On Monday, Backblaze (NASDAQ:BLZE) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://events.q4inc.com/attendee/290886121
Summary
Backblaze reported a strong Q1 2026 with $38.7 million in revenue, up 12% year-over-year, and B2 cloud storage growing 24%.
The company is seeing significant growth from AI-related customers, with a 76% increase in AI customer usage year-over-year.
Backblaze is focusing on the NEO cloud market, estimating a $14 billion opportunity by 2030, and has secured multiple six, seven, and eight-figure deals.
The company introduced new B2 pricing effective May 1, expected to positively impact revenue and margins.
Guidance for full-year 2026 revenue has been raised to $161.5 million to $163.5 million, with an adjusted EBITDA margin guidance increase to 23-25%.
Full Transcript
Abby (Conference Operator)
Ladies and Gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time I would like to welcome everyone to the Backblaze first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you and I would now like to turn the conference over to Mimi Kong, Head of Investor Relations. You may begin.
Mimi Kong (Head of Investor Relations)
Thank you. Good afternoon and welcome to Backblaze's first quarter 2026 earnings call. On the call with me today are Gleb Budman, Co Founder, CEO and Chairperson of the Board, and Mark Sweden, 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 most recent quarterly report on Form 10Q 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 8K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast which will also be posted on our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR gross customer retention rates and adjusted free cash flows. We will be participating in the Needham Technology Media and consumer conference on May 12th in New York. I hope to see many of you there. Thank you for joining us and I will now like to turn the call over to Cliff.
Cliff
Thank you Mimi and thank you everyone for joining us today. Q1 was a strong quarter. We beat revenue and adjusted EBITDA guidance, ending the quarter with 38.7 million in revenue up 12% year over year with B2 growing 24%. We more than doubled our average sales deal size and drove 72% year over year growth in our 50k port plus ARR cohort. As we continue to move up market and we are on track for our first full year of free cash flow positivity as a public company, what excites Me Most about Q1 goes beyond the numbers. AI is making storage increasingly important and our organization is gelling and executing better than ever to capture that opportunity. This is evidenced by more than 1/3 of all new bookings coming from AI and the number of AI customers using our platform growing by 76% year over year. We entered 2026 saying we would build a more scalable, more predictable growth engine that serves the AI opportunity. Q1 started to show what that looks like in AI. We are seeing demand from two parts of the market. One is companies building the infrastructure and tools that enable AI. The other is companies using that infrastructure to bring AI into products and workflows. We are winning in both. On the infrastructure side, there is a major re platforming happening in the market for the first time in about two decades. The traditional hyperscalers are not the only place companies are building, they're also building on the Neo clouds. Synergy Research estimates that the NEO cloud market was $25 billion in 2025 and growing to about 400 billion by 2031. In order for these Neo clouds to support their customers AI workflows, they need to offer cloud storage. Some Neo clouds have offered cloud storage built on Flash. It was fast and it worked. But as these platforms have scaled and AI workloads have grown, the economics have become increasingly difficult. Flash is now about 10 times more expensive per terabyte than hard drives. It works well for use cases requiring the lowest latency for smaller data sizes, but becomes unsustainable as at an exabyte scale. As a result, NEO Clouds are now actively looking to introduce a cost efficient hard drive tiered time flash to manage both performance and economics across their infrastructure. At Backblaze, we built an Internet scale file system to optimize performance per dollar out of hard drives and thus believe Backblaze is ideally positioned to provide exactly what these Neo clouds need. We've seen support for that belief not only from the multiple signed Neo clouds where we provide this for them already, but also the active engagement we're having with many of the top neoclouds. We estimate our opportunity to support neoclass at $14 billion by 2030, and with the success we're seeing, we are aligning resources internally behind that opportunity. In addition to neopods, we're seeing a significant opportunity for us supporting other AI infrastructure. For example, we are also seeing strong demand from companies supplying large data sets into the AI ecosystem because they need a place to store large data sets efficiently but also be able to move them where they need to go rapidly. One recent example is a training data provider serving AI use cases that selected V2 to store large volumes of video data. A hyper growth company, it was experiencing rate limits and bandwidth constraints with its existing provider and needed a solution that could scale quickly. Backblaze won on both economics and technical fit. The deal closed in just 11 