Backblaze (BLZE) Q3 2023: B2 Cloud Storage Jumps 31%, Setting Up 40%+ Growth Inflection
B2 Cloud Storage’s 31% growth propelled Backblaze past $100M ARR, with Q4 guidance signaling a revenue acceleration and a return to positive adjusted EBITDA. Strategic price increases and operational efficiencies position the business to capitalize on open cloud momentum and AI-driven data growth in 2024.
Summary
- B2 Cloud Storage Drives Mix Shift: Growth in B2 outpaces legacy backup, accelerating the business model transition.
- Price Actions and Free Egress Unlock Upside: Strategic pricing and frictionless data movement reinforce customer value and open cloud positioning.
- Profitability and Cash Use Improve: Operational discipline and margin focus set up a path toward sustained positive EBITDA and cash flow.
Business Overview
Backblaze is a cloud storage provider offering two primary services: B2 Cloud Storage, an object storage platform competing with hyperscalers like AWS S3, and Computer Backup, a direct-to-consumer and SMB cloud backup service. B2 Cloud Storage generates revenue via pay-as-you-go and reserved contracts, targeting mid-market and enterprise customers for scalable, low-cost, interoperable data storage. Computer Backup delivers recurring subscription revenue from individuals and businesses seeking automated endpoint protection. The company’s revenue mix is shifting rapidly toward B2, reflecting industry demand for open, affordable, and high-performance storage solutions.
Performance Analysis
Backblaze crossed the $100 million ARR milestone in Q3, with total revenue up 15% year-over-year, driven by a 31% surge in B2 Cloud Storage. B2 now accounts for 46% of total revenue, up from prior periods, and is on track to become the dominant segment. Computer Backup, while growing at a modest 4% year-over-year, remains a stable cash generator but is increasingly a smaller share of the business.
Adjusted gross margin came in at 74%, slightly down from 76% a year ago, primarily due to expanded data center footprint costs. However, operating leverage is improving, with adjusted EBITDA loss narrowing to $841,000 (negative 3% margin) versus negative 8% a year ago. Cash and investments ended at $36 million, and management expects cash usage to halve in Q4, with a clear line of sight to cash flow breakeven in 2025.
- Revenue Mix Shift: B2 Cloud Storage’s growth rate and rising share of revenue are transforming Backblaze’s business model toward higher-value, scalable enterprise use cases.
- Retention and Upsell: Net revenue retention (NRR) for B2 hit 120%, highlighting strong expansion within existing customers, while overall gross retention held steady at 91%.
- Operational Efficiency: Flat OPEX and slowing headcount growth signal a disciplined approach to scaling, with margin improvement expected as new data centers are leveraged.
Deferred revenue nearly doubled sequentially, mainly from a record multi-year B2 Reserve deal, underscoring growing demand for committed storage contracts. The company’s Q4 guidance points to a sharp revenue acceleration and the first quarter of positive adjusted EBITDA as a public company.
Executive Commentary
"We delivered a strong Q3. First, we believe that we're at an inflection point with higher revenue growth expected in Q4 and 2024. Second, we've made great progress on our financial performance, particularly adjusted EBITDA and cash... And third, our team continues to innovate on our storage cloud, delivering a dramatic increase in upload performance and making our B2 cloud storage up to 30% faster than Amazon Web Services' storage offering, while continuing to be just one-fifth the price."
Gleb Budman, Co-founder, CEO, and Chairperson of the Board
"Next quarter, we expect to accelerate revenue growth, reduce cash usage by about half sequentially, and reach positive adjusted EBITDA... For the fourth quarter, we expect revenue to be in the range of $27.9 to $28.7 million. This is a wider range than typical for our fourth quarter guidance due to the price increase that just started and is rolling through quarter four."
Frank Patchell, Chief Financial Officer
Strategic Positioning
1. Open Cloud Differentiation
Backblaze is leaning into the “open cloud” narrative, emphasizing interoperability, transparent pricing, and free egress to attract customers frustrated by hyperscaler lock-in and unpredictable fees. Partnerships with CoreWeave, Fastly, and Snowflake are broadening use cases in AI, edge, and analytics, making B2 Cloud Storage a central hub for multi-cloud data workflows.
2. Price Increases and Value Expansion
Strategic price increases—20% for B2 pay-as-you-go and bundled feature upgrades for Computer Backup—are being absorbed with churn in line or better than modeled, reflecting strong customer value perception. The phased rollout for backup and immediate effect for B2 mean revenue and margin tailwinds will compound into 2024.
