Backblaze Third Quarter 2026 Earnings Call - BACKBLAZE INC

Explicit Guidance:

• Q4 2026 Revenue: $49.8M – $50.2M (midpoint: ~$50M).
• Q4 2026 B2 Revenue Growth: Expected to accelerate to ~60% year-over-year.
• Q4 2026 Adjusted EBITDA Margin: 32% – 34%.
• FY2026 Revenue: Raised to $177.8M – $178.2M (midpoint increase of ~$5M from prior guidance).
• FY2026 Adjusted EBITDA Margin: Raised to 30% – 31% (previously 27% – 29%); excludes variable usage above contracted minimums and potential new deals >$500k ARR.
• FY2026 CapEx: Expected to remain 55% – 65% of revenue; implies $65M – $83M in Q4 based on revenue midpoint.
• FY2027 B2 Growth Outlook: Confidence in >40% year-over-year B2 growth for the full year.
• FY2025 ARR Reference: Hypothetical endpoint of ~$150M if growth continues, requiring ~$300M cumulative CapEx to generate $1B in lifetime revenue (2-year payback cycle).
• FY2026 Q4 CapEx Timing: Significant portion of hardware orders placed in Q4; depreciation impact on gross margin expected to pick up in Q1/Q2 2027, with cash outlays for most CapEx expected in Q5 2026.

Business-Segment Outlook:

• B2 Cloud Storage: Momentum expected to persist driven by AI training, inferencing, and multi-cloud data tiering strategies; pipeline for AI builders doubled in Q3 vs. Q2.
• AI Infrastructure Customers (NeoClouds):
  • CoreWeave: Contract of $335M over 5 years; 70% of contract (operating on Backblaze CapEx) ramps monthly through July 2027, reaching minimum run rate by July 2027; 30% (managed storage) launches later with higher margins.
  • Other NeoCloud Partner: Development completed ahead of schedule; data loading began months ahead of the early 2027 expectation; revenue ramping into execution with multi-year commitments.
• AI Builders: Strong momentum in self-serve and direct sales; 11 deals >$500k ARR signed in 2026; focus on "mid-to-late stage" startups with market values of $500M – $1B.
• Computer Backup (Consumer): Q4 2026 revenue expected to decline in the low-single digits year-over-year; sequential stabilization observed in Q3 due to retention initiatives; trend to remain until patterns solidify.
• Backblaze Powered (White Label): Demand for core workloads continues; market estimated at $26B for 2026.

Market and Competitive Outlook:

• AI Data Demand: Storage needs consistently exceed customer forecasts; "data growth keeps exceeding expectations" driven by training model size, AI agents generating data, and retention/reuse of datasets.
• Pricing Efficiency: Customers increasingly focused on ROI via storage tiering and model routing; Backblaze positioned as the high-performance capacity tier to improve economics.
• Market Share Dynamics: Broad-based demand acceleration across all segments (self-serve, >$50k ARR, >$500k ARR); ability to be "judicious" on customer selection due to high volume of inbound interest.
• B2 Net Revenue Retention (NRR): 115% in Q3, up from 113% in Q2, indicating strong expansion within the existing base.
• Customer Acquisition Channels: AI search engine visits grew 230% YoY (double market rate), driving self-serve account creation at >2x the rate of organic search.

Macro / Industry Outlook:

• AI Workflows: Categories generating data include foundation models, generative AI, multimodal, and physical AI; inferencing, training checkpoints, and logs are key data points.
• Startup Economics: AI startups now allocate ~15% of spend to data storage (vs. minimal historically); storage is a key asset and P&L line item.
• Capital Markets: Interest rates mentioned as a potential driver for AI builders to seek efficiency; however, Backblaze sees strong VC funding ($33k venture-funded AI startups) and capital access.
• Regulatory/Geopolitical: Data center power and capacity (top election issue) are actively monitored as key infrastructure constraints for expansion.

Strategic Initiatives:

• Capacity Expansion: CapEx expected to increase by a factor of ~10 over the next year to support committed demand; targeting a two-year payback period on CapEx spend.
• Product Development: Open-source B2 MCP server launched to allow AI agents direct storage integration; reference architectures for B2 in AI workflows published.
• Ecosystem Partnerships: "Flamethrower" program expanded to hundreds of startups via VC communities and events (TechCrunch, Coast-to-Coast Startup Lab); record 100+ sign-ups in a single month.
• Hardware Strategy: Supply allocations secured with vendors; hardware lead time reduced from ~9 months to 4–5 months; high-capacity drives from main vendors.
• Data Center: Active monitoring and expansion to ensure power and capacity keep pace with growth; potential to repurpose excess capacity from the legacy Computer Backup business for B2 use cases.

Risks and Headwinds to Outlook:

• Depreciation Impact: Deployment of capital ahead of customer usage expected to temporarily reduce GAAP gross margins by 3–6 percentage points as depreciation begins before associated revenue recognition.
• Execution Risk: Ability to deliver multi-exabyte capacity and manage complex ramp schedules for major partners (CoreWeave, NeoClouds) is critical to meeting commitments.
• Customer Concentration: While demand is broad, significant revenue is tied to specific multi-year commitments (e.g., CoreWeave) which ramp slowly; risk of execution delays or contract issues with large partners.
• Supply Chain: Hardware availability and data center power constraints are the primary long-lead items; failure to secure power or hardware could delay ramps.
• Macroeconomic/Political: Data center expansion influenced by top election issues (power/energy regulations).
• Guidance Caveats: FY26 EBITDA guidance excludes potential new deals >$500k ARR and variable usage above minimums.

Management Tone on the Future:

• Confidence: High confidence in "years-long tailwind" for AI; describes Q3 as "great" and "strong" with broad-based momentum.
• Strategic Focus: Emphasis on "executing relentlessly" on existing contracts before chasing new ones; no change in strategy regarding NeoClouds despite focus on ramping current partners.
• Discipline: Maintaining "operating discipline" and "judicious" customer selection despite high demand; confident in capital structure (convertible debt, cash balance, cap calls) to fund build-out without dilution up to $33.76/share.
• Market View: Acknowledges "exceeding expectations" in data growth and "strong demand" across the entire customer spectrum.

Miscellaneous:

• Event Participation: Team will attend Craig Hallam Alpha Select Conference (Nov 17, NY) and Needham Virtual Tech Week (Nov 18-19).
• Financial Structure: Zero-coupon convertible financing used for CapEx to avoid cash interest; cap calls purchased to offset equity dilution up to $33.76/share.
• Historical Context: May 1 price increase contributed ~12 percentage points to B2 growth; organic B2 growth (ex-cline) was 35%.