Earnings Call Transcript - BLZE Q2 2025

Operator, Operator

Thank you for standing by. My name is Danika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze Second Quarter 2025 Earnings Call. Thank you. I would now like to turn the call over to Mimi Kong, Head of IR. Please go ahead.

Mimi Kong, Head of IR

Thank you. Good morning, and welcome to Backblaze's second quarter of 2025 earnings call. On the call with me today are Gleb Budman, Co-Founder, CEO and Chairperson of the Board; and Marc Suidan, Chief Financial Officer. Today, Backblaze will discuss the financial results that were distributed earlier. Statements on this call include forward-looking statements about our future financial results, the impact of our go-to-market transformation, sales and marketing initiatives, cost-saving initiatives, results from new features, 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 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. Finally, we will be participating in the Oppenheimer Technology, Internet and Communications Conference on August 11. Thank you for joining us, and I would now like to turn the call over to Gleb.

Gleb Budman, CEO

Thank you, Mimi. Good morning, and thank you, everyone, for joining us today. Backblaze delivered a strong Q2, exceeding both the revenue and adjusted EBITDA guidance for the second quarter in a row. Total revenue was $36.3 million, up 16% year-over-year. B2 revenue was $19.8 million, up 29% year-over-year. Adjusted EBITDA margin doubled year-over-year to 18%. As we outlined last year, our focus has been to accelerate B2 growth and become adjusted free cash flow positive. We've accelerated year-over-year B2 growth from 22% at the end of last year to 29% this past quarter, and we remain on course to be adjusted free cash flow positive in Q4. This marks an important step as we continue our progress towards becoming a profitable Rule of 40 company. Now what's behind these numbers is the value we provide to customers: our increased pace of innovation, our go-to-market transformation, and our incredible opportunity with AI. Regarding the customer value we provide, a recently published report we commissioned from independent analyst firm Enterprise Strategy Group found that Backblaze B2 is up to 3x more cost-efficient and takes up to 92% less time to manage data compared with competitors. That is significant customer value. We also continue to hear from customers frustrated with other cloud providers for their surprise fees. In fact, over 80% of organizations using competitors report unexpected storage charges. In today's cost-conscious environment, can you imagine having to explain to your CEO, CFO or Board that you had significant cost overruns because your cloud provider has surprise storage charges? At Backblaze, our predictable pricing and ease of use consistently set us apart. It's a key reason customers switch to us and stay with us. Now let's talk about our increased pace of innovation. On our last earnings call, we introduced B2 Overdrive, which delivers the highest throughput performance per dollar in the market. In early Q3, just 2 months after launch, we've already signed our first six-figure B2 Overdrive customer, a clear indicator of its strong product-market fit, and we're thrilled to help customers with their high throughput performance needs. We also announced a suite of new tools to help customers protect and manage their data. Anomaly Alerts uses AI to detect suspicious data transfers, helping customers spot potential data exfiltration or ransomware early. The Enterprise Web Console with role-based access controls makes it easier for larger companies to manage access and stay aligned with Zero Trust principles. Finally, Bucket Access Logs give customers detailed visibility into how their data is used and accessed. As we move upmarket, these features continue the Backblaze tradition of making it astonishingly easy for customers to use and protect their data. These innovations provide customers a unique combination of performance and security, further differentiating Backblaze as the leading cloud storage