Backblaze (BLZE) Q1 2025: B2 Cloud Storage Accelerates to 23% Growth, AI Drives Strategic Upside
Backblaze’s B2 Cloud Storage segment accelerated for the second straight quarter, driven by AI use cases and a maturing go-to-market transformation. The company posted improved profitability and is making progress toward free cash flow positivity, while a new high-performance offering and record contract wins signal growing relevance in a competitive cloud storage market. Management reaffirmed full-year targets despite customer decision cycle elongation, with AI workloads and self-serve momentum underpinning confidence.
Summary
- AI Use Case Expansion: Fastest-growing segment with 66% customer growth and 25x data increase, now core to B2 momentum.
- Go-to-Market Transformation: Direct sales bookings more than doubled, supporting record contract wins and upmarket traction.
- Profitability Inflection: Adjusted EBITDA margin tripled YoY, with free cash flow improvement on track for Q4 positivity.
Performance Analysis
Backblaze delivered 15% total revenue growth year-over-year, with B2 Cloud Storage, its largest segment, accelerating to 23% growth on an organic basis. This marks the second consecutive quarter of B2 acceleration, a key validation of both product-market fit and sales execution. The company’s legacy Computer Backup business contributed 8% growth, primarily from prior price increases, underscoring the shift in growth leadership to B2.
Profitability also saw marked improvement, with adjusted EBITDA margin reaching 18%—triple the prior year’s level. Operating leverage from a Q4 restructuring, combined with higher gross margins (GAAP gross margin improved to 56%, adjusted to 79%), contributed to this step-change. Adjusted free cash flow margin improved from negative 13% to negative 6% sequentially, reflecting better cost control and higher sales efficiency. Net revenue retention (NRR) for B2 remains strong at 117%, though down from last year’s 126% due to lapping price increases. Gross customer retention held steady at approximately 90% across both segments.
- B2 Cloud Storage Outpaces Legacy: Now the largest segment, B2’s growth rate is outstripping Computer Backup, confirming the pivot to enterprise-grade storage and AI-centric workloads.
- Margin Structure Strengthens: Hardware longevity and data center efficiency are driving higher gross margins, with depreciation schedule changes expected to add another 200–300 basis points in Q2.
- Equity Dilution Controls: Initiatives to reduce dilution—such as cash-settled tax withholdings and shifting bonuses from equity to cash—are set to further improve the capital structure as free cash flow turns positive.
Momentum is building in both top-line and bottom-line performance, with management emphasizing a path to 30%+ B2 growth and free cash flow positivity by Q4. The company’s ability to sign its largest-ever TCV contract, displacing AWS, provides tangible evidence of upmarket traction and competitive differentiation.
Executive Commentary
"Our AI customer base grew by 66%. Their data with us grew by 25 times and AI use cases represented the fastest-growing piece of our business in the first quarter."
Gleb Budman, Co-Founder, CEO, and Chairperson of the Board
"Our adjusted free cash flow margin improved significantly from negative 17% to negative 6%, a 1,100 basis points improvement over the course of one year. This was driven by revenue growth and the operating leverage that we have achieved through the Q4 2024 restructuring and our commitment to be adjusted free cash flow positive in Q4 of 2025."
Mark Soudan, Chief Financial Officer
Strategic Positioning
1. AI as a Growth Engine
AI workloads have become a central pillar of Backblaze’s B2 growth strategy, with the company reporting that its largest customer is now an AI firm. Use cases span the full AI data lifecycle—data creation, labeling, modeling, inference, and retraining—demonstrating B2’s versatility as a storage backbone for modern AI pipelines. The launch of B2 Overdrive, a high-performance storage tier, caters directly to AI and high-throughput analytics, expanding the company’s addressable market and price realization.
2. Go-to-Market Transformation and Upmarket Penetration
The sales organization has doubled bookings year-over-year, reflecting both improved direct sales execution and a maturing sales team. New leadership in customer success and demand generation is intended to further enhance onboarding and post-sale support. Partnerships with technology and media workflow providers, such as PureNodal and Suite Studios, are positioning Backblaze as a strategic vendor in cloud-first environments. The company’s largest-ever TCV win, a multi-million dollar migration from AWS, highlights success in landing and expanding large enterprise accounts.
3. Cost Leadership and Platform Leverage
Backblaze’s value proposition is anchored in cost efficiency and open cloud flexibility, offering customers 80–90% lower costs than traditional hyperscalers and free egress. The Overdrive offering, priced at $15 per terabyte per month, remains dramatically cheaper than AWS for high-volume workloads, enabling Backblaze to monetize performance-sensitive use cases while undercutting legacy providers. Platform optimizations—both software (e.g., ShardStash) and hardware—allow the company to deliver SSD-like performance on spinning drives, further differentiating its offering without outsized R&D spend.
