officer: Yeah, good morning, Itai. So what I would say is we really focused on B2 growth. I mean, we doubled down on that, and we said we're going to get it up to 30% by the end of the year. Danica | Conference Operator: It looks like we lost the speaker audio line. Just give us one second. Mark Sweetan | Chief Financial Officer: Can you hear me, Itai? Now I can, yes. Danica | Conference Operator: We're back. Thank you. Mark Sweetan | Chief Financial Officer: All right. All right. So, you know, what I was saying, Itai, is our first phase was really to grow B2. And now that we got B2 well on track to get to 30% by the end of the year, we feel that's the new baseline for B2. Now we're able to work on two things, which is both see where do we take B2 from there, but also put more attention and focus on backup. But until we materialize more our actions on the backup side, and Gleb could elaborate what can we do on that front, we thought it'd be prudent to say there's nothing that new, right? Two quarters ago, we said the customer count is declining by low single digits. And what you're seeing is we'll have the price increase that coming through. But glad we'll elaborate on potential actions. Once those actions materialize, we'll start changing our views on the guidance for backup. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, I think Mark's correct on all that. And I think what I would say is, In terms of things that we're doing, we spent a good chunk of time and focus on the go-to-market transformation for B2. We're taking some of those learnings and then applying them to the computer backup side to drive the business opportunity there. The other thing is in early in the year, we launched Enterprise Control, which was an upgraded functionality for computer backup. And then we just launched a feature that was the single most requested feature by larger companies for computer backup, which is Legal Hold. And so with those two components combined with the learnings from our go-to-market transformation, We put a tiger team internally on computer backup. And so there's focus on getting that business to be a kind of steady business. There's no current plan to do a price increase with that. But as you know, we've done a few in the past, so it's not out of the question. But we want to make sure we provide a lot of value to customers as with all our offerings. Etow Kidron | Analyst, Oppenheimer & Co.: Got it. Work in progress. Understood. I appreciate it, guys. Good luck. Thanks. Thank you. Danica | Conference Operator: Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead. Simon Leopold | Analyst, Raymond James: Thank you very much for taking the question. First one really to follow up on the backup trending. I guess there was a messaging that the outlook is trying to be conservative. What is your understanding of why the customer count is going lower on the backup portion of the business? In other words, is it that customers are price sensitive or are you losing to competitors? Could you help us understand the rationale for why you've lost or expect to lose customers? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Hey, Simon. This is Gleb. So, I mean, first of all, the gross customer retention rate on computer backup is 90%. which has been pretty consistent for a long time. So 90% gross customer retention is actually a pretty industry-leading metric, especially for consumer and small to medium business metrics. And so we continue to see that. So it follows that trend line. I think in the consumer side of the business, it's a secular decline business that's slow secular decline, right? And that's in part because people aren't doing backups of their laptops and desktops as much as they used to because there's a lot more streaming and mobile devices and the like. On the business side of that, I think we actually have more opportunity, and that's, as I mentioned, with the new functionality that we launched with enterprise control and with legal hold and with the learnings from our go-to-market transformation, That's where we get to put some weight behind the business side of the computer backup offering. Simon Leopold | Analyst, Raymond James: Thanks. That's helpful. And then pivoting to the B2 opportunities, in the past you've talked about some of your alliance partners and how they've played into, I'd say, the value offered to your business-oriented customers. Uh, in light of, of some of the trends you have, particularly around AI, can you update us on how you see, uh, the featured Alliance partners? I'm thinking about sort of the companies like Dean and Fastly and how that to the strategy. Thank you. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, it's a good question. And I would say that Alliance has continued to be a really important part of our strategy. Some of the types of companies that are becoming Alliance partners are shifting. We, uh, some of the providers of GPUs are leaning in with us more because the customers need a lot of storage. They need the storage to go, uh, hand in hand with the GPUs and, and they, they go, they're a natural fit together. So some of the area that we're seeing more engagement in is around that part, but overall, uh, you know, storage, the great thing about storage is it's a key part of almost everything that everyone does. At the same time, a lot of what we're trying to do is help people solve an entire solution. So if we're looking to help them solve their virtual machine backup needs, then partnering with virtual machine backup companies like Beam, where they're the software and where the cloud storage is good. If we're looking to solve an AI data pipeline, then partnering with the various Neo clouds that they do that with in the modeling and the inferencing is a good solution. So we try to work with partners in order to solve