innovator. Now let me update you on our go-to-market transformation. We are seeing great results as demonstrated by our B2 growth accelerating to 29% in Q2. The number of customers generating over $50,000 in ARR hit 150, a 30% year-over-year increase, thanks to our upmarket focus. We added yet another seven-figure customer. This marks the fourth quarter in a row where we have highlighted a customer of this scale. Compared to our average $270 per year customer, this speaks to our dramatic upmarket shift. Our pipeline has grown significantly year-over-year, and we've had a steadily growing increase in six-figure opportunities enter the pipeline quarter-over-quarter, a sign that the machine is gaining momentum. Some of the changes we made in our go-to-market include rebuilding account-based marketing, which required significant systems and process work, that now enables us to more precisely target organizations for whom we should be an ideal fit when they're in the market and to the broader buying committee. We also revamped our approach to customer success to better identify and expand use cases with existing customers. We added a field enablement function to further up-level the sales team. We deployed AI in various activities across the go-to-market motion and of course, much more. The accelerated growth and upmarket momentum are encouraging results, and we are continuing to refine our go-to-market model to drive even greater growth. Earlier, I mentioned that a mere 2 months after launching B2 Overdrive, we won our first six-figure customer. Let me share the details behind that win. This customer is a generative AI video company and works with massive volumes of data to train models. They initially came to us because of the egregious egress fees they were incurring from the hyperscaler they were using. As we engaged with them, we learned that in addition to needing a cost-effective solution, they really needed speed, reliability, and availability. And speed is something customers are willing to pay more for because it unlocks opportunities for them. We introduced B2 Overdrive to provide the high performance customers like this need and their excitement around our performance was palpable. We are so happy to be partnering with this cutting-edge AI company and thank them for trusting us to help them scale. This B2 Overdrive customer I just talked about is an AI customer, but they're obviously not the only one. Let me share how impactful AI is to the market we sell into overall, to our products, and to our internal initiatives. To highlight the AI market opportunity for us, 1 year ago, we had no AI companies in our top 10 customers. In Q2, 3 of our top 10 customers are AI companies. This quarter, the number of AI customers grew 70%, and data stored by these customers grew 40x year-over-year. AI use cases drove the outperformance on our financial metrics this quarter, and this is by far the most data-hungry industry we have witnessed, and we're confident that AI will significantly drive our market opportunity. In our products, we launched B2 Overdrive targeted at AI use cases, and we are using AI to offer new products such as those in our security offerings. Internally, we're actively embracing AI across our organization, not just to drive efficiency but to unlock new opportunities for innovation and growth. Leading this effort is our Chief Human Resources Officer, which reflects how we see AI as a company-wide culture shift, not just a technology initiative. His role puts him at the heart of how we work, making him uniquely positioned to embed AI into our daily operations and mindset. In closing, I'm so proud of our team's accomplishments. We innovated for our customers with the launch of B2 Overdrive and a suite of security-focused functionality; we made great progress on our go-to-market transformation, which was visible in our accelerated B2 revenue growth; we've leaned into our incredible opportunity with AI; and overall, we delivered strong revenue, adjusted EBITDA, and cash flow numbers, putting us well on our way to our Rule of 40 target. With that, over to you, Marc.

