Backblaze, Inc. (BLZE) Q3 2025 Earnings Call Transcript
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Overview
The earnings call reveals mixed signals: while there's optimism with raised revenue guidance and strong B2 growth, concerns arise from AI customer variability, delays in large deals, and lack of clear timelines for growth targets. The restructuring and focus on operational efficiency are positive, but uncertainties remain. Given these factors, the overall sentiment is neutral, reflecting both potential and risks.
Key Financial Performance
Total Revenue $37.2 million, a 14% year-over-year growth. This exceeded expectations and was driven by the first phase of the go-to-market transformation.
B2 Revenue 28% year-over-year growth, compared to 19% organic growth in the same period last year. This represents an acceleration of about 900 basis points, driven by the first phase of the go-to-market transformation.
Computer Backup Revenue Flat year-over-year, reflecting the final roll-off of the price increase implemented in 2023.
Net Revenue Retention (NRR) Trailing 4-quarter company NRR for Q3 was 106%, compared to 109% in Q2. In-quarter NRR for B2 improved to 116% from 109% in Q2, driven by a large AI customer.
Gross Margin 62%, up from 55% a year ago, reflecting operating leverage and the benefit from the recent useful life study.
Adjusted Gross Margin 79%, compared to 78% last year, showing stable margin performance.
Operating Expenses 71% of revenue, an improvement from 92% a year ago, due to structural changes, including restructuring and zero-based budgeting.
R&D Spending 30% of revenue, down from 33% a year ago. When combined with capitalized R&D, it was 35% of revenue, down from 43% a year ago.
Sales and Marketing Expenses 24% of revenue, down from 36% a year ago, reflecting improved efficiency in the go-to-market model.
G&A Expenses 17% of revenue, down from 23% last year, due to efficiencies in corporate functions and general administrative spend.
GAAP Net Loss $3.8 million, a 70% improvement from a loss of $12.8 million in the prior year.
Non-GAAP Net Income $1.9 million, compared to a loss of $4.1 million last year.
Adjusted EBITDA Margin 23%, almost double the 12% from a year ago, reflecting financial discipline and operating leverage.
Adjusted Free Cash Flow Negative $3.5 million, improving by roughly $0.5 million year-over-year.
Cash and Marketable Securities $50 million, largely unchanged from last quarter, providing flexibility for growth and investment.
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Operating Highlights
B2 Cloud Storage: Delivered strong results with a 28% year-over-year growth. Recognized for cloud security and technology innovation, including an award for B2 Overdrive.
New Features: Introduced B2 Overdrive, which provides high performance and cost-effective solutions for AI startups and other customers.
AI Industry: AI is becoming central to customers and Backblaze's opportunities. The company is helping AI companies manage exploding data sizes and storage needs.
Customer Wins: Secured a 6-figure deal with an AI startup, a 7-figure deal with a surveillance AI company, and another 6-figure deal with a media app developer, all highlighting Backblaze's competitive pricing and performance.
Revenue Growth: Total revenue grew 14% year-over-year, reaching $37.2 million, exceeding expectations.
Operational Efficiencies: Gross margin improved to 62% from 55% a year ago. Operating expenses reduced to 71% of revenue from 92% last year. Adjusted EBITDA margin reached 23%, almost double from a year ago.
Go-to-Market Transformation: Launched Phase 2 to accelerate self-serve and direct sales motions, including developer relations and sales efficiency improvements.
Financial Strategy: On track to achieve positive adjusted free cash flow in Q4. Initiated a share repurchase program to manage equity dilution.
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Risk or Challenges
Revenue growth below target: B2 revenue growth is expected to be between 25% and 28% in Q4, which is below the 30% target set at the beginning of the year. This indicates challenges in meeting growth expectations.
Customer variability: Usage from one of the larger AI customers has been variable, with fluctuating data storage needs, creating uncertainty in revenue projections.
Data center cost pressures: Data center costs are generally rising, which could impact gross margins despite efforts to offset these increases through operational efficiencies.
Dependence on large customers: Revenue variability is influenced by certain large customers, which introduces risk if these customers reduce or change their usage patterns.
Competitive pressures: Backblaze faces competition from hyperscalers and other cloud providers, which could impact its ability to retain and attract customers.
Operational execution risks: The company is undergoing a go-to-market transformation, including adding talent and upgrading systems. These changes carry execution risks and may not deliver the expected growth acceleration.
Economic uncertainties: The company is exposed to broader economic uncertainties that could impact customer spending on data storage solutions.
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Guidance & Outlook
Revenue Expectations: For Q4, revenue is expected to be in the range of $37.3 million to $37.9 million. B2 growth in Q4 is projected to be between 25% and 28% year-over-year.
Growth Goals: The company aims to achieve a 30% B2 growth target, though current projections for Q4 are slightly below this goal. Efforts are being made to accelerate growth through Phase 2 of the go-to-market transformation.
Go-to-Market Transformation: Phase 2 of the transformation focuses on accelerating self-serve and direct sales motions. This includes making the platform more frictionless for AI use cases, initiating robust developer relations, adding sales talent, upgrading core systems, and partnering with advisors and consulting teams.
Financial Goals: The company is on track to achieve positive adjusted free cash flow in Q4 and is progressing towards operating at a Rule of 40 profile. B2's Rule of 40 score is expected to triple by Q4 compared to the start of the year.
Market Trends: Industry-wide demand for data storage is expected to grow rapidly, driven by AI-related workloads and the expansion of data sizes beyond text to images, audio, and video.
