10-Q: Backblaze Q2 2025: Revenue Up 16%, Gross Margin Improves

Backblaze reported a 16% increase in total revenue for Q2 2025, reaching $36.3 million, alongside significant gross margin expansion driven by infrastructure efficiency.

Summary

• Total revenue increased 16% to $36.298 million for the three months ended June 30, 2025, compared to $31.285 million for the same period in 2024.
• Total revenue for the six months ended June 30, 2025, increased 16% to $70.911 million, compared to $61.253 million for the same period in 2024.
• Gross profit for the three months ended June 30, 2025, was $23.041 million, representing a 63% gross margin, up from 55% in the prior year period.
• Net loss for the three months ended June 30, 2025, was $(7.097) million, an improvement from $(10.348) million in the prior year period.
• Net loss for the six months ended June 30, 2025, was $(16.421) million, an improvement from $(21.401) million in the prior year period.
• Adjusted EBITDA for the three months ended June 30, 2025, was $6.610 million, with an 18% margin, compared to $2.743 million and a 9% margin in the prior year period.
• Adjusted Free Cash Flow for the six months ended June 30, 2025, was $(6.018) million, an improvement from $(11.590) million in the prior year period.
• B2 Cloud Storage revenue grew 29% to $19.841 million for the three months ended June 30, 2025.
• Computer Backup revenue grew 4% to $16.457 million for the three months ended June 30, 2025.
• The estimated useful lives of data center equipment and machinery were extended from a range of 3 to 5 years to a uniform 6 years, effective April 1, 2025, reducing depreciation expense by approximately $2.4 million for the three months ended June 30, 2025.
• A new $20.0 million senior secured revolving credit facility with Citizens Bank, N.A. was established on June 4, 2025, maturing on June 4, 2027, with no outstanding borrowings as of June 30, 2025.
• A share repurchase program of up to $10.0 million was announced in August 2025, through August 1, 2026, intended to be cash neutral.

Sentiment

Score: 7

Explanation: The company shows strong revenue growth in its key B2 Cloud Storage segment and significant improvements in gross margin and Adjusted EBITDA, indicating better operational efficiency and a positive trajectory towards profitability. While still incurring net losses and negative free cash flow, the trends are favorable, and strategic initiatives like the new credit facility and share repurchase program demonstrate proactive financial management.

Positives

• Total revenue increased by 16% year-over-year for both the three and six months ended June 30, 2025, demonstrating consistent growth.
• B2 Cloud Storage revenue showed strong growth of 29% for the three months ended June 30, 2025, driven by higher storage usage from existing customers and new customer sales.
• Gross margin significantly improved to 63% in Q2 2025 from 55% in Q2 2024, primarily due to the extension of useful lives for infrastructure equipment and improved benefits of scale.
• Net loss decreased for both the three and six months ended June 30, 2025, indicating progress towards profitability.
• Adjusted EBITDA and Adjusted EBITDA Margin showed substantial improvement, reflecting enhanced operational efficiency.
• Adjusted Free Cash Flow, while still negative, improved significantly from $(11.590) million in H1 2024 to $(6.018) million in H1 2025.
• Maintained high gross customer retention rates of approximately 90% across all revenue products, indicating strong customer loyalty.
• Successfully launched B2 Overdrive, a premium high-performance cloud storage solution, and Enterprise Web Console, expanding the addressable market for enterprise and AI-driven customers.
• Secured a new $20.0 million revolving credit facility, enhancing liquidity and financial flexibility.
• Initiated a share repurchase program of up to $10.0 million to reduce the dilutive impact of stock-based compensation.

Negatives

• Continued to incur net losses of $(7.097) million for Q2 2025 and $(16.421) million for the six months ended June 30, 2025.
• Adjusted Free Cash Flow remained negative at $(6.018) million for the six months ended June 30, 2025.
• The Net Revenue Retention Rate for B2 Cloud Storage decreased to 112% as of June 30, 2025, from 126% as of June 30, 2024, attributed to the lapped impact of the October 2023 price increase.
• Computer Backup revenue growth slowed to 4% in Q2 2025, with a decline in license counts partially offsetting price increases.
• Cash and cash equivalents decreased to $32.187 million as of June 30, 2025, from $45.776 million as of December 31, 2024.
• Research and development expenses increased by 24% in Q2 2025, and general and administrative expenses increased by 19% in Q2 2025.

