Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze Third Quarter 2025 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Mimi Kong, Investor Relations. Mimi, please go ahead.

Thank you. Good morning, and welcome to Backblaze's Third Quarter 2025 Earnings Call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Marc Suidan, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier. Statements on this call include forward-looking statements about our future financial results, the impact of our go-to-market transformation, sales and marketing initiatives, cost-saving initiatives, results from new features, our ability to compete effectively and manage our growth, our strategy to acquire new customers, retain and expand our business with existing customers and the impact of previous price changes. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our quarterly report on Form 10-Q and our other financial filings. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will also be posted to our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR, gross customer retention rates and adjusted free cash flows. And finally, we will be in New York to participate in the Craig-Hallum Alpha Select Conference on November 18 and the Needham Tech Week one-on-one event on November 20. Thank you for joining us. And I would now like to turn the call over to Gleb.

Thank you, Mimi, and welcome, everyone, to the call. We delivered strong results this quarter. In Q3, revenue and adjusted EBITDA margin both came in above the high end of guidance, and we continue to be on track to be adjusted free cash flow positive in Q4. Overall company revenue grew 14% year-over-year and B2 Cloud Storage delivered strong results, growing 28%. Now I'd like to take a step back and share how we see the AI industry evolving because AI is becoming central to both our customers and our opportunity ahead. AI is built on models, compute and data. While just a couple of years ago, models were the domain of only a few large providers. Today, they are widely available with literally millions of open source options. So models are no longer a bottleneck for AI innovation. The next component of AI is compute. The GPUs that make up compute have become increasingly available, but access at scale remains challenging, and the market has also become quite fragmented with approximately 200 Neo clouds, such as CoreWeave and Nebius offering GPU capacity for it. That brings us to data, the key differentiator for AI success and where Backblaze helps companies win. Data sizes are exploding as AI expands beyond text to images, audio and video, driving massive storage and performance needs. The teams leading in AI aren't just the ones with the most data. They're also the ones who can aggregate, clean and organize it for today's workloads, move it to whichever Neo cloud they choose, all while preparing it for tomorrow's architectures. Backblaze has already built one of the largest, fastest and most cost-effective storage clouds on the planet, offering throughput of up to 1 terabit per second and priced at about 1/5 that of traditional cloud offerings.…

Thank you, Gleb, and good morning, everyone. We delivered a strong third quarter with results coming in above the high end of our guidance for both revenue and adjusted EBITDA. We have solidified our balance sheet, improved our path to be free cash flow positive, and accelerated revenue growth. We're focused on getting B2 to a Rule of 40, and we are on track to roughly triple our score this year. Now, let me walk you through the details of the quarter. Starting with revenue. Total revenue exceeded expectations. It came in at $37.2 million compared to the high end of guidance, which was $37.1 million. This represents a 14% year-over-year overall growth. B2 grew 28% year-over-year compared to the organic growth of 19% in the same period last year. This represents an acceleration of about 900 basis points this quarter. This improvement was driven by the first phase of our go-to-market transformation. As mentioned last quarter, usage from one of our larger AI customers has been variable as the customers' data storage needs have fluctuated for their business. Overall, industry-wide demand for data storage is expected to grow rapidly, and our platform is well-positioned to support those expanding needs. We're also seeing diversification within B2 across our core use cases, which are live application hub storage, backup, media, and AI-related workloads. In Computer Backup, revenue was flat year-over-year, reflecting the final roll-off of the price increase implemented in 2023. Turning to net revenue retention. Overall, the trailing 4-quarter company NRR for Q3 was 106% compared to 109% in the second quarter. Going forward, we believe it's clear to show in-quarter NRR versus the previously reported trailing 4-quarter average. As an example for Q3, in-quarter NRR for B2 improved to 116% from 109% in Q2, and this was driven by…

[Operator instructions]. Your first question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

Just a couple here. In terms of the sales evolution in Phase 2, talk to me about how you were envisioning the sales sort of evolution. I think you commented last quarter that most reps are more than halfway through the ramp. Are the existing reps ramping the way you had expected? Or was there something you experienced in the sales process that led to you sort of implementing the second phase?

