Backblaze (BLZE) Q2 2023: B2 Cloud Storage Climbs to 44% of Revenue, Fueling Upmarket Expansion
B2 Cloud Storage’s rapid growth and upmarket momentum signal a strategic inflection for Backblaze. The company’s disciplined cost controls and channel-driven wins underpin a credible path to breakeven, even as macro IT spending remains cautious. Investors should watch for sustained B2 acceleration and execution on larger enterprise deals as the next leg of value creation.
Summary
- Upmarket Pipeline Expands: Larger customer wins and a rising number of high-ARR accounts highlight traction beyond SMBs.
- Cost Discipline Takes Hold: Broad-based restructuring and capital efficiency drive improved cash flow trajectory.
- B2 Cloud Storage as Growth Engine: Segment mix shift and channel leverage set up durable revenue diversification.
Business Overview
Backblaze provides cloud storage and backup solutions through two core offerings: Computer Backup, a mature SaaS backup product for devices, and B2 Cloud Storage, an object storage platform for businesses and developers. The company generates revenue via subscription fees and scalable storage usage, serving both individual and business customers. In Q2, Computer Backup comprised 56% of revenue, while B2 Cloud Storage represented 44%, reflecting a growing shift toward infrastructure-scale storage services.
Performance Analysis
B2 Cloud Storage posted 39% year-over-year growth, continuing its multi-quarter outperformance and increasing its share of total revenue to 44%. This segment’s momentum is driven by both self-serve and sales-assisted channels, with the number of customers generating over $50,000 in annual recurring revenue (ARR) rising from 48 to 74 year-over-year—a clear sign of upmarket progress. Computer Backup, while slower-growing at 7%, delivered the largest deal in company history this quarter, validating ongoing relevance in enterprise backup use cases.
Gross margin recovered to 75% after temporary Q1 compression from data center expansion costs, and net revenue retention remains robust, with B2 Cloud Storage at 121%. Operating expenses have stabilized, reflecting the impact of broad-based restructuring and disciplined headcount management. Capital expenditures as a percentage of revenue are trending down, supporting the company’s push toward adjusted EBITDA breakeven in Q4 and reducing pressure on the balance sheet.
- Segment Mix Shift: B2 Cloud Storage now accounts for nearly half of revenue, accelerating Backblaze’s transition to a platform-centric model.
- Retention Metrics: Net revenue retention of 110% company-wide and 121% for B2 signal strong expansion within existing accounts.
- Cash Flow Leverage: $12 million in annualized cost reductions, lower capex intensity, and moderating headcount fuel improved cash outlook.
Backblaze’s execution on large deals, channel partnerships, and operational efficiency positions the company to weather macro uncertainty while capitalizing on secular cloud migration trends.
Executive Commentary
"I'm proud of our team for executing on larger customer deals for both computer backup and B2 cloud storage. We're seeing success in moving up market both among paying customers and in our sales pipeline."
Gleb Budman, Co-founder, CEO, and Chairperson of the Board
"Our recent restructuring, which included reductions in staff, a consolidation of facilities, and other savings, totals over $6 million in annual savings... We remain on track to approach adjusted EBITDA breakeven in Q4-23."
Frank Patchell, Chief Financial Officer
Strategic Positioning
1. Upmarket Expansion and Large Account Wins
Backblaze’s upmarket push is yielding tangible results, with the number of high-ARR customers (>$50K) rising significantly and the company closing its largest computer backup deal to date. The sales-assisted channel and inbound enterprise interest are both contributing, while partnerships (e.g., with Fastly) are unlocking petabyte-scale opportunities.
2. Channel and Partnership Leverage
Over one-third of B2 revenue now comes from identifiable joint solutions with partners, including new offerings like Cloud Instant Business Recovery (Cloud IBR) with Continuity Centers. Trade show activity has nearly tripled the pipeline versus last year, underscoring the channel’s critical role in driving growth and expanding reach.
3. Self-Serve and Developer Ecosystem Investments
Backblaze continues to optimize its efficient self-serve funnel, launching a rebuilt website backend and a more targeted onboarding experience. The new developer documentation hub is already driving higher traffic, lowering friction for both self-serve and sales-assisted adoption—key for scaling application storage customers.