days at nearly a million dollars of arrangement, underscoring how quickly these companies move when infrastructure becomes a constraint and how well Backblaze is suited to the infrastructure side of the AI opportunity. The other part of the AI market we're seeing is companies using infrastructure like ours to bring AI into their products. As AI models move from text to multimodal, incorporating video, audio and images, the volume of data required to train and run those models grows by orders of magnitude. This is not a future trend, it's happening now and it's creating significant and growing need for storage that can handle it economically and at scale. With the generative AI customers we have today, we are finding that price and performance get us in the door, but it is the experience that keeps them and grows them transparent pricing, responsive support and a team that works with them rather than just selling to them. These customers are scaling fast and they do not have time to manage infrastructure problems with Backblaze. They don't have to. A good example from Q1 is an AI powered video creation company that selected B2 to store data used to train its models. The customer had been running into cost and performance issues with its existing provider. The platform was difficult to manage and the economics were not working at its scale. Backblaze offered the best performance per dollar and a platform that was easy to use and easy to scale. The initial deployment represents nearly half a million dollars of ARR and creates a clear path to expand into higher performance workloads over time. These customer wins are just examples of where we won in Q1 and are reflective of opportunities we have in pipeline going forward. It's clear that whether customers are building AI infrastructure or using AI in their products, they are scaling fast, the data is growing exponentially and they need infrastructure that is performant, open and cost efficient at scale. That is the moat we have spent 19 years building and AI is making it more valuable, not less, to be the leading storage platform for AI. We are also meeting developers where they already work. We are embedding backwards into the AI ecosystem by integrating directly into the tools developers already use. For Hugging face, which has 13 million users and over 2 million models, we shipped a tool that lets teams store and share model caches on B2 for ComfyUI, which recently raised at a $500 million valuation. We built a plugin to support generative AI workflows for cvat, which is used by tens of thousands of computer vision teams. B2 is now integrated as a backend for training Data and for MLflow, the most downloaded tool for taking AI projects from lab to production. With 60 million monthly downloads. B2 has now been added as an integrated artifact store. So the AI opportunity is making what we do increasingly critical. We're also stepping up to meet it. A year ago we began a meaningful transformation of our go to market organization focused on three things increasing awareness, driving greater pipeline consistency and expanding revenue within our installed base. In Q1, we delivered progress on all three. On awareness, the Flamethrower startup program is gaining real traction. We have now welcomed approximately 100 companies in under three months, half the time it would typically take. We've been added to the A16Z Founder Resource Program, the Launch Startup Showcase and the Startup Grind Conference, all of which expand our reach with venture backed startups. On pipeline consistency, we have completed our core Go to Market systems upgrade, giving our team better visibility and a stronger foundation for a faster, more disciplined revenue motion. And within our installed base, pipeline sourced from existing customers has nearly doubled year over year, reflecting our growing ability to land and expand with our customers. To accelerate this next phase, we welcomed Anush Kumar as our Chief Revenue Officer. Anush has scaled go to market for cloud infrastructure and enterprise storage at NetApp, VMware, Red Hat and SUSE. He brings the pipeline discipline and execution rigor this phase of our growth requires and we believe his leadership will be a meaningful complement to the upmarket momentum we have already built. We also saw encouraging new customer momentum during the quarter across a range of data intensive use cases that included a healthcare data company who selected us for disaster recovery, a cloud gaming platform that chose B2 to store video across multi cloud environments, and an audio streaming platform migrating from self managed infrastructure to B2. These wins reinforce a broader point. Backwave is winning where data is valuable, active and operationally important and this is why I am excited about the opportunity ahead. The shift to multimodal AI is driving exponential data growth and the need for high performance, yet cost efficient storage has never been greater. The customers who are choosing Backblaze are exactly the kinds of customers that compound with us over time. We are stepping up to this opportunity with an up level team, a go to market transformation well underway and a platform we have spent nearly two decades building and optimizing. AI is making everything we have built more valuable and we are becoming the storage infrastructure that powers the AI economy. With that, I'll turn it over to Mark.