Jeff, this is Gleb. Thank you for the question. So what I would say is that in the first phase, one of the things we talked about was that our goal was to move upmarket. And so you could see that we've definitely moved upmarket with the multiple 6- and 7-figure deals that we've consistently announced over the year. The Phase 2 for us is about driving the velocity -- of the execution velocity. So it's a slightly different focus. We want to continue to move upmarket and support those larger deals, but we're spending more time focusing on moving things through the funnel more explicitly and more actively. In terms of the reps themselves, most of the reps were hired at the beginning of the year or earlier. So they are largely through their ramps as part of their onboarding.

Okay. And on the -- just revisit, if you would, on the B2. You had the 30% goal for Q4, and I heard a little bit of commentary there, but just expand on that a bit more. What's explicitly -- what specifically was it that you thought was going to play out that didn't play out? And when do we get to that 30% plus?

So on our -- from our last earnings call, basically, 2 things happened. One is we had a large customer that we talked about in the prior call that in Q2, the outperformance was in part driven by the variability of a large AI customer. And as we look towards Q4, the variability in part is driven by this same large customer trimming more than we expected. The other thing that drove that is just the larger deals as we move upmarket, a number of them have taken longer to execute. And so the combination of those 2 things have changed our expectations for Q3 somewhat. That's why we're doing Phase 2 of the GTM transformation. We love that we've been able to move upmarket. It's proven that the platform supports these larger customers, it supports these larger use cases. And we also want to have more core predictability in the business. So it's interesting because before we used to have lots and lots of small deals and having lots and lots of small deals provided really great predictability, and we were able to go public on lots of $300 and $2,000 type deals. The challenge with those was it was harder to significantly outperform, significantly rapidly accelerate growth. The bigger deals in moving up market allow us to do that, but we want to focus on increasing that core base of smaller deals to drive that consistency also.

One last quick one, if I could, on the data variability, Gleb, you mentioned several times on the call. Just talk about how that variability is maybe different than what you had expected from these customers, obviously, as you're getting AI workloads, some new experiences here as to how people are going to use you both in that moment as well as over time. Just a bit more about the variability on the data usage would be helpful.

Yes. The AI use cases are obviously all evolving very rapidly, and we're trying to support the customers where they are. So the different use cases that we see across AI are things that we are supporting and learning along with the customers. This particular customer that we talked about, as their business goes up and down in terms of the needs for their data, that we support them with that. So the way that we work with customers is many of our customers are pay-as-you go. They enter a credit card and they just sign up and go. Some of our customers, we sign contractual commitments with. And for a number of the contractual commitments, they'll often sign a contractual commitment and then have the ability to scale up above that. And with some of these larger AI customers, they'll sign a contractual commit and then they'll ramp up even faster than that because their business is growing faster than they expected and then sometimes they need to do some pullback. So that's what we're seeing with some of these. The nice thing, obviously, is we have 100,000 customers on B2, we're distributed across a variety of use cases. So it's not it's not all variable AI customers. We still have a lot of core predictability in our business. But we do want to lean in with the AI use cases because we do see that, that is transformative for the industry and where we see a lot of opportunity ahead.

Your next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets, LLC.

Yes. I'd like to touch on - I know you haven't given a guide for 2026, but I just wanted to learn your expectations for the 2 sides of the business going forward. Obviously, we've got good growth, but not the 30% you want in B2. And then we were flat here in Q3 on the CBU as we got through the last of the price increases. But to put it in broad strokes, we're looking at a year in 2025, where combined, we're at about 14% growth. I know I'm looking for that 14% growth to persist into 2026. But what are you thinking about for longer-term growth rate for B2 and CBU?

