Title

Presentation

Backblaze, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $0.00167.

Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Mimi Kong, Head of Investor Relations. You may begin.

Mimi Kong: Thank you. Good afternoon, and welcome to Backblaze, Inc.’s First Quarter 2026 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, Inc. 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, the impact of price changes, our ability to compete effectively and manage our growth, and our strategy to acquire new customers, retain and expand our business with existing customers.

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 most recent quarterly report on Form 10‑Q and our other 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 be posted on 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 rate, and adjusted free cash flows. We will be participating in the Needham Technology, Media and Consumer Conference on May 12 in New York. I hope to see many of you there. Thank you for joining us, and I would now like to turn the call over to Gleb Budman.

Gleb Budman: Thank you, Mimi, and thank you, everyone, for joining us today. Q1 was a strong quarter. We beat revenue and adjusted EBITDA guidance, ending the quarter with $38.7 million in revenue, up 12% year over year with B2 growing 24%. We more than doubled our average sales deal size and drove 72% year‑over‑year growth in our $50 thousand‑plus ARR cohort as we continue to move upmarket and are on track for our first full year of free cash flow positivity as a public company. What excites me most about Q1 goes beyond the numbers. AI is making storage increasingly important, and our organization is gelling and executing better than ever to capture that opportunity. This is evidenced by more than one third of all new bookings coming from AI and the number of AI customers using our platform growing by 76% year over year.

We entered 2026 saying we would build a more scalable, more predictable growth engine that serves the AI opportunity. Q1 started to show what that looks like. In AI, we are seeing demand from two parts of the market. One is companies building the infrastructure and tools that enable AI. The other is companies using that infrastructure to bring AI into products and workflows. We are winning in both. On the infrastructure side, there is a major replatforming happening in the market. For the first time in about two decades, the traditional hyperscalers are not the only place companies are building. They are also building on the Neoclouds. Synergy Research estimates that the Neocloud market was $25 billion in 2025 and growing to about $400 billion by 2031.

In order for these Neoclouds to support their customers’ AI workflows, they need to offer cloud storage. Some Neoclouds have offered cloud storage built on flash. It was fast, and it worked, but as these platforms have scaled and AI workloads have grown, the economics have become increasingly difficult. Flash is now about 10 times more expensive per terabyte than hard drives. It works well for use cases requiring the lowest latency for smaller data sizes but becomes unsustainable at exabyte scale. As a result, Neoclouds are now actively looking to introduce a cost‑efficient hard drive tier to manage both performance and economics across their infrastructure. At Backblaze, Inc., we built an internet‑scale file system to optimize performance per dollar out of hard drives and thus believe Backblaze, Inc.

is ideally positioned to provide exactly what these Neoclouds need. We have seen support for that belief not only from the multiple signed Neoclouds we provide this for already, but also the active engagement we are having with many of the top Neoclouds. We estimate our opportunity to support Neoclouds at $14 billion by 2030, and with the success we are seeing, we are aligning resources internally behind that opportunity. In addition to Neoclouds, we are seeing a significant opportunity supporting other AI infrastructure. For example, we are seeing strong demand from companies supplying large datasets into the AI ecosystem because they need a place to store large datasets efficiently but also be able to move them where they need to go rapidly.

One recent example is a training data provider serving AI use cases that selected B2 to store large volumes of video data. A hypergrowth company, it was experiencing rate limits and bandwidth constraints with its existing provider and needed a solution that could scale quickly. Backblaze, Inc. won on both economics and technical fit. The deal closed in just 11 days at nearly $1 million of ARR, underscoring how quickly these companies move when infrastructure becomes a constraint and how well Backblaze, Inc. is suited to the infrastructure side of the AI opportunity. The other part of the AI market we are seeing is companies using infrastructure like ours to bring AI into their products. As AI models move from text to multimodal, incorporating video, audio, and images, the volume of data required to train and run those models grows by orders of magnitude.

This is not a future trend. It is happening now, and it is creating significant and growing need for storage that can handle it economically and at scale. With the generative AI customers we have today, we are finding that price and performance get us in the door, but it is the experience that keeps them and grows them: transparent pricing, responsive support, and a team that works with them rather than just selling to them. These customers are scaling fast. They do not have time to manage infrastructure problems. With Backblaze, Inc. they do not have to. A good example from Q1 is an AI‑powered video creation company that selected B2 to store data used to train its models. The customer had been running into cost and performance issues with its existing provider.

