Backblaze, Inc. Q4 FY2025 Earnings Call

Good day, everyone. Welcome to the Backblaze Fourth Quarter and Full Year 2025 Earnings Call. Just a reminder, this call is being recorded. I would now like to hand the call over to Ms. Mimi Kong. Please go ahead.

Thank you. Good morning, and welcome to Backblaze's Fourth Quarter and Full Year 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 savings 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 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 rate, and adjusted free cash flows. And finally, we will be participating in the Citizens Technology Conference on March 2 in San Francisco. 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 finished 2025 with solid fourth-quarter results. Revenue came in line with guidance and adjusted EBITDA margin reached 28%, doubling over the prior year. We also delivered adjusted free cash flow profitability for the first time as a public company, a major milestone demonstrating the inherent operating leverage in our business model. For the full year, total company revenue grew 14% year-over-year with B2 Cloud Storage growing 26%. Today, I want to focus on three things: first, the strength and durability of our core business; second, an update on the meaningful progress of our go-to-market transformation; and third, how we're positioning Backblaze to take advantage of the AI opportunity. Let me start with the core of our business. As data creation accelerates exponentially, Backblaze addresses a large and growing market where long-term demand for scalable, cost-effective storage compounds over time. Our business compounds within that market as we add new customers and retain them for an average of nine years. B2 net revenue retention of 111% reflects consistent expansion within our installed base, reinforcing durable, long-term growth. We've proven our ability to grow in that market, delivering an annualized growth rate of 21% since IPO. Being a cash-generating business is an important financial milestone. Year-over-year, we meaningfully improved profitability, demonstrating how we are building a sustainably durable company, one that can invest in growth while maintaining financial strength. Now let me talk about our investment in growth and the progress on our go-to-market transformation. While we didn't achieve our budgeted Q4 B2 growth rate, we made meaningful progress and have positioned ourselves for success. More importantly, the underlying fundamentals of the business remain stable, and the investments we've made position us for durable growth going forward. Excluding the highly variable growth of the large AI customer we previously mentioned, we stabilized on a baseline of around 20% B2 revenue growth in each of the last five quarters. Now we've shared our goal of moving up-market. We ended the year with 168 customers generating more than $50,000 in ARR each, up 35% year-on-year. The ARR of this cohort increased 73% year-on-year to $26 million of ARR. We're very proud of this upmarket progress. We've also launched three key initiatives: number one, increasing awareness. We launched Flamethrower, our startup program designed to engage high-growth companies early and establish Backblaze as their long-term storage infrastructure partner; number two, driving greater pipeline consistency. We're upgrading our top-of-funnel systems and scaling demand generation programs to drive higher velocity sales motion; number three, expanding revenue within our installed base. We are implementing processes to proactively identify and capture additional share of wallet across our more than 119,000 B2 customers. People are the cornerstone of our success, and we continue to strengthen our leadership bench to support these initiatives. We have already hired the co-founder of an edge compute company to drive our Flamethrower program, a business systems leader for our systems work, and a head of customer success to build out that expansion effort. We will keep up-leveling our leadership and talent. For instance, we are also in the final stages of hiring a sales development leader to drive pipeline and a revenue operations leader to drive tighter coordination and accountability across the entire go-to-market organization. Scaling into this next phase requires even greater execution discipline. To support that, Elias Mendoza joined us as strategic transformation leader. He previously served as partner and COO at private equity firm, Sirius Capital, and held leadership roles at IBM and Morgan Stanley. In these roles, he has helped companies drive strong strategy to execution. Under his leadership, we also established a go-to-market advisory committee of operators who have scaled enterprise and platform businesses to billing and revenue and beyond at