10-Q: Backblaze Narrows Losses, Boosts Cloud Storage Revenue

Backblaze reported significantly reduced net losses and improved gross margins for Q3 2025, driven by strong B2 Cloud Storage growth and cost efficiencies, despite a decline in net revenue retention rates.

Summary

• Total revenue increased by 14% to $37.16 million for the three months ended September 30, 2025, compared to $32.59 million in the prior year.
• B2 Cloud Storage revenue grew by 28% to $20.70 million for the three months ended September 30, 2025, compared to $16.18 million in the prior year.
• Computer Backup revenue remained relatively flat, increasing by 0.3% to $16.46 million for the three months ended September 30, 2025, compared to $16.41 million in the prior year.
• Gross profit increased by 30% to $23.07 million for the three months ended September 30, 2025, up from $17.80 million in the prior year, with gross margin improving from 55% to 62%.
• Net loss significantly decreased by 70% to $3.78 million for the three months ended September 30, 2025, compared to $12.75 million in the prior year.
• Net loss per share improved to $(0.07) for the three months ended September 30, 2025, from $(0.29) in the prior year.
• For the nine months ended September 30, 2025, total revenue increased by 15% to $108.07 million, and net loss decreased by 41% to $20.20 million.
• The company's total net revenue retention rate decreased to 106% as of September 30, 2025, from 118% in the prior year, primarily due to the lapped impact of October 2023 price increases.
• Total annual recurring revenue (ARR) grew by 12.8% to $147.2 million as of September 30, 2025, with B2 Cloud Storage ARR increasing by 26% to $81.8 million.
• A new $20.0 million senior secured revolving credit facility with Citizens Bank, N.A. was established in June 2025, with $2.5 million outstanding as of September 30, 2025, which was fully repaid in October 2025.
• A share repurchase program of up to $10.0 million was approved in August 2025, with $1.2 million used to repurchase 142,069 shares by September 30, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated significant improvement in reducing net losses and increasing gross margins, driven by strong B2 Cloud Storage revenue growth and effective cost management through restructuring. Strategic initiatives like new product launches and international expansion are positive. However, the decline in overall net revenue retention rate and continued unprofitability temper the positive sentiment, suggesting ongoing challenges despite clear progress.

Positives

• Significant reduction in net loss for both the three-month ($3.78M vs $12.75M) and nine-month ($20.20M vs $34.15M) periods ended September 30, 2025, indicating improved financial efficiency.
• Strong revenue growth, particularly in B2 Cloud Storage (28% for Q3, 27% for YTD), driven by higher storage usage from existing customers and new customer acquisition.
• Gross margin improved substantially to 62% for Q3 2025 (from 55% in Q3 2024) and 60% for YTD 2025 (from 54% in YTD 2024), partly due to the extension of useful lives for infrastructure equipment.
• Operating expenses decreased by 12% for the three months ended September 30, 2025, reflecting cost efficiencies from restructuring and ongoing initiatives.
• Annual Recurring Revenue (ARR) for B2 Cloud Storage grew by 26% to $81.8 million, demonstrating continued expansion in this key segment.
• Stable gross customer retention rates of approximately 90% across all revenue products, indicating strong customer loyalty.
• Successful launch of new products like B2 Overdrive (premium high-performance cloud storage) and Enterprise Web Console, expanding market reach to enterprise and AI-driven customers.
• International expansion with a new data center region and wholly-owned subsidiary in Canada, enhancing global presence.
• Establishment of a $20.0 million revolving credit facility provides financial flexibility for general corporate purposes and working capital needs.
• Approval of a $10.0 million share repurchase program signals confidence in the company's value and aims to offset stock-based compensation dilution.

