Backblaze B2 Grew 47% While Backup Shrunk And Convertible Debt Funded Growth

Investment Thesis

Backblaze grew Q3 2026 revenue 26% to $46.7M because B2 Cloud Storage rose 47% to $30.5M, while Computer Backup fell 2% to $16.2M. Gross margin rose to 64% and adjusted EBITDA margin to 33%, yet nine-month adjusted free cash flow was only $1.9M. The company issued $201.25M of 0% convertible notes, materially changing the balance sheet to fund contracted growth and capital expenditure.

• Revenue. $46.7M, +26%.
• Mix. B2 $30.5M, +47%; Backup $16.2M, -2%.
• Margins. GAAP gross margin 64%; adjusted EBITDA margin 33%.
• Retention. B2 NRR 115%; Backup NRR 94%.
• Financing. $201.25M convertible notes; $194.5M long-term debt at quarter-end.
• This article contains no rating, price target or investment advice. Derived figures are marked (d).

Bottom line. The business is becoming a B2 storage company faster than the consolidated growth rate suggests. The trade-off is capital intensity: adjusted EBITDA is strong, but free cash flow is thin and external financing supplied most of the new cash.

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1).

Q3 2026 At A Glance

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1). Derived figures are marked (d).

What The Market Believes vs. What The Data Actually Shows

Forensic #1: Growth By Product

A blended growth rate can hide a fast-growing product and a shrinking legacy product. Mix determines the future margin and retention profile.

Backblaze revenue by product, Q3 2026

B2 supplied 65% of revenue (d) and all consolidated growth; without it, the company would have contracted. The shift is accelerating because B2 ARR grew 53%.

Why it matters. The consolidated business is being redefined by B2, while the legacy line is a drag.

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1)

Forensic #2: ARR And Retention Quality

ARR measures the annualized run rate, while net revenue retention shows expansion or contraction inside the customer base.

Backblaze net revenue retention by product

B2 customers expanded spending by 15% net of churn, while Backup customers contracted 6%. Total NRR fell from 107% to 105%, despite faster B2 growth, because mix transition and legacy contraction still matter.

Why it matters. Retention shows whether growth comes from durable expansion or repeated new-customer acquisition.

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1)

Forensic #3: Adjusted Profit Versus Cash

Adjusted EBITDA removes depreciation, stock compensation and other items. For storage infrastructure, depreciation and capex are economically important, so cash conversion is the harder test.

Backblaze adjusted EBITDA and nine-month cash measures

Nine-month operating cash flow improved, but adjusted free cash flow was only $1.9M after capex definitions and other adjustments. Property and equipment plus capitalized software spending totaled $12.3M (d).

Why it matters. Infrastructure growth is valuable only if the capacity eventually earns cash returns.

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1)

Forensic #4: Convertible Financing And Outlook

A zero-coupon note avoids current cash interest but can still create future repayment or dilution. The financing should be compared with the cash it adds and the capacity it funds.

Backblaze financing and liquidity after the note issue

Cash and securities rose to $230.2M, but long-term debt rose to $194.5M. Net cash was only about $35.8M (d), so the gross liquidity headline should not be read without the new liability.

Why it matters. The financing extends the runway but transfers part of future upside to noteholders if converted.

Source: Backblaze Q3 2026 earnings release (8-K Ex. 99.1)

Valuation Snapshot

At $7.40 per share, Backblaze had a market capitalization of $449.9M. Subtracting $230.2M of cash and securities and adding $194.5M of long-term debt gives enterprise value of approximately $414.2M (d).

Investment read-through. The 7.6x adjusted EBITDA multiple looks inexpensive beside 47% B2 growth, but the near-zero cash yield shows why the market discounts that EBITDA. If adjusted EBITDA converted to cash at 50%, enterprise value would equal about 15.3x cash earnings (d); at 25% conversion it would be 30.5x (d). Cash conversion, not revenue growth alone, is the rerating trigger.

What has to be true. B2 retention must remain above 110%, capital spending must normalize and adjusted EBITDA must become free cash flow before convertible dilution becomes material.

Source: Market quote and market capitalization from the in-session U.S. equity market feed; cash, debt and guidance from Backblaze's Q3 2026 SEC exhibit. Market data: latest quote retrieved after the November 2, 2026 U.S. trading session.

Risks: What Would Break The Thesis

• Legacy decline. Backup NRR is below 100%.
• Cash conversion. Free cash flow trails adjusted EBITDA.
• Convertible dilution. Notes can dilute equity depending on terms and price.
• Capital intensity. Property, equipment and internal-use software are growing.

The case improves if B2 NRR holds above 110% and capex per dollar of added ARR declines.

What To Watch Next

• B2 revenue growth against 47%.
• B2 NRR against 115%.
• Backup NRR against 94%.
• Adjusted free cash flow after $1.9M year to date.
• Use of the convertible proceeds.