Yes. Eric, this is Mark. So 2025, right, for B2 is on track to be in that mid-20s year-over-year growth rate. 2026, we don't want to give guidance yet, but we feel pretty comfortable it's going to be in that range given what we're seeing now as well as that second phase of that go-to-market transformation. And those larger deals Glen spoke about, if those come in, I mean, it could bring that number higher when they come in, in those specific quarters. On the computer backup, just like we said last time, it would be low to single, mid-single digits, the contraction of that business. We're obviously taking action to try to stabilize that. We probably need more time to come back and report a different outlook there. But for now, those are the right assumptions for B2 and computer backup.

Okay. And then the restructuring that you announced this morning as well, just curious to know where are we - you talked about some facilities, but it also talked about severance. Where are we cutting back on the headcount that we had versus the end of September?

Yes. Listen, that is how we're funding that next phase of our go-to-market transformation. Gleb talked about needing that mid-market, high-velocity deal volume to improve. It's done really well over the past year, but we think it should be way better than where it is. And that's the key formula to get to that 30%. So a lot of that restructuring cost is to transform our go-to-market practices. It's to bring on new talent on board. We have started that. So it's a lot more around getting talent that's a lot more operational in their go-to-market skills, know how to use the technology, the data science behind it. So I would say that it's more of a reinvestment versus a cost-cutting exercise.

Your next question comes from the line of Ittai Kidron with Oppenheimer.

This is [ Nolan Genvine ] on for Ittai. First, I just want to sort of double-click on these 7-figure customers. You're clearly showing traction in selling to enterprises now, and you've added yet another 7-figure customer this quarter. How many 7-figure ARR customers do you have now? And then how has their expansion dynamics evolved in recent quarters versus sort of the smaller cohort? And then I have a follow-up.

No, thanks for joining us, and thanks for the question. One clarification I would say is we have these 7-figure deals. The interesting thing is they're not all enterprises. They're heavy users of data. right? And so one of the things that we've seen is that customers are generating large volumes of data and needing high performance for those data sets. The AI-powered video surveillance customer that I mentioned, they're not an enterprise company, but they're a 7-figure deal. So, and that actually, I think, bodes well for us for the future because these smaller mid-market companies that have high data needs are generally faster moving than the traditional enterprises, and there's more of them out there. So that's one thing I would just say in terms of outlook and opportunity for us. In terms of the number of them, we've generally announced 1 or 2 per quarter over the last year. So it's not a large number of these 7-figure deals, but it's considering that in our first roughly 15 years of the company, we signed 1. And in the last year, we've highlighted at least one a quarter, I think is a great proof point to say that when we said we were moving upmarket, we moved up market.

Yes. And what I'll add, Nolan, is last quarter, we shared the number of customers with $50,000-plus ARR. It was up in Q2, 30% year-over-year. In Q3, it was up 41%. So we're maintaining good momentum on that front as well.

Got it. That's very helpful. And then I know you're not giving '26 guidance. But how should we think about the potential catalysts heading into the next fiscal year, things like overdrive ramping, this sort of Phase 2 of the go-to-market transformation? Could you just maybe put a finer point on what you think could maybe drive upside or downside, just to the sort of current growth rate?

Yes, it's a good question. So the go-to-market transformation Phase 2 is certainly something that we're leaning into heavily, right? We're putting a lot of focus on them in terms of talent system upgrades, leveraging advisers, and the consulting team. We believe that there's a lot of opportunity in driving the ability and execution for us to get to market, faster with the products that we have. In terms of B2 Overdrive, we announced that product line fairly recently. We've already closed multiple 6-figure deals on there, which is, I think, a great sign that it has product-market fit. It's we believe it's the highest throughput per dollar offering on the market, and that's a great fit for customers that really need that performance. One of the other things that we've seen on Overdrive, which has been interesting, is that we've seen customers come to us because of Overdrive. They heard about Overdrive, they heard about the performance availability, and they came to us for that. And then when they showed up, they realized that our B2 standard offering is actually quite a high-performance offering, and it was sufficient for them. So I think it's changed some of the perception around what we offer. And so even customers that aren't signing up for Overdrive are often coming to us with these higher performance needs, which is a great direction for us as we become a more strategic partner for them. Overdrive provides up to 1 terabit per second of throughput. So it's a blistering fast offering for them. So I do think that the GTM transformation is the thing that we look at as key to the overdrive offering. The other thing that I would just mention is I don't want to undersell the Phase 1 transformation that we did, right? The Phase 1 transformation was all about moving upmarket, and that is continuing to be an important catalyst for us, including for 2026. Mark mentioned that the big deals are something that can accelerate us even further, and that's something that we're excited about. The last thing I'll just mention is that the GTM Phase 1 transformation, I mean, it doubled pipelines, it doubled bookings, doubled channel. So it did help quite a bit. And so we're excited for Phase 2 of that.

