Executive Summary / Key Takeaways

• Backblaze is undergoing a strategic transformation, shifting focus towards accelerating growth in its B2 Cloud Storage segment and achieving profitability, targeting adjusted free cash flow positive by Q4 2025 and a Rule of 40 profile over time.
• The company's core investment thesis is underpinned by its differentiated technology platform built on commodity hardware, enabling a significant cost advantage (priced ~80% below traditional cloud providers) and performance suitable for demanding workloads like AI and media.
• Recent performance shows tangible results from this transformation, with Q1 2025 revenue growing 15% year-over-year, B2 Cloud Storage accelerating organic growth to 23%, and adjusted EBITDA margin tripling to 18%.
• Key strategic initiatives, including a revamped go-to-market approach focused on upmarket sales, partnerships, and specific sales plays (AI, media, backup, Powered by Backblaze), are driving increased sales bookings and larger deal wins.
• While facing intense competition from hyperscalers (Amazon Web Services (AWS) (AMZN), Google Cloud Platform (GCP) (GOOGL), and Microsoft Azure (MSFT)) and niche players, Backblaze's focus on value, ease of use, and specialized features like B2 Overdrive and Live Read provides a competitive edge in specific use cases, supported by cost efficiency initiatives expected to drive operating leverage and margin expansion.

The Cloud Storage Challenger's Transformation

Backblaze, Inc., founded in 2007, has carved out a distinct identity in the crowded cloud storage market. Initially known for its straightforward, affordable computer backup service, the company has strategically evolved into a specialized storage cloud platform. Its core mission remains consistent: providing businesses and consumers with easy, affordable, and reliable solutions to store and use their data. This mission is powered by a purpose-built, web-scale software infrastructure designed to run efficiently on commodity hardware, a foundational technological choice that underpins much of its competitive positioning.

In recent years, particularly since its 2021 IPO, Backblaze has embarked on a significant transformation. The focus has shifted towards accelerating the growth of its B2 Cloud Storage offering, an Infrastructure-as-a-Service (IaaS) product designed for developers and businesses needing scalable, accessible object storage. This strategic pivot is coupled with an aggressive push upmarket, targeting larger customers and enterprises through direct sales and expanded partnerships, moving beyond its historical reliance on a self-serve, SMB-centric model. This evolution is not merely operational; it's a fundamental reshaping of the company's go-to-market strategy and financial profile, aiming to balance growth with profitability and achieve a "Rule of 40" profile over time.

Technological Foundation and Differentiated Innovation

At the heart of Backblaze's value proposition is its unique technology stack. Unlike hyperscale cloud providers that often rely on complex, proprietary hardware and tiered storage classes, Backblaze's platform is built on standard, off-the-shelf hardware managed by sophisticated, internally developed software. This approach yields tangible, quantifiable benefits.

Firstly, it provides a significant cost advantage. By leveraging commodity components and optimizing its software for efficiency, Backblaze is able to offer B2 Cloud Storage at a price point approximately 80% below traditional cloud providers. This isn't just a marginal difference; it translates to substantial savings for customers, as highlighted by a specific example where a customer using B2 Overdrive for a 10PB egress use case found it to be roughly 90% less expensive than the equivalent on AWS. This cost leadership is a critical competitive moat, particularly appealing to cost-sensitive customers and those with large data volumes or high egress needs.

Secondly, the platform is engineered for performance and accessibility, supporting an open cloud ecosystem. This means customers can store data with Backblaze and easily use it with other cloud services, including specialized compute providers like GPU clouds for AI workloads, without being locked into a single vendor's ecosystem or incurring prohibitive egress fees. This flexibility is increasingly vital in dynamic fields like AI and media production.