companies such as Okta, Snowflake, ZoomInfo, and Carta. Their role is to bring pattern recognition, pressure test key decisions, and provide external perspective as we scale. We have made meaningful progress in our go-to-market transformation, and I'm excited about the team we're putting in place to drive it forward. Now let's talk about how we're positioning Backblaze to take advantage of the massive AI opportunity ahead. We all understand there's a lot happening in AI today, but sometimes the scale is still hard to fully comprehend. I saw a report recently that capital spending on AI as a percent of GDP by just the hyperscalers in 2026 is forecast to be five times larger than the entire spend to create the U.S. interstate system, ten times larger than the Apollo Space Program. AI CapEx spending accounted for 92% of all U.S. GDP growth. It's hard to hyperbolize AI. With AI, a big focus is who's disrupting and who's getting disrupted. We believe Backblaze is one of the disruptors, participating in this infrastructure replatforming as a storage backbone for the next wave of cloud infrastructure. So while like any major new innovation, there will be market volatility, we are firm believers in the long-term growth opportunity and are leaning into it. We're doing that with two growth vectors. Number one, on the supply side of AI, neoclouds and other AI tooling companies are building the platforms for AI workflows. Our opportunity is to be the storage backbone of those platforms. And number two, on the demand side of AI, companies are using AI to build everything from anomaly detection to zonal forecasting. These companies are using and generating large datasets. Our opportunity is to be the storage of choice for their developers and use cases. And we are uniquely positioned to be the glue between these, creating a virtuous cycle. Developing a platform that can deliver massive performance with large-scale datasets while providing that cost efficiently is a significant technical challenge. Backblaze has done that, and AI is driving an increasing need for this technology. On the supply side, roughly 200 neoclouds have sprung up, and industry estimates project that market to reach $237 billion within the next five years. These companies provide GPUs as a Service. Most will need cloud storage to fully serve their customers. We've already signed multiple of these multibillion-dollar neoclouds with not only six- and seven-figure deals but our company's first eight-figure TCV deal, an over $15 million deal. We believe all of these have material upside potential, and we're in discussion with half a dozen others. By our estimates, neocloud storage for our solution alone represents a $14 billion opportunity by 2030. To further pursue our neocloud opportunity, this morning, we launched B2 Neo, a high-performance white label storage offering specifically designed for neoclouds. Developed in collaboration with our neocloud customers, B2 Neo allows neoclouds to offer a top-tier storage solution without the massive capital costs or years of engineering required to build a storage back end from scratch. On the demand side, the growth in AI developers is exponential. GitHub disclosed they were adding, on average, a new developer every second. Hundreds of AI companies and countless individual AI developers already use B2. For example, one of our customers uses AI to generate audio. They just launched a year ago and already have multiple petabytes with us, signing a six-figure annual deal with us. As they add new users and those users generate more audio, that data grows exponentially. Our self-serve platform, where we added 12,000 customers this year alone, is a great enabler for this class of AI developers who just want to get going. We launched our startup program called Flamethrower and a developer relations initiative to ensure developers are building with Backblaze. To drive our roadmap forward for the AI opportunity ahead, we strengthened our product and engineering leadership. Dan Spraggins joined as SVP of Engineering, and Rhett Dillingham as SVP of Product, bringing deep experience in AI and high-performance cloud infrastructure. We also added Russ Artzt, Co-Founder and former Head of R&D at Computer Associates, as an adviser. Together, this team strengthens our ability to scale the platform for larger, more complex AI-driven deployments. We entered 2026 with a strong and growing business, a rapidly improving go-to-market motion, and a tremendous AI opportunity with a targeted B2 Neo offering and a strong product team. AI is reshaping how data is created and scaled, and storage sits at the center of that transformation. Durable growth and massive AI potential are the hallmarks of our opportunity. With that, I'll turn the call over to Marc.

