Backblaze (BLZE) Q3 2025: B2 Cloud Storage Accelerates 28% as AI Demand Drives Upmarket Shift
Backblaze’s B2 Cloud Storage business posted a 28% YoY surge, outpacing overall company growth and validating the firm’s AI-centric pivot. While large-deal variability and slower-than-expected ramp in the upmarket segment tempered B2’s trajectory against internal targets, management doubled down on a go-to-market overhaul to unlock higher velocity and deal consistency. With positive adjusted free cash flow on the horizon and new operational discipline, Backblaze is positioning for durable growth in an increasingly data-intensive AI era.
Summary
- AI Workloads Now Core Growth Driver: Backblaze’s customer base is increasingly AI-native, fueling larger, faster-growing deals.
- Go-to-Market Overhaul Targets Consistency: Phase two transformation aims to accelerate pipeline velocity and reduce large-deal unpredictability.
- Margin Expansion Bolsters Profitability Path: Operating leverage and cost discipline support the shift toward sustainable cash generation.
Business Overview
Backblaze provides cloud-based storage solutions for businesses and consumers, monetizing via its flagship B2 Cloud Storage platform and a legacy computer backup product. B2, which serves as a scalable, high-throughput, and cost-effective alternative to traditional hyperscale cloud providers, is the company’s primary growth engine, targeting data-heavy use cases such as AI, media, and application storage. Revenue is generated through a mix of self-serve and direct sales, with a growing focus on large, high-value contracts in AI and digital media verticals.
Performance Analysis
B2 Cloud Storage revenue climbed 28% year over year, materially outpacing the company’s overall 14% growth and underscoring Backblaze’s pivot toward high-performance, AI-driven workloads. While B2’s growth fell just short of the 30% target, the business continues to diversify across live application, media, backup, and AI use cases. Notably, B2’s in-quarter net revenue retention (NRR) improved to 116%, up from 109% in Q2, driven by significant expansion within large AI customers.
Operating leverage was evident as gross margin expanded to 62% (from 55% a year ago), and adjusted EBITDA margin nearly doubled to 23%. Cost discipline was reinforced by a restructuring and zero-based budgeting, driving operating expenses down to 71% of revenue from 92%. Sales and marketing efficiency improved, with spend dropping to 24% of revenue, as resources were reallocated to strengthen top-of-funnel programs and operational talent. The legacy computer backup segment remained flat year over year, reflecting the full absorption of prior price increases and highlighting the company’s reliance on B2 for future growth.
- AI-Driven Expansion: A quarter of new business now comes from AI-focused companies, with multiple six- and seven-figure deals signed, including notable wins from hyperscalers.
- Margin Expansion: Gross margin gains stemmed from scale, improved code efficiency, and lower R&D amortization rates.
- Deal Size and Pipeline Mix: The upmarket push is yielding larger deals, but with increased sales cycle variability and execution complexity.
Backblaze’s financial transformation is yielding tangible results, with positive adjusted free cash flow targeted for Q4 and a strengthened balance sheet supporting continued investment.
Executive Commentary
"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. Backblaze has already built one of the largest fastest and most cost-effective storage clouds on the planet."
Gleb Budman, Co-founder, CEO, and Chairperson of the Board
"We're focused on getting B2 to a rule of 40, and we are on track to roughly triple our score this 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."
Mark Friedan, Chief Financial Officer
Strategic Positioning
1. AI-Centric Product Strategy
Backblaze is capitalizing on the AI data explosion by positioning B2 as a high-throughput, cost-effective alternative to hyperscale clouds, with features like free egress and universal data migration. The newly launched B2 Overdrive product, offering up to one terabit per second throughput, is gaining traction with AI, media, and surveillance customers seeking predictable pricing and performance.
2. Go-to-Market Transformation (Phase Two)
After phase one’s success in moving upmarket, the company is now focused on accelerating deal velocity and enhancing pipeline consistency. This involves retooling both the self-serve and direct sales motions, upgrading systems, and bringing in operational go-to-market talent and external advisors with experience from top SaaS firms. The aim is to drive more high-velocity mid-market deals and reduce the unpredictability of large contract closes.