Backblaze continues to invest in R&D to enhance its platform and introduce differentiated features. Recent innovations include:

• B2 Cloud Storage Overdrive: Launched in April 2025, this offering is optimized for very fast performance and high-performance throughput, specifically targeting data-intensive use cases like AI, machine learning, high-performance compute, and origin storage for CDNs. Management noted that this was achieved by leveraging their underlying platform and IP without requiring massive R&D investment, highlighting the efficiency of their technological foundation. Overdrive starts at $15 per terabyte per month, a premium over standard B2 but still vastly more affordable than hyperscaler alternatives for high-throughput needs.
• B2 Live Read: Introduced in June 2024, this patent-pending service allows users to access and work with files while they are still being uploaded to the cloud. This is a unique capability, particularly valuable for media workflows (broadcasters, news outlets) where time is critical. The business model involves a charge per terabyte uploaded ($15/TB) in addition to standard storage, representing a higher-margin offering for Backblaze.
• Event Notifications and Enterprise Control (B1E): These features enhance the platform's functionality for developers and larger businesses, supporting automation and better management of storage at scale.

These technological advancements, rooted in the company's core architectural choices, directly contribute to its competitive positioning, enabling Backblaze to offer a compelling blend of value, performance, and flexibility that differentiates it from both hyperscale generalists and niche players.

Business Model and Financial Performance

Backblaze's revenue is primarily generated from its two main offerings: B2 Cloud Storage and Computer Backup.

• B2 Cloud Storage: This IaaS offering is the engine of future growth. Revenue is largely consumption-based or via committed contracts. In Q1 2025, B2 revenue reached $18.0 million, representing 23% year-over-year growth. This marked the second consecutive quarter of accelerating organic growth, driven by increased storage usage from existing customers (upselling and organic data expansion) and new customer acquisition. The Net Revenue Retention (NRR) for B2 remained strong at 117% as of March 31, 2025, although slightly down from 126% a year prior, primarily due to the lapping impact of the October 2023 price increase. Annual Recurring Revenue (ARR) for B2 stood at $73.8 million as of Q1 2025, up from $59.5 million in Q1 2024.
• Computer Backup: This SaaS offering provides automated data backup for individuals and businesses, typically with flat-rate pricing. In Q1 2025, Computer Backup revenue was $16.6 million, growing 8% year-over-year. This growth was primarily attributable to the October 2023 price increases, partially offset by a decline in license counts. The NRR for Computer Backup was 108% in Q1 2025, benefiting from the price increase tailwind which is expected to taper off in Q2 2025. Management expects this segment to be relatively flattish for the full year 2025, with the consumer side facing secular decline while the business side (focused on cyber resilience) offers some opportunity.

Overall, total revenue in Q1 2025 was $34.6 million, a 15% increase from Q1 2024.

The company's gross margin has shown healthy improvement, with GAAP gross margin reaching 56% and adjusted gross margin hitting 79% in Q1 2025. This expansion reflects improved efficiency in data center operations and benefits of scale. The increase in cost of revenue was primarily due to higher amortization of internally developed software and co-location facility costs.

Operating expenses remained relatively flat year-over-year in Q1 2025, benefiting from the restructuring activities undertaken in late 2024. Research and development expenses increased due to personnel and stock-based compensation investments in platform features, while sales and marketing saw a decrease due to headcount changes and increased efficiency, though this is expected to rise in Q2 2025 with increased hiring and marketing spend. General and administrative expenses increased primarily due to stock-based compensation.

The focus on cost management and revenue growth is translating into improved profitability metrics. Adjusted EBITDA margin tripled from 6% in Q1 2024 to 18% in Q1 2025. Adjusted free cash flow margin also saw significant improvement, moving from negative 17% to negative 6% over the same period. Management emphasizes adjusted free cash flow as a key metric for an IaaS company, as it accounts for necessary capital investments.

Despite these improvements, Backblaze still carries an accumulated deficit of $205.3 million as of March 31, 2025, reflecting past investments in building the platform and scaling the business. The company does not expect to be GAAP profitable in the near future as it continues to invest for growth.