the actual full-end solution for customers. Simon Leopold | Analyst, Raymond James: Thanks. And then just one last one is maybe if you could shed some light on your priorities in terms of internal investment, basically how to divvy up your spending growth between sales and marketing versus R&D. Thank you. Mark Sweetan | Chief Financial Officer: Hi, Simon. This is Mark. So R&D, if you, our R&D as a percent of revenue, when you take the R&D expense line and the R&D that's capitalized is consistently going down as a percentage of revenue because we're benefiting from our scale, right? Not because we want to invest us in innovation, because if anything, you just saw this past quarter, we had several major releases. On the sales and marketing side, what we're focused on is productivity of our investments there. And what you saw is B2 net new ARR went up by 6.9 million, which is a record for us in quarterly net new ARR. Additionally, if you look at B2 growth, if you factor out the price increase, this was the record growth at 29% in seven quarters. So sales marketing is all about productivity. I mean, there's different ratios of what you aim for there. And R&D at this point, I would say for us, is really absolute dollars, kind of keep, not let it grow more than mid-single digits in absolute dollars, but as a percentage of revenue, it will continue to benefit from a scale that will come down every year. Thank you. Danica | Conference Operator: Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please go ahead. Eric Martinuzzi | Analyst, Lake Street Capital Markets: The enterprise security suite was just hoping to get a sense of the potential uplift for a typical enterprise account. If someone's using you for a storage situation, whether it's computer backup or B2, what does the uplift What is the uplift potential if they decide to sign up for the security suite? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, Eric, thanks for asking. So I'll break it down in a couple little pieces. So first of all, Enterprise Web Console with the role-based access control helps them manage larger numbers of people interacting with it. And it's really targeted at ease of use. So there's not an extra charge for that. It's part of the offering. But as it's been rolled out in private preview with customers, the sales team has talked about how they've absolutely loved the functionality. And so I see that as a customer adoption and customer retention and customer satisfaction functionality. On the bucket access logs, it's functionality that enables them to keep in track all of their data that they've used. So they, and all the ways and operations and everything. So it depends on the size of the data they pay for the amount of data that gets stored. The anomaly alerts is a fee per, for the amount of data that's being analyzed as part of that. And so it's not a, It's not a large dollar amount per terabyte, but if they're protecting a lot of data, then that can be an interesting material uplift. So we're in the early stages of testing some of the pricing pieces of that one as we want to really show that there's a lot of value to customers. And I think that there really is going to be data exfiltration, Ransomware, you know, these are issues that organizations are dealing with all the time. And, you know, some of these organizations are ending up paying 10 2030, you know, million dollars to deal with some of these implications for them. So there's a lot of value if we can help detect that early before they've had to before they've had a major breach. Eric Martinuzzi | Analyst, Lake Street Capital Markets: Okay, my second question is on the kind of a macro-related question. Obviously, you had a good quarter and a good outlook, but it's in part driven by the better-than-expected traction on the AI front. As far as your SMB-sized customer, what's the health there? Typically, you've seen in times where SMB is softer, you've seen the amount of data being stored start to tail off of a trend line. Have you seen anything there on the SMB side? Gleb Budman | Co-founder, CEO and Chairperson of the Board: You know, Simon, I think that the core business continues to be strong and the AI is an accelerant. So, you know, as I was looking through the deals that we won last quarter, just, you know, kind of eyeballing through them, right? I mean, there's MSPs, there's K through 12 schools and colleges and universities, there's cities, there's counties. There are software companies, media companies, ad agencies. They're companies across the board adopting Backboys. If you look at the gross customer retention metrics, they continue to be strong. The net revenue retention metrics continue to be strong. And so the core business, it's not like Patrick Corbett- backups are no longer important or media content is not getting generated or or application storage use cases like surveillance and streaming are shrinking so all of those are still continue to be growing areas. Patrick Corbett- But you know Ai is big and so we're we're leaning into that opportunity for us, I think you know just looking at it, I mean. You know, going from, you know, zero to three of our top 10 customers, you know, being AI companies and the 40X growth rate and data, it's where we're putting an increasing amount of focus because of the size of that opportunity. But the core business continues to be strong. Mark Sweetan | Chief Financial Officer: Yeah. Another way to evidence that, Eric, good morning, it's Mark. Slide 13, we posted a new slide into our quarterly earnings deck that breaks up what's driving our growth. And you can see that all four categories of our revenue driver growth are improving. That includes net organic growth, so existing customer base organically growing. It includes cross-selling and up-selling by our direct sales team. It