Backblaze (BLZE) Q3 2026 earnings review
Backblaze cloud storage sales surge, while its backup business shrinks
Backblaze's cloud storage business is growing rapidly on artificial intelligence demand while its older computer backup service slowly shrinks. Total sales rose 26% from a year ago as B2 Cloud Storage jumped 47%, and operating profit excluding one-offs, depreciation and stock pay reached 33% of sales. Chief executive Gleb Budman pointed to four new large contracts and quadrupling self-serve additions, while finance chief Marc Suidan raised the full-year outlook and projected about 60% B2 growth for the fourth quarter.
| B2 Cloud Storage revenue | $30.5M +47% from a year ago |
|---|---|
| Total revenue | $46.7M +26% from a year ago |
| Adjusted EBITDA margin | 33% 23% a year ago |
| Full-year revenue outlook | Raised $5M middle of the range: 22% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because AI storage demand broadened across smaller developers and the company fixed its expensive equipment funding. Issuing $201 million of zero-interest convertible notes lets the cloud provider buy servers with cash instead of nearly 13% leases, and gross margin expanded despite new equipment depreciation. One caution: swinging to a profit excluding one-offs triggered 12 million dilutive share equivalents from employee options and customer warrants, lifting the diluted share count by 24%.
The question now is how much of B2's surge comes from underlying storage usage versus the May price hike and a single giant customer. Either broad AI workloads are driving durable volume growth, or the pace will cool once the price increase laps in May and the CoreWeave contract finishes ramping. The quarterly filing's backlog table and next quarter's volume breakdown will tell.
🐂 Bull Case
AI Capacity Deals Push B2 Growth Toward 60%
“As AI customers scale, we are solidifying Backblaze’s role as the capacity tier for AI infrastructure companies and AI builders,” chief executive Gleb Budman said. B2 Cloud Storage is the company's pay-as-you-go service for storing business data, and management wants it to power artificial intelligence workloads.
In the third quarter, the storage provider signed four large contracts worth over $500,000 each in annual recurring revenue (ARR), the yearly value of active contracts. Three of those deals came from AI companies, including a $4 million expansion with an AI training data provider. Meanwhile, self-serve customer additions quadrupled from a year ago despite the May price hike, while gross customer retention held steady at 89%.
- B2 revenue: $30.5 million, up 47% from a year ago and up from 34% growth last quarter
- B2 ARR: $126.8 million, up 53% from a year ago after adding $13.5 million in the quarter by our math
- Large customers spending over $50,000 a year: 254 accounts, up 57%, generating $50 million in ARR (up 109%)
- Fourth-quarter B2 outlook: finance chief Marc Suidan projects about 60% revenue growth
This matters because the acceleration goes beyond the May price increase and the single giant CoreWeave contract signed last quarter. Record self-serve sign-ups and a doubling of the large-customer ARR pool show that smaller AI developers are also adopting the platform.
What to watch: the fourth-quarter B2 revenue reading and management's breakdown of how much growth came from the May price hike versus new storage volume. That split will show how fast underlying usage is growing before the price increase laps next May.
Zero-Coupon Notes Replace Costly Equipment Leases
Buying hard drives and servers before customers pay for them has been a major financial strain for Backblaze. Until now, the cloud storage firm funded this equipment through finance leases that carried a steep 12.9% average interest rate and required heavy quarterly principal payments.
This quarter, the company issued $201.3 million of 0% convertible senior notes due in 2031, which it said “replaces higher-cost capital leases” and funds “capital expenditures supporting contracted growth and for general corporate purposes”. It also paid $17.5 million for capped call options that prevent the notes from diluting shareholders unless the stock trades above $33.76. Total cash and marketable securities jumped from $49.9 million in June to $230.2 million.
The refinancing flips the funding risk because Backblaze now has the cash to buy servers outright at zero interest instead of borrowing at nearly 13%. That lowers future interest costs and removes the lease principal payments that have weighed on free cash flow.
What to watch: principal payments on finance leases and cash capital expenditures on the fourth-quarter cash flow statement. A drop in new lease obligations will confirm that the company is buying its new AI storage servers with cash.
Lower Research and Sales Costs Lifted Margins
Backblaze previously warned that installing servers ahead of customer usage would add depreciation and hurt gross margin—the share of sales left after the cost of running data centers. Instead, GAAP gross margin rose to 64% from 62% a year ago and 63% last quarter, as cost of revenue fell 1.9 percentage points to 36.0% of sales.
Operating profit excluding one-offs, depreciation and stock pay (Adjusted EBITDA) rose from 23% of sales a year ago to 33%, beating the 27–29% plan. Excluding one-offs, research and development costs dropped 5.4 percentage points to 17.2% of sales, while sales and marketing expenses fell 2.8 percentage points to 18.0%. That operating discipline prompted finance chief Marc Suidan to raise the full-year Adjusted EBITDA margin outlook to 30–31%.
What to watch: fourth-quarter GAAP gross margin as more servers go live for contracted AI deals. Holding the 64% level would mean higher revenue is absorbing the new equipment depreciation faster than management planned.
🐻 Bear Case
Profitable Quarters Trigger 24% Share Count Dilution
Backblaze highlights rapid growth in profit excluding one-offs, which more than tripled from a year ago to $6.7 million. For the share count outlook, management guides only basic shares, which grew 9.8% from a year ago to 62.5 million.
However, once the company reports a profit excluding one-offs, accounting rules add unexercised employee stock options and customer warrants into the diluted share count. That added 12.2 million share equivalents this quarter, pushing the diluted share count for profit excluding one-offs up 24.5% from a year ago to 74.8 million. Stock-based pay also rose 34% to $7.3 million, or 15.7% of revenue.