The platform was difficult to manage, and the economics were not working at its scale. Backblaze, Inc. offered the best performance per dollar and a platform that was easy to use and easy to scale. The initial deployment represents nearly $500 thousand of ARR and creates a clear path to expand into higher‑performance workloads over time. These customer wins are just examples of where we won in Q1 and are reflective of opportunities we have in pipeline going forward. It is clear that whether customers are building AI infrastructure or using AI in their products, they are scaling fast, their data is growing exponentially, and they need infrastructure that is performant, open, and cost‑efficient at scale. That is the moat we have spent 19 years building, and AI is making it more valuable, not less.

To be the leading storage platform for AI, we are also meeting developers where they already work. We are embedding Backblaze, Inc. into the AI ecosystem by integrating directly into the tools developers already use. For Hugging Face, which has 13 million users and over 2 million models, we shipped the tool that lets teams store and share model caches on B2. For ComfyUI, recently raised at a $500 million valuation, we built a plugin to support generative AI workflows. For CVAT, which is used by tens of thousands of computer vision teams, B2 is now integrated as a backend for training data. And for MLflow, the most downloaded tool for taking AI projects from lab to production, with 15 million monthly downloads, B2 has now been added as an integrated artifact store.

So the AI opportunity is making what we do increasingly critical, and we are also stepping up to meet it. A year ago, we began a meaningful transformation of our go‑to‑market organization focused on three things: increasing awareness, driving greater pipeline consistency, and expanding revenue within our installed base. We delivered progress on all three in Q1. On awareness, the Flamethrower startup program is getting real traction. We have now welcomed approximately 100 companies in under three months, half the time it would typically take. We have been added to the a16z Founder Resource Program, the LAUNCH Startup Showcase, and the Startup Grind conference, all of which expand our reach with venture‑backed startups. On pipeline consistency, we have completed our core go‑to‑market systems upgrade, giving our team better visibility and a stronger foundation for a faster, more disciplined revenue motion.

And within our installed base, pipeline sourced from existing customers has nearly doubled year over year, reflecting our growing ability to land and expand with our customers. To accelerate this next phase, we welcomed Anuj Kumar as our Chief Revenue Officer. Anuj has scaled go‑to‑market for cloud infrastructure and enterprise storage at NetApp, VMware, Red Hat, and SUSE. He brings the pipeline discipline and execution rigor this phase of our growth requires, and we believe his leadership will be a meaningful complement to the upmarket momentum we have already built. We also saw encouraging new customer momentum during the quarter across a range of data‑intensive use cases. That included a healthcare data company that selected us for disaster recovery, a cloud gaming platform that chose B2 to store video across multicloud environments, and an audio streaming platform migrating from self‑managed infrastructure to B2.

These wins reinforce a broader point: Backblaze, Inc. is winning where data is valuable, active, and operationally important. This is why I am excited about the opportunity ahead. The shift to multimodal AI is driving exponential data growth, and the need for high‑performance yet cost‑efficient storage has never been greater. The customers who are choosing Backblaze, Inc. are exactly the kinds of customers that compound with us over time. We are stepping up to this opportunity with an upleveled team, a go‑to‑market transformation well underway, and a platform we have spent nearly two decades building and optimizing. AI is making everything we have built more valuable. We are becoming the storage infrastructure that powers the AI economy.

With that, I will turn it over to Marc.

Marc Suidan: Thank you, Gleb, and good afternoon, everybody. Our first quarter results reflect the strategy that we have been executing against. We exceeded the top end of both revenue and adjusted EBITDA guidance. The Q1 outperformance reflects stronger sales execution, and the EBITDA beat demonstrates the operating leverage in the model. Let me walk through the quarter and then cover our outlook. We finished Q1 with revenue of $38.7 million, above the high end of our guidance of $38 million. The beat was broad‑based across both B2 Cloud Storage and Computer Backup, with B2 remaining the primary growth driver. B2 Cloud Storage grew 24% year over year to $22.4 million, and ARR grew 28% year over year, reflecting the underlying strength and momentum of the business.