Marc Suidan, CFO

Thank you, Gleb, and good morning, everyone. We are excited by our second quarter results with both revenue and adjusted EBITDA beating the high end of our guidance. This is the second consecutive quarter of exceeding guidance on both revenue and adjusted EBITDA. The combination of our zero-based budgeting exercise, our go-to-market transformation and the AI revolution, including a significant AI customer, is driving these strong results. It's hard to believe, but next week marks my 1-year anniversary with the company. Looking back, I'm incredibly proud about the results that we have achieved. When I started, I conducted a thorough assessment of the situation, consulted with our leading analysts and investors, and worked with Gleb and the Board to lay the groundwork for: one, solidifying our balance sheet; two, making Backblaze a sustainably profitable company; three, accelerating revenue growth. The good news is we've addressed all three of these objectives at an incredible pace. Here is a quick summary of our achievement. First, on solidifying our balance sheet, we aggressively reduced cash usage and recapitalized the balance sheet with a secondary offering in November of 2024. We also established a new line of credit this quarter, giving us further financial flexibility. Second, on being a sustainably profitable company, we shifted our focus from adjusted EBITDA to adjusted free cash flow, which incorporates our capital expenditures. We conducted a zero-based budgeting exercise, freeing up $8 million in expenses for 2025 and strategically redeploying nearly half of those funds to drive more productive growth. We remain on track to achieve our guidance of becoming free cash flow positive in Q4 of this year. Our subsequent aim will be to achieve GAAP net income positivity as operating leverage kicks in. Third, on accelerating revenue growth, we launched a go-to-market transformation. This has resulted in 2 consecutive quarters of increased B2 revenue growth, including a significant 600 basis points acceleration in Q2 over Q1. While these are phenomenal results, I consider this just the first phase of our transformation with plenty more to come. We're continuing to focus on growing B2 in the future and are incredibly proud of the team's success in moving the needle so quickly. These pillars of our transformation set the foundation for Backblaze to become a Rule of 40 company. Now turning to our results for the quarter. Revenue finished strong at $36.3 million, a 16% year-over-year increase. B2 revenue growth climbed to 29% as we continue our momentum with another quarter of increased growth. This outperformance was driven by solid direct sales bookings bolstered by strong AI tailwinds, including a significant AI customer. Our Q2 investor presentation, available on the IR website, outlines the four drivers behind the B2 revenue growth, which comes from: net organic data growth; direct sales, cross and upselling; new logos from self-serve; and new logos from direct sales. This chart provides clarity on what drives our revenue growth. Computer Backup revenue grew 4% year-over-year, driven by the October 2023 price increase, of which the benefit has largely ended. In the second half of 2025, we see Computer Backup declining in the low to mid-single digits on a quarterly basis. We continue to see areas for growth and are exploring options to improve the business. But at this point, we feel it is prudent to provide this outlook. Moving on to net revenue retention, or NRR. For the quarter, overall NRR was 109% versus 114% the same period last year. For B2 Cloud Storage, NRR was 112% compared to 126% in the prior year and 117% in the prior quarter. As a reminder, the decline is mainly due to the price increase lapping and it will continue to roll off the next quarter as we calculate NRR with a trailing 4-quarter average. Computer Backup NRR is 106% compared to 105% in the prior year. Gross customer retention continues to be strong at about 90% across B2 and Computer Backup. Gross margin improved to 63% from 55% in the prior year. As we disclosed last quarter, we evaluated the estimated useful life of our fixed assets based on more recent operational data and found that our hardware lasts an estimated 6 years instead of the 3 to 5 years estimate that we previously were using. This change better reflects our business operations and accounts for most of the gross margin improvements this quarter. The remainder of the margin expansion was from our technical operations team driving more benefits of scale across our infrastructure. As a result, adjusted gross margin improved to 79% from 78% last year. Our operating expenses continue to decrease as a percentage of revenue as operating leverage kicks in. Operating expenses improved to 82% as a percent of revenue from 86% in the prior year. We expect continued improvement as we scale further. Q2 adjusted EBITDA margin doubled over the prior year to 18% and beat the high end of guidance of 16% by 200 basis points. Adjusted free cash flow for the quarter came in at negative 11%, a 1,000 basis point improvement from negative 21% a year ago. We are on track to be adjusted free cash flow positive in the fourth quarter. Both adjusted EBITDA and adjusted free cash flow margins benefited from stronger revenue performance and robust cost controls. Looking at the balance sheet, we ended the quarter with $50.5 million in cash and marketable securities. In June, we announced a new $20 million line of credit with Citizens Bank. This new facility comes with industry-standard covenants related to EBITDA attainment and maximum debt leverage ratios. We plan to use this facility for equipment capital expenditures outside the U.S., where leasing rates are comparatively much higher, resulting in interest expense savings. Last quarter, we outlined steps to reduce our rate of equity dilution through RSU net cash settlement. This quarter, we are announcing an additional initiative. Our Board has approved a stock repurchase program of up to $10 million over the next 12 months. The proceeds for this buyback will come from exercise stock options and the employee stock purchase plan. This cash-neutral move will help us improve our dilution trajectory. Our combined actions are expected to reduce our projected path of stock-based compensation dilution by approximately 15% to 25%. Until our cash flows permit, this is a cost-effective way to manage equity dilution. Over the long term, our goal is to reduce dilution from stock-based compensation down to 0. Before discussing our guidance, I'd like to provide some color around B2 revenue growth for the back half of the year. As mentioned, our Q2 beat was helped by a large AI customer who ramped up data storage in a short period of time. But we want to be mindful of the potential variability. Regardless, I'd like to reiterate that we continue to expect B2 revenue growth to exit the year with at least 30%. Looking ahead, we are guiding Q3 2025 revenues to be in the range of $36.7 million to $37.1 million, with B2 revenue growing in the range of 28% to 30%. For adjusted EBITDA margins, we are guiding Q3 to be in the range of 17% to 19%. For the year, we are raising our revenue guidance to be in the range of $145 million to $147 million from the previous range of $144 million to $146 million. This is due to better-than-expected B2 performance. As for adjusted EBITDA guidance, we reiterate the 17% to 19% range. To wrap up, in Q2, we continue to accelerate revenue growth while also delivering operating efficiency gains. Looking forward, we believe that we are well positioned to continue delivering durable and efficient B2 revenue growth as we set the course to being a Rule of 40 company. Now I would like to turn it over to the operator so we can open it up for questions.