3. Margin and Cost Discipline
Operating efficiency has become a core strategic lever. Through restructuring and zero-based budgeting, Backblaze has reduced sales and marketing, R&D, and G&A as a percentage of revenue, while maintaining investment in growth areas. The company is funding new go-to-market initiatives through internal reallocations rather than incremental spend, supporting sustainable margin expansion.
4. Upmarket and Partner Channel Expansion
Backblaze’s move upmarket has resulted in a growing roster of $50,000-plus ARR customers (up 41% YoY), with several recent seven-figure deals. The white-label “Powered By” solution is gaining traction with both channel partners and “neocloud” providers, expanding the company’s reach into new verticals and geographies.
5. Self-Serve Engine Reinvention
The company is adapting its self-serve acquisition engine to the new AI-driven search paradigm, updating content and integration workflows to better capture AI-native startups and developer-led adoption. Self-serve account creation is up 56% as a result of these changes.
Key Considerations
Backblaze’s Q3 marks a pivotal moment as the company leverages AI adoption to drive upmarket expansion while tightening operational discipline and refining its go-to-market approach.
Key Considerations:
- AI Workload Volatility: Large AI customers can drive significant revenue spikes but introduce variability in usage and deal timing, requiring robust pipeline management.
- Sales Cycle Complexity: Upmarket deals are larger but involve longer, less predictable cycles with more stakeholders and compliance hurdles.
- Self-Serve Resurgence: Adapting self-serve content and workflows for AI-native search is paying off, with a notable increase in new account creation.
- Margin Sustainability: Cost controls and operating leverage are supporting margin gains, but ongoing investment in go-to-market and product innovation is essential for long-term growth.
- Legacy Segment Drag: The flat performance in the computer backup segment highlights the need for continued B2 outperformance to drive consolidated growth.
Risks
Reliance on large, variable AI customers introduces unpredictability to B2’s growth trajectory, with delays or pullbacks in usage impacting quarter-to-quarter results. Competition from hyperscalers and emerging neoclouds remains intense, and the company’s upmarket push brings greater sales execution and compliance risks. The legacy backup business is in structural decline, and while cost discipline is strong, further growth depends on successful execution of the new go-to-market strategy.
Forward Outlook
For Q4, Backblaze guided to:
- Revenue of $37.3 million to $37.9 million, widening the range to reflect large customer variability
- B2 Cloud Storage growth of 25% to 28% year over year
For full-year 2025, management maintained a mid-20s percent growth outlook for B2 and expects to be adjusted free cash flow positive in Q4.
Management highlighted several factors that will shape the outlook:
- Continued investment in go-to-market transformation, with a focus on pipeline velocity and operational sales talent
- Potential upside from large deal closings and B2 Overdrive ramp
Takeaways
Backblaze’s Q3 underscores the company’s successful pivot to AI-driven storage workloads, but also the operational and execution challenges of scaling upmarket in a fast-evolving market.
- B2 Outperformance Drives Growth: The 28% surge in B2 revenue, fueled by AI adoption, is now the company’s primary growth engine, offsetting flat legacy segments.
- Operational Discipline Creates Leverage: Margin expansion and cost controls are enabling positive cash flow and supporting reinvestment in high-impact growth initiatives.
- Execution on GTM Phase Two is Critical: Investors should watch for evidence that the revamped go-to-market approach can convert pipeline into more predictable, higher-velocity deals as the company targets a rule of 40 profile.
Conclusion
Backblaze is executing a decisive shift toward AI-centric, upmarket growth with early signs of success in both product innovation and operational discipline. The next phase of go-to-market transformation will be key to sustaining B2’s momentum and delivering on the company’s long-term profitability ambitions.
Industry Read-Through
Backblaze’s results highlight the accelerating shift in cloud storage demand toward AI workloads, with data volume and throughput requirements outpacing legacy use cases. The rise of neocloud providers and the need for flexible, high-performance storage solutions is fragmenting the market and creating opportunities for specialized players to win share from hyperscalers. Vendors across cloud infrastructure and data management should note the growing importance of predictable pricing, performance, and seamless data mobility as AI adoption drives new buying criteria. The evolving sales cycle complexity and deal variability seen at Backblaze is likely to be echoed across the sector as enterprise and mid-market customers pursue larger, more strategic data initiatives.