JFrog Ltd. (NASDAQ:FROG) Q1 2024 Earnings Call Transcript

JFrog Ltd. (NASDAQ:FROG) Q1 2024 Earnings Call Transcript May 9, 2024

JFrog Ltd. misses on earnings expectations. Reported EPS is $-0.08213 EPS, expectations were $0.14. FROG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for joining us, and welcome to JFrog’s First Quarter 2024 Financial Results Conference Call. I’ll now hand the conference over to Jeffrey Schreiner, VP, Investor Relations. Jeffrey, please go ahead.

Jeffrey Schreiner: Good afternoon, and thank you for joining us as we review JFrog’s first quarter 2024 financial results, which were announced following the market close today via a press release. Leading the call today will be JFrog’s CEO and Co-Founder, Shlomi Ben Haim; and Ed Grabscheid, JFrog’s CFO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, and including our outlook for Q2 and the full year of 2024. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations.

You are cautioned not to place undue reliance on these forward-looking statements which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31st, 2023, which is available on the Investor Relations section of our website and the earnings press release issued earlier today.

Additional information will be made available in our Form 10-Q for the quarter ended March 31st, 2024, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures which are used as a measure of JFrog’s performance, should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog’s Investor Relations website for a limited time. With that, I’d like to turn the call over to JFrog’s CEO, Shlomi Ben Haim.

Shlomi?

Shlomi Ben Haim: Thank you, Jeff. Good afternoon to you all and thank you for joining our call. I’m pleased to report another strong quarter for JFrog, with all metrics exceeding the high end of our guidance range. Unification of DevOps, DevSecOps, MLOps and MLSecOps in a single platform continues to resonate in the market, resulting in continued expansion across the portfolio. In the first quarter of 2024, JFrog delivered total revenue of $100.3 million, up 26% year-over-year. Our cloud revenue continued to show positive momentum in Q1, equaling $36.9 million, a growth of 47% year-over-year. Cloud growth above our guidance range of mid-40s was supported by increases in customer consumption. In Q1, JFrog customers with ARR greater than $100,000 grew to 911 compared to 785 in the prior year, increasing 16% year-over-year.

Customers with ARR greater than $1 million increased by three in the quarter, now equaling a total of 40. This is up from 21 in the year ago period, growing 90% year-over-year, reflecting the continued success of our sales teams top down efforts and adoption of the complete software supply chain platform by the enterprise. Our customers continue to tell us that having a single system of record that allows the seamless, secure flow of Binaries for DevOps and Security is mission critical to their business. In addition, we see the practices of DevOps being implemented by organizations that wish to enable the next generation of applications already incorporating gen AI and machine learning. In the past year, we extended the JFrog software supply chain platform to include MLOps and MLSecOps solutions as mandatory requirements to support our users alongside DevOps and DevSecOps comprehensive solutions.

This unified approach led to some of the themes behind our first quarter of successes that will be discussed today. On our call today, we will cover the continued adoption of the JFrog platform, including embedded holistic security solutions. Next, I will look at the cloud usage and migration trends. We will also share updates about our partners and channel go to market activity and game changing technology integrations. Finally, I will share how JFrog’s AI and ML solutions support the emerging needs of our customers. Let me address the adoption of the JFrog platform by the world’s largest companies. As a unified software supply chain platform with Artifactory at its core, the JFrog platform continues to be chosen as mission critical partner by some of the world’s most demanding and highly regulated enterprises who are increasingly looking to standardize on holistic solutions.

One of the most recognizable financial services companies in the world, Fidelity, recently expanded their relationship with JFrog to drive DevOps scale alongside security, while increasing SLA capabilities for the thousands of developers. Supporting over 42 million customers with a stated goal of over 90% of their applications in the cloud by 2026, Fidelity needed a partner with robust, hybrid and multi cloud capabilities to support their cloud first and enterprise scaled DevSecOps vision. Gerard McMahon, Head of ALM Tools and Platforms at Fidelity, noted in a webcast with JFrog, the whole development processes have become much more symbiotic, you have to shift left, shift middle and shift right. As we continue to use tools like JFrog Xray and JFrog Artifactory, security is much more ingrained into the full lifecycle of software delivery.