3. Performance and Product Innovation
Shard Stash, a platform innovation, boosted B2 small file upload speeds up to 30% faster than AWS S3, a critical differentiator for developers and AI workloads. The company continues to invest in usability and performance, with a roadmap to further improvements, reinforcing its cost-performance leadership.
4. Upmarket and Partner Channel Expansion
Backblaze is moving upmarket, as evidenced by a record $1 million multi-year B2 Reserve deal and a growing number of customers with over $50,000 ARR. The channel partner program is scaling, bringing in multi-year, committed contracts and reducing reliance on transactional revenue.
5. Operational and Financial Discipline
OPEX discipline, flat headcount, and efficient use of expanded data centers are yielding margin improvement and reduced cash burn. Management expects to reach cash flow positive in the first half of 2025, with no need for additional capital under current growth plans.
Key Considerations
This quarter marks a clear inflection in Backblaze’s trajectory, as the company pivots from a backup-centric, SMB-heavy business to a scalable cloud storage platform with enterprise and AI relevance. Investors should weigh the following:
Key Considerations:
- Mix Shift Toward B2: B2’s rapid growth and rising share of revenue signal a business model transition, with higher NRR and larger deal sizes supporting durable expansion.
- Price Increase Absorption: Early data show churn is manageable, and value-added features (like extended version history) are driving customer stickiness.
- AI and Analytics Tailwinds: Partnerships and use cases in AI, analytics, and media production are expanding the addressable market and creating new growth vectors.
- Margin and Cash Flow Path: Gross margin is expected to trend into the upper 70% range, and positive adjusted EBITDA is now imminent, reducing capital risk.
- Competitive Moat with Free Egress: Free egress removes a key friction point for customers and sharpens Backblaze’s differentiation versus hyperscalers.
Risks
Execution risk remains around scaling upmarket and sustaining B2’s high growth rate as competition intensifies from both hyperscalers and emerging cloud-native rivals. The impact of price increases on long-term churn, especially as contracts renew, is still playing out. Gross margin improvement depends on leveraging recent data center investments, and any delay in revenue scaling could pressure profitability targets. Macroeconomic volatility, while seen as a customer acquisition opportunity, could slow IT spending or elongate sales cycles.
Forward Outlook
For Q4, Backblaze guided to:
- Revenue of $27.9 to $28.7 million, reflecting a sharp acceleration in growth rate.
- Adjusted EBITDA margin between positive 1% and positive 3%—the first expected quarter of positive adjusted EBITDA as a public company.
For full-year 2023, management raised the bottom end of revenue guidance to $101.2 to $102 million and improved adjusted EBITDA guidance to negative 6% to negative 4%.
Management highlighted several factors that will shape 2024:
- B2 Cloud Storage ARR growth is expected to accelerate into the 40%+ range in Q4 and sustain into next year.
- Gross margin is expected to trend toward the upper 70% range as the business scales into recent infrastructure investments.
Takeaways
Backblaze’s business model is rapidly evolving, with B2 Cloud Storage becoming the engine for growth and margin expansion. The company is leveraging pricing power, product innovation, and partner momentum to deepen its competitive moat and reduce dependence on legacy backup revenue.
- B2 Cloud Storage Momentum: The segment’s 31% growth and rising revenue share underpin a credible shift toward scalable, enterprise-grade storage, with AI and analytics use cases broadening the TAM.
- Path to Profitability: Operational discipline, price increases, and improving gross margin set up a sustainable run toward positive EBITDA and cash flow, reducing capital risk for investors.
- 2024 Watchpoints: Investors should monitor B2’s growth durability, churn trends post-price increase, and the impact of open cloud positioning on large deal flow and partner traction.
Conclusion
Backblaze delivered a pivotal quarter, as B2 Cloud Storage’s outperformance and strategic price actions drive a business model transformation. With accelerating revenue, improving profitability, and a sharpened open cloud value proposition, the company is positioned to capitalize on secular data growth and multi-cloud adoption in 2024.
Industry Read-Through
Backblaze’s results and strategy signal growing customer demand for open, interoperable cloud storage alternatives to hyperscalers, especially as AI and analytics workloads proliferate. The success of free egress and transparent pricing could pressure larger providers to revisit their fee structures and customer lock-in tactics. Channel and partner-driven growth, combined with performance innovation, is likely to become a more important lever for cloud infrastructure players across the sector. Investors in storage, data management, and cloud infrastructure should watch for similar mix shifts and margin expansion plays as the industry pivots to serve data-intensive, multi-cloud workflows.