Your next question comes from the line of Simon Leopold with Raymond James.

I wanted to ask about this Phase 2 initiative, in that I don't imagine there are free lunches and have to assume that there's some investment involved. I know earlier, you talked about sort of reallocating. But if we think about it, your sales and marketing have been running between roughly 21% and 23% of revenue. What are you budgeting for next year? How should we think about either a dollar basis or a percent of revenue basis, but some metrics to try to get an understanding of what investment you're making for this Phase 2 initiative?

Simon, it's Mark. The percentage of revenue for sales and marketing should stay stable as a percentage of revenue. The funding is going twofold. The restructuring allows us to fund the one-time cost that's not in that percentage of revenue. That allows us to drive the transformation work, which is really to rejigger all our go-to-market systems to make them work better together, cleanse the underlying data, and drive that data science capability I was talking about. The talent refresh we're doing is within existing OpEx budget, right? As one of you highlighted earlier, yes, there are severance costs that are one-time charges that fit into the restructuring. But on a recurring basis, when we finish this as a percentage of revenue, it should be pretty stable.

Great. And then in terms of the outlook for B2, slight downtick, nothing to be embarrassed about, high 20% growth. But what changed in your mind versus your expectations when you set the goal? What's different?

Well, we set the goal all the way back when we launched our first phase of that transformation, which was exactly a year ago. That was a while back. That is our aim. Frankly, it remains our aim. And our Phase 1, as Gleb said, doubled our pipelines, doubled our bookings, doubled our channel business. What we noticed candidly is our inbound motion is really strong, right? Like we addressed a lot of our technical marketing content, or blogging. We started doing more events and webinars, and all that really improved our inbound. I mean, our inbounds are up substantially. The inbound pipeline is up 100% year-over-year. Our outbound motion is newer to the company. So that muscle is newer. That's the muscle we're working on fixing now in this next phase of this transformation. And it's unfortunately, one of these things, like until you get into it, you don't know how much you don't know. And we're realizing it's a muscle that needs to be a lot stronger to make it successful, and we're hard-charging at it now. Our aim is that, when we do our Q4 earnings release in February to give a lot more details around what makes up that Phase 2 go-to-market transformation. When should you expect a change in the outcome from it, an improvement, and how that would address the year-over-year B2 revenue growth?

Your next question comes from the line of Zach Cummins with B. Riley Securities.

Gleb or Mark, either one. I was wondering if you could give a little more context around some of the larger deals in the pipeline. It sounds like maybe those were pushing a little to the right when it came to the B2 side of the business. So any additional context around just the pipeline that you're seeing with some of these larger deals and maybe the reason that some of them pushed to the right?

