JFrog Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for joining us and welcome to J. Frog's Second Quarter 2023 Earnings Conference Call. I'll hand the conference over to Mr. Jeff Schreiner, VP of Investor Relations. Jeff, please go ahead.

Speaker 1

Good afternoon, and thank you for joining us as we review J. Frog's Q2 2023 financial results, which were announced following market close today via press release. Leading the call today will be JFrog's CEO and Co Founder, Shlomi Ben Haim and Jacob Schulman, JFrog's CFO. During this call, we may make statements related to our business that are forward looking under federal security 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, including our outlook for Q3 and the full year of 2023. 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.

Speaker 1

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 ks for the year ended December 31, 2022, filed with the SEC on February 9, 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 June 30, 2023 and other filings and reports that we may file from time to time with the SEC.

Speaker 1

Additionally, non GAAP financial measures will be discussed on this conference call. These non GAAP financial measures, which are used as measures 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 Investor Relations website for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim.

Speaker 1

Shlomi?

Speaker 2

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. I'm happy to report that JFrog's 2nd quarter revenue exceeded our prior guidance, driven by increased cloud consumption, expansion of our security solutions and continued adoption of the JFrog Software Supply Chain platform. Our 2023 second quarter revenue was $84,200,000 reflecting 24% year over year growth. Cloud usage continued to accelerate as we expected, delivering revenues of $27,600,000 increasing 44% year over year.

Speaker 2

We also exceeded our profitability guidance with a non GAAP profit of $12,100,000 while still investing in our core teams. Customers with ARR over $100,000 grew to 813 compared to $647,000,000 in the year ago period, increasing 26% year over year. Customers with ARR over $1,000,000 increased to 24 versus 17 in the Q2 of 2022, up 41% compared to the year ago period. These results reflect that the JFrog platform continues to be prioritized as critical infrastructure and that our 3 pillars Of DevOps, Security and IoT, both strategic value for our customers. Let me expand on what made Q2 another strong quarter for JFrog.

Speaker 2

Let's begin with the ongoing adoption of JFrog Security Solutions. Most organizations recognize the need for multiple Zestech ops capabilities such as software composition analysis, Confection analysis, infrastructure and security, leaked security detection and container security among other key features that are included in JFrog Advanced Security alongside other JFrog offerings. As we noted in our previous call, We have ambitious goals to provide end to end security across the software supply chain with a comprehensive set of capabilities bundled together as a consolidated solution. We believe this approach will outpace and displace point solutions in the market. I'm pleased to report that in the short period since the availability of JFrog advanced security in the market, we already gained tens of customers that have added this capability to their subscription indicated that enthusiasm for advanced security is gaining momentum in the DevSecOps market, Not only because of the advanced scanners and automation of software packages, but also the native integration without the factory that serves our customers as their single source of record.

Speaker 2

On that note, I'm excited to mention our recent security product release. As we know in our industry over time less and less software is being written as original code and instead binaries are being brought in from the outside world, often open source. Many industry estimates know that up to 90% of software is comprised of open source packages, containers and more, all binaries. Developers often cache public repositories to obtain these libraries From the Internet to speed development and add critical features. While developers may be faster, these practices can unknowingly add security and compliance risk in the form of vulnerabilities entering the organization.

Speaker 2

This creates friction between developers who want to move fast and security teams who don't want to compromise and require a clear understanding of the software's composition and dependency management. In partnerships with our community, We build JFrog X-ray and advanced security as tools integrated natively with our refactoring to protect the faster supply chain and everything happening within the organization. JFrog has now shifted even further left to build a fence allowing companies to automatically and seamlessly stop malicious packages and unvalidated open source licenses From ever entering the organization, I'm proud to announce the general availability of JFrog Curation, which was released a few weeks ago in mid July. This solution automates the curation of open source software entering an organization before the development process begins. JFrog Curation automatically checks for malicious components and policy violating software and prevents them from ever entering the organization and compromising security of the software supply chain.

