Backblaze (BLZE) Q1 2023: B2 Cloud Storage Grows 42%, Outpacing Hyperscaler Slowdown
Backblaze’s B2 Cloud Storage business surged 42% year over year, decisively outpacing hyperscaler growth and reinforcing its differentiated positioning as a specialized storage cloud. Margin pressure from data center expansion and energy costs weighed on near-term profitability, but management reaffirmed full-year guidance and the EBITDA breakeven target. The company’s channel and self-serve optimizations are showing early traction, setting the stage for continued share gains against traditional cloud providers.
Summary
- B2 Cloud Storage Momentum: Specialized storage offering continues to win share from hyperscalers and legacy vendors.
- Cost Structure in Focus: Data center expansion and energy inflation pressured margins, but improvement is expected ahead.
- Strategic Channel Bet: Channel and partnership investments are accelerating pipeline and expanding addressable reach.
Business Overview
Backblaze is a cloud storage provider specializing in affordable, open, and predictable data storage solutions for businesses and developers. The company operates two core segments: B2 Cloud Storage, object storage for backup and application data, and Computer Backup, direct-to-consumer and business endpoint backup. Revenue is generated through consumption-based and prepaid (B2 Reserve) storage subscriptions, with a growing focus on channel and technology partnerships to expand distribution.
Performance Analysis
Backblaze delivered 20% total revenue growth in Q1, with B2 Cloud Storage surging 42% year over year and now representing 43% of total revenue, a continued shift toward the higher-growth segment. In contrast, Computer Backup posted 8% growth, demonstrating resilience but reinforcing B2 as the primary engine. Notably, B2’s growth rate more than doubled that of AWS’s storage business in the same period, highlighting Backblaze’s ability to attract customers seeking cost-effective, open alternatives.
Gross margin compressed to 72% from 76% last year, primarily due to planned data center expansion, migration costs, and higher power prices. Management expects this to be the low point for the year, with margins rebounding as new capacity is absorbed and duplicate costs subside. Adjusted EBITDA margin improved year over year, reflecting disciplined cost control even as the company absorbed one-time severance and legal settlement charges. Net revenue retention (NRR) remained robust at 111% company-wide, with B2 at 120% and Computer Backup at 106%.
- Segment Mix Shift: B2 Cloud Storage now comprises nearly half of total revenue, accelerating the company’s transition to a storage-first cloud model.
- Margin Pressure Drivers: Temporary gross margin headwinds were attributed to overlapping data center costs and energy inflation, with normalization expected in coming quarters.
- Retention Stability: Gross customer retention held steady at 91%, underscoring the stickiness of both core offerings even in a cost-conscious IT environment.
Backblaze’s ability to reiterate full-year guidance amid sector-wide deceleration signals both model resilience and effective positioning against hyperscaler fatigue.
Executive Commentary
"B2's growth rate was more than two and a half times that of Amazon AWS, which grew only 16% in the same period. Not only did we show strong growth, but as Frank will discuss in a moment, with our results and our expectation for continued EBITDA margin improvement in Q2, we remain committed to our goal to approach adjusted EBITDA breakeven in Q4."
Gleb Budman, Co-Founder, CEO and Chairperson of the Board
"We remain focused on two key metrics, revenue growth and adjusted EBITDA... In Q1, B2 cloud storage represented 43% of total revenue, continuing its upward trend. We're pleased to be able to deliver continued strong growth in a challenging economic environment. This highlights the resiliency and predictability of our business model, as well as the appeal of our cost-effective solutions for customers."
Frank Patchell, Chief Financial Officer
Strategic Positioning
1. Specialized Storage Cloud Focus
Backblaze’s core differentiation lies in its focus on open, affordable storage, enabling customers to avoid vendor lock-in and unpredictable fees common with hyperscalers. This “best-of-breed stack” philosophy, supported by technology alliances (e.g., Vultr, Cloudflare), attracts workloads from AWS, Google, and Azure, especially as customers seek to optimize spend and flexibility.
2. Self-Serve and Guided Conversion Optimization
The company’s roots in self-serve acquisition remain a strength. Recent investments in in-app messaging and guided onboarding drove a >10% increase in conversion from free to paid users. This channel remains efficient and scalable, with further improvements planned to drive both volume and ARPU (average revenue per user).