Mark Sweden (Chief Financial Officer)
Thank you Gleb and good afternoon everybody. Our first quarter results reflect the strategy that we have been executing against. We exceeded the top end of both revenue and adjusted EBITDA guidance. Our Q1 outperformance reflects stronger sales execution and the EBITDA demonstrates the operating leverage in the model. Let me walk through the quarter and then cover our outlook. We finished Q1 with revenue of $38.7 million above the high end of our guidance of 38 million. The beat was broad based across both V2 cloud storage and computer backup, with B2 remaining the primary growth driver. B2 cloud storage grew 24% year over year to 22.4 million and ARR grew 28% year over year, reflecting the underlying strength and momentum of the business. The Q1 revenue outperformance was driven by higher customer data consumption on the B2 cloud platform and computer backup coming in slightly more favorable than our forecasted decline on bookings. which primarily affect revenue in future quarters. We closed multiple large deals for a strong quarter. We made several updates this quarter to improve the calculations of our ARR and RPO metrics. I will briefly walk through those changes as I cover the results. ARR increased by more than $5 million sequentially to $158 million with B2 growing 28% year over year. This quarter we updated our ARR methodology to improve comparability across periods and the change is defined in the earnings presentation posted on our Investor Relations website. Under both the new and previous methods, the sequential ARR improvement is approximately $5 million. We ended the quarter with 187 customers contributing over $50,000 in ARR, up 51% from a year ago reflecting continued strong progress upmarket. We also updated our RPO methodology this quarter and described the change in our earnings presentation. The change is aligned to our peer group and RPO is now a more important metric as we continue to move upmarket, signing both annual and multi year customer commitments. Under the updated methodology, RPO increased by $6 million sequentially and by $31 million from the prior year period. Our gross customer retention metrics remain very healthy with customers continuing to use both our B2 and computer backup solutions for nine years on average beginning this quarter. Our reported net revenue retention reflects an in quarter methodology which we believe provides a more current view of our customer expansion and retention trends. In B2, net revenue retention was 110% up from 105% a year ago, reflecting continued expansion within the customer base as a consumption business. V2 benefits from both the organic customer data growth and the cross sell upsell sales motion. Q1 gross margin was 61% versus 56% in the prior year. The year over year improvement shows strong operating leverage continuing to kick in as we tightly manage costs and also from the extension of the useful life of our fixed assets. Total operating expenses were $29 million in Q1, roughly flat compared to Q4 and improved by approximately 600 basis points from the prior year as a percentage of revenue, reflecting strong operating leverage. As we maintain our focus on Cost Management, Q1 adjusted EBITDA was $10 million or 26% of margin, up from $6 million or 18% in the prior year reflecting strong operating leverage as revenue scales sequentially. Margin declined modestly from 28% in Q4, primarily reflecting the one time benefits we referenced in our last earnings call. Adjusted free cash flow was negative $1.8 million in Q1, reflecting earlier payments in the quarter. We are also pulling forward a portion of 2027 CAPEX into 2026 in response to strong demand signals. Even with that pull forward, we continue to expect adjusted free cash flow to be positive for the full year with improvement weighted towards the second half of the year. We have the capital in place to support the growth that we are seeing. We currently have more than $100 million in capital leasing capacity with approximately half of that utilized. Based on our current operating plan, we expect to fund growth through operating cash flow and capital leases and we do not anticipate the need to raise additional capital through follow on equity offerings. In fact, we plan to continue to focus on reducing our dilution through our modest stock buyback in our next share settlements for RSU grants. Looking ahead, we introduce updated B2 pricing and packaging effective May 1. The change reflects the investments that we have made in our platform performance, our effort to further simplify pricing by removing API transaction fees, and the rising cost of hardware and data centers on a net basis. We expect the pricing update to be accretive to revenue and margins and that will be reflected in our guidance. So, moving on to our guidance for the second quarter, we expect revenue to be in the range of 39.8 million to $40.2 million. On our last earnings call, we said B2 growth in the second quarter would be 12%. Based on this new midpoint, the B2 growth in Q2 will be closer to 20%, which is a big improvement. The Q2 outlook includes a partial quarter benefit from the May 1st pricing update along with variable usage from customers that we have already actualized in April. We are not assuming the same level of variable usage in the second half of the year. Adjusted EBITDA margin is expected to be in the range of 21 to 23% for Q2. The sequential step down from Q1 reflects the timing of investments as we continue to build for growth. Turning to the full year, we are raising our full year revenue guidance to 161.5 million to 163.5 million, up $5 million from our prior midpoint of 157.5 million. That increase reflects 2 factors stronger first quarter performance impacting the rest of 2026 and the benefit of the new B2 pricing and offering Each contributes to approximately half of the raise. We are also raising our full year adjusted EBITDA margin guidance by 400 basis points to a range of 23 to 25%, up from 19 to 21% previously. As a reminder, our guidance philosophy excludes individual deals greater than $500,000, high variable usage above contracted minimum and incremental upside from our go to market transformation. As these elements become more predictable and repeatable, we will incorporate them into our forward guide and communicate that transition Clearly. In summary, Q1 was a strong quarter across the board. Revenue beat, adjusted EBITDA beat, B2 growth accelerating and bookings improving. We remain focused on executing on our AI opportunity by driving forward our go to market transformation and scaling our B2 business. We look forward to your questions with that operator. Please open up the line.
OPERATOR
Thank you and we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be Able to take as many questions as possible. We ask that you please limit yourself to one question and one follow up. Again, it is star one to join the Q. And our first question comes from the line of Mike Sikos with Needham. Your line is open.