This cuts against the profit story because a quarter of the earnings growth is absorbed by new shares from employee equity grants and the 4.2 million warrants given to CoreWeave. While total profit excluding one-offs grew 254% from a year ago, profit per diluted share rose from $0.03 to $0.09.
What to watch: dilutive share equivalents on the fourth-quarter reconciliation table. As more employee awards and customer warrants vest, the gap between basic and diluted shares will show how much of the AI upside goes to existing shareholders.
Computer Backup Keeps Shrinking as Customers Spend Less
Alongside B2 Cloud Storage, Backblaze runs Computer Backup, a subscription tool that backs up laptops and desktops for consumers and businesses. The unit brings in 35% of total revenue and provides steady cash, but it continues to contract.
Computer Backup revenue fell 2% from a year ago to $16.2 million, and its annual recurring revenue slipped 2% to $63.9 million, down $0.1 million from last quarter by our math. Net revenue retention (NRR)—the share of last year's spending kept from existing customers—held at 94%, down from 96% a year ago. Because existing backup customers are shrinking their accounts, B2 has to carry all of the company's growth.
What to watch: Computer Backup net revenue retention next quarter. A drop below 94% would show that seat reductions among backup customers are speeding up and will further drag on total revenue growth.
Risks This Quarter Didn't Answer
Five standing concerns around contract backlog, pricing and technology got no new numbers in the press release or slide deck.
- CoreWeave concentration: the AI cloud firm made up 79% of the $396 million contract backlog (remaining performance obligations, or RPO) in June; the quarterly filing will show the updated backlog.
- Price hike boost: the May price increase added about 8 percentage points to second-quarter B2 growth, and the third-quarter contribution is not in the release; call remarks or the filing will detail it.
- AI usage swings: management excludes usage above contracted minimums from its outlook because a large AI customer cut spending last year; quarterly B2 revenue vs ARR will test stability.
- Flash storage competition: whether cheaper flash memory will replace hard drives for AI storage was not addressed; conference call Q&A is the next check.
- Audit rules: exiting emerging-growth-company status on December 31 brings stricter internal control audits in the annual report.
👓 Other Themes
WEKA Partnership and Agent Server Target AI Builders
To make its storage easier for AI developers to adopt, Backblaze launched two technical integrations this quarter. It partnered with AI memory company WEKA to link high-speed graphics processor memory directly with B2 capacity storage, reducing setup work for joint customers. The company also released an open-source B2 MCP Server, which it said “Enables AI agents to use B2 storage directly within developers’ existing tools”.
💲 Other KPIs
Cash left after capital spending and lease payments (adjusted free cash flow) slowed to $0.5 million (1% of sales) from $3.2 million (8% of sales) last quarter, though up from negative $3.5 million a year ago. Total server and equipment additions via cash and leases rose to $13.2 million (28% of sales) from $11.7 million last quarter.
Uncollected customer bills (accounts receivable) nearly doubled from $3.5 million at the end of December and $3.4 million a year ago, growing much faster than the 26% rise in revenue. That buildup absorbed $3.2 million of operating cash flow over the first nine months as Backblaze shifted from credit-card self-serve users to invoiced enterprise AI contracts.
The yearly value of active contracts (annual recurring revenue, or ARR) rose 29% from a year ago, speeding up from 21% growth in the second quarter and 13% in the first quarter. By our math, the storage provider added $13.4 million of net new ARR in the quarter, while overall net revenue retention rose to 105% from 103%.
🔮 Guidance
Raised against the $46.2–47.8 million that the prior full-year plan left for the fourth quarter by our math. The middle of the range ($50.0 million) calls for 32.4% growth from a year ago and 7.2% from this quarter, driven by expected B2 growth of about 60%. Backblaze has beaten its quarterly midpoint by 3.5% on average over the past year; if the pattern holds, fourth-quarter sales would reach $51.8 million by our math.
Raised. Management lifted the middle of the full-year range by $5.0 million to $178.0 million, or 22.1% growth from last year. This marks the third consecutive raise this year, following increases of $5.0 million in the first quarter and $10.5 million in the second quarter.
New. The plan sets fourth-quarter operating margin excluding one-offs, depreciation and stock pay at 33% at the middle of the range, matching the third quarter's 33% result and up from 28% in the fourth quarter of last year.
Raised. The company lifted the middle of the full-year margin target by 2.5 percentage points to 30.5%, after reaching 30% over the first nine months. It is the third raise of the year, following 4-point increases in both the first and second quarters.
New. Basic share count is planned to rise by about 1.2 million shares from the third quarter's 62.5 million, or 9.6% from the fourth quarter of last year by our math.
❓ Key Questions
How much did the May price hike boost Q3 B2?
In the second quarter, the May 1 pay-as-you-go price increase added about 8 percentage points to B2 revenue growth. Management did not give the third-quarter figure in the release, and investors need it to measure underlying storage volume growth before the price hike laps.
Where did total contract backlog stand at September 30?
Remaining performance obligations (RPO) jumped to $396 million in June on the CoreWeave contract, which represented 79% of the total. Because RPO is only reported in the quarterly 10-Q filing, investors need the new balance to see if new deals replaced third-quarter usage.
How quickly will cash replace the 12.9% equipment leases?
Backblaze raised $201 million in zero-coupon convertible notes to fund servers and replace capital leases, yet lease liabilities still rose by $16 million from December to $52.2 million. Management has not said whether it will pay off existing leases early or only buy future servers in cash.
Will restructuring charges end in the first quarter of 2027?
The company booked another $1.7 million of restructuring expenses in the third quarter and $5.2 million over the first nine months, which it adds back to both Adjusted EBITDA and adjusted free cash flow. Confirming the first-quarter 2027 completion target matters for clean cash flow.