Operator, Operator

Your first question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee, Analyst

Just two or three from me, if I could. Gleb, maybe on the seven-figure customer that you talked about in the quarter, just curious a little more background on that deal. Was that a displacement? And if it was, who was it? Maybe just a little more color there. And then secondarily, on the B2 Overdrive, maybe you could just expand a little bit. Obviously, quick out of the gate to get a six-figure customer. Can you put a little finer point on kind of how that pipeline is building? Any quantitative measures?

Gleb Budman, CEO

Thank you, Jeff, for the questions. Regarding the seven-figure customer, they were a smaller existing customer who has been with us for a few quarters. Their data has grown significantly, and they're an AI company creating greenfield data that didn't exist previously. This trend is common among AI companies, as they are generating new data for model building or due to the generative aspects of AI. As for the Overdrive customer, we connected with them before we launched Overdrive. They were previously with a hyperscaler and facing high egress fees, prompting them to seek a more cost-effective storage solution for their data, especially for model building. After we announced Overdrive, they expressed interest in increased performance and decided to run a proof of concept. They became very excited during testing and quickly moved forward, as the high costs of GPUs and the urgency of their work made the performance of B2 Overdrive crucial for them.

Jeffrey Van Rhee, Analyst

Yes. That's great. Great coming out of the test front. Last one for me then maybe on the channel front. Just any update on channel efforts? I know you were leaning in there, making some moves to get a little deeper, get a little tighter. Just where are you there? And how is that mapping to your expected progress?

Gleb Budman, CEO

Yes. On the channel side of things, we're seeing a consistently increasing number and value of both leads and then closed ARR business. We've focused on, as we talked about before, on a smaller number of channel partners to drive more meaningful business with, and that's been working as a good strategy. I will say that because the AI companies tend to buy direct, a lot of the bigger opportunities have actually been through the direct side of things, but the channel has been an important component for us.

Operator, Operator

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

Ittai Kidron, Analyst

Nice quarter as well. Maybe we're running too far ahead here, Gleb, but what percent of your B2 customers do you think can be Overdrive customers?

Gleb Budman, CEO

Yes, that's a great question, Ittai. One thing we’re noticing is that the use cases for AI are likely to keep growing and become a more significant part of our overall strategy. There's potential for AI to present a $1 billion opportunity in storage. Many AI companies require high performance since GPUs are quite expensive, so the quicker they can deliver data to the GPUs when necessary, the better. Therefore, companies developing models would find Overdrive valuable. We also observe use cases in high-performance computing and media workflows where transferring large amounts of data is crucial. Currently, Overdrive is available only for multi-petabyte customers, which means it's aimed at the larger enterprises. However, we believe that Overdrive could be useful for any organization engaged in substantial AI workloads. As you can see, AI is a significant opportunity for us.

Ittai Kidron, Analyst

That makes a lot of sense. I’m looking at your website right now, and the pricing for Overdrive is more than double. This clearly presents a significant opportunity for you. However, it raises the question of whether you should consider adding another price tier in the middle for hybrid options, which could allow you to reach a broader range of customers more quickly. Does that sound reasonable? Is there a way to enhance your current pricing plans to extract more value from your customers?

Gleb Budman, CEO

Yes, as we move ahead, we aim to strike a balance between delivering significant value to our customers while keeping things straightforward. Historically, we've gained an advantage over competitors who have complicated pricing structures with multiple tiers and lengthy documents that are hard to understand, leading to unexpected charges for customers. Our goal is to maintain simplicity in our offerings. At the same time, we are attentive to customer feedback regarding their needs. For instance, Overdrive was developed in response to customer requests highlighting the importance of performance, durability, and availability, along with the high costs of GPUs. Customers indicated willingness to pay more for faster data delivery. We will continue to listen to customers to determine how we can provide value and explore further opportunities to introduce additional options to better support their workloads.

Ittai Kidron, Analyst

That's great. Last question for me, Marc, on Computer Backup, solid quarter indeed. You have very good retention rates. I understand your guidance now that we are moving past the price increase. My question is, with strong gross retention, how do you view the considerations in deciding whether to raise prices again or maintain the current pricing and accept a gradual decline over time? Please share your thought process on this. What factors should we focus on in the next 12 months in this business?