Mike Sikos (Equity Analyst at Needham)
Hey guys, thanks for taking the question here. Congratulations on the strong start to calendar 26. First question I guess is more for Gleb, but I just wanted to get more on the success that you guys are seeing with the AI customers following the go to market transformation initiatives we've put in place. Can you just talk to the improved visibility you have for those AI customers in the pipe and as you have more of these customers, I guess begin to season, Are you noticing, is there a significant departure as far as cohort behavior or sales cycles? And then I just have a follow up.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Hey Mike, thanks for the question. You know, I'll use actually the two customers that I referenced in my prepared remarks as an, as a good example. So one of the customers came to us through the GTM motion that we're building, right? So the machine that we're building, the combination of outbound targeting, better systems going to, going to the AI events and so we found them through that outbound process. The other one actually came to us as a referral from one of our existing AI customers who said that they were having a great experience and specifically they were saying that the combination of the performance that they were getting from our platform at the price point that they were getting was unmatched. And so they referred them over. And so we're seeing more AI companies coming to us. We kind of feel like the market is coming our way and it's really from both of these. Part of it is from the work that we're doing, part of it is from the referrals in the market coming to us. So that maybe that answers kind of the first part of that in terms of the cohort part of it. Maybe you can ask your question if I didn't completely get it, but one of the things we mentioned on the prior call is that we're seeing the AI companies growing much faster, about three times faster than our average customer. And that's just a function of their inherent data growth driven by their AI use cases. Did that answer the question you were asking?
Mike Sikos (Equity Analyst at Needham)
It does, it does. Thank you for that. And then for the follow up, I think it might be more geared towards Mark, but I just wanted to double check on the B2 with the NOR of 110%. I know you said, hey, we drive that between two factors. Right. You have the data consumption which grows each year and then you also have the cross sell upsell. And I just wanted to see can we unpack that a little bit more to get evidence of the go to market actually driving adoption. Whether it is the cross sell upsell motion, what are the drivers behind that B2NRR today? If I'm trying to unpack consumption growth versus go to market initiatives to expand wallet and drive additional offerings into the installed base.
Mark Sweden (Chief Financial Officer)
Yeah. Hey Mike, I'll start off by saying I think the best evidence of the, of the GTM working is the, the RPO disclosure of committed contracts that change quarter over quarter. So for commitments of, of less than a year, it's up $3.4 million. You could see it on slide 19 of our earnings deck. So I think that's the best evidence of the performance. Now that is made up of both new logo as well as expansion sale. The expansion sale realistically does fluctuate. You know, on the nrr we did move to in quarter reporting versus the trailing four quarter average specifically to give you more visibility and to hold us accountable to explain what's happening. So there will be more fluctuation there from that, from that perspective. So it's up to 110% from 105% a year ago. Because a year ago was the quarter where we did talk about one customer, one large customer going away. I mean since I joined that was the only time we've had to reference that. So that's, that's what drove that improvement year over year. But it generally fluctuates around 110 on a stable basis. But there's going to be some ups and downs and the expansion changes will be the biggest driver of that because the organic growth tends to be incredibly stable and predictable.
Mike Sikos (Equity Analyst at Needham)
Excellent. Thank you so much and congrats again on a strong start to the year.
OPERATOR
And our next question comes from the line of Itai Kidron with Oppenheimer. Your line is open.
Itai Kidron (Equity Analyst at Oppenheimer)
Thanks. Hey guys and congrats. Great, solid numbers. I had a couple of things maybe starting with you, Mark. Can you be a little bit more, can you give us a little bit
Mark Sweden (Chief Financial Officer)
more color on the pricing update? The magnitude of this, how much of this you think you can capture? I'm just trying to think about your growth without the pricing update. How would your outlook would have looked without it? I'm just trying to get my hands around that. Yeah, absolutely. So in the $5 million raise for the year, half of it is from the pricing and packaging change. Half of it is from the strength of the business that we observed in Q1. So the bookings, the strong bookings in Q1. So if you look at that RPO number I referenced just a few moments ago, that kind of roughly equates to the raise from the organic health of the business for the rest of the year because that has no price increase in it. We continue to guide very prudently for the rest of the year. So the same philosophy we laid out last time, which is no large customers, no no go to market benefits and not accounting for large variability of that large customer. What I would say also within Q2, I could give you a bit more color there. You know, last time we said Q2 would grow by for B2 would grow by 12% year over year. Now it's 20%. That difference is more anchored on the organic health of the business because the price change took effect May 1. So it's not a full quarter. And we obviously actualized some of the things we saw in April in the business and on the price, I mean we could elaborate a bit more on that price change. It's not a flat price change, it's a pricing and packaging change. So for instance, we are including now transaction API fees. So in the spirit of being the simplest billing model out there, we further simplify by no longer billing customers for transaction fees.