Speaker 2

Policies can be defined centrally by security teams and applied at global scale across organizations. Many of our customers are already exploring JFrog Curation and we look forward to partnering with them. JFrog Curation is offered as a buy seat add ons to the Enterprise X or Enterprise Plus subscription. Our goal is to enable JFrog users to gain the Highest level of visibility and control over the software development lifecycle by delivering a consolidated solution that focuses on all of an organization's binaries. We will continue to bring innovative security solutions to the market and coupled them with Altifactory, which already serves millions as their database of DevOps.

Speaker 2

JFrog Curation Joins the security suite of products offered by JFrog, all of which are available in hybrid and multi cloud versions. Next, I want to address customers' expansion and tuning consolidation on the JFrog platform. The complete software supply chain flow is the flow of binaries, which uniquely positions JFrog as mission critical for every enterprise. As customers continue to streamline their operations with our platform, we see them consolidating tooling around the binary centric pipelines for both DevOps and security. For example, 1 of the Fortune 100 top 5 healthcare pharmaceutical and retail companies Made a decision in Q4 of 2022 to migrate away from Google's container management cloud services and SonoTech Nexus binary repository to the JFrog platform consolidating the complete package management, development pipeline solutions and container registries under one platform.

Speaker 2

Only a few months later in Q2 of this year, They successfully completed the proof of concept with our team as they began to explore consolidation of their multiple security point solutions. As a result of this proof of concept, the customers decided to move away from SLEC to JFrog to cover the software composition analysis needs and are now exploring JFrog's other security capabilities as part of a strategic consolidation and standardization around JFrog's platform. We believe tooling consolidation will continue to be both a macro trend and a DevSecOps tooling imperative. This type of consolidation and ROI for our customers reflects the finding of a recent study conducted by Forrester. Commissioned by JFrog, the Forrester EEI report found that enterprises investing in the JFrog platform could expect a nearly 400% ROI across 3 years and that some organizations could expect to save up to 156 hours per developer per year when utilizing JFrog's DevOps and security platform.

Speaker 2

In their study, an enterprise with 1,000 of developers could potentially save tens of 1,000,000 of dollars in costs over 36 months. These results reflect JFrog's core business value of improving efficiency and productivity across an organization through automation and control of the binary flow. At the same time, Forrester noted in another recent industry report that JFrog is great for enterprises that place high value on software supply chain security. Customers are looking across their portfolios to discover ways to reduce technological and integration costs and the JFrog platform allows them to fulfill this vision. I now want to focus on ongoing adoption of the JFrog platform across our 3 calls and high value enterprise subscriptions.

Speaker 2

When JFrog first entered the market, DevOps was not even free. When we introduced X-ray as our first security solution a few years ago, that's a cost was in its infancy. And today, we see that developers and development organizations are tasked with security, multiple programming languages, Cloud native technologies, multi cloud deployments, open source management, software distribution and more. With a number of connected devices that must stay updated growing into the tens of billions, software truly has no boundaries. We continue to see customers trusting JFrog with its boundless software delivery.

Speaker 2

For example, a leading biopharmaceutical company turns to JFrog to help them revolutionize medical supply processes with an innovative approach. Using a combination of software and connected devices, they aim to simplify How hospital and medical staff consume and trace organic and inorganic medical inventory. Looking to guarantee the security and integrity of their extensive network of sensor driven devices in the field, they first consider JVOCONNECT for the over the air software update and as a fleet management solution. However, upon realizing the benefits of JFrog Artifactory as a universal binary repository and JFrog X-ray and advanced security for mitigating software supply chain attacks, they decided to adopt JFrog's platform as their system of record. Partnering with JFrog helped to consolidate around the single DevOps and DevSecOps platform.

Speaker 2

And we look forward to working with companies such as these Moving forward to change the way every industry thinks of delivering and managing software from developer to the secure distributed edge. Now I would like to address JFrog's view of the potential impact of generating artificial intelligence technologies within our software supply chain platform, security solutions and for individual developers. As we have previously noted From a business perspective, we believe that AI powered creation of software would drastically increase the overall code created within organizations. And thus leading to an increase in the number of binaries being generated by developers or machines. As JFrog continues to be the gold standard in enterprise artifacts management, we look forward to helping companies Scale with our software supply chain platform alongside their AI driven advances.