Thank you, Gleb, and good afternoon, everyone. We grew revenue while achieving adjusted free cash flow profitability in Q4. This is a significant milestone and an important step forward in our profitability journey. This progress was not driven by short-term cost actions but by the inherent leverage in our operating model as revenue scales. For the quarter, total revenue was in line with guidance at $37.8 million and adjusted EBITDA exceeded the high end of our guidance by approximately 600 basis points. In the fourth quarter, B2 revenue grew 24% year-over-year, up from 22% in the prior year. This is modestly below the range that we outlined last quarter. We delivered record bookings this quarter. As Gleb noted, we closed our largest contract in the company's history with over $15 million in total contract value. We're excited about this eight-figure deal. This deal validates the product market fit at scale. We don't expect to see meaningful revenue in 2026 as we complete certain development work. In 2027, we expect this customer to contribute over 300 basis points to B2 revenue growth. This customer helped drive our RPO, which was up 60% year-over-year to $66 million. In-quarter B2 NRR was 111% compared to 116% in the prior quarter. The sequential decline reflects variability from the large customer that we mentioned in our past two earnings calls. Factoring out that one customer, the underlying retention and expansion trends remain stable. Moving to the income statement. Q4 gross margin was 62%, flat sequentially and up from 55% in the same period last year. Adjusted gross margin was 80% compared to 78% last year. Margins remained stable despite higher data center costs, reflecting continued efficiency in our infrastructure and disciplined management of our operating model. Looking ahead, we anticipate some pressure on gross margins driven by increased costs. In response, we are proactively launching a gross margin optimization initiative focused on structural improvements across pricing, packaging, and infrastructure. Our Q4 adjusted EBITDA margin was 28%, doubling year-over-year. The adjusted EBITDA outperformance was primarily driven by non-recurring items, including variable compensation alignment and office restructuring savings. Excluding those one-time items, adjusted EBITDA would still have been above the 22% high end of our guidance. Adjusted free cash flow was positive $4 million in the quarter, representing a margin of 11%, exceeding our outlook of being adjusted free cash flow neutral. We ended the quarter with $51 million in cash and marketable securities. Based on our current operating plan, we expect to fund our growth through operating cash flows and capital leases. We do not anticipate a need to raise additional capital. We will continue to evaluate opportunities to optimize our capital structure over time in a disciplined manner. To improve accountability and further align management incentives with shareholders, we are shifting part of the compensation to performance-based stock units. These awards are tied to clearly defined performance objectives. Turning to our guidance for the year. Our objective is to provide a clear incredible baseline that reflects the most predictable portions of our business. While pipeline activity remains healthy, larger customer wins in usage-driven workloads can introduce variability in timing and revenue recognition. To maintain forecast discipline, we have derisked our outlook by excluding large swing deals and anchoring guidance on opportunities with more predictable demand characteristics. For our customers with high variable usage patterns, our assumptions reflect contractual minimum commitments rather than potential upside consumption. Our outlook is therefore based on continued expansion within our existing customer base and steady adoption of B2 across core use cases, consistent with recent operating trends. We believe this approach provides a prudent and reliable foundation for the year while preserving upside as deployment timing and usage visibility improve. For the first quarter of 2026, we expect revenue to be in the range of $37.6 million to $38 million, with adjusted EBITDA margins in the range of 18% to 20%. For the full year, we expect revenue to be in the range of $156.5 million to $158.5 million. Full-year adjusted EBITDA margins are expected to be 19% to 21%. We expect adjusted free cash flows to be roughly neutral for the year with normal quarterly variability. Due to the difficult comp from last year's large variable customer, we expect B2 year-over-year growth in Q2 and Q3 to be in the range of 12% to 19% and approximately 20% for the full year. To wrap up, over the past year, we made meaningful progress towards becoming a Rule of 40 company, with our combined B2 revenue growth and free cash flow margin improving from 9% to 35%. As we look toward 2027 and beyond, we believe Backblaze is well positioned to grow efficiently. Our platform is already built. Our infrastructure scales with discipline and incremental revenue increasingly translates into profitability and cash generation. This capital-efficient model allows us to pursue the massive AI-driven opportunity ahead while maintaining financial discipline, expanding margins over time, and building a durable self-funding business. With that, operator, let's open it up for questions.