Itai Kidron (Equity Analyst at Oppenheimer)
Got it. Okay. And then as a follow up, maybe one for each of you. Mark, for you on the computer backup, the net retention rate is now well below 100. So is this a model, is this a business we should model towards decline now going forward? And for you Gleb, on the go to market side, great to see the progress there. What else is left here? What is it that between now and Iran still needs to kick in that hasn't from your perspective?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
So Itai, just to reiterate the we're still, we're still thinking of computer backup as declining year over year, 5% and you know the NRR is going to be tightly tied to that because it's a subscription business, not consumptive, which would mean that B2 would grow 24% year over year. So the, the change in outlook is pretty much all on B2 and computer backup remains at a decline of 5% is what we're forecasting and guiding. EJ thanks for the question about the GTM transformation. What's done and what we have to do still. So what I'll say is I think we've made great progress this quarter and there's still a variety of things that we want to get further. Right. So we hired Anuj Kumar to run that organization. I've asked Jason, who's with us, to take on and focus most of his time on the Neo Cloud opportunity. So Jason works for Anush and you know, we see that as a $14 billion opportunity. So we're putting focus and resources on that specific part of the opportunity. With Jason focusing on that, the awareness generation is off to a good start with Flamethrower, but you know, it's only been a couple months in and so we've, you know, we've been moving faster than I think expected on that and we've been invited to participate in some great organizations and partnerships with, you know, a 16Z and startup grind and Launch. But it's, you know, there's a lot of opportunity there still. Between that and the open source developer efforts that we're doing, there's still a lot of opportunity to make sure that everyone thinks of backwards as their first spot for their price performance storage. So there's, you know, there's a lot that we've done. There's still, I think, a lot of opportunity that we have. There's. I am excited that we're seeing pipeline growth stronger than we've seen in the past. We're seeing more of our sales team hitting their quota than we've ever seen in the past. So a lot of the right things are happening. But we still, you know, we're always
Itai Kidron (Equity Analyst at Oppenheimer)
going to keep working on it. Appreciate it. Good luck. Thanks.
OPERATOR
And our next question comes from the line of Eric Sepiger with B. Riley Securities. Your line is open.
Eric Sepiger (Equity Analyst at B. Riley Securities)
Yeah, thanks for taking the question and congrats on a real good quarter. Can you speak to what portion of the Neo cloud market you're either servicing or at least engaged with? And then where are you in terms of the hiring on the, on the sales front? Are you adding additional salespeople at this point or where are you on that from that perspective?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Yeah. Thanks, Eric. So there are about 200 neo clouds. We are, we went to GTC, the Nvidia's premier conference, and had just a host of great conversations there at GTC. Yeah, sorry, some noise on the online. So the, what I would say is we're, we're engaged with most of the top neoclouds as part of it. The part that we are servicing for them is this data lake layer. Right. So if you think of the AI workflow, the GPUs themselves, there's the very low latency, high performance flash that you want adjacent to the GPUs. And then what you need is the place where you store all of the data, right? So you can almost think of it if the whole AI workflow was a laptop. You've got your compute, your cpu, you've got the RAM and you've got the hard disk or ssd. We are basically providing that hard disk layer. There's about half a dozen companies that provide that RAM layer and then the base neo cloud part is that CPU GPU part. So we're providing that large scale, high performance, not the highest performance, but high performance per dollar data lake layer for them. And so we're the, we're a white labeled provider for them. We're doing that as we talked about in the last call. We've got, you know, the six, seven and eight figure deals that we've signed for that. We have others that are in the works and we're engaged with a bunch of the neocons at this.
Eric Sepiger (Equity Analyst at B. Riley Securities)
Can you give us a sense of what portion of the neoclouds out there, of the 200 that are out there that you're speaking to? Do you think it's a quarter? Do you any gauge on what penetration you've had?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
So I think in terms of the conversations and engagement side, probably somewhere around that number. But I would say we're engaged with pretty much all of the top ones at this point point and having, you know, different levels of conversations and some in POCs etc with them on the, on the sales side of it. You know, we talked earlier this year that there were a number of different roles we wanted to fill at this point. I'm excited to say we've. We filled the, you know, the CR role with anuj. We filled the rev ops role, we filled, filled the sales development role. And so we've got a really strong build out of that team now.
Eric Sepiger (Equity Analyst at B. Riley Securities)
Very good, thank you. Thank you.
OPERATOR
And her next question comes from the line of Jeff Van Re with Craig Hallam. Your line is open.
Jeff Van Re (Equity Analyst at Craig Hallam)
Great, thanks for taking my questions. Guys, a couple. First, just maybe Mark, help me with the guide in the outlook. I'm trying to understand the progression here. So in, at the end of February, what February 24th, you took roughly 4 million out relative to the consensus and now we're putting 5 back in. I'm trying to understand, you know, in, in the February 24th call, was the May 1st price increase in B2 already contemplated in the guide?
Mark Sweden (Chief Financial Officer)
Hi Jeff. No, that was not contemplated in the guide. And in the, the 5 million increase we just did half would be from the pricing, half would be from the organic momentum and health of the business. We saw in Q1 and the change is really a lot of it. This guidance philosophy we spoke about just a lot more prudent going forward. That's what drove the change.