Speaker 2

More code equals more builds. More builds equals more binaries, which creates a huge opportunity for JFrog. We also see JFrog as an AI enabler for our customers. We already observed JFrog Artifactory serving the repository for customers' Machine Learning and AI Models. Machine Learning models are yet another form of binary and consumed in the organization and software packages.

Speaker 2

Therefore, managing customers' AI processes and their metadata at scale Locally, natively alongside other technologies generate incremental benefit from the use of the JFrog platform. The business of AI models within companies are often Python developers and data scientists utilizing Conda Our serial packages already natively supported by Artifactory. This reinforces JFrog as the single source of truth for company's development processes as well as potentially their AI and MLOps initiatives. Finally, regarding AI within JFrog, we are exploring several approaches that will enhance future versions of JFrog DevOps and security solutions. And we look forward to providing updates on our progress in the near future.

Speaker 2

With that, I'll turn the call over to our CFO, Jacob Schulman, who will provide an in-depth recap of Q2 financial results as well as update you on our guidance for Q3 and for fiscal year 2023. Jaco? Thank you, Shlomi, and good afternoon, everyone. During the Q2, total revenues were $84,200,000 up 24% year over year. Our stronger than expected revenues in the quarter were driven by continued threat of our cloud business and adoption of higher subscription tiers across the JFrog software supply chain platform.

Speaker 2

In the Q2, our cloud business saw sequential expansion in customer usage equaling revenues of $27,600,000 up 44% year over year. While we continue to see a slower pace of cloud migrations compared to the prior year, We are pleased with improving user strength during the first half of twenty twenty three. Going forward, we believe cloud optimization will remain an ongoing with the large enterprises as customers continue to focus on efficient growth. We reiterate our baseline cloud growth rate of mid-40s during fiscal year 2023. Self managed revenues or on prem were $51,800,000 up 17% year over year during the quarter.

Speaker 2

Overall expansion and revenue growth within our self hosted business remains Constrained relative to prior years as customers transition towards cloud and hybrid deployments, which has reduced organizational focus on future expansion within self hosted deployments. We have received positive feedback from customers regarding JFrog advanced security and initial interest in JFrog Curation with many of these engagements being self hosted deployments. We remain optimistic that our security solutions can be a potential catalyst to reaccelerate revenue growth and customer expansion within our self hosted business. Net dollar retention for the 4 trailing quarters was 120%, a decline of 4 points sequentially due to ongoing macro headwinds and lower retention within our self hosted business. We have started seeing stabilization of NDR around these levels and continue to expect our net dollar retention for the year to be around 120%.

Speaker 2

Our gross retention continued to be 97% with no change in overall customer churn terms. In Q2, 45% of our total revenue came from Enterprise Plus subscriptions, up from 36% in Q2 of 2022, And increased revenue contribution of 56% year over year. Now let me discuss our income statement in more detail. Gross profit in the quarter was $70,400,000 representing a gross margin of 83.6%, Essentially flat with a year ago period and in line with expectations as economies of scale and cost control offset higher cloud revenue contribution. Operating expenses for the 2nd quarter were $62,200,000 down $1,000,000 sequentially, equaling 73.9 percent of revenues compared with $58,800,000 or 86.8 percent of revenues in the year ago period.

Speaker 2

During the Q2, we benefited from timing of certain expenses being pushed into the Q3. We continue to remain focused on expense discipline, while continuing to strategically invest in go to market initiatives and technology innovation. Our operating profit in Q2 was $8,200,000 or a 9.7 percent operating margin compared to an operating loss of $2,000,000 or negative 3% operating margin in the prior year due to better than expected cost efficiencies. 2nd quarter net income equaled $12,100,000 or $0.11 per diluted share based on 108 1,000,000 diluted shares outstanding versus a year ago net loss of $2,200,000 equating to a loss of $0.02 per diluted share. Turning to the balance sheet and cash flow.

Speaker 2

We ended the June quarter with $470,000,000 in cash and short term investments, up from $443,000,000 as of December 31, 2022. Cash flow from operations was $16,700,000 in the quarter. After taking into consideration CapEx, free cash flow was $16,200,000 generated a 19.3% free cash flow margin. We reiterate our expectations for low double digit free cash flow margins in fiscal 2023. As of June 30, 2023, our remaining performance obligations totaled $213,600,000 Now I'd like to speak about our guidance for the Q3 and full year 2023.