Negatives

• Overall net revenue retention rate decreased to 106% as of September 30, 2025, from 118% in the prior year, indicating less expansion from existing customers.
• Computer Backup ARR experienced a slight decline of $0.2 million compared to the prior year, suggesting stagnation in this segment.
• The company continues to incur net losses, with an accumulated deficit of $216.2 million as of September 30, 2025, and does not expect to be profitable for the foreseeable future.
• Cash and cash equivalents decreased to $29.08 million as of September 30, 2025, from $45.78 million as of December 31, 2024.
• A new 2025 Restructuring Plan initiated in November 2025 is expected to incur charges of $4.4 million to $6.0 million, including employee termination expenses and office footprint reduction, indicating ongoing operational adjustments and costs.
• The decrease in net revenue retention for B2 Cloud Storage is largely driven by the lapped impact of the October 2023 price increase, suggesting that future price increases may not yield similar NRR benefits.

Risks

• The company has a history of cumulative losses and does not expect to be profitable for the foreseeable future, requiring continued investment in sales, marketing, and development.
• The markets are intensely competitive with larger competitors having greater resources, potentially leading to pricing pressures and reduced sales or margins.
• Significant disruption to service, or loss/delay in customer data availability, due to technical failures, natural disasters, or cybersecurity attacks could damage reputation and harm business.
• Failure to maintain brand and reputation due to performance issues, ineffective marketing, or inability to differentiate services could adversely affect business.
• Breaches or cybersecurity attacks on information technology systems, including customer data, could harm reputation, lead to litigation, fines, and reduced demand.
• Inability to attract and retain customers on a cost-effective basis, or if price increases lead to customer churn, could adversely affect revenue and operating results.
• Failure to provide successful enhancements, new features (including AI-related), and modifications to cloud services could adversely affect business, especially with rapid technological developments.
• Material defects or errors in software or hardware failures could negatively impact business, harm reputation, and result in significant costs.
• Failure to effectively manage rapid growth, including strain on management, corporate culture, service quality, and infrastructure, could harm business.
• Ineffective management of data center capacity and associated costs, including underestimating or overestimating needs, could materially harm business and results of operations.
• Dependence on a small number of service offerings (B2 Cloud Storage and Computer Backup) makes the business vulnerable to declines in demand for cloud-based storage solutions.
• Changes in global trade policies, including tariffs and trade restrictions, could increase costs for the company and its vendors, or reduce customer demand.
• Uncertainty in general economic conditions (e.g., inflation, geopolitical conflicts) may adversely impact revenue and profitability, as customers may reduce discretionary spending.
• Reliance on the ease of use of cloud services means any increase in complexity could lead to customer dissatisfaction and loss.
• Future acquisitions and investments could disrupt business, harm financial condition, and operating results due to integration challenges, retention issues, and potential liabilities.
• Need for additional capital to support operations or growth, which may not be available on reasonable terms or at all, potentially impairing business expansion.
• Restrictive covenants under the new credit facility may constrain strategic and operational flexibility, limiting ability to incur debt, make investments, or return capital to stockholders.
• Exposure to fluctuations in currency exchange rates, particularly as international operations expand, could negatively affect results of operations.
• Future litigation could be costly and time-consuming, diverting management attention and potentially resulting in significant monetary damages.
• Reliance on third-party vendors and suppliers (data centers, hard drive providers) exposes the company to supply and service disruptions, potentially increasing costs or impacting service availability.
• Dependence on strategic relationships with third parties (channel partners, integrators) means their failure to perform or competitive actions could impair business growth.
• Risks associated with online payment processing methods, including increased fees, delays, or disruptions, could adversely impact revenue and operating expenses.
• Reliance on third-party systems for essential financial and operational services means a failure or disruption could adversely affect business management.
• The company's ability to use net operating loss carryforwards and certain other tax attributes may be limited due to ownership changes or other tax law provisions.
• Changes in tax laws and related matters could materially affect financial condition, results of operations, and cash flows.
• If estimates or judgments relating to critical accounting estimates prove incorrect, results of operations could be adversely affected.
• Assertions by third parties that cloud services infringe intellectual property could lead to costly litigation and adversely impact business.
• Inability to adequately establish, maintain, protect, and enforce intellectual property and proprietary rights could harm reputation and business.
• Use of open-source software could negatively affect ability to sell cloud services and subject the company to possible litigation or unfavorable license terms.
• The market price of common stock has been, and will likely continue to be, volatile, and investors could lose all or part of their investment.
• Sales of a substantial number of common stock in the public market could cause share price to fall, and future issuances could be dilutive.
• The company does not expect to declare any dividends in the foreseeable future, requiring investors to rely on stock price appreciation for gains.