Risks

• History of cumulative losses and no expectation of profitability for the foreseeable future.
• Intensely competitive markets with larger competitors (Amazon Web Services, Google Cloud Platform, Microsoft Azure) and on-premises offerings.
• Significant disruption to service, or loss or delay in availability of customer data, due to technical issues, natural disasters, human error, war, or cybersecurity attacks.
• Inability to maintain brand and reputation.
• Breaches or cybersecurity attacks on information technology systems, including customer data.
• Inability to attract and retain customers on a cost-effective basis, potentially impacted by price increases or AI technologies affecting search engine traffic.
• Failure to provide successful enhancements, new features, and modifications to cloud services.
• Material defects or errors in software or hardware failures.
• Reliance on third-party vendors and suppliers (data center and hard drive providers) with limited sources, leading to potential supply and service disruptions.
• Dependence on the success of strategic relationships with third parties (channel partners, integrators).
• Exposure to risks associated with online payment processing methods, including geopolitical conflicts impacting payment flows.
• Reliance on third-party software for essential financial and operational services.
• Fluctuations in currency exchange rates, particularly as international operations expand.
• Potential for costly and time-consuming litigation, including intellectual property claims.
• Failure to effectively manage growth, including data center capacity and associated costs.
• Business is substantially dependent on a small number of service offerings (B2 Cloud Storage, Computer Backup), making it vulnerable to reduced market adoption.
• Adverse impact from changes in global trade policies, including tariffs and other trade restrictions.
• Uncertainty in general economic conditions (inflation, recession concerns, geopolitical conflicts) affecting customer spending.
• Challenges in maintaining customer adoption and satisfaction if cloud services become less easy-to-use.
• Risks associated with future acquisitions and investments, including disruption to business and financial harm.
• Requirement for additional capital to support operations or growth, with no certainty of availability on reasonable terms.
• Restrictive covenants under the new credit facility that may constrain strategic and operational flexibility.
• Risks associated with targeting mid-market organizations, which may be more vulnerable to market fluctuations.
• Potential negative publicity and legal liability from material stored using cloud services if illegal or inappropriate content is discovered.
• Quarterly results may fluctuate significantly and not fully reflect underlying business performance.
• Reliance on the performance of key personnel and challenges in attracting and retaining qualified employees.
• Difficulty in maintaining corporate culture as the company grows.
• Increased business, regulatory, and economic risks from international operations.
• Risks associated with internal use of artificial intelligence technologies, including inaccurate outputs, data leakage, and intellectual property risks.
• Exposure to various data privacy laws and governmental regulations (GDPR, CCPA, CPRA), with potential for non-compliance fines and reputational harm.
• Failure to maintain effective internal controls over financial reporting.
• Downturns or upturns in new business may not be immediately reflected in operating results due to the subscription revenue recognition model.
• Potential requirement to collect sales or other related taxes in jurisdictions where it has not historically done so.
• Limitations on the ability to use net operating loss carryforwards and certain other tax attributes.
• Changes in tax laws and related matters could materially affect financial condition, results of operations, and cash flows.
• Adverse effects if estimates or judgments relating to critical accounting estimates prove to be incorrect.
• Anti-takeover provisions in corporate documents and Delaware law could impair a takeover attempt.
• Volatility in the market price of common stock, with potential for loss of investment.
• Adverse effects from actions of third parties attempting to manipulate share price (e.g., short and distort campaigns).
• Failure to meet publicly announced guidance or other expectations could cause stock price to decline.
• Sales of a substantial number of common stock in the public market could cause share price to fall.
• If securities or industry analysts cease coverage or adversely change recommendations, stock price and trading volume could decline.
• No expectation of declaring dividends in the foreseeable future.
• Exclusive forum provisions in the Amended and Restated Certificate of Incorporation could limit stockholders' ability to obtain a favorable judicial forum.
• Requirements of being a public company, particularly after ceasing to be an emerging growth company, may strain resources and require substantial management attention.
• Use of open-source software could negatively affect ability to sell cloud services and subject to possible litigation.

Future Outlook

Operating expenses, excluding depreciation, amortization, and stock-based compensation, are expected to remain relatively flat in 2025 compared to the prior year. Capital expenditures are anticipated to increase in the coming quarters to support the up-market transformation and new offerings. The company aims to achieve sustainable positive cash flow and expects to maintain its Emerging Growth Company (EGC) status through November 2026.

Management Comments

• Starting in the second half of 2024, we initiated a go-to-market transformation that is actively moving the company up-market, which has been evidenced by the signing of multiple deals with total contract values over $1.0 million each and an acceleration of revenue growth for B2 Cloud Storage to 29% year-over-year.
• To support our up-market expansion and evolving customer needs, we recently launched B2 Overdrive, our premium-priced, ultra high-throughput performance cloud storage solution, designed to meet the demands of data-intensive workloads including AI and machine-learning training, large-scale analytics, high-performance computing, and media processing.
• We also introduced a suite of enterprise cyber security features including AI-powered anomaly alerts, mandatory multifactor authentication, bucket access logging, and Enterprise Web Console which streamlines roles-based administrative control in complex environments to help with cybersecurity and account management.
• These launches expand our addressable market among enterprise and AI-driven customers and lay the groundwork for further innovation to drive differentiated value for these customers.
• Our continued focus on our customers is driving significant revenue retention, as evidenced by our overall net revenue retention rates (NRRs) of 109% and 114% as of June 30, 2025 and June 30, 2024, respectively.
• The enhancement of our B2 Cloud Storage offerings is a key contributor to this success, resulting in NRRs of 112% and 126% for the same periods.
• 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.
• In August 2025, in connection with the establishment of a new share repurchase program, the Company amended the Credit Agreement to permit share repurchases of up to $10.0 million, thereby excluding such repurchases from the covenant restrictions.