We'll take the first question from Ittai Kidron from Oppenheimer.

Solid numbers, and thank you for clarifying the outlook for the year. It's hopefully a very smart move. Gleb, I wanted to explore the neoclouds and the large deal. Firstly, from a broad perspective, are the demand patterns different? Can you explain how your B2 Neo cloud solution differs from B2? In what ways are the demands, pricing, and margins different? Additionally, could you elaborate on why this deal will take a year before we start seeing revenue? I would appreciate that.

Thank you, Ittai, for your questions. Our pursuit of the neoclouds is an important aspect of our business strategy. There are around 200 neoclouds, and we believe this presents a significant opportunity for us, estimated at about $14 billion. We are well positioned to take advantage of it. Hyperscalers are not direct competitors in this space as they are competing with neoclouds rather than acting as vendors like we do. Now, regarding B2 Neo, it is a white label solution. B2 is typically sold directly to end customers, while B2 Neo can be integrated directly into their services. It offers similar functionality as B2, being high-performance, low-cost, durable, and scalable. Moreover, it allows them to manage storage for their customers through API integration and single sign-on. B2 Neo leverages technology we've developed over the last 17 years, streamlining native integration and making it easier for them to manage and offer storage to a broader market. As for the timeline regarding the neocloud provider to see benefits, it will take about a year due to the necessary work on both our end and theirs. They have an existing storage offering to transition to B2 Neo, so we need to enhance automation and integration processes for them. It’s worth noting that the enhancements we're making will also be beneficial to other neocloud providers and businesses, although not all will require these changes. Several new clouds have already signed up without needing this additional work, and we anticipate many others will follow suit.

Okay, thank you. First of all, the total contract value of $50 million is impressive. Can you provide details on the duration of the contract? Additionally, as you ramp up the neocloud, is there a chance of experiencing upfront costs before the margin stabilizes for this business?

Yes, I mean, Ittai, this is Marc. I can take that question. We do have to accelerate some capital expenditures. That would impact that and other things happening in the market would impact our gross margin by a few hundred basis points to help us prepare for this because it's obviously a large deal. You need to have the capacity in place.

Okay. And then lastly, on computer backup, Marc, can you comment on the expectation? The number of customers in this business is now declining. Can you help me understand the framework for this business in '26? How should I consider the quarterly and annual cadence of this business? Is there a different long-term outlook for this?

Yes. I mean, I'll start off by the coming year, Ittai. We see this business declining 5% year-over-year. Currently, in Q1, that's more like a minus 3%. That builds up throughout the year and averages out for the end of the year at a minus 5%.

Okay. And longer term, should we continue to expect this business to slowly decline?

What I would say to you, Ittai, on that one is we have programs that we've put in place and are putting in place to stabilize the business. We would like to get it to a place where it is flat and possibly even slowly growing. We don't think this is a fast-growth business, as you know, but it would be good for it to not be a declining business. But it's a little too early for us to have confidence in those programs getting to that place. So for this point, we're estimating it at that shrinking rate, but we are putting effort into getting that to be flat to slightly growing.

The next question will come from Jeff Van Rhee from Craig-Hallum Capital Group.

Congrats on the free cash flow. Great to see it. A couple for me. Maybe if you could just start in terms of B2 coming into Q4, came in a bit below expectations. Just expand a bit more on what missed there. And then as you're looking at the annual number, I didn't catch what you had guided it for in Q1, so if you could just fill in the gap. I think we can back into it, but maybe you could just share it. So what happened in Q4? And what do you think in Q1?

Yes, Jeff, good to hear from you. This is Marc. So on the Q4 '25, we were expecting, when we set our guide, quite a few deals to close in November. They came in very late in the quarter, so they didn't benefit Q4. That's why we've adjusted our guidance philosophy going forward, where we said, going forward, we're going to factor out the swing deals because they're less predictable in timing of closing. So that feeds into the guide going forward. And we said for B2 year-over-year, it will be 20% in 2026. The ranges that we provided of 12% to 19%, a lot of that has to do with the comps of that high variable customer in 2025, so Q2 would be the low end of that range, and Q3 would be about the higher end of that range. And overall, the year would average out to 20%. Does that answer your question?