Speaker 2

Our full year 2023 expectations continue to estimate strong growth in our cloud business and ongoing expense discipline. For Q3, we expect revenues to be between $87,000,000 to $88,000,000 with non GAAP operating profit between $6,000,000 to $7,000,000 and non GAAP earnings per diluted share of 0 point 0 $8 to 0 point 0 $9 assuming a share count of approximately 110,000,000 shares. I would note that 3rd quarter operating expenses will include costs related to our employee merit increases and our Swamp Up user conference, which will cause a sequential step up. For the full year of 2023, we anticipate total revenue in a range between $343,500,000 to $345,500,000 Non GAAP operating income is expected to be between $24,000,000 $25,000,000 and non GAAP earnings per diluted share of $0.26 to $0.28 assuming a share count of approximately 110,000,000 shares. Now let me turn the call back to Shlomi for some closing remarks before we take your questions.

Speaker 2

Thank you, Jacob. We continue to believe that JFrog is well to achieve our planned growth in the coming quarters and our customers' ongoing commitments and partnership alongside us validate The mission critical nature of our platform. Before we close, I want to thank the entire JFrog team for a strong quarter. Your resilience and passion is stronger than any macro headwind and the results speak for themselves. Q2 success belongs to you.

Speaker 2

I also want to invite everyone to attend our annual SwampUP DevOps and DevSecOps user conference in San Jose on September 13. I'm looking forward to updating the community on our major product and strategy announcements alongside amazing industry and JFrog customer stories from companies like Fidelity, Riot Games, Netflix and others. Thank you all for joining us for our Q2 earnings call and may the frog be with you. Now we'd be happy to take your questions. Operator?

Operator

We'll take our first question today from Pangilin Borja, JPMorgan.

Speaker 3

Hey, guys. This is Noah on for Kendall. Thanks for taking our questions. Just wanted to double click a bit on the recent Curation, I don't feature you just recently rolled out. Can you just maybe elaborate on how this is helping you shift more or less in the dev Set offs lifecycle.

Speaker 3

And are you now targeting a potential different buyer as you sort of roll out this new product? Thanks.

Speaker 2

Hi, Benjamin. Yes, we are very excited about the release of JFrog, Eurasian. Actually, that was part of the plan of extending our DevSecOps solution And shift even further left as I've mentioned. The buyers of JFrog curation Actually a combination of the CIO office and the CISO office. The developers would like to have An automated way to enforce policies that are coming from the CISOs and by that to avoid having each of the Cashing from public hubs of software binaries to get into the organization and to automate this full process.

Speaker 2

So basically, It's a partnership between the CISO and the CIO. And still, this demand came from the DevOps and the Dev So not yet really a few security stakeholder, but a combination of both.

Speaker 4

Got it. Thank you.

Operator

The next question comes from Sanjit Singh, Morgan Stanley.

Speaker 5

Hey, this is Chris Quintero on for Sanjit. Congrats on the results and thanks for taking our questions. I wanted to Ask around the disparity between the slower kind of $100,000 customer adds versus the $1,000,000 plus I think was your best ever. So just trying to square both of those would be really helpful.

Speaker 2

Yes, I will take this question. So our goal is to expand all customers and we see diversification of the customers between different segments. So specifically to expansion of $1,000,000 customers, what we're happy to see is that these customers It's actually coming from industries that kind of outside of our traditional strong segments, Technology and Banking, those coming from other industries and it just shows that the DevOps and DevSecOps Capabilities that we offer important across multiple industries. We also see that our enterprise plus Platform and subscription continues to provide a lot of value. You're absolutely right that in absolute Number of in Q3, we added less than prior quarter.

Speaker 2

However, we see a lot of engagements over the last 12 trailing months. It's comparable to prior periods. So we really don't see any change in the trends here. It's probably just more like a timing issues.

Speaker 5

Got it. Makes sense. And then I also want to ask around kind of that you're seeing around JFrog cloud signing from customers, any kind of more color you can give there and maybe kind of where we are in terms of timing and maybe what inning we are with those optimizations.