Fidelity is not alone. We see companies increasingly integrating DevOps and security strategies through tool consolidation, scalability planning and embracing cloud hybrid and multi cloud environments. DevOps stakeholders have already taken ownership of software supply and security in most companies, but enterprises failing to streamline security tools by minimizing point solutions will face higher expenses, waste time, inability to automate security practices, also known as DevSecOps, and possibly place the entire organization at risk. One of the strongest differentiators is the company’s security research team that fuels tools with unique data, often before anyone else in the market, delivering crucial value into DevSecOps processes. Reflecting this reality, the JFrog Security Research team recently released a Software Supply Chain State of the Union report.

The report revealed that many companies still have major security gaps, with only about half of companies actively scanning and securing both code and binaries. It also revealed that despite sometimes using ten or more security point solutions, companies are unable to detect that nearly 75% supposedly critical vulnerabilities are not even exploitable. Industry analyst, Paul Nashawaty from Futurum Group noted regarding the report and its consequences. JFrog’s analysis reveals an important finding. A sizable percentage of vulnerabilities that have been reported are not exploitable. This emphasizes how crucial it is for engineers to distinguish between theoretical vulnerabilities and those that pose real concerns. Our security research team’s reports are closely tracked by the market as they often uncover groundbreaking insights.

These finding serves as the cornerstone for enhancing our tool capabilities, ensuring JFrog Xray, JFrog Advanced Security and JFrog Curation, deliver our users unmatched DevSecOps protection. I would now like to address our cloud business. Exiting the first quarter of 2024 we continue to see organizations looking for optimization for the cloud spent in tight budgetary environments. We are actively building the pipeline for cloud migration and anticipate enterprise efforts will accelerate throughout the year, similar to how they approached 2023. We are also seeing cloud customers looking to standardize on best of breed platforms to effectively manage the software delivery. For example, JFrog customer, Informatica, recently signed a new deal to grow the JFrog platform as the system of record for their software supply chain.

Attracted to JFrog’s universality, breadth of solution and cloud first development approach, Informatica supercharged their platform experience. Their DevSecOps team noted, Informatica empowers their customers to realize the transformative capabilities of their data utilizing company’s AI-powered data management platform. By partnering with JFog and leveraging the solutions for our DevSecOps needs, we are able to take advantage of best practices across our software supply chain to improve efficiency. We expect JFrog’s cloud growth in 2024, much like the previous year, to continue to be driven by usage expansion. We anticipate that cloud migration projects will gradually emerge carefully managed within budget constraints. Our guidance aligns with evolving market trends and we remain committed to collaborating with our customers and partners to facilitate the adoption of our software supply chain platform.

Now I want to address our partner and reseller network as part of our strategic channel goal. JFrog is constantly expanding our partner network across resellers, integrators and technology partners. As an investment in this area, we recently formalized a partnership with the leading governmental distributor Carahsoft to serve as a JFrog Public Sector Distributor. Natalie Gregory, Vice President of Open Source Solutions at Carahsoft said, “Supply chain attacks in recent years have highlighted the importance of integrating security into each phase of software development.” “Supply chain attacks in recent years have highlighted the importance of integrating security into each phase of software development. A single source of tools for companies’ binaries in a solution like JFrog Artifactory along with integrated security as part of a holistic platform, allows JFrog to provide agencies with unparalleled DevSecOps agility and peace of mind for the software supply chain.

We anticipate further growth in JFrog’s indirect and reseller sales for the enterprise as we continue to expand our partner programs across sectors and geographies. Finally, allow me to discuss the expansion of our platform to support MLOps and GenAI initiatives. In today’s hype, every DevOps tool is talking about how their solutions support or utilize AI-based practices. But beyond the buzzwords, there is a critical question, can the solution deliver on its promises? Can the infrastructure you use effectively guide ML powered software securely from development to production? ML models are like all other binaries that require management, security and governance. JFrog with this model as a package approach, once again offers a top tier solution to the industry, enabling freedom of choice for ML engineers and responsible AI adoption by the organization.

With our commitment to universality, we have always focused on making the JFrog Platform too integrated to fail, with Artifactory as the model registry of choice we recently introduced the industry’s first DevOps platform to seamlessly integrate with MLflow and Qwak platforms as we anticipate MLOps market needs. Driven by the organic growth of our platform and customers’ demand, we continue to actively integrate AI and machine learning into software supply chain practices. MLflow, a Databricks Open Source project which has over 14 million monthly downloads, gives users the ability to build, manage and deliver ML models in a streamlined workflow. Ali Ghodsi, CEO of Databricks, the data intelligence platform designed to help organizations harness the power of big data and artificial intelligence set.