Yes, I think it does. And so the growth is, if I do the quick math, maybe in Q1 looks like it's 9%, if I have it right, on year-over-year, and you're decelerating to 8% for the overall year. So it actually looks like maybe you're assuming some deceleration in the year. I'm sure there's a little bit of lumpiness from the large customer, but generally speaking, you had some pretty good momentum in sort of Phase 1 of the sales build. It sounded like you felt like you had some early good signs on Phase 2, but the numbers are painting a picture of deceleration. So just help me reconcile the two.

The deceleration you're observing is primarily due to that one monthly customer. If you look at Slide 21 of our earnings presentation and exclude that customer, you'll notice we've been relatively stable in the low 20s. Over the past five years, excluding any price increases, our B2 growth rate has consistently been increasing but at a slower pace. We've successfully maintained it in the low 20s. With our new guidance approach, we are now seeing a 20% year-over-year growth, which accounts for the variability I mentioned in Q2 and Q3. After implementing all the Phase 2 changes, Gleb can provide further details, and we anticipate that these will lead to benefits moving forward.

I think you were referring to the entire company, not just B2. One factor influencing this is the growth in computer backup, partly due to previous price increases, and as Marc mentioned, we anticipate it will decrease by about 3%. This is exerting some downward pressure on the overall company in Q1. Regarding the go-to-market transformation, I believe we are seeing progress, as evidenced by actions like hiring a VP of Revenue Operations. We have made significant strides in advancing our systems and expect that work to be mostly finished by the end of this quarter. We are also advancing in recruiting sales development leaders, and have implemented several improvements. Additionally, we are seeing positive outcomes, such as the 73% growth in annual recurring revenue from customers over $50,000 and several eight-figure deals. We have indeed made progress in the go-to-market area, though we all desire to see more accomplishments there.

Great. Maybe just one last one if I could. On the large neocloud win, can you just expand a bit on what the competitive landscape looked like there, maybe the finalists, the kind of two or three that it came down to at the end of the day and if there were specific features or capabilities that were the deciding factors for your win there?

Yes, it's interesting because neocloud has its own storage. They realized from their customers that their previous source wouldn't provide what they needed for the next phase of evolution. They began to consider how to address this. Many of their internal engineering and business leaders were familiar with Backblaze from previous positions and recognized Backblaze's strong reputation for offering a reliable storage platform. Essentially, we created a competitive advantage around the concept of high performance combined with predictable economics and low-cost storage, making us a top choice for them. When they evaluated options, they wanted to ensure that everything worked perfectly because they would be putting their brand on the line by using us as the foundational platform for all their customers. They conducted thorough technical due diligence before ultimately selecting us. The reason for their choice was partly because we had built significant credibility over the years as an excellent storage platform, and we met their technical requirements for performance, scalability, affordability, and openness.

Your next question today comes from Mike Cikos from Needham.

If I could just come back to the gross margin comment, this expected headwind that we're up against, I guess it's a bit of a two-parter here. When I think about the headwind we're facing this year, is that really tied to customer success initiatives or deployment in advance of recognizing revenue from this large neocloud agreement that we're talking to today? Or is there potentially an ongoing presence or multiyear factor we need to consider when evaluating corporate gross margins on a go-forward basis?

Yes. Mike, it's Marc. There's a few factors in there, right? First of all, data center cost and equipment have gone up. That, combined with us needing to accelerate some CapEx, does reduce our gross margin this coming year by a few hundred basis points. That's why we said we're doing that gross margin optimization initiative to look for opportunities to offset that. Now in terms of business model, when you go after a white label, large-scale solution like that, generally speaking, the gross margin will be a bit lower and the OpEx will be lower as well because you have to spend less on sales and marketing. So it nets out to the same economic model for us, but that's the P&L benefit if that makes sense.