Industry Context

The company operates in the highly competitive cloud storage market, competing with hyperscalers like Amazon Web Services (AWS), Google Cloud Platform, and Microsoft Azure, as well as traditional on-premises solutions. It is strategically differentiating itself by focusing on specialized storage and an open cloud ecosystem that integrates smoothly with partners. The recent launch of B2 Overdrive and enterprise cybersecurity features indicates a deliberate move up-market to capture larger enterprise and AI-driven workloads, a rapidly evolving and demanding sector within the cloud industry. This positions the company to address the increasing need for high-performance, cost-effective data storage solutions in a market characterized by rapid technological advancements and evolving customer requirements.

Comparison to Industry Standards

• The company's 'purpose-built, web-scale software built on commodity hardware' approach aims to offer a more cost-effective solution compared to the often higher-priced and complex offerings from hyperscale cloud providers like AWS S3, Google Cloud Storage, and Microsoft Azure Blob Storage.
• The launch of B2 Overdrive directly competes with specialized high-performance storage tiers offered by major cloud providers (e.g., AWS S3 Express One Zone, Google Cloud Hyperdisk, Azure Ultra Disks) that cater to data-intensive workloads such as AI/ML training and high-performance computing.
• The 'flat-rate pricing' model for Computer Backup differentiates it from many consumer and small business backup solutions that typically impose tiered storage limits or per-device fees, offering a simpler, more predictable cost structure.
• The company's gross customer retention rate of approximately 90% is a strong indicator of customer satisfaction and loyalty, performing competitively within the SaaS/IaaS industry where customer churn can be a significant challenge.
• The Net Revenue Retention Rate of 109% (total) and 112% (B2 Cloud Storage) suggests that existing customers are expanding their usage, which is a key metric for growth in the cloud services sector. However, the decline in B2 NRR from 126% in the prior year indicates some impact from past price increases or increased competitive pressures.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved from time to time in various claims and legal actions arising in the ordinary course of business.
• Management does not expect the resolution of current matters, individually or in the aggregate, to have a material adverse effect on the company's financial position, results of operations, or cash flows.
• The company has faced patent infringement claims from non-practicing entities in the past.
• Litigation can be expensive and divert management attention and resources.
• The company is subject to subpoena requests from third parties and governmental agencies.

Related Party Transactions

• During the six months ended June 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 as of December 31, 2024.

Stakeholder Impact

• Shareholders: Potential for increased value from the share repurchase program, but also face dilution from equity awards and stock price volatility. No anticipated cash dividends.
• Employees: Impacted by the 2024 restructuring plan (12% headcount reduction). Benefit from the new 2025 Bonus Plan and stock-based compensation. Face intense competition for talent.
• Customers: Benefit from new product features (B2 Overdrive, Enterprise Web Console) and continued high gross customer retention. May be impacted by past price increases and reliance on platform reliability and security.
• Suppliers/Vendors: Company's reliance on a limited number of third-party data centers and hard drive suppliers exposes them to potential supply chain disruptions.
• Creditors: The new $20.0 million revolving credit facility with Citizens Bank, N.A. provides liquidity but is subject to financial and operating covenants.

Next Steps

• Continue to enhance and grow the direct sales team to expand the customer base and target larger clients.
• Continue to build the ecosystem of partners.
• Continue investing in marketing initiatives to scale self-service customer acquisition.
• Optimize the conversion rate of visitors to customers.
• Increase revenue from existing customer relationships through additional features, Customer Success initiatives, and natural customer data growth.
• Continue investment in capital and research and development activities to meet performance requirements of modern enterprise and AI workloads.
• Potentially expand internationally into targeted key geographies.
• Execute share repurchases under the new program through August 1, 2026.
• Commencement of expanded data center space from the June 2025 lease amendment is expected in Q2 2026.
• Implement ASU 2023-09 (Income Taxes) beginning with the annual reporting period ending December 31, 2025.

Key Dates

Recommendation

While Backblaze demonstrates strong revenue growth in its B2 Cloud Storage segment and notable improvements in gross margin and Adjusted EBITDA, indicating a positive operational trajectory, the company continues to incur net losses and negative free cash flow. The share repurchase program is a positive signal for shareholder value, but the overall financial position still requires sustained execution to achieve profitability and consistent positive cash flow. The competitive landscape and ongoing investments in infrastructure and R&D present both opportunities and risks. A 'hold' recommendation reflects the positive operational momentum balanced against the continued unprofitability and the need for further progress towards sustainable financial health.

Keywords

Cloud Storage, Data Backup, SaaS, IaaS, B2 Cloud Storage, Computer Backup, Data Center, Enterprise Cloud, AI Workloads, Cybersecurity, SEC Filing, 10-Q, Financial Results, Backblaze