The Q1 revenue outperformance was driven by higher customer data consumption on the B2 cloud platform and Computer Backup coming in slightly more favorable than our forecasted decline. On bookings, which primarily affect revenue in future quarters, we closed multiple large deals for a strong quarter. We made several updates this quarter to improve the calculations of our ARR and RPO metrics. I will briefly walk through those changes as I cover the results. ARR increased by more than $5 million sequentially to $158 million, with B2 growing 28% year over year. This quarter, we updated our ARR methodology to improve comparability across periods, and the changes are defined in the earnings presentation posted on our Investor Relations website. Under both the new and previous methods, the sequential ARR improvement is approximately $5 million.

We ended the quarter with 187 customers contributing over $50 thousand in ARR, up 51% from a year ago, reflecting continued strong progress upmarket. We also updated our RPO methodology this quarter and described the change in our earnings presentation. The change is aligned to our peer group, and RPO is now a more important metric as we continue to move upmarket, signing both annual and multiyear customer commitments. Under the updated methodology, RPO increased by $6 million sequentially and by $31 million from the prior‑year period. Our gross customer retention metrics remain very healthy, with customers continuing to use both our B2 and Computer Backup solutions for nine years on average. Beginning this quarter, our reported net revenue retention reflects an in‑quarter methodology, which we believe provides a more current view of our customer expansion and retention trends.

In B2, net revenue retention was 110%, up from 105% a year ago, reflecting continued expansion within the customer base. As a consumption business, B2 benefits from both organic customer data growth and the cross‑sell/upsell sales motion. Q1 gross margin was 61% versus 56% in the prior year. The year‑over‑year improvement shows strong operating leverage continuing to kick in as we tightly manage costs and also from the extension of the useful life of our fixed assets. Total operating expenses were $29 million in Q1, roughly flat compared to Q4 and improved by approximately 600 basis points from the prior year as a percentage of revenue, reflecting strong operating leverage as we maintain our focus on cost management. Q1 adjusted EBITDA was $10 million, or 26% margin, up from $6 million, or 18%, in the prior year, reflecting strong operating leverage as revenue scales.

Sequentially, margin declined modestly from 28% in Q4, primarily reflecting the one‑time benefits we referenced in our last earnings call. Adjusted free cash flow was negative $1.8 million in Q1, reflecting earlier payments in the quarter. We are also pulling forward a portion of 2027 CapEx into 2026 in response to strong demand signals. Even with that pull forward, we continue to expect adjusted free cash flow to be positive for the full year, with improvement weighted towards the second half of the year. We have the capital in place to support the growth that we are seeing. We currently have more than $100 million in capital leasing capacity, with approximately half of that utilized. Based on our current operating plan, we expect to fund growth through operating cash flow and capital leases, and we do not anticipate the need to raise additional capital through follow‑on equity.

In fact, we plan to continue to focus on reducing our dilution through our modest stock buyback and our next‑year settlements for RSU grants. Looking ahead, we introduced updated B2 pricing and packaging effective May 1. The change reflects the investments that we have made in our platform performance, our effort to further simplify pricing by removing API transaction fees, and the rising cost of hardware and data centers. On a net basis, we expect the pricing update to be accretive to revenue and margins, and that will be reflected in our guidance. Moving on to our guidance: For the second quarter, we expect revenue to be in the range of $39.8 million to $40.2 million. On our last earnings call, we said B2 growth in the second quarter would be 12%.

Based on this new midpoint, B2 growth in Q2 will be closer to 20%, which is a big improvement. The Q2 outlook includes a partial‑quarter benefit from the May 1 pricing update, along with variable usage from customers that we have already actualized in April. We are not assuming the same level of variable usage in the second half of the year. Adjusted EBITDA margin is expected to be in the range of 21% to 23% for Q2. The sequential step down from Q1 reflects the timing of investments as we continue to build for growth. Turning to the full year, we are raising our full‑year revenue guidance to $161.5 million to $163.5 million, up $5 million from our prior midpoint of $157.5 million. That increase reflects two factors: stronger first‑quarter performance impacting the rest of 2026 and the benefit of the new B2 pricing and offering.