Yes. Thanks, Zach, for the question. So one thing I'll say is when I looked at some of the deals and dug into it with Jason on the sales side, frankly, there wasn't any pattern in them. They were kind of random reasons. signer got sick, a different project internally came up that has to take priority, et cetera. So there wasn't any kind of clear pattern for why, but it just spoke to us about that in the small deals, a lot of times what happens is it's one person who is the person that's interested, the decider, the buyer, the purchaser, the user, and they go in, they make a decision and they go. In these larger deals, it's just more complex where you have a buying committee, you have the various different oftentimes security compliance reviews. There are sometimes different departments that need to be involved for how it's going to get used, how the migration is going to happen, et cetera. So it's just one where as we're moving upmarket, we're closing these bigger deals, and that's fantastic. And at the same time, we want to be realistic about that some of them take longer than I think we were seeing because we also have seen some large deals close very quickly. The BT Overdrive deal at the beginning, the first one that we announced last quarter closed incredibly quickly. Some of the customers that I talked about in my prepared remarks, when I was looking at them, the 6-figure deals that from start to finish were three months. And that's quite quick for a 6-figure deal from the first conversation to fully onboarded. But we're also realizing that not all deals move that quickly.

Understood. And in terms of the Phase 2 of the transformation, I'm sure we'll get much more detail in your Q4 earnings call. But can you give us a sense of some of the things you're looking to improve within the self-serve motion? Is this largely targeted towards some of these faster-moving higher data usage customers and reducing the friction there? Or anything you can provide there would be helpful.

Yes. It's interesting because we built the company basically on the self-serve motion, right? When we went public, almost the entire business was driven by self-serve. We had a very, very nascent sales motion at the time. And so the great thing was that we built a blog that a few million people a year would read that drove a lot of inbound interest into the company. We had people will be able to sign up, enter their e-mail just enter a password and go and then try it and then get a credit card and sign up. And as we moved upmarket, we had said concretely at the beginning of the year that our focus was going to be on that upmarket move, and we were not going to be doing a lot to change the self-serve motion. But at the same time, our team was focused on that the whole SEO world was changing, right, with the way that companies and individuals were searching was changing and moving to AI use cases where people would look on ChatGPT or Anthropic or whatever to find information. And so, they actually leaned in on making sure all the content was updated and positioned well to be read by these applications. And one of the things we saw was that our self-serve accounts account creation was -- is actually up 56%. And if you -- as you look to a lot of the companies out there for whom they're self-serve or driven by inbound type content, a lot of them were down quite a bit because they hadn't adjusted to the new AI chat type of search algorithms. So the team leaned in and supported that quite well. Going forward in this Phase 2, one of the things that we're doing is really focusing on how these new AI native start-ups and developers build themselves and ensuring that we're well integrated through the whole life cycle of those workflows and making sure that it's really easy for them to learn about and then adopt the platform. So it's a lot of work in terms of making sure that the content, the guys, but also the flows and the integrations are all there to support those data-heavy use cases. One thing I'll mention is one of the customers I gave on the call, they came in as self-serve. They started just by themselves. And then as they wanted even higher performance, even larger deals, they requested to reach out to the sales team, and they had a conversation with us and then they bought B2 Overdrive. And that's a motion that we love to see.

Your next question comes from the line of Mike Cikos with Needham.

This is Jeff Hopson on for Mike Cikos. I just wanted to see if there is any more info on how the power -- the Powered by white label solution is going. Obviously, NeoClouds is coming more popular trend, and it seems like that could be a good place for that or any sort of partnership to offer their customers more flexibility. So maybe just any info on that opportunity.

Thanks, Jeff. Good to have you on. So we're actually pretty excited by the Powered by. As you saw in my prepared remarks, one of our largest deals this quarter was a Powered-by deal. We also have seen some of our channel partners actually adopting Powered by where instead of trying to resell and integrate at the customer level, they actually build it into their own offering and offer it directly. And then, same like you said with the NeoHubs, we have various discussions that are in progress around that front. It's certainly an exciting opportunity. There's about 200 of them out there. So they all have GPUs, and they all have storage needs. So we engage with them today in a variety of ways where we service our customers using the NeoCloud by providing this open platform, free egress, high throughput, but also are in conversations with some of them to help them with their storage needs directly.