It does. I wanted to revisit the derisk guide we discussed. I appreciate the insights shared in the prepared remarks. However, to clarify, are the swing factor deals or the idea of underwriting minimum contract commitments from customers specifically related to the neoclouds, or is it more about moving upmarket? Can you provide any additional context on what is driving that dynamic? I also have a follow-up.

Sure. I'll answer this one and then you can ask your next question if you want. So moving upmarket, there are different aspects to consider. When you look at the average deal size of those 168 customers, it has increased significantly. However, for the larger deals, which we define as $500,000 in ARR and above, they do take longer to close, leading to less predictability in our guidance. That's why we excluded them from our estimates. This doesn't mean they won't occur; it just makes it more challenging for us to provide guidance on them. The same applies to the neocloud deals, which are also substantial and share similar characteristics, requiring more time for technical feasibility and ensuring completion of proof of concepts. This is what's influencing that aspect.

And then, I guess, the final follow-up on my side, but for those, let's say, $0.5 million plus deals that you're signing, can we start bifurcating the extent to which those sales cycles are longer versus a more typical run rate business? And then final piece, but for the calendar '26 guide, is there any way you can give us some pointers as far as the NRR that you're thinking about when we look at this calendar '26 guide? And that's all on my side.

Mike, regarding the differentiation in the size of the deals and their duration, they certainly involve longer sales cycles. However, they are not significantly longer. For instance, the eight-figure deal we mentioned took almost a year largely because they needed to evaluate their own systems and determine the requirements for switching to a different system and its integration. On the other hand, some of the other neoclouds closed much more quickly, and many larger customers, particularly those with deals in the $50,000, $100,000, and $200,000 range, moved relatively fast. Nonetheless, some of the largest deals did take around six months to finalize, while we've also seen many deals close in under 90 days.

Yes. And then I could jump in and discuss the NRR outlook. Due to the lumpiness of that large customer in '25, we factored out any usage above their minimum commitment level in our guide for '26. So assuming that that's what materializes, the NRR, just like the revenue growth rate for B2 and just like the overall growth rate at the company will be lower in Q2 and Q3. NRR could go down to closer to 100% for one or two quarters. But our overall growth rate of 20%, which is where we should be finishing the year and year-over-year overall should equate to an NRR that's closer to 110%, so pretty much where we are now, plus or minus 200, 300 basis points.

Mike, I want to highlight something about our Net Revenue Retention that I find quite exciting. We have a diverse range of customers, but we are putting more focus on AI customers beyond just the neoclouds. Hundreds of these customers are using our services for specific AI workflows. We’ve experienced a growth rate of 75% in the number of AI customers. Even more exciting is that the growth rate for these customers is about three times faster than that of our average customer. As we continue to onboard more AI customers, we see the potential for Net Revenue Retention to increase over time since they are generating data at a quicker pace than typical customers.

Up next, we'll go to Jason Ader from William Blair.

Wanted to first ask about your comment, Gleb, that most neoclouds don't have storage. I think that's what you said. I just wanted to understand why that might be. And then also your comment that the eight-figure win was with the neocloud that did have storage, but the storage wasn't going to handle what they needed, maybe just if you could elaborate on why it wouldn't be able to handle what other customers needed.

Yes. Thanks, Jason. Both are good questions. With the 200 neoclouds that have come up, they almost all started with GPUs. The demand arose from AI use cases that required GPUs first. Additionally, they needed a place to store the data to feed these GPUs. Initially, many set up data centers specifically designed for GPUs, which consume a lot of power and often require liquid-cooled environments. They don’t need as much square footage in the data centers, but they do need more power in the limited space. These providers have focused on the GPU opportunity. However, they've realized that customers using GPUs need a place to store their data for model building and for inferencing outputs. Some have begun to address this by using open-source projects to create their infrastructure, while others have opted for storage solutions involving flash systems. The challenge is that operating flash systems can be very costly, making them impractical for large-scale data sets. Managing open-source tools is also complex, requiring ongoing expertise to maintain and tune, and they are not built to scale to exabyte levels. Most of these open-source projects are designed for the needs of a single enterprise. As they see progress and start to experience limitations, the opportunity for us emerges. These 200 providers have established GPUs and are beginning to realize they need storage. They are unlikely to obtain this from the hyperscalers since those are their competitors, and the solutions available are either prohibitively expensive, overly complicated, or do not scale effectively.