Each contributes to approximately half of the raise. We are also raising our full‑year adjusted EBITDA margin guidance by 400 basis points to a range of 23% to 25%, up from 19% to 21% previously. As a reminder, our guidance philosophy excludes individual deals greater than $500 thousand, high variable usage above contracted minimum, and incremental upside from our go‑to‑market transformation. As these elements become more predictable and repeatable, we will incorporate them into our forward guide and communicate that transition clearly. In summary, Q1 was a strong quarter across the board: revenue beat, adjusted EBITDA beat, B2 growth accelerating, and bookings improving. We remain focused on executing on our AI opportunity by driving forward our go‑to‑market transformation and scaling our B2 business.

We look forward to your questions. With that, operator, please open up the line.

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Operator: Thank you. We will now open the call for questions. If you have dialed in and would like to ask a question, please press star one. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit to one question and one follow‑up. Again, it is star one to join the queue. Our first question comes from the line of Michael Cikos with Needham. Your line is open.

Michael Cikos: Hey, guys. Thanks for taking the question here. Congratulations on the strong start to calendar 2026. First question, I guess, is more for Gleb. I just wanted to get more on the success that you guys are seeing with the AI customers following the go‑to‑market transformation initiatives you have put in place. Can you talk to the improved visibility you have for those AI customers in the pipe and, as you have more of these customers begin to season, are you noticing a significant departure as far as cohort behavior or sales cycles? And then I just have a follow‑up.

Gleb Budman: Hey, Mike. Thanks for the question. I will use the two customers that I referenced in my prepared remarks as a good example. One of the customers came to us through the GTM motion that we are building, the combination of outbound targeting, better systems, and going to the AI events. We found them through that outbound process. The other one actually came to us as a referral from one of our existing AI customers who said that they were having a great experience. Specifically, they said the combination of the performance they were getting from our platform at the price point they were getting was unmatched, and so they referred them over. We are seeing more AI companies coming to us. We feel like the market is coming our way, and it is really from both of these: part of it is from the work that we are doing, and part of it is from the referrals and the market coming to us.

In terms of the cohort behavior, one of the things we mentioned on the prior call is that we are seeing the AI companies growing much faster, about three times faster than our average customer, and that is just a function of their inherent data growth driven by their AI use cases. Did that answer the question you were asking?

Michael Cikos: It does. Thank you for that. And then for the follow‑up, I think it might be more geared towards Marc, but I just wanted to double‑check on B2 with the NRR of 110%. I know you said we drive that between two factors: you have the data consumption, which grows each year, and then you also have the cross‑sell/upsell. Can we unpack that a little bit more to get evidence of the go‑to‑market actually driving adoption, whether it is the cross‑sell/upsell motion? What are the drivers behind that B2 NRR today if I am trying to unpack consumption growth versus go‑to‑market initiatives to expand wallet and drive additional offerings into the installed base?

Marc Suidan: Yeah. Hey, Mike. I will start off by saying I think the best evidence of the GTM working is the RPO disclosure of committed contracts and the change quarter over quarter. For commitments of less than a year, it is up $3.4 million. You can see it on slide 19 of our earnings deck. That is the best evidence of the performance. Now that is made up of both new logo as well as expansion sales. The expansion sales realistically do fluctuate. On the NRR, we did move to in‑quarter reporting versus the trailing four‑quarter average, specifically to give you more visibility and to hold us accountable to explain what is happening. So there will be more fluctuation there from that perspective. It is up to 110% from 105% a year ago because a year ago was a quarter where we did talk about one large customer going away.

Since I joined, that was the only time we have had to reference that. That is what drove that improvement year over year. It generally fluctuates around 110% on a stable basis, but there are going to be some ups and downs, and the expansion changes will be the biggest driver of that because organic growth tends to be incredibly stable and predictable.

Michael Cikos: Excellent. Thank you so much, and congrats again on a strong start to the year.

Operator: And our next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron: Thanks. Hey, guys, and congrats. Great, solid numbers. I had a couple of things, maybe some with you, Marc. Can you give us a little bit more color on the pricing update, the magnitude of this, how much of this you think you can capture? I am just trying to think about your growth without the pricing update. How would your outlook have looked without it? I am just trying to get my hands around that.