Originally developed by Databricks, MLflow streamlined the machine learning processes with a platform for experiment tracking, model packaging and model deployment. Through a JFrog Platform integration, users can now seamlessly utilize JFrog Artifactory as a model registry with JFrog Xray to secure the ML model artifacts. This integration accelerates both the development and deployment phases of ML powered applications, helping companies to drive responsible AI practices. As noted, we also announced the JFrog and Qwak integration. Qwak is an MLOps platform designed to facilitate the construction, deployment, management and monitoring of AI workflows, allowing users to deliver AI applications at speed and scale. This integration further expands the JFrog Platform catering to ML engineers by providing them with a single source of tools for their models.

Alon Lev, CEO of Qwak noted, integrating with a proven artifact repository like JFrog Artifactory allows Qwak to provide the automation capabilities that makes data scientists and ML engineers more efficient, while allowing DevOps and DevSecOps team to manage ML models like any other software package in a holistic, secure software supply chain. As JFrog continues to bring together DevOps, DevSecOps, MLOps and MLSecOps into a single enterprise-grade platform, we look forward to supporting the emerging needs of our users and aim to further expand the platform to enable ongoing consolidation needs across the software supply chains. We are excited about the growth opportunity the world of MLOps and MLSecOps introduced as part of the GenAI revolution, and we will keep expanding our platform forward the direction as it’s natural leap forward for us and for our customers.

With that, I will turn the call over to our CFO, Ed Grabscheid, who will provide in-depth recap of Q1 financial results and update you on our outlook for both Q2 and full fiscal year of 2024. Ed?

Ed Grabscheid: Thank you, Shlomi and good afternoon, everyone. During the first quarter of 2024, total revenues were $100.3 million, up 26% year-over-year. First quarter results exceeded the high end of our guidance range across all measures as a result of ongoing strength in our cloud revenues and growth in our Enterprise Plus subscriptions. We continue to see customers looking to consolidate their software supply chain tools towards a best-of-breed platform solution. Our results demonstrate strong execution during the first quarter. As noted by Shlomi, in the first quarter of 2024, we saw customers allocating efforts towards efficiency in their software development spend versus a focus on accelerating new projects. Cloud revenues in the quarter equaled $36.9 million, up 47% year-over-year, representing 37% of total revenues versus 31% in the prior year.

The growth in the cloud revenues above our guidance in the mid-40s for 2024 was driven by customer usage levels above commitments. We reiterate fiscal 2024 baseline cloud growth around the mid-40s for the full year. Self-managed revenues are on-prem were $63.4 million, up 16% year-over-year during the first quarter. We anticipate self-hosted revenue growth trends in 2024 will be similar to 2023. Net dollar retention for the four trailing quarters was 118% in line with our guidance for high-teens during 2024. Our gross retention rate remained at 97%. Our first quarter results saw strong customer adoption of the complete JFrog platform, driven by customers consolidating point solutions and securing their full software supply chain. In Q1, 49% of total revenue came from Enterprise Plus subscriptions up from 44% in the prior year.

Revenue contribution from Enterprise Plus subscriptions grew 39% year-over-year. Now, I’ll review the income statement in more detail. Gross profit in the quarter was $85.3 million, representing a gross margin of 85.1%, compared to 82.9% in the year ago period. The increase in gross margin relative to the year ago period is attributable to the elimination of outsource costs derived from the synergies related to the acquisition of Vdoo and ongoing cost discipline efforts. We reiterate expectation for annual targets remaining between 83% to 84% in the near future, then trend towards the low-80s aligned with our long-term model and cloud growth. Operating expenses for the first quarter were $71.3 million, up $5.2 million sequentially equaling 71% of revenues, up from $63.5 million or 80% of revenues in the year ago period.

We continue to remain focused on expense discipline while investing in scaling our enterprise sales team, channel partner ecosystem and strategic R&D spending. Our operating profit in Q1 was $14.1 million or 14% operating margin compared to an operating profit of $2.7 million, or 3.4% operating margin in the year ago period, an improvement of 10.6 percentage points. Earnings per share equaled $0.16 based on approximately 114.6 million weighted average diluted shares compared to $0.06 per share in the prior year on 106.9 million weighted average diluted shares. Turning to the balance sheet and cash flow, we ended the first quarter of 2024 with $579.6 million in cash and short-term investments, up from $545 million as of December 31, 2023. Cash flow from operations was $17.5 million in the quarter.

