Backblaze Third Quarter 2026 Earnings Call - BACKBLAZE INC

Financial Performance:

• Total revenue reached $47 million, a 26% year-over-year increase, exceeding the high end of guidance.
• B2 Cloud Storage revenue grew 47% year-over-year (up from 34% in Q2), driven by a 12 percentage point contribution from a May price increase and 35% organic growth.
• B2 ARR reached $127 million, a 53% year-over-year increase, with ARR from customers over $50,000 growing 109% to $50 million.
• Adjusted EBITDA margin expanded 1,000 basis points year-over-year to 33%; GAAP net loss narrowed to $2 million, while Non-GAAP net income was $6.7 million.
• Total company gross margin improved to 64% (up from 62% prior year); operating expenses were 67% of revenue.
• Cash flow from operations was $23 million year-to-date (vs. $14 million prior year); Adjusted free cash flow improved to $2 million (vs. -$10 million prior year).
• Balance sheet ended Q3 with $230 million in cash, cash equivalents, and marketable securities.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to $177.8–$178.2 million (up $5 million midpoint) and adjusted EBITDA margin outlook to 30–31%.
• Q4 2026 revenue guidance set at $49.8–$50.2 million, projecting B2 revenue growth to accelerate to ~60% year-over-year.
• Management expresses confidence in >40% B2 growth for 2027.
• Capital expenditures (CapEx) expected to remain 55–65% of revenue; Q4 CapEx implied at $65–$83 million, largely funded by convertible debt proceeds.
• CapEx depreciation is projected to temporarily reduce GAAP gross margins by 3–6 percentage points in Q1/Q2 2027 before revenue ramps recover margins.
• Expected full ramp of CoreWeave and other NeoCloud contracts to occur in Q3 2027.

Business Segments and Product Lines:

• B2 Cloud Storage is the primary growth engine, driven by AI infrastructure customers and AI builders; four deals exceeding $500,000 ARR were closed this quarter.
• "AI Infrastructure" customers (e.g., NeoClouds) began loading data ahead of schedule; CoreWeave ramp started in Q3 with a $335 million, 5-year contract, 70% of which involves Backblaze-funded CapEx.
• "AI Builders" (startups/foundations) pipeline doubled from Q2 to Q3; 33,000 venture-funded AI startups identified as a target market.
• Computer Backup revenue was $16 million, down 2% year-over-year but up sequentially due to stabilized retention initiatives.
• New product developments include the open-source B2 MCP server allowing AI agents direct storage integration with governance.
• "Flamethrower" ecosystem program saw over 100 new startup signups in a single month.

Market and Competitive Landscape:

• Market trends indicate AI data growth exceeding internal customer forecasts; storage tiering and ROI optimization are becoming critical for AI efficiency.
• Backblaze captures value from both AI infrastructure providers (needing capacity tiers for their customers) and AI builders (needing capacity for training/inference).
• AI search engine traffic to Backblaze grew 230% year-over-year, doubling the market rate and significantly outperforming organic search in conversion.
• The core workload market is estimated at $26 billion for 2026; the capacity storage market for NeoClouds is projected at $14 billion by 2031.
• Competition for AI data storage is implied to be high, but Backblaze leverages its "high-performance capacity" positioning and ecosystem authority.

Risks and Challenges:

• Short-term GAAP gross margin pressure due to depreciation on new CapEx before associated revenue recognition.
• Supply chain and hardware delivery timelines, though currently on track with 4–5 month fulfillment cycles.
• Dependence on specific large customers (CoreWeave and other NeoClouds) for future revenue growth.
• Potential equity dilution risks mitigated by convertible debt structures and cap calls (fully offsetting dilution up to $33.76/share).
• Market volatility regarding interest rates and the capital efficiency requirements of AI startups.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing "broad-based momentum" and "accelerating growth."
• Management highlighted the strategic shift to becoming the "high-performance capacity storage layer for AI."
• Confidence expressed in the ability to execute on multi-year commitments and the repeatability of upmarket momentum.
• Gleb Budman (CEO) emphasized that the current focus is on successfully ramping existing signed contracts before chasing new, larger opportunities.
• Mark Sweet (CFO) noted significant improvements in operating leverage and cash flow generation despite heavy investment.

Analyst Questions and Answers:

• Strategy Shift: Clarified that focusing on ramping existing NeoClouds (CoreWeave, others) is not a change in strategy but an execution priority; new NeoCloud pursuit continues in parallel.
• CoreWeave Ramp: Confirmed CoreWeave ramp extends through mid-2027, contributing meaningfully to Q4 and beyond; contract includes two-way minimum commitments.
• Revenue Drivers: Q3 outperformance attributed to broad-based B2 strength, price increases, and four large new deals ($500k+ ARR), rather than immediate CoreWeave contribution.
• CapEx Efficiency: Management reiterated a ~2-year CapEx payback period, citing $300M CapEx on $150M ARR generating $1B lifetime revenue.
• AI Infrastructure vs. Builders: Differentiated the markets; infrastructure providers are at varying maturity stages, while AI builders represent a massive, immediate opportunity with 33,000+ startups.
• Computer Backup: Guided for low single-digit decline in Q4 and 2026; sequential growth in Q3 validates stabilization initiatives.
• Hardware Supply: Confirmed hardware allocations are secured from vendors, with fulfillment cycles improving from 9 months to 4–5 months.

Other Key Points:

• Four deals exceeding $500,000 ARR were signed, including a nearly $1M agreement signed and expanded within 11 days.
• A global networking technology company signed a $500k ARR deal for "Powered by Backblaze" (white-label offering).
• Backblaze is building a repeatable, scalable go-to-market for AI builders via AI search visibility, VC ecosystem partnerships (Flamethrower), and developer tools (MCP server).
• Company participates in upcoming Craig Hallam Alpha Select Conference (Nov 17) and Needham Virtual Tech Week (Nov 18-19).