Marc Suidan: Absolutely, Ittai. In the $5 million raise for the year, half of it is from the pricing and packaging change, and half of it is from the strength of the business that we observed in Q1. If you look at that RPO number I referenced just a few moments ago, that roughly equates to the raise from the organic health of the business for the rest of the year because that has no price increase in it. We continue to guide very prudently for the rest of the year: the same philosophy we laid out last time, which is no large customers, no go‑to‑market benefits, and not accounting for large variability of that large customer. Within Q2, last time we said B2 would grow by 12% year over year; now it is 20%. That difference is more anchored on the organic health of the business because the price change took effect May 1, so it is not a full quarter, and we obviously actualized some of the things we saw in April in the business.

On the price, it is not a flat price change; it is a pricing and packaging change. For instance, we are now including transaction API fees, so in the spirit of being the simplest billing model out there, we further simplify it by no longer billing customers for transaction fees.

Ittai Kidron: Got it. Okay. And then as a follow‑up, maybe one for each of you. Marc, for you on the Computer Backup, the net retention rate is now well below 100. Is this a business we should model towards decline going forward? And for you, Gleb, on the go‑to‑market side, great to see the progress there. What else is left here? What is it that between now and year‑end still needs to kick in that has not from your perspective?

Marc Suidan: Just to reiterate, we are still thinking of Computer Backup as declining year over year 5%. The NRR is going to be tightly tied to that because it is a subscription business, not consumptive. Which would mean that B2 would grow 24% year over year. The change in outlook is pretty much all on B2, and Computer Backup remains at a decline of 5%, which is what we are forecasting and guiding.

Gleb Budman: Thanks for the question about the GTM transformation—what is done and what we still have to do. We have made great progress this quarter, and there are still a variety of things that we want to push further. We hired Anuj Kumar to run that organization. I have asked Jason, who is with us, to take on and focus most of his time on the Neocloud opportunity. Jason works for Anuj, and we see that as a $14 billion opportunity, so we are putting focus and resources on that specific part with Jason leading it. The awareness generation is off to a good start with Flamethrower, but it has only been a couple of months. We have been invited to participate in great organizations and partnerships with a16z, Startup Grind, and LAUNCH, but there is a lot of opportunity there still, between that and the open‑source developer efforts we are doing.

There is a lot of opportunity to make sure that everyone thinks of Backblaze, Inc. as their first spot for price‑performance storage. I am excited that we are seeing pipeline growth stronger than we have seen in the past, with more of our sales team hitting their quota than ever. A lot of the right things are happening, and we are going to keep working on it.

Ittai Kidron: Appreciate it. Good luck. Thanks.

Operator: And our next question comes from the line of Analyst with B. Riley Securities. Your line is open.

Analyst: Yes. Thanks for taking the question, and congrats on a really good quarter. Can you speak to what portion of the Neo market you are either servicing or at least engaged with? And then, where are you in terms of the hiring on the sales front? Are you adding additional salespeople at this point, or where are you from that perspective?

Gleb Budman: Thanks. There are about 200 Neoclouds. We went to GTC, NVIDIA’s premier conference, and had a host of great conversations there. We are engaged with most of the top Neoclouds at this point. The part that we are servicing for them is the data lake layer. If you think of the AI workflow, there are the GPUs themselves, there is the very low‑latency, high‑performance flash that you want adjacent to the GPUs, and then you need the place where you store all of the data. If the whole AI workflow were a laptop, you have your compute (CPU/GPU), you have the RAM, and you have the hard disk or SSD. We are providing that hard disk layer. There are about half a dozen companies that provide that RAM layer, and the base Neocloud part is that CPU/GPU part.

We are providing that large‑scale, high performance‑per‑dollar data lake layer for them. We are the white‑labeled provider for them. As we talked about in the last call, we have six‑, seven‑, and eight‑figure deals that we have signed for that. We have others in the works, and we are engaged with a bunch of the Neoclouds at this point.

Analyst: Can you give us a sense of what portion of the Neoclouds out there—the 200—that you are speaking to? Do you think it is a quarter? Any gauge on what penetration you have had?