After taking into consideration our CapEx requirements, free cash flow was $16.6 million, or 16.6% free cash flow margin. We remain committed to our free cash flow margin targets provided within our long-term model, implying an estimated mid-point of 28% over the coming years. As of March 31, 2024, our remaining performance obligation totaled $261.7 million. Now, I would like to speak about our guidance for the second quarter and full year 2024. Our outlook for 2024 implies continued momentum within our cloud business, driven by expectations for increasing customer usage, adoption of our Enterprise Plus platform and contribution from new security products. We anticipate seasonality in 2024 to be consistent with 2023 as customer activity likely accelerates through the year, weighted more towards the second half as budgets and resources are allocated to key initiatives after focus on expense rationalization by customers during the first quarter.

Given the expectation of our self-hosted and cloud businesses, we reiterate our guidance suggesting a net dollar retention rate in the high-teens exiting the fiscal year 2024, implying stability through the remainder of the year. We will continue to expand operating expenses on a dollar basis during 2024, but see room for operating leverage as ongoing cost discipline and strategic investment remain balanced. For Q2, we expect revenue to be between $103 million and $104 million, equaling 23% year-over-year growth at the mid-point. With non-GAAP operating profit between $13 million and $14 million and non-GAAP earnings per diluted share of $0.13 to $0.15 assuming a share count of approximately 116 million shares. For the full year of 2024, we raised our revenue range between $425.5 million and $429.5 million.

Non-GAAP operating income is expected to be between $56 million and $58 million, and non-GAAP earnings per diluted share of $0.59 to $0.61 assuming a share count of approximately 116 million shares. Now, I’ll turn the call back to Shlomi for some closing remarks before we take your questions.

Shlomi Ben Haim: Thank you, Ed. In one week, Israel will observe its 76th Independence Day. This year, Israel can truly celebrate, but only mark the day. The 132 civilian hostages still held by Hamas in Gaza since October 7 reminds us that until they are safely reunited with their families, an important milestone like Independence Day cannot be celebrated in full. Despite the ongoing challenges of the war in Israel and global macroeconomic uncertainties, the JFrog team remains dedicated to our goals and culture. Team JFrog, your unwavering commitment and consistent delivery are truly admirable. I’m saluting your resilient spirit and thank you for your hard work. Q1 was a solid start for the year. We continue to believe that JFrog, as a system of records for the entire software supply chain is uniquely positioned for success in the expanding world of DevOps and security, as well as seeing potential growth in the emerging market of GenAI.

We also recently announced our annual user conference swampUP, to be held in September in Austin, Texas. This year’s keynotes will change the DevOps, DevSecOps and MLOps landscape as we again prepare together with our partners and community to set the industry standards moving forward. With that, thanks for attending our call, and may the Frog be with you. Operator, we are now open to take questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Sanjit Singh with Morgan Stanley. Please go ahead.

Sanjit Singh: Yes, thank you for taking the question. Shlomi, I just wanted to get your latest read on the spending environment and the macro environment. This time last year in the market and including JFrog customers were still in sort of cost optimization mode, watching their cloud spend. At the same time, they’re also hesitant to invest in data center. And so as 2024 has started, what trends sort of remain similar to back then, and to what extent are you seeing any sort of improvement in terms of your customers willing to invest?

Shlomi Ben Haim: Yes, Sanjit, thank you for the question. So what we see actually in the cloud environment is that our cloud keeps growing faster than the on-prem, mainly because of user consumption and cloud migration projects are being included in our pipeline as we see the market coming back very slowly towards that direction. On the self hosted, we see a bit of a growth on the adoption and the expansion, but it remains the same as it was in 2023. Overall, cloud and on-prem remind us a lot as we reported 2023 Q1 started with 47% year-over-year growth in the cloud and more and more cloud customers are looking forward multiyear subscription when they speak about migration and betting more on migration from [indiscernible]

Sanjit Singh: Understood. And just to follow-up, maybe for Ed on the cloud business. Ed, if I back out the true up from last quarter I think, which was around $1.5 million, when I look at the sequential growth in cloud, it was lower than it has been in prior Q1s for the past couple of years. Any reason for the lower sequential growth this quarter once I did that normalization?