Strategic Execution and Upmarket Momentum

Backblaze's strategic transformation is centered on accelerating B2 growth by moving upmarket. This is being driven by a revamped go-to-market approach under new leadership. Key pillars of this transformation include:

• Upskilling the Sales Team: Implementing rigorous processes for qualifying leads and executing larger deals. This has already shown early success, with sales bookings more than doubling year-over-year in Q1 2025 and the team completing the build-out and expansion of sales capacity in Q1 2025.
• Partnerships: Focusing on high-value channel partners and building strategic technology alliances. The company is actively working on joint solutions with partners for AI-powered media workflows and compute/storage needs around large AI data sets. Partnerships are expected to significantly benefit results in 2026.
• Sales Plays: Aligning sales and marketing efforts around four key areas: application storage, IT backup/cyber resilience, media and entertainment, and Powered by Backblaze (white label). Marketing efforts are being revamped to drive targeted demand generation and brand awareness within these plays.

Evidence of the upmarket push and strategic execution includes signing multiple deals valued over $1 million each since H2 2024, including the largest TCV deal ever in Q1 2025 – a multimillion-dollar, multiyear contract displacing AWS. The number of customers contributing over $50,000 in ARR increased 55% year-over-year by Q2 2024, reaching 115.

A significant growth driver is the burgeoning AI market. Backblaze's platform characteristics (high-performance, low-cost, open cloud, free egress) make it ideal for AI workflows, which are inherently data-intensive and often require flexibility to utilize various specialized compute resources. The AI customer base grew 66% year-over-year in Q1 2025, with their data growing 25x. AI use cases were the fastest-growing piece of the business in Q1 2025, and an AI company is now Backblaze's largest customer. Management believes they are well-positioned to benefit from AI tailwinds without the massive CapEx burden of GPU investments.

International expansion is also part of the strategy. The opening of a new data center region in Toronto, Canada in January 2025, in partnership with Opti9, addresses data sovereignty requirements and extends market reach, representing the company's fourth region globally.

To support its profitability goals, Backblaze implemented a restructuring plan in November 2024, including a ~12% workforce reduction, which resulted in $4.9 million in charges in Q4 2024. Coupled with a comprehensive zero-based budgeting exercise, these initiatives are expected to yield over $8 million in year-over-year run rate cost reductions, creating operating leverage where approximately 75% of incremental revenue flows to the bottom line.

Competitive Landscape and Positioning

Backblaze operates in a highly competitive market dominated by hyperscale cloud providers like Amazon Web Services (AWS) , Google Cloud Platform (GCP) , and Microsoft Azure. These giants possess immense scale, vast global infrastructure, extensive service portfolios, and significantly greater financial resources and brand recognition. They offer integrated ecosystems that can be attractive to large enterprises seeking a single vendor for a wide range of IT needs.

However, Backblaze strategically positions itself as a specialized alternative, focusing on core storage use cases and promoting an open cloud environment. Its key competitive advantages against the hyperscalers stem from its technological foundation:

• Cost Leadership: The commodity hardware approach allows Backblaze to offer significantly lower storage costs per gigabyte and, crucially, free egress (data download) fees, which are often a major expense for customers on hyperscale platforms. This makes Backblaze particularly attractive for workloads involving frequent data access or distribution, such as media streaming, content delivery, and AI model training/inference requiring data movement to various compute providers.
• Simplicity and Ease of Use: Backblaze is consistently recognized for its user-friendly interface and faster implementation compared to more complex enterprise-focused offerings. This appeals to developers, SMBs, and even larger organizations seeking straightforward storage solutions.
• Performance for Value: While not competing head-to-head on raw speed with the most expensive tiers of hyperscale storage, Backblaze's platform provides performance that is more than adequate for a wide range of demanding workloads, including high-performance compute and AI, especially when considering the cost. Innovations like B2 Overdrive specifically target high-throughput needs at a fraction of the cost of alternatives.
• Open Cloud Philosophy: By supporting free egress and standard APIs, Backblaze enables customers to avoid vendor lock-in and build best-of-breed solutions using their preferred compute, networking, and application providers. This contrasts with the walled-garden approach often associated with hyperscalers.