Got you. Okay. And then the neocloud that you announced or that you talked about, the eight-figure one, can you say if that is a publicly traded company?

They are a publicly traded company, yes.

They are. Okay. Great. And then last one for me. Just, Gleb, what's your confidence level that you could win additional deals like the one that you announced on the call today?

I am very confident that we can secure additional deals. While the timing is always uncertain, it's important to note that the neocloud we mentioned isn't the only one we've successfully acquired. We already have others that are in the six- and seven-figure range. Those signed agreements have the potential to evolve into eight-figure deals, especially as these clients expand their offerings to more customers and increase their scale. Currently, we are in discussions with approximately half a dozen other neocloud providers that represent similar organizational opportunities. Although timing remains a question, our fit for these customers and the ongoing discussions instill a great deal of confidence in me.

And I may have missed it, but did you say how the duration of that eight-figure win was?

That one's a three-year deal.

Eric Martinuzzi from Lake Street Capital Partners has the next question.

Yes, you mentioned that the revenue impact from the eight-figure transaction won't begin until 2027. Based on your response regarding the three-year duration and the amount exceeding $50 million, does this mean that we might see a small portion at the end of 2026, with the majority occurring in 2027 and 2028?

Yes, that's correct, Eric. And for now, honestly, we're not factoring anything into 2026 for that.

By the way, Eric, I want to clarify that you mentioned $50 million; it's actually $15 million, 1-5. I look forward to a $50 million deal in the future, but we're not there yet.

Got you. The other thing I wanted to ask about was your comment regarding the adjusted free cash flow. You talked about it being neutral for the year. And I'm just wondering, given the investments you're making to have the infrastructure in place here, it seems like it's sort of front-half loaded. Is that to suggest then that the adjusted free cash flow positive, we're Q4 for sure and potentially Q3? Is that the right way to think about it quarter-by-quarter?

Yes, Eric. I mean, generally speaking, the first half of the year is our cost base increases. It starts kicking into Q1. And our OpEx lines honestly should not be really increasing that much other than maybe around 500 basis points, not as a percent of revenue, just off the dollar baseline from last year on a non-GAAP basis as it relates to just basic inflation, salary raises, and so on. Other than that, we're keeping our OpEx model pretty tight. I spoke about the gross margin being set back by a few hundred basis points. So when you combine all those factors and accelerating some of the expenditures to prepare for these customers, that's why we're free cash flow neutral for 2026. It is lumpy during the year. Usually, Q2 is also where we have the least of our computer backup renewals. So Q2 is usually the worst set, and the second half of the year is in better shape. And that would be a nice improvement from the minus $5 million for 2025 as a year and the minus $20 million in 2024. So I think we're pretty well set on exiting the phase of cash burn, and our aim is to stay here and get better.

Up next is Zach Cummins from B. Riley Securities.

Ethan Widell calling in for Zach Cummins. I guess start with neocloud and with there being a high portion of leverage there to AI and HPC. How would you define, I guess, the incremental revenue opportunity or overlap, whether it be like customer base or function or revenue opportunity versus B2 Overdrive?

Yes. Thanks, Ethan. It's a good question. So B2 Overdrive was initially actually developed because we heard from customers saying they wanted to use high-performance storage, high throughput storage that would enable them to send their data to the neoclouds when they needed them or to other hyperscalers, for example. So B2 Overdrive is not a white label offering. It's designed for end customers to actually use themselves. B2 Neo is specifically designed as a white label offering for the neoclouds to them themselves offer storage to customers. So they're largely serving different sides of the market but both serving the needs of AI and HPC type use cases.