Marc Suidan, CFO

Yes. So what I would say is we really focused on B2 growth. I mean we doubled down on that, and we said we're going to get it up to 30% by the end of the year. Now that we've got B2 well on track to get to 30%, we feel that's the new baseline for B2. Now we're able to work on two things, which is both seeing where do we take B2 from there, but also put more attention and focus on backup. But until we materialize more our actions on the backup side, and Gleb could elaborate on what can we do on that front, we thought it would be prudent to say there's nothing net new, right? Two quarters ago, we said the customer count is declining by low single digits. And what you're seeing is we lap the price increase that is coming through. But Gleb will elaborate on potential actions. Once those actions materialize, we'll start changing our views on the guidance for backup.

Gleb Budman, CEO

Yes. Ittai, I think Marc is correct on all that. And I think what I would say is in terms of things that we're doing, we spent a good chunk of time and focus on the go-to-market transformation for B2. We're taking some of those learnings and then applying them to the Computer Backup side to drive the business opportunity there. The other thing is in early in the year, we launched Enterprise Control, which was an upgraded functionality for Computer Backup. And then we just launched a feature that was the single most requested feature by larger companies for Computer Backup, which is Legal Hold. And so, with those two components, combined with the learnings from our go-to-market transformation, we've put a tiger team internally on Computer Backup. And so, there's focus on getting that business to be a kind of steady business. There's no current plan to do a price increase with that. But as you know, we've done a few in the past. So it's not out of the question, but we want to make sure we provide a lot of value to customers as with all of our offerings.

Operator, Operator

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

Simon Matthew Leopold, Analyst

First one, really to follow up on the backup trending. I guess there was a messaging that the outlook is trying to be conservative. But what is your understanding of why the customer count is going lower on the backup portion of the business? In other words, is it that customers are price sensitive or are you losing to competitors? Could you help us understand the rationale for why you've lost or expect to lose customers?

Gleb Budman, CEO

Gleb here. First, the gross customer retention rate for Computer Backup is 90%, which has been quite consistent over time. This 90% retention is actually a leading metric in the industry, especially for consumer and small to medium business sectors. We continue to see this trend. On the consumer side, the business is witnessing a gradual decline, largely because people are backing up their laptops and desktops less frequently due to the rise of streaming and mobile devices. However, on the business side, we see more opportunities. With the new functionalities we've introduced like Enterprise Control and Legal Hold, combined with insights from our go-to-market transformation, we can strengthen our Computer Backup offering for businesses.

Simon Matthew Leopold, Analyst

Then pivoting to the B2 opportunities. In the past, you've talked about some of your alliance partners and how they've played into, I'd say, the value offered to your business-oriented customers. In light of some of the trends you have, particularly around AI, can you update us on how you see the featured alliance partners? I'm thinking about sort of the companies like Veeam and Fastly and how that plays into the strategy?

Gleb Budman, CEO

Yes, that's a great question. I would say that partnerships remain a vital aspect of our strategy. We are noticing a shift in the types of companies becoming our alliance partners. Certain GPU providers are increasingly collaborating with us because customers require substantial storage that complements the GPUs, making them a natural pairing. We're observing heightened engagement in this area. Importantly, storage is fundamental to nearly everything we do. Our goal is to assist customers in solving complete solutions. For instance, if we're addressing virtual machine backup needs, we partner with companies like Veeam, which provide the software along with our cloud storage. Similarly, when working on AI data pipelines, we collaborate with various neo clouds involved in modeling and inferencing. Overall, we aim to work with partners to deliver comprehensive solutions for our customers.

Simon Matthew Leopold, Analyst

Then just one last one is maybe if you could shed some light on your priorities in terms of internal investment, basically, how to divvy up your spending growth between sales and marketing versus R&D?

Marc Suidan, CFO

So R&D as a percentage of revenue is consistently decreasing because we're benefiting from our scale, not because we're cutting back on innovation. In fact, this past quarter, we had several major releases. On the sales and marketing front, we're focusing on the productivity of our investments. B2 net new annual recurring revenue increased by $6.9 million, which is a record for us in terms of quarterly net new ARR. Moreover, if you exclude the price increase, B2 growth reached a record 29%, the highest in seven quarters. Effectively, sales and marketing is all about productivity, and while there are different benchmarks to aim for, I would say our R&D budget will not grow more than mid-single digits in absolute dollars. As a percentage of revenue, we expect it to continue declining each year as we leverage our scale.