Gleb Budman: On the conversations and engagement side, probably somewhere around that number, but I would say we are engaged with pretty much all of the top ones at this point and having different levels of conversations, including some POCs. On the sales side, we talked earlier this year that there were a number of different roles we wanted to fill. At this point, I am excited to say we have filled the CRO role with Anuj, we filled the ops role, and we filled the sales development role. We have a strong build‑out of that team now.

Analyst: Very good. Thank you.

Gleb Budman: Thank you.

Operator: And our next question comes from the line of Jeff Van Rhee with Craig‑Hallum. Your line is open.

Jeff Van Rhee: Great. Thanks for taking my questions, guys. A couple. First, help me with the guide and the outlook. I am trying to understand the progression here. In the February 2024 call, you took roughly $4 million out relative to the consensus, and now we are putting $5 million back in. I am trying to understand: in the February 2024 call, was the May 1 price increase in B2 already contemplated in the guide?

Marc Suidan: Hi, Jeff. No, that was not contemplated in the guide. In the $5 million increase we just did, half would be from the pricing and half would be from the organic momentum and health of the business we saw in Q1. The change is really a lot of it about this guidance philosophy we spoke about—just a lot more prudent going forward. That is what drove the change.

Jeff Van Rhee: Did you, if you take the final month of the quarter, March, and then April, see substantial improvement in close rate? It sounds like you are saying your conviction is coming both from improved bookings as well as usage. I am trying to understand how January bookings were weakish and then all of a sudden April really killed it. I know you have made some process changes over time to sales, but it was such a quick snap. Maybe you can help me dial it in a little bit.

Unknown Speaker: Jeff, this is Pavel. Maybe I will touch on it and Marc can also weigh in. We certainly had a more back‑ended quarter in Q1, and we started off Q2 strong. There is definitely enhanced feel from the numbers that we are seeing. We talked about the roughly $1 million deal that closed in 11 days that started and closed toward the end of the quarter, but it was not the only deal. The pipeline itself has been building strongly this April, and we are layering that on along with the execution we are doing on our own side. That is the conviction and momentum side of things based on the data and the execution. I will let Marc add on the guide side.

Marc Suidan: Q4 bookings were good, but to hit 30% growth, we would have to be booking around $5 million a quarter. We were not at that rate yet, but it has been improving pretty much every quarter, and this latest Q1 is a further improvement and probably the closest we have gotten, frankly. The demand signals are really strong. We are feeling good about the outlook, but we are still guiding with that prudence. We will use some of that price change to also fund additional CapEx so we can have further capacity in place to handle that demand because we do not want to be in a position where we are declining any revenue opportunities.

Jeff Van Rhee: Got it. And just to follow up on that last piece: in terms of the outlook for the year for CapEx for 2026, can you give us a number there? What are you expecting? And then also on the stock comp.

Marc Suidan: On the CapEx side, we are probably going to be around mid‑thirties as a percent of revenue. I would say there are three factors. One, last quarter we spoke about that large customer we have to service next year, so we need to get that CapEx in place now. Two, all the strong demand signals. And three, the general equipment cost is 30% higher than it was on a per‑unit basis a year ago. For those three factors, we are beefing up our CapEx plan for this year, accelerating it from 2027 to this year.

Jeff Van Rhee: Your thoughts on stock comp?

Marc Suidan: I would say pretty stable. If you look at our headcount, generally speaking, year over year, our headcount is actually coming down, so we are continuing to drive more efficiency out of the business. Stock comp should be pretty stable in dollar terms, and as a percent of revenue it does improve over time.

Gleb Budman: Since you bring up supply chain constraints, what is interesting is we have to buy the equipment, so we have to spend more on some of that. But we also get two tailwinds from the supply chain being constrained. On the GPU side, because the supply chain is constrained, customers need access to where the GPUs are available. We regularly talk with customers who say they have to have their data somewhere that they can send it to whichever Neocloud has the GPUs available. On the memory side, which is also heavily constrained, Neoclouds that offer cloud storage have often been building out on flash, and that becomes really expensive, especially now with the constraints. It is driving additional interest from the Neoclouds in working with us on that data lake tier. So on one hand, we have to pre‑buy on the equipment side for CapEx, but on the other hand, we have these two tailwinds to the business.