Future Outlook

The company expects to continue scaling its business, investing in sales and marketing, and research and development to enhance cloud service offerings and expand data center infrastructure. Operating expenses (excluding depreciation, amortization, and stock-based compensation) are expected to remain relatively flat in 2025 due to restructuring efficiencies offsetting growth investments. Capital expenditures are anticipated to increase in early 2026 to support platform development, future product launches, and the up-market strategy. The company intends to use the extended transition period for new accounting standards as an Emerging Growth Company until December 31, 2026. A new restructuring plan initiated in November 2025 is expected to incur charges of $4.4 million to $6.0 million, primarily in Q4 2025, related to efficiency improvements in sales and marketing and office footprint reduction.

Management Comments

• Our go-to-market transformation, initiated in the second half of 2024, is actively moving the company up-market, evidenced by multiple deals with total contract values over $1.0 million each and 28% revenue growth for B2 Cloud Storage in the current quarter.
• The launch of B2 Overdrive and a suite of enterprise cybersecurity features expands our addressable market among enterprise and AI-driven customers and lays the groundwork for further innovation.
• Our continued focus on our customers is driving significant revenue retention, as evidenced by our overall net revenue retention rates (NRRs) of 106% and 118% as of September 30, 2025 and September 30, 2024, respectively.
• We believe our high gross customer retention rates demonstrate that we provide a vital service to our customers, as the vast majority of our customers tend to continue to use our platform from one period to the next.
• Although B2 Cloud Storage is generally consumption-based and paid for by customers in arrears, we recognize revenue in the month these storage services are delivered and consider this revenue recurring as customers are charged as long as their data is stored with us.
• We expect our operating expenses, excluding depreciation, amortization and stock-based compensation expenses, to remain relatively flat in 2025 compared to the prior year, as efficiencies from our restructuring activities in 2024 offset increased investments in research and development and other growth-related costs.
• We plan to continue investing in sales initiatives, supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, driving our go-to-market strategies, building our lead generation and brand awareness, and sponsoring marketing events.
• While we expect general and administrative expenses to increase in absolute dollars as the business scales, we anticipate that these costs will decline as a percentage of revenue over time.
• We believe that our existing cash, cash equivalents, and marketable securities, together with cash provided by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months.

Industry Context

Backblaze operates in the highly competitive cloud storage market, facing giants like Amazon Web Services, Google Cloud Platform, and Microsoft Azure, as well as on-premises offerings. The company's strategic focus on specialized storage and an open cloud ecosystem, coupled with recent product launches like B2 Overdrive, positions it to capture growth in data-intensive workloads, including AI and machine learning. The increasing demand for AI-driven solutions is creating both opportunities and challenges, requiring significant infrastructure investment and exposing the company to rapid technological obsolescence and intense competition. The EU Data Act, effective September 2025, introduces new regulatory requirements for cloud service providers, impacting customer contracts and operational costs, reflecting a broader trend of evolving data privacy and sovereignty regulations globally.

Comparison to Industry Standards

• Backblaze's B2 Cloud Storage revenue growth of 28% for Q3 2025 is strong, but its overall Net Revenue Retention (NRR) of 106% is lower than some leading SaaS companies that often report NRRs above 120%, indicating less upsell/cross-sell from existing customers compared to top performers in the cloud industry.
• The improvement in gross margin to 62% for Q3 2025 is a positive step, aligning more closely with typical cloud infrastructure providers, though still below the higher margins seen in pure SaaS models.
• The company's continued net losses, despite significant improvement, contrast with more mature, profitable cloud providers like Amazon Web Services (AWS) or Microsoft Azure, which are major profit drivers for their parent companies.
• Backblaze's focus on cost-effective, purpose-built storage on commodity hardware differentiates it from hyperscalers that offer a broader, more expensive suite of services, potentially appealing to a specific segment of the market seeking value.
• The launch of B2 Overdrive targets high-performance workloads, including AI, a rapidly growing segment where competitors like CoreWeave and DigitalOcean are also expanding, suggesting increased competition for specialized infrastructure.