Operator, Operator

Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

Eric Martinuzzi, Analyst

I would like to understand the potential increase in value for a typical enterprise account if they are using your services for storage, whether for Computer Backup or B2. What could the potential uplift be if they choose to adopt the security suite?

Gleb Budman, CEO

Yes, Eric, thanks for asking. So I'll break it down in a couple of little pieces. So first of all, Enterprise Web Console with the role-based access control helps them manage larger numbers of people interacting with it, and it's really targeted at ease of use. So there's not an extra charge for that. It's part of the offering. But as it's been rolled out in private preview with customers, the sales team has talked about how they've absolutely loved the functionality. And so, I see that as a customer adoption and customer retention and customer satisfaction functionality. On the Bucket Access Logs, it's functionality that enables them to keep and track all of their data that they use, and all the ways and operations and everything. So it depends on the size of the data they pay for the amount of data that gets stored. The Anomaly Alerts is a fee for the amount of data that's being analyzed as part of that. And so, it's not a large dollar amount per terabyte. But if they're protecting a lot of data, then that can be an interesting and material uplift. So we're in the early stages of testing some of the pricing pieces of that one as we want to really show that there's a lot of value to customers. And I think that there really is going to be data infiltration, ransomware, these are issues that organizations are dealing with all the time. And some of these organizations are ending up paying $10 million, $20 million, $30 million to deal with some of these implications for them. So there's a lot of value if we can help detect that early before they've had a major breach.

Eric Martinuzzi, Analyst

My second question is on the kind of a macro-related question. Obviously, you had a good quarter and a good outlook, but it's in part driven by the better-than-expected traction on the AI front. As far as your SMB oriented SMB sized customer, what's the health there? Typically, you've seen in times where SMB is softer, you've seen the amount of data being stored start to tail off of a trend line. Have you seen anything there on the SMB side?

Gleb Budman, CEO

I think that the core business continues to be strong and the AI is an accelerant. So as I was looking through the deals that we won last quarter, just kind of eyeballing through them, right? I mean there's MSPs, there's K-12 schools and colleges and universities. There's cities, there's counties. There are software companies, media companies, ad agencies. There are companies across the board adopting Backblaze. If you look at the gross customer retention metrics, they continue to be strong. The net revenue retention metrics continue to be strong. And so, the core business, it's not like backups are no longer important or media content is not getting generated or application storage use cases like surveillance and streaming are shrinking. So all of those still continue to be growing areas. But AI is big. And so we're leaning into that opportunity for us. I think just looking at it, I mean, going from 0 to 3 of our top 10 customers being AI companies and the 40x growth rate in data, it's where we're putting an increasing amount of focus because of the size of that opportunity, but the core business continues to be strong.

Marc Suidan, CFO

Yes. And another way to evidence that, Eric, it's Marc. Slide 13, we posted a new slide into our quarterly earnings deck that breaks up what's driving our growth. And you could see that all four categories of our revenue driver growth are improving. That includes: net organic growth, so existing customer base organically growing; it includes cross-selling and upselling by our direct sales team; it includes new self-serve, thousands that show up every quarter and sign up; and new direct sales bookings. So it's pretty well diversified that really sets us up to get to that 30% quarterly growth rate and really makes that our new baseline from thereafter, right? That's the momentum we carry forward from there.

Operator, Operator

Our next question comes from the line of Jason Ader with William Blair.

Jason Noah Ader, Analyst

I wanted to ask on the B2 NRR. Can you just talk about some of the puts and takes there? And just maybe an outlook for the back half of the year for just B2 NRR?

Marc Suidan, CFO

Jason, it's Marc. The 112% is down 500 basis points from the previous quarter, reflecting the effects of the price increase and the trailing four-quarter impact. If you look at Slide 13, the first two categories at the bottom essentially represent NRR, which actually improved in Q2 compared to Q1. The improvement was driven by a large customer, which both Gleb and I mentioned, and they were with us before. This significant ramp-up contributed to Q2, and we also saw improvements across all variables of that growth rate. For the rest of the year, I would say that on a reported basis, the trailing four-quarter average will likely be affected by another quarter of the price increase impact. However, it should stabilize afterward. As we enhance our customer success, I believe that by 2026, we will start to see further improvements.