Marc Suidan: Just to step back on stock comp: if you look at the statement of cash flows, Q1 stock comp is higher as we settle some of our annual bonuses in equity as well, but you will notice this year stock comp was actually lower than last year’s.

Jeff Van Rhee: That is helpful. Great. Thanks. Congrats on the turn, guys.

Gleb Budman: Thanks, Jeff.

Operator: And our next question comes from the line of Jason Ader with William Blair. Your line is open.

Jason Ader: Yes. Thanks. Good afternoon. I just wanted to get a better sense on the Neoclouds. What are the size of some of these deals? I know you talked about the eight‑figure deal that is coming in, I believe, next year. But maybe more detail on some of the other deals that you have landed or are in the pipeline? Are we talking about household cloud names that are contracting with you for potentially further eight‑figure deals? I think gauging how significant an impact you might have from these Neocloud opportunities would be helpful.

Gleb Budman: Thanks, Jason. We estimate that our opportunity in the Neocloud market by 2030 is $14 billion, and that is just the data lake tier that we provide, not the entire storage footprint. The deals that we have signed—the six‑, seven‑, and eight‑figure deals—I will say two things. One, you would recognize them. They are companies that you would know. Two, all three of those are initial deals. All three are ways to start, not the total opportunity. I can see a path where the six‑ and seven‑figure deals could become eight‑figure deals themselves. The eight‑figure deal can certainly scale from where it is once it is ramped. The other conversations we are in, assuming they move forward, are of that same scale. Some conversations may start with a six‑ or seven‑figure deal, but many of them, given the scale of the opportunity, are eight figures at ramp.

Jason Ader: Okay. Helpful. Thanks. And then just on the risk that the Neoclouds add a lower‑cost storage tier and then you guys are helping them for a little bit, but then they insource it.

Gleb Budman: It is always possible, but it is a little bit like the question we were always asked for almost two decades: what happens if AWS lowers their price to match you? We are two decades in, and that has not happened. The challenge is it is not easy to build the type of IP that we have built over the last two decades. It requires scale and expertise and focus over a long period of time to get it really honed and right. For the Neoclouds, they have a lot of things they need to do: opportunities around GPUs and GPU scaling and optimization, making tooling better for inferencing, and many other things. Spending all their resources to try to replicate what we have built over the last two decades is probably not the best place for them to invest when time to value is so much faster by using Backblaze, Inc.

Jason Ader: Great. And then, Marc, a couple of quick ones. With the higher CapEx, are you still guiding for free cash flow positivity this year?

Marc Suidan: The second half of the year is still guided to be free cash flow positive. Q1 was minus $1.8 million. Q2 should be somewhere around neutral. For the whole year, net‑net, we should be neutral or around 1% of revenue free cash flow positive, despite the acceleration of the CapEx.

Jason Ader: Okay. Great. And then on the gross margin, it was mid‑50s for a few years, and then last year was roughly 62—62% in Q1. Can you remind us what caused the significant increase in gross margin and then maybe some puts and takes going forward?

Marc Suidan: About a year ago, we reviewed the estimated useful life of our fixed assets, and it turns out we are using our fixed assets for typically six years onwards, so we moved all the depreciation to six years. That drove a big benefit to gross margin. Second, all other lines—labor, payment fees, and everything else that fits into our cost of sales—we have managed tightly year over year, so they are kind of staying flat in absolute dollars and improve as a percent of revenue. We are looking at everything within our gross margin now to further drive optimization. Between the price increase, which benefits gross margin, and the accelerated CapEx, which will push our gross margin down, it should stay flat around where it is now. We are not guiding to any major changes in gross margin through the rest of the year.

Jason Ader: Okay. Thank you very much. Thanks, guys.

Operator: And our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open.

Eric Martinuzzi: I was just curious about the timing of the price increase. I went back and looked it up. I guess it was October 2023 was the last time you raised the price on B2, and you really had not raised it since you rolled out the product back in 2015. So we are at about the two‑and‑a‑half‑year mark here with the price increase. Was this something that you felt like you are delivering more value and need to capture more value, or were there competitive issues where competitors were raising price and provided an umbrella for you to do the same?

