Backblaze, Inc. Q4 FY2025 earnings call

Gleb Budman focused on core business strength, go-to-market transformation progress, and AI opportunity. Core business benefits from data creation growth, B2 net revenue retention 111%. Go-to-market transformation includes increasing awareness with Flamethrower, driving pipeline consistency, expanding revenue in installed base. Hired leaders for various initiatives and established go-to-market advisory committee. AI opportunity: neoclouds and AI developers as growth vectors. Launched B2 Neo for neoclouds. Marc Suidan discussed revenue, margins, guidance, and compensation shifts. Q4 total revenue $37.8M, adjusted EBITDA exceeded guidance. RPO up 60% year-over-year to $66M. Launched gross margin optimization initiative.

Fourth quarter revenue in line with guidance. Total company revenue grew 14% year-over-year with B2 Cloud Storage growing 26%. Q4 B2 revenue grew 24% year-over-year. 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. Q4 adjusted EBITDA margin was 28%, doubling year-over-year. Adjusted free cash flow was positive $4 million in the quarter. For full year 2026, expected revenue range $156.5M - $158.5M, adjusted EBITDA margins 19% - 21%, adjusted free cash flows roughly neutral with normal quarterly variability. B2 year-over-year growth in 2026 expected 20%, with Q2 and Q3 in 12% - 19% range.

For 2026, revenue expected $156.5M - $158.5M. Adjusted EBITDA margins 19% - 21%. Adjusted free cash flows roughly neutral. B2 year-over-year growth 20%, Q2 and Q3 in 12% - 19% range. Excluded large swing deals in guidance, anchored on predictable demand. First quarter 2026 revenue expected $37.6M - $38M, adjusted EBITDA margins 18% - 20%.

Q: Solid numbers, and thank you very much for derisking 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 Neo -- your B2 Neo cloud solution, how is it different than B2? And 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 started seeing revenue, I would appreciate that.

A: Yes. Thanks, Ittai. 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 and important opportunity for us, right? The -- 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 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 is -- 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 [ upmarket ]. So that's what B2 Neo 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 B2 Neo 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 new clouds 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 for others as well.

Q: Jeff Van Rhee: 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 there. And then 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?

A: Yes, Jeff, good to hear from you. This is Marc. 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 out to 20%. Does that answer your question?

Q: Michael Cikos: If I could just come back to the gross margin comment, this expected headwind that we're up against, I guess it's a bit of a two-parter here. But when我 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 multiyear factor we need to consider when evaluating corporate gross margins on a go-forward basis?

A: Yes. Mike, it's Marc. 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 it nets out to the same economic model for us, but that's the P&L benefit if that makes sense.

Q: Jason Ader: Wanted to first ask about your comment, Gleb, 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 8-figure win was with the neocloud that did have storage, but the storage wasn't going to handle what they needed, maybe just if you could elaborate on why it wouldn't be able to handle what other customers needed.

A: Yes. Thanks, Jason. Both good questions. So with these 200 neoclouds that are -- 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. 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 needed 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 -- to stand up their own infrastructure, where some of them have set up a storage infrastructure using flash systems. The problem is what they found is the flash systems are incredibly expensive to operate. And so for large-scale data sets that becomes very quickly unaffordable. The open source tooling 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 enterprise's 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 up 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.

Q: Eric Martinuzzi: Yes. You mentioned the revenue impact from the 8-figure transaction really doesn't start to hit until 2027. Is that -- based on your answer about the 3-year duration and over $50 million, is that to say then that we're a small amount, maybe the end of 2026 and the bulk of it split between '27 and '28?

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

Q: Ethan Widell: Ethan Widell calling in for Zach Cummins. I guess 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 like customer base or function or revenue opportunity versus B2 Overdrive?

A: Yes. Thanks, Ethan. 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 the neoclouds when they needed them or to 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 them 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.

Q: Rustam Kanga: Marc and Gleb, congrats on the RPO acceleration. Just building on another question that you answered, Marc -- Gleb, where you kind of mentioned that B2 Overdrive versus B2 Neo are serving 2 different sides of the market. And 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 it 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 lead to higher ASP engagements as you look towards this opportunity?

A: Yes. It's a good question, Russ. So one of the ways我 would look at it is the market for the neoclouds, if you take just the hard drive-based storage opportunity inside of those 200 providers, that market is estimated at about $14 billion in the next 5 years. So with 200 players representing $14 billion of opportunity, every single 1 of those deals on average is going to be a large deal. So the short answer to your question is, yes, the B2 Neo deals, we see as large opportunity deals. The ones that we've signed so far are 6- and 7- and now 8-figure opportunities on those. Some of those, I imagine, they start smaller just as they start getting familiar with it, but I think all of them have the opportunity to get quite large.

Q: 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.

A: 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 B2 Neo and signed multiple neoclouds, including this $15 million-plus deal. We also launched Flamethrower, our program for high-performance start-ups. In just the last few days since the launch, it's exceeded expectations, growing faster than the kickoffs at other leading companies that are a leader for that has driven. We had about a dozen start-ups 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 look forward to chatting with you next quarter. Thank you.