Speaker 2

Yes. As we noted on our prepared remarks, We continue to see expansion of our usage by our customers. Previously, we noted that we started the year like January was very slow and still subject to optimizations. Then in March, we did see the pickup in usage, which Strength continues in April and throughout the quarter. So we believe that those initial headwinds of optimization behind us.

Speaker 2

Going forward, we do expect that customers will continue to put emphasis on efficient growth. But in terms of usage, We do our customers using more cloud platform. And therefore, we expect that our cloud revenues will continue to grow in mid-40s throughout the year.

Speaker 5

Thank you.

Operator

Next up is Kingsley Crane, Canaccord.

Speaker 6

Hi, thanks for taking my question. So I'd like to ask about duration. I think one of the most interesting aspects of it is that It is focused around developer velocity. Obviously, your platform appeals to all kinds of stakeholders, but I think in terms of an individual product, this is one of the more So how do you think that will play out in terms of encouraging adoption? And then are you thinking this will more Drive upsell in the premium bundles or gain more revenue through pricing a la carte?

Speaker 2

Yes. So thank you, Kingsley. Duration in terms of the adoption will increase the usage of JFrog's security solutions, the Holistic Software Supply Chain Securities comes as an option, as an add on to the Enterprise X and the Enterprise Plus subscription. And it's, as mentioned, a by seat, by ear model. So we are Expecting to see the expansion coming from the adoption of JFrog Curation as well, not only by The number of enterprise staff and enterprise ex users, but also by the number of developers in the organization in the enterprise that we use.

Speaker 6

Okay. Thanks, Selim. It's very helpful. And then one on the financials. So Want to talk about NRR.

Speaker 6

So I think that 120% is a great number. But if NRR is a trailing 12 month metric, I think declining 4 percentage points in 1 quarter is significant. So I think that would suggest that the end quarter performance is well below. So I guess Does that imply a reacceleration or a higher NRR in the back half in order to reach $120,000,000 for the full year? Thank you.

Speaker 2

Yes. So you're absolutely right, Difei, that our netball retention rates declined 4% from prior quarter. This was actually in line with our expectations. If you recall, when we guided The year, we did expect our net dollar retention to go down to around these levels. Currently, we're seeing stabilization around this level and expect to finalize finish the year with NRI around this levels.

Operator

Brad Reback from Stifel is up next.

Speaker 7

Great. Thanks very much. Jacob, on the cloud consumption trends, did July look a lot like June or did it actually continue to

Speaker 2

Brett, I don't have yet the date of July, I cannot comment. During the month, we continue to see strong performance, but I don't have final numbers for July.

Speaker 7

Got it. No problem. And then, Shlomi, I think last quarter you talked about the global partner network and the momentum you were seeing there. And I don't I'm not sure if I missed it earlier in the prepared remarks, but any commentary on sort of rest of the world would be great. Thanks.

Speaker 2

Yes, that's a good point. Our partners and alliances program continue to accelerate. Actually, I mentioned Swamp Up, our user conference happening on September 13. For the first time, we are also having a Partner Day a day before to celebrate and to enable the over 100 partners that in the past year we've built the program with. Aside of that, the co sell and co marketing motion of working with all 3 clouds, AWS, GCP and Azure It's also accelerating through the marketplace.

Speaker 2

So we are very pleased to see it not only by Cloud growth, but also self hosted partners and not only self hosted partners, but also by region, by geography And not just DevOps, but also new security partners that joined the portfolio.

Speaker 7

Great. Thanks very much.

Operator

Mike Sicos from Needham and Company has the next question.

Speaker 4

Hey guys, thanks for getting me on here. I Just wanted to cycle back to Jacob's earlier comment around the NRR. I think it was that we expect to finish the year around this current level. And really where I'm going with this is, I just like to see what gives you the confidence to see JFrog finishing the year at these levels? Is it based on maybe The tone of conversations with customers, the renewal base that you have coming due, just anything there would really be incremental.