Gleb Budman, CEO

Yes. And Jason, I would just say one example for me of that improvement in customer success. So we talked about earlier this year that we brought on a leader for the customer success organization. She's been doing a fabulous job of revamping how we engage with our customers, really focused on both getting significant value to them and making sure that they're getting full value of the platform and also looking at what opportunities we have to expand with them. One thing that happened this quarter was we had a customer that had been a roughly $15,000 a year customer. And when our customer success team engaged with them and really showed them kind of the value that they could get, that customer grew from $15,000 for a 1-year deal to becoming a $500,000 TTV over a 3-year deal. So I think that there's a lot of that type of opportunity in a customer base of 500,000 customers.

Jason Noah Ader, Analyst

If we exclude the effects of pricing and the significant AI customer from last year, did we see any growth in our existing customer base? Did the net revenue retention actually improve when adjusting for those two factors?

Marc Suidan, CFO

If you account for those two factors, I would consider it to be more stable. In Q1, we mentioned a large customer that left, and in Q2, we talked about a new customer coming in. So when you combine all of this, it results in a very stable figure. Also, as we've noted, once the customer success initiatives are fully implemented, you will start to see positive growth.

Gleb Budman, CEO

Yes, I believe we're at an advantage. The GPUs and storage are two crucial components, with GPUs serving two main aspects of the AI workflow: model building and inferencing. The overall AI data pipeline consists of five stages: data collection, data processing (where labeling occurs), model training, inference, and monitoring. We participate in all five stages and support customers at each one. For data collection, it’s about having an affordable and durable storage solution for large-scale data, where GPUs do not play a part, but we are essential. In stage two, while labeling data, GPUs are not significant, but the data must be stored effectively. In stage three, during model training, GPUs are vital, but high-performance data storage is crucial for sending data to the GPUs promptly, as customers often sign short-term contracts for GPU access. Our B2 Overdrive offering is ideal for this purpose. Once model training is complete, inference occurs, which is a classic application storage use case that requires durable, available, high-performance, and affordable data storage. The final stage is monitoring, which doesn't primarily rely on GPUs, but storing the data is necessary. Interestingly, GPU usage can fluctuate, while data storage remains constant. Even as customers may increase or decrease GPU usage, they still retain their data. We are involved in every aspect of the AI workflow, maintaining data availability despite GPU changes. With more accessible GPU options emerging, customers are keen to ensure their data is not confined to traditional hyperscalers, seeking flexibility in choosing their cloud providers. We are therefore developing this storage platform to support the next generation of technology that is not solely dependent on hyperscalers.

Operator, Operator

Our final call comes from Rustam Kanga with Citizens.

Rustam Shiraz Kanga, Analyst

Congrats on the outperformance of B2 relative to the prior expectations. Just one for me. It looks like there's a solid drumbeat of innovation with several announcements for your security features. I understand some of these are in private preview. It looks like Legal Hold has a complementary trial phase. Gleb, I know you touched on the monetization there. I just wanted to ask, big picture, to what extent do you think these enhancements sort of naturally help bolster the shift upmarket?

Gleb Budman, CEO

Thank you for the question, Russ. We have concentrated on enhancing functionality for performance, security, and AI, which supports our progress into higher market segments. Our event notifications, launched in recent quarters, allow organizations to build their applications and integrate our services more effectively into their workflows. Legal Hold was the top requested feature for Computer Backup from larger companies, and the Bucket Access Log was requested by customers who wanted to integrate their security insights into their fundamental infrastructure. Both of these enhancements are naturally advancing our ability to secure larger opportunities. I also want to highlight the positive response to the Enterprise Web Console with role-based access control, which, when previewed to customers, was extremely well-received according to feedback from our sales team. Our transformation in go-to-market strategies positions our teams and processes to better engage with large organizations, and these tools and features facilitate that effort.

Operator, Operator

All right. I will pass it back to Gleb Budman for closing remarks.

Gleb Budman, CEO

Thank you, everybody, for joining today. We delivered a strong quarter financially, and we delivered for our customers. This is an exciting opportunity for our company as we lean in to help customers with their data needs around AI, cybersecurity, and more. I want to thank our team for collaborating to make this happen, and thank you to our customers, partners, and investors for your trust in us as we continue to build the core storage platform for the Cloud 2.0 era. Operator, you may now end the call.