Corporate Governance

Legal Proceedings

• The company is not presently a party to any legal proceedings that are believed to have a material adverse effect on its business, financial condition, or operating results.
• The outcome of litigation is inherently uncertain, and unforeseen developments could result in an adverse impact, including defense and settlement costs and diversion of management resources.

Related Party Transactions

• During the nine months ended September 30, 2024, the company made payments of $0.2 million to Meaningful Works for marketing services. An executive officer of Meaningful Works is an immediate family member of the company's CEO. The scope of services was completed by December 31, 2024.

Stakeholder Impact

• **Shareholders:** Potential positive impact from reduced net losses, improved gross margins, and the share repurchase program. However, the decline in NRR and continued unprofitability present ongoing risks.
• **Employees:** Impacted by the 2024 Restructuring Plan (12% headcount reduction) and the upcoming 2025 Restructuring Plan (employee termination expenses), indicating ongoing workforce adjustments. New bonus structure (2025 Bonus Plan) and equity incentive plans aim to incentivize performance.
• **Customers:** Benefit from new product features like B2 Overdrive and Enterprise Web Console, and international data center expansion (Canada). The EU Data Act provides enhanced data portability and termination rights for EU/EEA customers. Stable gross customer retention indicates satisfaction with core services.
• **Creditors:** The new $20.0 million revolving credit facility and compliance with its financial covenants (minimum liquidity, EBITDA, leverage ratio) provide a clear framework for debt management and financial health.
• **Suppliers/Vendors:** Continued reliance on a limited number of third-party data centers and hard drive providers exposes the company to supply chain risks and potential disruptions.

Next Steps

• Continue optimizing the direct sales organization to focus on larger enterprise customers and strategic accounts.
• Strengthen relationships with channel, alliance, and managed service provider partners to expand market reach.
• Invest in targeted marketing initiatives to increase brand awareness, generate demand, and convert new customers, emphasizing account-based marketing.
• Expand revenue within the current customer base through new features, enhanced Customer Success programs, and natural data growth.
• Continue investment in capital and research and development activities to meet performance requirements of modern enterprise and AI workloads.
• Increase capital expenditures in early 2026 to support ongoing platform development, future product launches, and the up-market strategy.
• Evaluate and incorporate provisions of the EU Data Act into revenue recognition policies and contract assessments prospectively.
• Assess the implications of new accounting standards (ASU 2025-06, 2025-05, 2024-03, 2023-09) and implement them in accordance with EGC status.
• Execute the 2025 Restructuring Plan, incurring charges of $4.4 million to $6.0 million primarily in Q4 2025, to improve efficiency in sales and marketing and reduce office footprint.
• Monitor and manage compliance with financial and operating covenants under the Citizens Bank credit agreement.
• Continue share repurchases under the $10.0 million program through August 1, 2026, funded by employee stock option exercises and ESPP contributions.

Key Dates

Recommendation

Backblaze demonstrated significant progress in reducing net losses and improving gross margins, driven by strong B2 Cloud Storage growth and effective cost management through restructuring. Strategic initiatives like new product launches targeting enterprise and AI workloads, along with international expansion, position the company for future growth. However, the decline in the overall net revenue retention rate, while partially explained by prior price increases, is a key metric to monitor for sustained growth from existing customers. The company remains unprofitable and faces intense competition from larger players. While the financial improvements are encouraging, the stock is a 'Hold' for a seasoned investor, awaiting consistent profitability, a rebound in NRR, and clear evidence that its strategic shifts are translating into sustained, profitable market share gains in competitive segments like AI.

Keywords

Cloud Storage, Data Backup, IaaS, SaaS, SEC Filing, Financial Results, Quarterly Report, BLZE, B2 Cloud Storage, Computer Backup, Net Loss, Revenue Growth, Gross Margin, Operating Expenses, Restructuring, Share Repurchase, Debt Facility, AI Workloads, Enterprise Solutions, International Expansion