includes new self-serve, thousands that show up every quarter and sign up, and new direct sales booking. So it's pretty well diversified. That really sets us up to get to that 30% quarterly growth rate and really makes that our new baseline from thereafter. That's the momentum we carry forward from there. Eric Martinuzzi | Analyst, Lake Street Capital Markets: Got it. Thanks. Danica | Conference Operator: Our next question comes from the line of Jason Adder with William Blair. Please go ahead. Jason Adder | Analyst, William Blair: Yeah, good morning. Thanks, guys. Wanted to ask on the B2NRR, can you just talk about some of the puts and takes there and just maybe an outlook for the back half of the year for just B2NRR? Mark Sweetan | Chief Financial Officer: Hi, Jason. It's Mark. The 112% coming down 500 basis points from the previous quarter, that's all the price increase lapping and the trailing four-quarter impact. Our actual NRR, if you look at that slide 13, those first two categories at the bottom pretty much represent NRR and actually improved in Q2 over Q1. The improvement was driven by Gleb referenced a large customer, I referenced a large customer, they were with us before. So that big ramp up fed into Q2, but you could also see all variables of that growth rate improved. As for the rest of the year, I would say on a reported basis, it was a trailing four-quarter average. You'll probably have another quarter of that lapping price increase impact us. but then it should stabilize. And then as we improve our customer success, I think there'll be more into 2026. You'll start seeing improvements from there. Yeah. Gleb Budman | Co-founder, CEO and Chairperson of the Board: And Jason, I would just say one example for me of that improvement in customer success. So, you know, we talked about earlier this year that we brought on a leader for the customer success organization. She's been doing a fabulous job of revamping how we engage with our customers. really focused on both getting significant value to them and making sure that they're getting full value of the platform and also looking at what opportunities we have to expand with them and one thing that happened uh this quarter was uh we had a customer that had been a roughly 15 000 a year customer and when our customer success team engaged with them and really uh and showed them kind of the value that they could get, that customer grew from 15K for a one-year deal to becoming a 500K TCV over a three-year deal. So I think that there's a lot of that type of opportunity in a customer base of 500,000 customers. Jason Adder | Analyst, William Blair: Gotcha. So we take out the impact of price, and we take out the impact of the single big AI customer that was in the numbers a year ago. Was there, I guess, was there expansion on the existing base? So did the NRR actually improve if you adjust for those two items? Mark Sweetan | Chief Financial Officer: If you adjust for those two items, I would say it's more in the stable range. Because if you remember in Q1, we talked about a customer, a large customer that went away. In Q2, we talked about this new customer coming in. When you put all these, it all nets out to a very stable number. And then, like we said, once this customer success motion kicks in, that's when you'll start seeing it go up in a healthy way. Jason Adder | Analyst, William Blair: Okay, great. And then, Gleb, just one for you. You know, and I'm hung up on this question. I think I've asked it on a number of different earnings calls, but can you just explain and help people understand why you guys are not at a disadvantage on the AI storage side by not having compute and GPUs in your offering? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Yeah, it's actually, I think we're at an advantage. So one of the things is that the GPUs in storage, there are two pieces of it, but GPUs service two concrete parts of the overall AI workflow, the model building and the inferencing. The overall data pipeline for AI is actually five stages. It's data collection. It's data processing, where you do all the labeling. It's the model training. It's the inference. And then it's the monitoring. And so we get to play... Danica | Conference Operator: Looks like we lost the speaker audio once again. Just give us one moment, please. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Can you hear us again? Danica | Conference Operator: Yes, I can hear you now. Thank you. Jason Adder | Analyst, William Blair: Excellent. I think, Cleve, you were on stage, maybe stage four or something. Stage four. Gleb Budman | Co-founder, CEO and Chairperson of the Board: So just kind of the five stages of the pipeline, right? So stage one is where you collect all the data, you ingest it, and you get it ready. Stage two is where you label the data. Stage three is you build the models. Stage four is you run inferencing on it. And stage five is you monitor it. And so the GPUs are great for the model training and the inference. But backwards, we get to participate at all five of these stages and help customers at each one. And so for the data collection part of it and the ingest, That is all about having a really affordable, highly durable place to store a lot of data that scales. GPUs have no role in that, but we play a key role in that. Stage two, where you have the data and you label all of it. Again, GPUs aren't really a significant portion of that, but the data needs to be stored in a place where you can do that with. Stage three for the model training, the GPUs play a big role in this, but it's really important to have high performance, high throughputs. data storage where you can get it to the GPUs because a lot of times the customers will sign, for example, a 90-day contract for access to their GPUs. Once they have all the data collected and labeled, they