Gleb Budman: Thanks, Eric, for the question. We periodically reevaluate what the pricing and packaging of the offering should be. When we were looking at it, a few things came together. One is that we have been investing more into the performance of the platform. More of our customers are using us in these hot use cases where we are driving high throughput and high IOPS. We made egress free before, and one of the things that has enabled is not just that it is less expensive for the customers, but it allows them to run more frequent training of their models in the AI use cases. It is actually unlocking their ability to innovate, but while it is free for them, it costs us money to provide that. We have been working to increasingly provide more and more value to these higher‑performance, more active use cases, and we also wanted to simplify pricing by removing transaction fees.

So the pricing and packaging combination, along with, as Marc said, the underlying costs of the components increasing, led us to decide this was the right time to do that.

Eric Martinuzzi: With regard to competitors, historically you have said you are 80% cheaper than Amazon. You are raising—I think what I saw was about a 15%–16% per terabyte per month. Does that shrink that gap now, or do you still feel like there is a big delta?

Gleb Budman: We are still dramatically more cost‑efficient than the alternatives out there. I was just talking to one of our account execs a couple of days ago who was talking about a customer who has been ramping on our platform. They moved over a lot of their data and are continuing to move over more of their data and use cases. On the one hand, we are more affordable on the storage side at the base level. But where they were getting hit dramatically with their prior provider was each time they egressed the data out to one of the other Neocloud providers, they were getting hit with massive egress fees, and the transaction fees were costing them three to four times more than the cost of the storage at the prior provider. When you put it all together, they were more than 5x more expensive at their prior provider, and they were literally wondering whether it was going to be affordable for them to stay in business.

The total cost of ownership benefit we provide is still quite dramatic.

Eric Martinuzzi: Got it. Thanks for taking my question.

Gleb Budman: Thank you.

Operator: And our final question comes from the line of Rustam Kanga with Citizens. Your line is open.

Rustam Kanga: Great. Gleb, Marc, thanks for taking my question. Nice clean set of results here. Just one on B2 Neo. As workloads begin to shift more towards inferencing from training, will that lead to improving predictability and visibility? And then to that end, could you potentially share what percentage of Neo business on average or even directionally represents inference versus training workloads? Thanks.

Gleb Budman: Sure. It is a good question. The first part of the answer is yes: as things move toward inferencing, it does make it easier to be more predictable. Today, more of the use cases that we are seeing are related to model building. That makes sense because a lot of the datasets right now that are very large and that need to be moved are related to model building, and we are a great service for that. In the GenAI media space, for example, a customer’s data flow is: they accumulate a lot of data, they store that data, they annotate that data, then they find a GPU provider that is available, and then they run iterative model building on different GPU products. They use us to store that large dataset, and as they acquire new datasets, they use us to store those efficiently and then send them quickly and for free to the GPU provider they want.

As they do that, the other side of their business—the actual thing they offer and charge for—is generating videos. That is all the inferencing side. They are looking at us for the outputs of all that video because every single time a user generates new video, that video then gets stored basically forever, and each version and iteration gets stored forever. We become a great place to store that, and that inferencing side is a much more smooth and predictable side. So the short answer is yes, it will be more predictable as we get more inferencing. Today, the bigger workloads we see are related to model building because we are great for that, but we are seeing more inferencing start up on our platform.

Rustam Kanga: Okay. Great. Thank you.

Gleb Budman: Thanks, Rustam.

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

Gleb Budman: Thank you, everybody. Q1 was a proof point. We beat on revenue, beat on EBITDA, B2 is growing 24%, deal size more than doubled, AI customers up 76% year over year. We are not just riding the AI wave. We are building the infrastructure that supports it. We are key for the Neoclouds, key for the AI builders. We have had nearly two decades of optimizing performance per dollar at scale, which makes us ideal for the needs of AI. We raised guidance, we are on track for our first full year of free cash flow positivity as a public company, and we are picking up steam. Thank you to our customers, our partners, and thank you to our amazing team that is making all this happen. Thanks for joining our Q1 call, and we look forward to connecting on the next one. Bye‑bye.

Operator: Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.

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