Backblaze also competes with other niche cloud storage providers (like Wasabi) and traditional on-premises storage vendors (like Dell EMC (DELL), NetApp (NTAP)). Against these, Backblaze competes on scalability, cloud-native advantages, and its specific feature set (Live Read, Overdrive, Powered by Backblaze). While precise market share figures for all niche players are not publicly detailed, Backblaze's accelerating B2 growth and increasing number of large customers suggest it is gaining traction in its target segments.

The company's strategic response to this competitive landscape involves leveraging its cost and ease-of-use advantages to win deals, particularly in use cases where hyperscaler pricing or complexity is a pain point. The upmarket sales transformation and focus on specific sales plays are designed to more effectively communicate this value proposition to larger organizations. Partnerships are key to extending reach and integrating into broader workflows.

Risks in this environment include the potential for hyperscalers to engage in aggressive pricing wars, which could pressure Backblaze's margins despite its cost structure. The execution risk of the upmarket transformation is also present; failure to effectively sell to and support larger customers could hinder growth. Furthermore, while Backblaze benefits from AI growth, hyperscalers are also heavily investing in integrated AI platforms, which could draw some workloads away. Supply chain risks for hardware (hard drives, semiconductors) and reliance on third-party data centers also pose operational challenges in maintaining its cost and performance edge.

Outlook and Guidance

Backblaze's outlook reflects confidence in its strategic direction and the early results of its transformation efforts. For Q2 2025, the company guided revenue in the range of $35.2 million to $35.6 million, with B2 revenue growth expected between 23% and 25%. Adjusted EBITDA margin for Q2 2025 is projected between 14% and 16%.

For the full year 2025, Backblaze maintained its revenue guidance of $144 million to $146 million. Crucially, management reiterated its confidence in accelerating B2 growth throughout the year, targeting an exit run rate of over 30% year-over-year growth by Q4 2025. The full-year adjusted EBITDA margin guidance was raised from 16%-18% to 17%-19%, reflecting the strong Q1 performance and anticipated benefits from cost efficiencies.

The company remains on track to achieve adjusted free cash flow positive status in Q4 2025. This milestone is expected to be supported by the combination of accelerating B2 growth, operating leverage from cost controls, and the anticipated reduction in depreciation expense of approximately $5 million for the remainder of 2025 following the useful life extension of infrastructure equipment to 6 years, effective April 1, 2025. Management expects adjusted EBITDA margin to exceed 20% by Q4 2025.

The long-term objective is to become a Rule of 40 company, balancing strong revenue growth with increasing adjusted free cash flow margin. The successful remediation of SOX material weaknesses, confirmed in the 2024 10-K, and the appointment of Deloitte & Touche as new auditors also signal progress in strengthening internal controls as the company matures.

Conclusion

Backblaze is at a pivotal point in its journey, actively transforming its business model and go-to-market strategy to capitalize on the vast cloud storage market opportunity. By leveraging its foundational technological advantage – a cost-efficient platform built on commodity hardware – the company offers a compelling value proposition that resonates with customers seeking alternatives to the complexity and cost of hyperscale providers, particularly for data-intensive workloads like AI and media.

The early results of the upmarket push and strategic initiatives are promising, evidenced by accelerating B2 growth, increasing sales bookings, larger deal wins, and expanding AI customer adoption. Coupled with aggressive cost efficiency measures, this is translating into significant improvements in profitability metrics, with the company firmly targeting adjusted free cash flow positive status and a higher adjusted EBITDA margin by the end of 2025. While navigating intense competition and execution risks inherent in such a transformation, Backblaze's focused strategy, differentiated technology, and clear path towards profitability position it as a compelling player to watch in the evolving cloud storage landscape. The ability to consistently execute on its growth and efficiency targets will be key to realizing its ambition of becoming a Rule of 40 company and delivering long-term shareholder value.