Speaker 2

Yes. So when we think about our netball retention forecast, first of all, we're looking at the renewal with our customers and obviously talking to them and evaluating their plans. We're also seeing continued consumption trends on SaaS and commitments of our annual customers on SaaS. And finally, we're looking at the kind of overall economic environment and demand environment. And we see stabilization in that regard and that's what gives us the kind of analysis of the pipeline, analysis of the That's in front of us for the second half of the year.

Speaker 2

That's what gives us confidence that the netball retention will stay around this level.

Speaker 4

Great. And also I appreciate the commentary around the customers that are adopting Advanced Security as well. I think a lot of us are excited about that offering. Can you help us through how your sales force or your go to market effort is driving awareness within your existing customer base to drive adoption? And I guess,

Speaker 2

what has been some of

Speaker 4

the early findings from Who have adopted that, at least as you think about feedback and building up those customer testimonials to drive additional success around advanced security?

Speaker 2

Yes, Mike. So just as you, we are also very excited about the results. To remind the public, we announced JFrog Advanced Security full hybrid availability in the Q1 of this year and to see So many of our customers are showing interest and some of them, tens of them already Paid for additional subscription, obviously, these are great news for us. The main thing that our Go to market team is focusing on is to map the renewals that we have ahead of us and see Well, the X-ray customers that already uses JFrog Tier 1 secondurity, X-ray software composition analysis And also then obviously the capabilities that JFrog Advanced Security Suite offer. And the second effort Goes to the market education, so attracting new customers, some of them were mentioned in the call today That coming to JFrog mainly because of the consolidation.

Speaker 2

So they want to start and see 1 software supply chain that not only provide 1 capability or 2 capability to secure your DevOps and DevSecOps team, but also The repository, the distribution process and everything around that. So these are the main two catalysts for the adoption. The fact that it's also available in the cloud and on prem gives us obviously the freedom to operate in different deployment environment. So that's a plus as well. And the last thing is that since we are very transparent with our roadmap, We are speaking about X-ray and JFrog Advanced Security as available in the market in the last quarter, But now we added QA and so really what we see from our customers is a demand for a holistic one stop shop for their software supplies and security that also includes future roadmap items that also help us to build the pipeline.

Speaker 4

That's great to hear. I really appreciate the commentary, Shlomi. Thank you very much, guys.

Speaker 2

Thank you.

Operator

Your next question is Jason Ader, William Blair.

Speaker 7

Yes. Thank you. Jacob, question for you. I'm just trying to figure out what's going on in Q4 with your guidance, Because you guided to $26,000,000 to $28,000,000 for the full year. But you're at, if my numbers are correct, you're at basically $0.25 for the 1st 3 quarters based on your guidance for Q3.

Speaker 7

So That implies Q4 would have like $0.03 of earnings and that would be the lowest of the year. Can you talk us through what's going on there?

Speaker 2

So our actual results for the year for the 1st 6 months About $0.17 plus about $0.08 to $0.09 So it's about 24. So I think If you look at the operating profitability, we expect operating profitability in Q4 to be comparable, Slightly higher than in Q3. And I expect that EPS for Q4 Probably going to be in the kind of same levels comparable to Q3. So I hope that makes sense.

Speaker 7

But then that doesn't work. I mean, because if you say $0.27 is the midpoint for the full year And you just said $0.25 through the 1st three quarters, right? Then that would imply $0.02 for Q4. So maybe there's something going on below the line in Q4, but I guess the operating income trends and it looks like that's Continuing to be pretty healthy, but Q4 EPS looks like it would be quite a bit below where the rest of the year has been. So I mean We can move that offline if you want, but I just wanted to flag that.

Speaker 2

Thank you for your notes. And I don't expect any Outstanding items below the line in Q4.

Speaker 7

Okay. All right. And then maybe, Shlomi, I wanted to Follow-up on the last question just on the go to market side for security. I guess, what are you guys learning about The go to market side for security and how that might be different for some of these packages that you are now offering for security that It's different than what you've had to do in the past in terms of go to market.

Speaker 2

Yes. So regarding security, what we see is that it's a bit different. First of all, When it comes to DevOps, the bottom up mechanism is very popular. Usually, it's being adopted by developers or DevOps engineers And scale up by the size of the PO, maybe to the CTO or the CIO and so on. Maybe strategic decisions are being taken Top down, like, let's say, migration to the cloud, but most of what we've seen and most of what we have built was from the ground up.

