Backblaze’s Q1 Surge: Cloud Storage Pioneer Embraces AI-Driven Growth

Backblaze, Inc. (BLZE) delivered a standout performance in its Q1 2025 earnings, showcasing robust revenue growth, margin expansion, and strategic momentum across its cloud storage business. The company’s results highlight its transition into a key player in AI-driven storage solutions, while navigating competitive and macroeconomic headwinds. Let’s unpack the numbers and what they mean for investors.

Financial Highlights: A Strong Start to 2025

Backblaze reported $34.6 million in Q1 revenue, a 15% year-over-year increase, easily surpassing the $34.22 million consensus. Adjusted EPS came in at -$0.03, outperforming expectations of -$0.06, marking a 50% positive surprise. The company’s adjusted EBITDA margin tripled to 18% compared to Q1 2024, while adjusted free cash flow margin improved by 1,100 basis points to -6%. These metrics underscore operational discipline and cost management.

Key Drivers of Growth: B2 and AI Take Center Stage

1. B2 Cloud Storage Dominance:
2. Backblaze’s largest segment grew 23% year-over-year, its second consecutive quarter of accelerated organic growth.
3. Net revenue retention (NRR) for B2 stood at 117%, reflecting strong customer loyalty and retention.

4. A multi-million-dollar multiyear contract with an AI firm migrating from AWS highlights Backblaze’s ability to displace hyperscalers with its cost-effective, high-performance platform.

5. AI Segment Explosion:

6. The AI customer base surged 66% year-over-year, with data storage volumes growing 25 times compared to prior periods.
7. Use cases span industries like autonomous vehicles, drug discovery, and media workflows, driven by Backblaze’s B2 Cloud Storage OverDrive product. This new offering, optimized for large datasets and high-throughput tasks, leverages existing infrastructure without significant R&D costs.

Strategic Moves and Operational Momentum

• Partnerships Pay Off: Collaborations with firms like PureNodal (for high-performance compute) and Suite Studios (media workflows) expanded Backblaze’s reach in cloud-first industries.
• Sales Execution: Direct sales bookings doubled year-over-year, aided by a restructured sales team and the hiring of a VP of customer success to enhance retention.
• Margin Expansion Plans:
• Management aims to achieve positive adjusted free cash flow by Q4 2025, supported by operational efficiencies and a 200–300 basis point boost in gross margins from extended hardware depreciation schedules.
• Equity dilution mitigation steps include cash-settled tax withholdings and shifting bonuses from equity to cash.

Risks and Challenges

• AWS and Hyperscaler Competition: Backblaze faces intense pricing and feature competition from AWS, Google, and Microsoft.
• Macroeconomic Uncertainty: Slower customer decision-making and budget constraints could delay sales cycles.
• Regulatory Risks: Potential tariffs on imported hardware could marginally increase costs (1.5% over six years).

Market Reaction and Valuation

Backblaze’s stock surged 8.41% in aftermarket trading to $4.9, with analysts raising their consensus price target to $15.9—55% above current levels. The stock remains $5.1 below its 52-week high of $10, suggesting investors may be pricing in near-term risks.

Conclusion: A Growth Story with Upside, But Risks Linger

Backblaze’s Q1 results demonstrate a clear path to becoming a Rule of 40 company (combining revenue growth and profitability). The B2 segment’s scalability, AI’s explosive growth, and margin improvements position BLZE to capitalize on long-term demand for cloud storage.

The data speaks:
- Revenue Growth: 15% YoY in Q1, with guidance raised to $144–$146 million for 2025.
- Margin Expansion: EBITDA margin guidance up to 17–19%, with free cash flow positivity by year-end.
- AI Adoption: 66% customer growth and 25-fold data storage expansion signal a structural tailwind.

However, investors must weigh these positives against AWS’s entrenched dominance and macroeconomic uncertainties. Backblaze’s stock trades at a deep discount to its 52-week high, offering potential upside for those willing to bet on its AI and cost-leadership strategies. For now, the verdict is clear: Backblaze is a high-risk, high-reward play on the cloud storage and AI boom.

Investors should monitor Q2 results for further margin improvements and AI-driven revenue traction.