4. Cost Structure and Capital Allocation Discipline
Restructuring has delivered $12 million in annualized savings, with cost moderation spread across headcount, facilities, and equipment. Capex intensity is projected to decline from 28% to 18% of revenue over three years, even as data center capacity expands. This discipline underpins the path to cash flow breakeven without reliance on equity markets.
5. Market Positioning on Value and Openness
Backblaze’s open cloud advocacy and low-cost leadership are central to its differentiation. The company’s S3-compatible APIs, no egress fees for partners, and ease of use are attracting customers frustrated with traditional hyperscaler lock-in and pricing. This is especially resonant for cost-sensitive SaaS and internet businesses seeking flexibility and predictable infrastructure costs.
Key Considerations
This quarter marks a strategic pivot as B2 Cloud Storage’s growth and mix shift reshape Backblaze’s trajectory. Investors should focus on the sustainability of these trends and the operational levers supporting margin and cash flow improvement.
Key Considerations:
- Large Customer Traction: Sustained growth in $50K+ ARR accounts and successful execution on enterprise-scale deals are critical to long-term upmarket credibility.
- Channel-Driven Pipeline: Partner-led wins and expanded trade show activity are driving a broader, more resilient pipeline, reducing reliance on direct sales alone.
- Cost and Capex Management: Broad-based cost reductions and lower capex intensity are directly supporting path to breakeven and future capital flexibility.
- Competitive Pricing Pressure: Despite hyperscaler stability, Backblaze’s value proposition remains anchored in price and openness, with no near-term intent to raise prices even as competitors do.
- Macro IT Spend Environment: Cautious customer spending and ongoing optimization trends may limit near-term upside but also create tailwinds for value-oriented providers like Backblaze.
Risks
Backblaze faces continued macro headwinds as IT buyers prioritize optimization and delay discretionary spend, which could impact the pace of new logo acquisition or expansion. The company’s upmarket ambitions introduce deal size variability and longer sales cycles. Execution risk remains around large account ramp timing, channel conversion, and sustaining B2’s high growth rate as comps become tougher. The competitive landscape is stable for now, but hyperscaler pricing or feature moves could pressure differentiation.
Forward Outlook
For Q3, Backblaze guided to:
- Revenue of $25 to $25.4 million
- Adjusted EBITDA margin between negative 8% and negative 4%
For full-year 2023, management reiterated guidance:
- Revenue of $98 to $102 million
- Adjusted EBITDA margin improved to negative 8.5% to negative 4.5%
Management emphasized:
- Temporary B2 growth dip in Q3 due to tough comps, with acceleration expected in Q4
- Lower cash usage in back half as restructuring and lease payments conclude
Takeaways
Backblaze is executing a deliberate transition toward a B2-centric, upmarket cloud platform, underpinned by cost discipline and ecosystem leverage.
- B2 Cloud Storage is now the primary growth engine, with channel and partnership momentum set to drive further mix shift and margin leverage.
- Cost controls and capital efficiency are credible, supporting a near-term path to breakeven and reduced funding risk.
- Investors should monitor B2 growth durability, enterprise deal execution, and the ability to maintain pricing power as the market evolves.
Conclusion
Backblaze’s Q2 results reinforce its evolution into a scalable, channel-driven cloud storage provider with credible upmarket ambitions. The company’s mix shift, cost structure improvements, and strategic partnerships position it well for the next phase of growth, though execution on large deals and B2 acceleration will remain key investor watchpoints.
Industry Read-Through
Backblaze’s continued B2 outperformance and customer migration from hyperscalers highlight a growing appetite for open, cost-effective storage alternatives in the cloud market. The success of channel partnerships and S3-compatible APIs signals that interoperability and ecosystem collaboration are becoming table stakes for challenger cloud vendors. As IT buyers remain focused on cost optimization, traditional providers may face increasing pressure to revisit pricing and egress fee structures. The rise of application storage and disaster recovery solutions built atop open storage platforms suggests a broader shift in how businesses architect data infrastructure, with implications for both legacy backup vendors and hyperscale cloud providers.