Jeff Van Re (Equity Analyst at Craig Hallam)
Did you, if you take the final month of the quarter, March and then April was there. I don't know if radical is the right word to use, but did you see substantial improvement in close rate? Because it sounds like you're saying your conviction is coming both from improved bookings as well as usage. So I'm trying to understand how Jan. Feb bookings were weak. Ish. And then all of a sudden March, April really killed it. I know you've made some process change over, you know, over time to sales, but it was just such a quick snap. Is that maybe you can just help me dial it in there a little bit.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Yeah, Jeff, I mean this is level. Maybe I'll touch on and Mark can also weigh in. So we certainly had a, a more back ended quarter in Q1 and we, and we started off Q2 strong. So there's definitely enhanced feel from the numbers that we're seeing. Right. And then I think, you know, and we talked about like, you know, the million dollar ish deal that you know, closed in 11 days that you know, that started and closed toward the end of, of the quarter. But it wasn't, it wasn't the only deal. Right. The pipeline itself has been, has been building strongly this April and I think we're layering that on along with the execution that we're doing on our own side. So I think that that's kind of the, I guess the conviction and emotion side of things based on the data and, and the execution. And then I'll let Mark, if you want to add anything on beyond that, on the guide side of things.
Mark Sweden (Chief Financial Officer)
Yeah, I mean Q4 bookings back in, Q4 bookings were good, but you know, we wanted to hit that 30 growth, Jeff. To hit 30 growth, you know, we'd have to be booking like $5 million a quarter. Okay. So we, we weren't at that rate yet, but it's been improving pretty much every quarter. And this latest Q1 is, is a further improvement and probably the closest we've gotten frankly. And the demand signals are really strong, so. The demand signals being really strong. Yeah, we're feeling good about the outlook, but we're still guiding with that prudence and you know, we'll, we'll use some of that price change to also fund some additional CapEx, so we could have further capacity in place to handle that demand because we don't want to be in a position where we're declining any revenue opportunities.
Jeff Van Re (Equity Analyst at Craig Hallam)
Yep, yep, got it, got it there. And just to follow up on that last piece then, in terms of the outlook for the year for capex for 26, I heard you referenced it, but can you just give us a number there? What do you think? What are you expecting? And then also on the stock come. Thanks.
Mark Sweden (Chief Financial Officer)
Yeah, on the, on the, on the CapEx side, we're probably going to be around mid-30s as a percent of revenue. I would say there's three factors there. One, last quarter we spoke about that large customer. We've got a service next year, but we need to get that capex in place now to all the strong demand signals. And three, the general equipment cost is 30% higher than it was on a per unit basis from a year ago. So for those three factors, we're beefing up our CapEx plan for this year, accelerating it from 2017 to this year.
Jeff Van Re (Equity Analyst at Craig Hallam)
Yeah. And your thoughts on stock comp?
Mark Sweden (Chief Financial Officer)
I'd say pretty stable if you look at our headcount. I mean, generally speaking, year over year, our headcount is actually coming down. So we're continuing to drive more efficiency out of the business. So stock comp should be pretty stable in dollar terms. And as a percent of revenue, it does improve over time.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Jack, you know, one thing I would also just mention, since you bring up supply chain and supply chain constraints and all that, what's interesting is, you know, we have to buy the equipment, right? So we have to, you know, spend more on some of that side of things. But the interesting thing is also there we get two tailwinds from the supply chain being constrained on the GPU side. When because the supply chain is constrained on the GPU side, customers are saying, well, I need to go and have access to wherever the GPUs are available. And so we rarely talk with customers who say I have to have my data somewhere that I can send it to whichever NEO Cloud has the GPUs available. And on the memory side, which is also obviously heavily constrained, the NEO clouds that offer cloud storage have been building out often on flash and that becomes really expensive, especially now with the constraints there. And so it's driving additional interest from the NEO clouds in working with us on that data lake tier. So on the one hand we have to deal with pre buying ourselves on the equipment side for CapEx, but on the other side we have these two tailwinds to the business.
Jeff Van Re (Equity Analyst at Craig Hallam)
That's helpful. Congrats Jeff.
Mark Sweden (Chief Financial Officer)
Just to step back on Stop comp, I mean if you look at the statement of cash flows Q1, obviously stock comp is higher as we settle some of our annual bonuses in equity as well. But you'll notice this year's stock comp was actually lower than last year's.
Jeff Van Re (Equity Analyst at Craig Hallam)
That's helpful. Great, thanks. Congrats on the turn, guys. Thanks Jeff.
OPERATOR
And our next question comes from the line of Jason Ader with William Blair. Your line is open.