And maybe hardware storage has been on the top of investors' minds recently as AI video generation comes into the forefront. And I know you guys called out some AI video wins with customers. Just curious if you're seeing an actual uptick in AI video companies just in the past 6 to 9 months, as those models have kind of have become more popular.

I'm sorry, can you repeat the very first part of the question? Did you say hardware storage?

Yes. We've seen in the market hardware storage has become..

So initially, AI was all about text, right? It was generative AI for text. Then it became generative AI for images, then audio, and now video. Obviously, each of those is in order of magnitude bigger in terms of the data sizes. So, video is a very data-heavy cloud format. So we absolutely are seeing customers signing up for that. I was looking, we had one of the interesting AI, Gen AI, video companies was a recent customer this quarter. There was another large one in the prior quarter. And we have hundreds and hundreds of AI companies. So obviously, I don't know all of them, but just as they come up, I see ones that catch my attention. So it's something where they create models for the video that requires a lot of data on the front end, then it requires the data to generally get sent to one of the Neo cloud providers for the model creation. And then the inferencing itself, where they're generating the video, that video needs to go somewhere. And so we're supporting customers on the various fronts. One thing I'll tell you is that AI in general is a space that we're seeing significant adoption. Today, about 1/4 of all of our new business is coming from AI companies. Over time, it's going to become harder to say what is an AI company and what is just a company using AI. But today, about 1/4 of that new business is actually coming from companies that are specifically in the AI space. So it's an area that we're excited to lean into.

Your next question comes from the line of Rustam Kanga with Citizens.

Great to see the outperformance and new high watermark on the net income and adjusted EBITDA there. Mark, given your prepared remarks, it sounds like there's going to be a lot more honing in on the operational go-to-market skills in Phase 2. And given the success from Phase 1 moving upmarket, getting these larger deals, perhaps you have some better picture on the talent most equipped for what you're looking for in Phase 2. Is that reps with a prior focus on cloud computing and storage or more well versed for lack of a better term, the language of AI? Ultimately, any insights you can share on what kind of reps have been the most successful on the direct sales front and that you might be looking to replicate in Phase I?

This is actually Gleb. I'll start, and then Mark can join in if he wants to add as well. So first of all, what I'll say is in terms of talent, a lot of the talent is actually on the systems and operational side of it. So we're looking for a top-tier Rev ops person, the consulting firm that we're working with, we're doing a large project around both the systems transformation as well as the sales enablement and execution side. So Mark mentioned that we have a success with inbound. At the same time, what we see is there's a lot of stuff that comes at the very top of the funnel. And then there's a lot of opportunity to be more efficient and effective in having it go through the funnel. And then on the outbound side of it, one of the things that we realized is that we can do better with targeting the right types of customers who are ideal customer profiles, both in terms of identifying them and also in terms of how we reach out to them. So a lot of the work in the transformation isn't even specifically about the different reps. It's about the infrastructure of people and systems around the reps to help them.

This is Mark. Our reps have done well. Our win rate is 30% from opportunity to close, which is a very healthy win rate. So we just want to be flowing more opportunities through that team. And then as that opportunity flows through that team, you start expanding capacity and optimizing capacity within. So as Gleb said, there's a lot more around making things available to every stage of the process in a way where people are following up at the right time. They got the right content, the right messaging, the multimodal approach to the customer, when you place advertising versus e-mail versus text message. So there's just an incredibly scientific way of doing that these days. And I mean, the people helping us are people who help companies like Snowflakes and Databricks. So they bring the best-in-class on that process. And we want to adopt it and drive a lot more volume through there.

That concludes our question-and-answer session. I will now turn the call back over to Gleb Budman for closing remarks.

Thank you, everyone, for joining us. With the double beat this quarter and how well we're positioned to help companies with AI workloads, we're enthusiastic about our opportunity ahead. I want to thank our employees, our customers, our partners, our investors for being on this journey with us as we build this core storage backbone of the Internet. For our investors, we look forward to seeing you at the Needham Conference and at the Craig-Hallum conferences this month and chatting with all of you next quarter. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.