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Shareholder Return Plan
Share Repurchase Program: 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.
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Key Q&A
Q:In terms of the sales evolution in Phase 2, how are the existing reps ramping, and what led to the implementation of the second phase?
A:The goal in Phase 1 was to move upmarket, which was achieved with multiple 6- and 7-figure deals. Phase 2 focuses on driving execution velocity and moving deals through the funnel more actively. Most reps were hired earlier in the year and are largely through their onboarding ramps.
Q:What happened with the 30% goal for Q4 B2 growth, and when will it be achieved?
A:Two factors impacted the goal: a large AI customer trimmed more than expected, and larger deals took longer to execute. The company is focusing on increasing predictability and consistency by balancing large deals with a core base of smaller deals. No specific timeline for achieving the 30% growth was provided.
Q:How is data variability from AI customers different than expected?
A:AI use cases are evolving rapidly, and customers' data needs fluctuate. Some customers sign contractual commitments but scale up or down based on their business needs. The company supports both pay-as-you-go and contractual customers, with AI use cases being transformative and a significant opportunity.
Q:What are the expectations for B2 and CBU growth in 2025 and beyond?
A:B2 is expected to grow in the mid-20% range year-over-year in 2025, with potential upside from larger deals. CBU is expected to contract in low to mid-single digits. No guidance was provided for 2026, but the company is optimistic about maintaining similar growth rates.
Q:Where are headcount reductions happening as part of the restructuring?
A:The restructuring is funding the next phase of the go-to-market transformation, focusing on mid-market, high-velocity deal volume. It involves bringing in new talent with operational go-to-market skills and reinvesting in the business rather than cost-cutting.
Q:How many 7-figure ARR customers are there, and how have their expansion dynamics evolved?
A:The company has announced 1 or 2 new 7-figure deals per quarter over the last year. These customers are not all enterprises but include mid-market companies with high data needs. The number of customers with $50,000+ ARR grew 41% year-over-year in Q3.
Q:What are the potential catalysts for growth heading into the next fiscal year?
A:Key catalysts include Phase 2 of the go-to-market transformation, the B2 Overdrive product line, and continued momentum from Phase 1. Overdrive has already closed multiple 6-figure deals and is attracting high-performance customers. The company is also focusing on improving execution and leveraging its pipeline.
Q:What investment is being made for the Phase 2 initiative, and how will it impact sales and marketing expenses?
A:Sales and marketing expenses as a percentage of revenue are expected to remain stable. The restructuring funds one-time costs for system upgrades, data cleansing, and talent refresh. The focus is on improving go-to-market systems and operational efficiency.
Q:What changed in expectations for B2 growth compared to initial goals?
A:The outbound sales motion is newer and less developed than inbound, which has been strong. The company is working to strengthen this muscle and improve targeting and execution. Details on Phase 2 outcomes will be provided in the Q4 earnings release.
Q:What is the context around larger deals in the pipeline and their delays?
A:Delays in larger deals were due to random reasons like internal customer priorities and compliance reviews. Larger deals involve more complex buying processes compared to smaller deals, which are quicker to close. Some large deals have closed quickly, but not all follow the same timeline.
Q:What improvements are being made to the self-serve motion in Phase 2?
A:The company is focusing on AI-native startups and developers, ensuring easy adoption of the platform. Efforts include updating content for AI-driven search algorithms and improving workflows and integrations. Self-serve account creation is up 56%, and some customers transition from self-serve to sales-assisted for larger deals.
Q:How is the Powered by white-label solution performing?
A:The Powered by solution is gaining traction, with one of the largest deals this quarter being a Powered by deal. Channel partners are adopting it, and discussions with NeoCloud providers are ongoing. The solution supports storage needs for NeoCloud providers and other partners.
Q:Is there an uptick in AI video companies, and how is the company supporting them?
A:Yes, there is an increase in AI video companies as video becomes a data-heavy format. About 25% of new business comes from AI companies. The company supports AI video customers with storage for model creation, data transfer, and inferencing needs.
Q:What kind of talent is being sought for Phase 2, and what has been successful in Phase 1?
A:Phase 2 focuses on operational and system improvements rather than specific sales reps. The company is hiring top-tier RevOps talent and leveraging consulting expertise. Reps have a 30% win rate, and the focus is on improving efficiency and targeting ideal customer profiles.
Q:Review of Unclear Management Responses
A:Management avoided providing a specific timeline for achieving the 30% B2 growth goal and did not give clear guidance for 2026 growth rates. Additionally, reasons for delays in larger deals were described as random, without a clear pattern or actionable insights.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI GPUs
AI model
AI one
AI scale
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AI text
Alpha Select
Chairperson Chief
Conference Needham
CoreWeave Nebius
Databricks market
Development assumption
GPUs compute
Gleb Budman
Gleb result
Hallum Alpha
Nebius GPU
Needham Tech
New York
Overdrive
commitment
developer
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example
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hyperscaler
market transformation
million user
pricing
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space
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Backblaze, Inc. (BLZE) Q3 2025 Earnings Call Transcript
Unknown11-6
The earnings call reveals mixed signals: while there's optimism with raised revenue guidance and strong B2 growth, concerns arise from AI customer variability, delays in large deals, and lack of clear timelines for growth targets. The restructuring and focus on operational efficiency are positive, but uncertainties remain. Given these factors, the overall sentiment is neutral, reflecting both potential and risks.
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BLZE Report
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