Jason Ader (Equity Analyst at William Blair)
Yeah, thanks. Good afternoon. I just wanted to get a better sense on the Neo clouds, you know, what, what are the size of some of these deals? I know you talked about the eight figure deal that's coming in I believe next year, but maybe just more detail on some of the other deals that you've landed or are in the pipeline. Are we talking about kind of household NEO cloud names that are contracting with you for you know, potentially further kind of eight figure deals? I mean just, I think gauging kind of how significant an impact you might have from some of these NEO cloud opportunities would be helpful.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Yeah, thanks Jason. So first of all the, we estimate that our opportunity in the NEO cloud market by 2030 is 14 billion and that is just the data lake tier that we provide.
Jason Ader (Equity Analyst at William Blair)
Right. So that's not the entire storage footprint. The deals that we have signed, the six, seven and eight figure deals that we've signed, I'll say two things. One is you would recognize them, right? They are companies that you would know. And two is that all three of those, our initial deals, so all, all three of them are ones where companies, the companies look at it as the way to start not, not the total opportunity. So I think, you know, there's frankly I, I, I can, I could see a path where the six and seven figure deals could become eight figure deals themselves. You know, the eight figure deal, you know, can certainly scale from where it is once it's, once it's ramped. So that's kind of a little bit of that side of the opportunity. The other conversations that we're in, you know, many of them are, assuming they move forward are of that same scale. You know some, some of the conversations are, you know, we may want to start with a six figure or seven figure deal but many of them be scale of the opportunity is eight figures at ramp.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Okay, helpful, thanks. And then just on the, I guess the risk potentially that the Neo clouds add a lower cost storage tier and then you know, you guys are helping them for a Little bit. But then, you know, they kind of insource it. You know, I mean, it's always possible, but it's a little bit like, you know, for the first almost two decades of Backblaze, one of the questions we were always asked was, you know, what happens if AWS ends up lowering their price to match you? And, you know, we're two decades in and, you know, that hasn't happened. I think that the challenge is it's not easy to build the type of it that we have built up over the last two decades. It requires scale and expertise and a focus over a long period of time to get it really honed and right. The thing for the neoclouds is they have a lot of things they need to do. There's opportunities around GPUs and GPU scaling and optimization and how do you make tooling better for inferencing and all kinds of things. Spending all their resources to try to replicate what we have built over the last two decades is probably not the best place for them to invest their own resources when they can, when time to value is so much faster by using backblaze.
Mark Sweden (Chief Financial Officer)
Okay, great. And then Mark for you, just a couple of quick ones. So with the higher capex, are you still guiding for free cash flow positivity this year? Yeah, so the second half of the year we're still guiding for that to be free cash flow positive for, for the whole year. I mean, Q1 was minus 1.8 million. Q2 should be somewhere around neutral and the second half of the year should be positive. So net net for the year we should be, you know, neutral or very, you know, 1% of revenue free cash flow positive despite the acceleration of the CapEx.
Jason Ader (Equity Analyst at William Blair)
Okay, great. And then, and then just on the gross margin, just last question for me. Sorry. It sort of, as I look at the last few years, I'm looking at just the, not the adjusted gross margin but the, you know, the reported non GAAP gross margin. It was like mid-50s for a few years and then last year was 62, roughly 62 in Q1. Can you just remind us of like what caused the kind of the significant increase in the gross margin and then maybe some puts and takes going forward on that gross margin line.
Mark Sweden (Chief Financial Officer)
Yeah, sure, Jason. So if you, if you go about a year ago, we, we reviewed the estimated useful life of our fixed assets and it turns out we're using all our fixed assets for typically six years onwards. So we moved all the depreciation to six years. So that drove a big benefit to gross margin. Second, all other lines, like if you think about all the labor or payment fees or everything else that fits through our cost of sales, we've managed really tightly year over year. So it's kind of staying flat in absolute dollars pretty much and improves as a percent of revenue. We're looking at everything within our gross margin now to further drive optimization. But I would say between the price increase, which benefits gross margin, but the accelerated capex which will push on gross margin down, it should stay flat around where it is now. We're not seeing, we're not guiding through any major changes in gross margin through the rest of the year.
Jason Ader (Equity Analyst at William Blair)
Okay, thank you very much. Thanks, guys.
OPERATOR
And our next question comes from the line of Eric Martinezzi with Lake Street Capital Markets. Your line is open.