3. Channel and Partnership Expansion
Channel partnerships are emerging as a material growth lever. The B2 Reserve prepaid offering, designed for channel distribution, surpassed $1 million in annual recurring revenue within a year. At least a third of B2 data is sourced via partners, and management is investing to accelerate this channel’s contribution.
4. Targeted Sales-Assisted Motion
Building out a dedicated sales team and outbound motion is starting to yield results. Pipeline generation per salesperson hit new highs, and sales cycles for larger accounts shortened further, bucking broader SaaS trends. The ability to close larger, cost-sensitive customers is a key driver of B2’s outperformance.
5. Application Storage and AI Use Cases
Backblaze is capturing new, data-intensive workloads, particularly in AI and media verticals. Customer wins from each major hyperscaler were highlighted, including an AI video analytics firm and a leading esports solutions provider, validating the appeal of B2 for high-growth, storage-heavy applications.
Key Considerations
This quarter reinforced Backblaze’s strategic pivot to a storage-first, partner-enabled growth model while highlighting the operational realities of scaling infrastructure and capturing share from larger incumbents.
Key Considerations:
- B2 Growth Outpaces Market: Sustained 40%+ B2 growth signals competitive displacement and validates the company’s open storage thesis.
- Margin Recovery Path: Gross margin compression is expected to abate as new data center capacity is absorbed and temporary migration costs roll off.
- Channel Leverage Building: Early B2 Reserve traction and expanding distributor relationships could unlock incremental growth and predictability.
- Cash and CapEx Discipline: CapEx as a percentage of revenue is trending down due to platform efficiency gains, supporting the path to EBITDA breakeven.
- Macro Resilience: Churn and retention metrics remain stable, with cost optimization tailwinds offsetting any macro drag on IT spend.
Risks
Backblaze faces competitive pressure from hyperscalers and specialized storage providers, and must continuously invest in platform innovation to sustain its value proposition. Margin recovery depends on successful absorption of new data center capacity and normalization of energy costs. Customer acquisition could slow if IT spending retrenches further, and channel ramp may take longer than forecast. The company’s focus on storage (without compute) could limit wallet share in certain AI or integrated workloads if ecosystem partnerships do not scale as planned.
Forward Outlook
For Q2 2023, Backblaze guided to:
- Revenue of $24.1 to $24.5 million
- Adjusted EBITDA margin of negative 11% to negative 7%, a sequential improvement
For full-year 2023, management reaffirmed guidance:
- Revenue of $98 to $102 million
- Adjusted EBITDA margin of negative 10% to negative 6%, targeting breakeven in Q4
Management cited pipeline acceleration, ongoing sales cycle compression, and channel growth as drivers of confidence in the outlook.
- Gross margin expected to rebound to mid-70s percent for the remainder of the year
- CapEx as a percentage of revenue will continue to decline due to platform efficiencies
Takeaways
Backblaze’s Q1 results highlight the company’s ability to win share in a slowing cloud market by offering a differentiated, cost-efficient storage solution and by building out scalable go-to-market channels.
- B2 Cloud Storage Inflection: Sustained outperformance versus hyperscalers and traditional vendors validates the company’s product-market fit for storage-centric use cases.
- Margin and Cash Focus: Temporary gross margin pressure is being actively managed, with CapEx discipline and efficiency gains supporting the EBITDA breakeven trajectory.
- Watch Channel and Partnership Scale: The next leg of growth will depend on the channel’s ability to drive predictable, large-scale customer acquisition and wallet share expansion.
Conclusion
Backblaze is executing a focused strategy to capitalize on hyperscaler fatigue and IT cost optimization, with B2 Cloud Storage as the clear growth engine. Near-term margin headwinds are being managed, and the company’s channel and self-serve optimizations are starting to show results. Investors should watch for continued B2 outperformance and margin recovery as key signals for the durability of the growth thesis.
Industry Read-Through
Backblaze’s performance underscores a broader shift in cloud infrastructure spend toward specialized, open, and cost-predictable providers as enterprises seek to optimize cloud costs and avoid vendor lock-in. The outperformance of B2 relative to hyperscalers signals that customers are increasingly willing to decouple storage from compute and networking, creating opportunities for niche players with best-of-breed offerings. Channel and partner enablement is becoming a critical lever for SaaS and infrastructure vendors seeking to scale efficiently. The margin volatility tied to data center expansion and energy costs is a watchpoint for all cloud infrastructure companies, particularly those in growth mode.