Understood. That's helpful. And then the large TCV deal, can you clarify whether that was from an existing customer? And generally, is the revenue upside from existing customers there based on increasing usage?

So the $15 million-plus TCV deal is a new customer, completely new to us. However, what I would say is if you look across the $1 million-plus deals that we've had over the last year-ish, it's roughly half-half. Half of them are net new customers to us that came in, evaluated, considered, tested, and then signed a seven-figure deal with us. And the other half are customers that started off small. Some of them started off self-serve. Some of them came in as just smaller sales deals, got familiar with the platform, liked the platform, and then expanded into seven-figure deals.

Yes. And Ethan, this is Marc. If you look at Slide 17 of the earnings deck, you can see the breakdown between new and expansion from the existing, and it's evenly split. The self-serve product-led growth represents about half of that as well, along with the larger direct sales customers, with each segment distinctly showing a balance between expansion and new logos. That's why, if you look at the stacked bar, it's well diversified in terms of how it presents.

Got it. Well, I appreciate the color.

Yes. One additional point to mention regarding our forward-looking indicator is the pipeline. In 2024, we generated approximately $15 million in pipeline, and in 2025, we nearly doubled that to around $30 million. Our goal with our ongoing go-to-market transformation is to achieve a run rate that is about double that amount. Given our industry-leading win rates, we efficiently convert pipeline into annual recurring revenue. While we're not there yet, we made significant progress in 2025 and plan to continue that momentum into 2026.

The next question is from Rustam Kanga from Citizens.

Marc and Gleb, congratulations on the RPO acceleration. Building on another question you answered, Gleb mentioned that B2 Overdrive and B2 Neo serve different sides of the market. As we think about the development of the pipeline for B2 Neo, is it accurate to say that these opportunities will focus on larger deals, perhaps not as large as the one from this quarter, but still representing a significant opportunity? Will this likely lead to higher average sales price engagements as you consider this opportunity?

Yes. It's a good question, Russ. So one of the ways I would look at it is the market for the neoclouds, if you take just the hard drive-based storage opportunity inside of those 200 providers, that market is estimated at about $14 billion in the next five years. So with 200 players representing $14 billion of opportunity, every single one of those deals on average is going to be a large deal. So the short answer to your question is, yes, the B2 Neo deals, we see as large opportunity deals. The ones that we've signed so far are six- and seven- and now eight-figure opportunities on those. Some of those, I imagine, they start smaller just as they start getting familiar with it, but I think all of them have the opportunity to get quite large.

Yes, Russ, this is Marc. Good to hear from you. Our CapEx will be higher next year. As a percent of revenue, when you look at our PP&E at the end of the year, it should be in the high 20s percentage of revenue. We typically finance our CapEx through capital leases, and we're fully set up to do that. And that would be the principal lease payments on a statement of cash flows, which is around mid-teens of revenue, right, because you're buying today but financing over five years over a growing revenue base. That mid-teens, I mean, over the past few years, has actually improved from our side as we continue to optimize our cost of capital.

And everyone, at this time, there are no further questions. I would like to hand the conference back to Gleb for any additional or closing remarks.

Thank you. We have a strong and durable core business, made meaningful progress in our go-to-market transformation, and have a tremendous opportunity in AI. We drove growth while becoming adjusted free cash flow positive. We launched B2 Neo and signed multiple neoclouds, including this $15 million-plus deal. We also launched Flamethrower, our program for high-performance start-ups. In just the last few days since the launch, it's exceeded expectations, growing faster than the kickoffs at other leading companies that are a leader for that has driven. We had about a dozen start-ups that have applied, been evaluated, accepted, and given credits, including ones from Andreessen Horowitz and Y Combinator, and we've bolstered our team overall to take advantage of this tremendous opportunity. I'm really excited about the year that we have upcoming together. I want to thank our employees, our customers, and our investors for taking this journey with us, and we look forward to chatting with you next quarter. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.