Eric Martinezzi
Yeah, I was just curious about the timing of the price increase. I went back and looked it up. I guess it was October of 2023 was the last time you raised the price on B2, and you really hadn't raised it since you rolled out the product back in 2015. So we're at about the two and a half year mark here with the price increase. Was this something that you felt like, hey, we're delivering more value, we need to capture more value, or was there competitive issues where competitors were raising price and kind of provided an umbrella for you to do the same?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Yeah, thanks, Eric, for the question. So, you know, we periodically reevaluate what the pricing and packaging of the offering should be. When we were looking at it, there were a few things that came together. One is that we've been investing more into the performance of the platform. More of our customers are using us in these hot use cases where we're driving high throughput, high iops. You know, we've been, you know, we, we made egress free before. And one of the things that that's enabled is not just that it's less expensive for the customers, but it allows them to actually run more frequent training of their models in the AI use cases. So it's actually unlocking their ability to innovate. But that, you know, that makes it, it's free for them. It's cost us money to provide that. So we've been working to increasingly provide more and more value to these higher performance, more active use cases. And we also wanted to simplify the pricing by removing transaction fees. So the pricing and packaging combination, along with, as Mark said, you know, the underlying costs of the components have been increasing. So taking all of that together, we decided this was the right time to do that.
Eric Martinezzi
Okay. And with regard to competitors, do you. I mean historically you guys have thrown out the, hey, we're 80% cheaper than Amazon does this. Obviously you're raising. I think what I saw was about a 15, 16% per terabyte per month. Does that shrink that gap now or do you still feel like there's a delta?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
There's. We are still dramatically more cost efficient than the alternatives out there. I was literally actually just talking to one of our account execs a couple days ago who was talking about a customer who has been ramping on our platform and they, they said that they moved over a lot of their data and they're continuing to move over more of their data, more of their use cases, because on the one hand, where we're more affordable on the storage side, Right? So just at the base level of storage. But where they were getting hit dramatically at their prior provider was that each time they egressed the data out from their provider to one of the other NEO cloud providers, they were getting hit with massive egress fees. One and two, the transaction fees were actually costing them three to four times more than the cost of the storage at their prior provider. So when you put it all together, they were more than 5x more expensive at their prior provider and they were literally wondering whether that was going to even be affordable for them to stay in business. So the scale of total cost of ownership that we provide on a benefit basis is still quite dramatic.
Eric Martinezzi
Got it. Thanks for taking my questions. Thank you.
OPERATOR
And our final question comes from the line of Rustam Conga with Citizens. Your line is open.
Rustam Conga (Equity Analyst at Citizens)
Great, Glad. Mark, thanks for taking my question. Nice clean set of results here. Just one on B2NEO. As workloads begin to shift more towards inferencing from training, will that lead to improving predictability and visibility? And then to that end, could you potentially share what percentage of NEO business on average or even directionally represents inference versus training workloads?
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Thanks. Sure. It's a good, good question. And the first part of the answer is yes. As things move toward inferencing, it does make it easier to be more predictable. Today, more of the use cases that we're seeing are related to model building and that's. That makes sense because a lot of the data sets right now that are very large and that need to be moved are related to the model building and we're a great service for that. But I'll give you an example. In the Genai media space I was talking about to a customer about their Data flow. And the data flow is they accumulate a lot of data, they store that data, they annotate that data, then they find a GPU provider that is available, and then they run iterative model building on the different GPU providers. So they use us to store that large data set, and as they acquire new data sets, they use us to store more of those large data sets. They love the fact that they can store those efficiently and then send them quickly and for free to the GPU provider they want. So they're using us in this whole model building process. Now, as they do that, the other side of their business, the actual thing that they offer and they charge for is generating videos. That's all the inferencing side. And so they're looking at us for the outputs of all that video. Because every single time a user generates new video, that video then gets stored basically forever. And each version and each iteration gets stored forever. We become a great place to store that. That inferencing side is a much more smooth and predictable site. The short answer is, yes, it will be more predictable as we get more inferencing. Today, the bigger workloads that we see are related to model building because we're great for that, but we are seeing more inferencing startup on our platform.
Rustam Conga (Equity Analyst at Citizens)
Okay, great. Thank you. Thanks, Rob.
OPERATOR
And that concludes our question and answer session. I will now turn the conference back over to Gleb Budman for closing remarks.
Gleb Budman (Co-Founder, CEO and Chairperson of the Board)
Thank you, everybody. Q1 was a proof point. We beat on revenue, beat on EBITDA. B2 is growing 24%. The deal size is more than doubled. The AI customers up 76% year over year. We are not just riding the AI way, we're building the infrastructure that supports it. We are key for the Neo clouds, key for the AI builders, and we've had nearly two decades of optimizing performance, performance per dollar at scale, which makes us ideal for the needs of AI. We raised guidance. We're on track for our first full year of free cash flow positivity as a public company. And we're picking up steam. Thank you to our customers, our partners, and thank you to our amazing team that's making all this happen. Thanks for joining our Q1 call and we look forward to connecting on the next one.
OPERATOR
All right, and ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.
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