want to get it to those GPUs as fast as possible so that they're not wasting any of that time. That B2 overdrive offering that we introduced is perfect for that. Once it's done with the model training, you have the inference. This is our more classic application storage type use case where you're running the models on top of it. Again, it's really important to have durable, available, high performance and affordable data storage for that. And then the last part of it is the monitoring of it, where you, again, you don't need much in the way of GPUs for that, but you absolutely want to keep the data. So one of the things I think that's also interesting is that GPU usage is spiky, but storage is sticky. So even though you may ramp up your GPUs and shut them down, you're not going to get rid of that data. And so we get to participate in all parts of the AI workflow. We get to keep the data, even though the GPUs go up and down. And because there are more and more places where you can get GPU availability, right? There are all these Neo clouds popping up. We're increasingly seeing customers who want to make sure that their data is outside of the traditional hyperscalers who try to lock you in because they want access to have their data go to whichever neocloud provider they want to use. So we're really building this storage platform for the next era of the way that technology is built when it's not just locked inside of the hyperscalers. Etow Kidron | Analyst, Oppenheimer & Co.: Thank you. Danica | Conference Operator: Our next question comes from the line of Zach Cumins with B Reilly Securities. Please go ahead. Zach Cumins | Analyst, B. Riley Securities: Yeah, thanks. Good morning. I appreciate you taking my questions. Mark, I know you've really focused on this go-to-market transformation here over the last several quarters, bringing in new leadership and building out additional teams there. Can you kind of give us a sense, maybe in a baseball analogy, kind of what entering we're in in terms of building out the actual teams and functionalities versus actually having everyone in place and really just executing against the plan now? Mark Sweetan | Chief Financial Officer: Zach, good morning. We're probably midway. I'll give you the, you know, crawl, walk, run, right? We're clearly no longer crawling. I mean, this is the best quarter factory price increase in seven quarters. We're not running. So that puts us at that 30% mark. We got, you know, we got to build it out to be more than that. But that's when we get to the running stage. So we're not ready to share anything on that front. The team's largely in place, but, you know, you got to build the processes, the systems around them, train people. So, yeah, it's all coming together well. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Zach, I'll say I'm glad that you asked Mark that question, not me, because I'm not sure that I could give you a baseball analogy of any kind. Not quite my world. But what I will say is that, you know, the pipeline has doubled year over year. So I think the demand gen function has improved significantly. The types of deals in that pipeline, the number of six-figure opportunities has scaled quarter over quarter over quarter. So that really speaks to, I think, the demand gen function is starting to work well. If you look at the direct sales, Jason and team have upskilled the organization and added a lot of processes in how the system works. That has resulted in us having the 150 companies that are over 50K. If you think about each of the last four quarters, we've announced a seven-figure size deal. In the history of the company before that, we only had one seven-figure deal in the prior 15-plus years, and we've been able to announce one every single quarter over the last four quarters. So I think that there's – like Mark said, I think we still absolutely want to continue to improve, pick up the pace, and drive the opportunity even bigger. Fundamentally, like – Even without AI, the core market just servicing the ransomware protection and backups and archives and media and all the different companies that need the base functions is so large. Adding AI on top of that, we believe it is just this massive opportunity. And so we want to go and chase that faster. I think we've made great strides over the last few quarters, and I think we have a lot of opportunity left. Zach Cumins | Analyst, B. Riley Securities: Understood. That's helpful. And just my one follow-up question is maybe just around the updated guidance. Next is the continued outperformance here in the first half. Are there any incremental investments that are contemplated in the current guide in the second half? Just curious on the puts and takes of how we should think about the ongoing margin progression. Mark Sweetan | Chief Financial Officer: Yeah, Zach. With the launch of Overdrive, we are accelerating a bit of CapEx, but I would say it It's mainly pulling it from Q4 to Q3. So it doesn't impact the whole year. Just pulls it in so we could get more of our data centers up to overdrive performance because we're just getting a lot of interest. And when the interest comes in, they got to test and run POCs. So that's what's happening on that front. Otherwise than that, I think we're well on track to get to free cash flow positive in Q4. Thereafter, operating leverage kicks in, and that's where we've been really focused on building a fiscally responsible financial model with faster growth, with less spend, and driving free cash flows. That's why also we announced the share buyback. It's not a big one, but we felt like now that we got the growth going, Now that we're clearly six weeks away from free cash flow positive, we could start – we talked last quarter about equity dilution. Now we could further dig into it as we set the journey to, over time, eliminate equity dilution. Zach Cumins | Analyst, B. Riley Securities: Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter. Danica | Conference Operator: All right, our next question comes from the line of Mike Sikos with Needham. Please go ahead. for Mike Sikos\ Hi, this is Jeff Hopson on for Mike Sikos. Thanks for getting me in here. Are you guys seeing the length of sales cycles for AI companies coming in shorter, as I would kind of expect them to see the large cost and performance advantages much quicker than others, or Do they still tend to be a little bit longer as you kind of move up market? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Jeff, thanks for the question. You're absolutely right. We're actually seeing some of the companies moving really fast. I mean, you saw that with our B2 Overdrive note, right? So they came in and within two months of B2 Overdrive launching, they signed a six-figure deal. So a lot of these companies, they're newer companies. And they are just accustomed to themselves moving very quickly. And the needs that they have are significant. So some of them, I will say, are more hesitant to sign long-term contracts. In which case, our ability to have our consumption-based model actually works great for them, and we're thrilled to have them on our consumption-based model. But they definitely seem to be moving faster than some of the other more traditional organizations. for Mike Sikos\ Got it. Makes sense. And maybe just one more quickly. I know you guys are lapping price increases now, but What is kind of the methodology for if or when you'd implement future price increases on B2, considering you guys are still substantially cheaper than your competition? Gleb Budman | Co-founder, CEO and Chairperson of the Board: You know, we don't have any plan to do additional price increases on B2. We obviously, you know, always evaluate what we should be charging for the different services in the market. But we want to provide a lot of value to the customers. That's kind of rule number one. So we'll continue to evaluate, but there's no intention or no plan to at this point. What we did was we launched B2 Overdrive, which solves a different need for them, and that starts at $15 per terabyte, and it goes up from there depending on the performance that they want because that service, we can offer up to a terabit per second of performance for that, which is just, I mean, it's hard to wrap your head around how fast that is and how much data that can move. And so with that type of performance, you know, it would price it still for providing a lot of value, but it's certainly a significantly higher price point. Mark Sweetan | Chief Financial Officer: Yeah, and the starting price for that is 250% above our current standard price. So that's how we monetize more, right, giving more value to our customers. And everything we're launching, we're aiming to make it either gross margin neutral or accretive to our current model. So we'll slowly see ongoing hopefully improvements in our gross margin. Perfect. Thanks again. Danica | Conference Operator: Our final call comes from Rustem Conga with Citizens. Please go ahead. Rustem Conga | Analyst, Citizens Bank: All right. Thanks for squeezing me in here, guys. And congrats on the outperformance of B2 relative to the prior expectations. Just one for me. It looks like there's a solid drumbeat of innovation with several announcements for your security features. I understand some of these are in private preview. It looks like Legal Hold has a complimentary trial phase. Gleb, I know you touched on the monetization there. I just wanted to ask, big picture, to what extent do you think these enhancements sort of naturally help bolster the shift of market? Gleb Budman | Co-founder, CEO and Chairperson of the Board: Thanks. Yeah, thanks for the question, Russ. So we've focused on functionality for performance, functionality for security, functionality for AI. These are definitely supporting that upmarket momentum. So event notifications, which we launched in the past few quarters, that was to enable organizations to actually build their applications and integrate us better into all their workflows, legal hold, supports organizations. It was literally the number one most requested feature from the larger companies for computer backup. Bucket access logs was something that customers were asking for because we became an increasingly strategic part of their fundamental infrastructure and so they wanted to plug that in to the insights they were getting around how their the security um was uh of the overall environment so these are these are both natural and helping us uh close those those bigger opportunities And like I said, enterprise web console with role-based access control, when that was previewed to customers, what I heard from the sales team was basically, wow, customers loved it. I think the go-to-market transformation that we're doing helps us make sure that our teams and process infrastructure are better able to sell to larger organizations, and these tools and functionalities give them the features and products to make that easier. Danica | Conference Operator: All right. I will pass it back to Gleb Bedman for closing remarks. Gleb Budman | Co-founder, CEO and Chairperson of the Board: Thank you everybody for joining today. We delivered a strong quarter financially and we delivered for our customers. This is an exciting opportunity for our company as we lean in to help customers with their data needs around AI, cybersecurity and more. I want to thank our team for collaborating to make this happen and thank you to our customers partners, and investors for your trust in us as we continue to build the core storage platform for the Cloud 2.0 era. Operator, you may now end the call. jsPDF 3.0.3 D:20260606090018-00'00'