4. Operational Discipline and Capital Allocation
Q4 2024 restructuring and ongoing cost discipline have yielded operating leverage, with R&D and G&A spend holding steady as a percentage of revenue. Sales and marketing investments are being ramped in Q2, with a focus on outbound demand generation and participation in key industry conferences. The company is also proactively managing equity dilution by transitioning executive tax settlements and annual bonuses from equity to cash, signaling a commitment to shareholder value as free cash flow improves.
5. Resilience Amid Competitive and Macro Headwinds
Despite some customers elongating decision cycles, Backblaze’s self-serve channel and recurring revenue base provide a buffer against macro uncertainty. The company continues to win both greenfield and displacement deals, with a notable portion of customers adopting cloud storage for the first time. Management reports high win rates and sees little impact from tariffs or supply chain disruptions, aided by multi-country sourcing and a flexible contract structure (pay-as-you-go and committed contracts).
Key Considerations
Backblaze’s Q1 demonstrates the company’s ability to align strategic focus with operational execution, positioning it as an emerging challenger in the cloud storage and AI infrastructure market.
Key Considerations:
- AI-Driven Demand: AI use cases are now a material growth driver, with B2 Overdrive expanding the company’s reach into high-throughput, high-value workloads.
- Upmarket Expansion: Record TCV wins and improved sales execution validate the go-to-market transformation, but continued progress in channel and demand generation is needed to sustain momentum.
- Profitability Trajectory: Margin expansion and free cash flow improvement are on track, though capital allocation discipline remains critical as outbound marketing ramps in Q2.
- Customer Retention and NRR: High retention rates and strong NRR in both B2 and legacy segments provide a solid recurring revenue foundation, though NRR will be pressured by lapping prior price increases in the near term.
- Competitive Positioning: Cost and performance advantages are clear, but hyperscaler incumbency and customer decision inertia remain structural challenges.
Risks
Elongated customer decision cycles, particularly among larger enterprise accounts, could delay growth realization despite pipeline strength. Tariff escalation on storage hardware remains a manageable but longer-term risk, with a potential 1.5% impact on cost of sales if fully implemented. Competitive pressure from hyperscalers (AWS, Google, Microsoft) persists, with customer awareness and channel reach still under development. Equity dilution, while being addressed, requires continued vigilance as the company transitions to cash-based compensation.
Forward Outlook
For Q2 2025, Backblaze guided to:
- Revenue of $35.2 million to $35.6 million
- B2 revenue growth of 23% to 25%
- Adjusted EBITDA margin of 14% to 16%
For full-year 2025, management maintained revenue guidance of $144 to $146 million and raised adjusted EBITDA margin guidance to 17% to 19%.
Management highlighted:
- Continued acceleration of B2 growth, targeting 30%+ by Q4
- Positive adjusted free cash flow in Q4 as a near-term milestone
Takeaways
Backblaze is executing on a multi-pronged growth strategy, with AI use cases and B2 Cloud Storage at the forefront. Profitability is improving, and capital discipline is evident, but customer decision cycles and competition from hyperscalers remain key watchpoints.
- AI Workload Leadership: B2’s traction with AI and high-performance workloads is driving both revenue growth and higher price realization, positioning Backblaze as a differentiated alternative to legacy cloud providers.
- Sales Transformation Gaining Traction: Doubling of direct sales bookings and record contract wins validate the new go-to-market approach, though further channel and demand generation progress is needed to fully unlock upmarket potential.
- Investor Focus for 2025: Watch for continued B2 acceleration, successful ramp of Overdrive, progress toward free cash flow positivity, and sustained improvement in sales pipeline velocity.
Conclusion
Backblaze’s Q1 2025 results confirm a strategic pivot toward AI-driven cloud storage, with operational improvements and go-to-market execution supporting both growth and profitability goals. The company remains on track for its stated targets, though execution on pipeline conversion and further upmarket penetration will be critical to sustaining momentum in a competitive landscape.
Industry Read-Through
Backblaze’s accelerating B2 growth and AI-centric product evolution signal a broader shift in the cloud storage market toward specialized, high-performance, and cost-effective solutions. The displacement of AWS in a record contract highlights increasing enterprise willingness to consider alternatives to hyperscalers, especially for workloads with demanding performance and cost requirements. AI data infrastructure remains a key battleground, with vendors that can deliver open, flexible, and affordable storage poised to win share from both legacy on-prem and public cloud incumbents. For industry peers, the message is clear: operational efficiency, targeted go-to-market investments, and product differentiation are essential to capitalize on the next wave of AI and analytics-driven demand.