Ed Grabscheid: Hi, Sanjit. This is Ed and thank you for the question. What we saw in Q4 was a quarter of significant consumption. We see Q1 as more of a digestion quarter. Now, when you look at on a year-over-year basis we grew 47%. On a dollar basis, we grew much more in Q1 than we did in the prior quarter. So what we’re seeing is that customers expanded in terms of usage in Q4. In Q1, they took that opportunity to digest a little bit more and think about project spend and software development projects more towards later quarters.

Sanjit Singh: I appreciate the color. Thank you very much.

Operator: Our next question comes from the line of Pinjalim Bora with JPMorgan. Please go ahead.

Pinjalim Bora: Great. Hey, thanks for taking the questions. Shlomi, I’ll ask you on MLOps, MLflow is interesting, but maybe talk about how your conversations with customers are trending at this point. Are you seeing customers considering JFrog as JFrog Artifactory as a proxy for kind of hugging face or any kind of model repositories? And since a lot of the MLOps works kind of, we use a lot of open source library, is it kind of even underscoring the security aspect of the JFrog Platform that you have. So anything around MLOps, what are you hearing from customers would help?

Shlomi Ben Haim: Yes. Pinjalim, hi. MLOps obviously is natural expansion of what we call the natural leap forward for JFrog as we treat all models as a package, yet another binary. What we hear from our customers, what we hear from the market, by the way, what we hear from the community as well, is that they are looking to have a single source of record for models, just as they have for the other packages. Artifactory obviously serves that – Xray serves as the scanner for models and malicious models, and this is what we announced back in Q4 of the previous year. Now, with the universality philosophy in mind, we are providing all data scientists and ML engineers with freedom of choice. Choose whatever platform works for you, whether it’s Maslow, which is super popular, as we mentioned, with millions of dollars a month or other like Qwak and others coming from AWS SageMaker.

So the universality of Artifactory will make Artifactory the registry of choice for models as well as it is today for all the other binaries.

Pinjalim Bora: Yep, understood. One question for you, Ed on the cloud business, correct me if I heard this wrong, but seems like you’re seeing incremental efficiency efforts by customers – optimization efforts by customers in Q1. Just wanted to make sure I heard that correctly. And maybe how are those customers kind of optimizing at this point? Because that’s something different than what others are saying that optimization has already done mostly? And maybe help us understand the consumption trend going into April or so far in May.

Ed Grabscheid: Thank you for the question, Pinjalim. What we’re seeing first off is that again, this being a quarter of digestion after a very strong Q4, we guided to the mid-40s and we exceeded our guidance in terms of 47% on a year-over-year basis. What we’re seeing in terms of the trends is that the customer today, the behavior is more towards and aligned with what we’re seeing in 2023. That purchasing decisions as well as large projects will most likely come towards the second half of 2024. But what we are reiterating our guidance around mid-40s for the full year.

Pinjalim Bora: Understood. Thank you very much.

Operator: Our next question comes from the line of Koji Ikeda with Bank of America. Please go ahead.

Koji Ikeda: Yes. Hey guys, thanks so much for taking the questions. I wanted to ask a question or maybe, maybe another question here on the SaaS side. I know there is a lot of focus on this revenue line item here. And so as we think about – I wanted to ask you a question on the visibility in SaaS. When I look at the net new revenue in SaaS after normalizing for that one-time, it looks about same as the fourth quarter. And so really trying to understand what your visibility looks like with your SaaS customers say for the rest of your business.

Ed Grabscheid: Yes. So what we see and what we’ve commented before is that we guide towards mid-40s, it’s on the commit. Anything above mid-40s would be usage and we don’t necessarily guide on usage. So if we see a percentage growth that is above the mid-40s that is because additional consumption. What we see today and what we have visibility to is in the commitments. And we continue to reiterate at mid-40s for our cloud business.

Koji Ikeda: Got it. That makes sense. And just to follow-up here, if I may. JFrog, we definitely view you guys as an enterprise DevSecOps tool. I think there’s no denying that. But you do have SMB and smaller bid markets as customers and so wanted to ask the question on how demand and resiliency is shaking out in the lower end of your customer base.