Speaker 2

In securities, it's a bit different. The decision is first being taken by the security leaders and then apply in the different groups of the company. What we also see and this is quite interesting, we start to see a partnership between the CIO and the CISO when it comes to software supply chain security, on one hand, the CIO, the VP R and D, they want to be super fast. The security guys are trying So any kind of automation that applies into the software supply chain is obviously helping those 2 to bridge Dernit, so we usually meet more than 1 persona over 1 PO when it comes to security. Most of it would be Top down and most of it most of these opportunities will take more than the average quarter or 4 month cycle To complete.

Speaker 7

Great. And then are the budgets usually the CECL has its own budget Pool versus the CIO and the developer teams. So Is that creating friction because you have to actually tap into 2 different budget pools?

Speaker 2

So the strategy that we chose is a strategy of consolidating all the security solution Into not all of them, but the majority of the security solution from the grid scanning to the binary scanning to the distribution Consolidated with capabilities like secret detection, like software composition analysis, we discussed in the call The displacement of SNC, the displacement of Sonotype, those were displaced by consolidation To a platform, usually when this is happening, there is a budget already marked by the CISO and it's being compared to a security tool they already have. If there is a new capability like JFrog Curation, obviously, it will be discussed To start with, with the CIO and then they would probably bring the security stakeholders.

Speaker 7

Okay. Just to clarify, that's very helpful. Just to clarify, the security tools that are sold into the DevOps tool chain, are those Part of the kind of CIO's budget or are those part of the CECL budget? Or is that just depends on

Speaker 2

the company? Exactly. It depends on the company and the enterprise. Most of what we saw over 80% of the opportunities that we deal with, a combination of discussion with both the CISO office and the CIO office. And we were also very pleased to see that in some organization, big one, including leading financial institutes Retail, the CIO and the CISO offices were already merged into 1.

Speaker 7

Okay, great. Thanks very much.

Speaker 2

Good luck. Thank you.

Operator

Your next question is Koji Ikeda, Bank of America.

Speaker 8

Hey guys, thanks for taking the questions. A couple from me. Just kind of going back to curation, you mentioned earlier, the seat based model. So how do you think about the TAM for curation? Is it all the developers out there, security folks, ops folks?

Speaker 8

I mean, is it all of them? How do you think about And then second part of the question on curation is because of seat based, where is it going to show up The revenue recognition, is it going to be in subscription self managed to start and eventually break it out? Just trying to understand where it will fit, So we could begin to understand where it's contributing to growth.

Speaker 2

Yes, Koji. Hi. And I'll take the first part of The question then Jacob can elaborate more about where it will be recognized. The TAM of JFrog Curation It's very much aligned with the TAM of the DevSecOps market. Actually, we are after The opportunity to cover all the developers from outside the organization.

Speaker 2

So the reason that there is an alignment between the value And the way we price it is that it goes by the number of developers that consume software packages from outside the organization. So let's say that you go to a public repository and you want your software supply chain to be curated from the get go, It would be multiplied by the number of developers that are consuming this service. And obviously, with the combination of Party Factory And JFrog Advanced Security, the system top of Artifactory and security of software supply chain from inside the organization, there is an alignment Between the models. So it's basically all organizations are now using based on researches, 90% of the software That is being made in the world is coming from open source initiatives, software that is being cached from outside the organization, And therefore, it's relevant to all the organizations by the number of developers and so on. So we are looking at the same time.

Speaker 2

The second thing so it's the same time with a bigger market share. The second thing around that is obviously the fact that the competition with this solution It's completely different than the DevSecOps market that is very fragmented. There are not so many curation solution out there that are putting a fence between the organization and the public hub and preventing you from bringing The Log 4J the Next Log 4J from the get go. So it's not just the TAM, it's also what is the size of the market share that we can grab By having this solution embedded to our platform. And with regards to the split between deployment types, it Would be really since it's an add on to existing subscriptions, so it will be dependent on the main subscription that the customer subscribed for.

Speaker 2

If it's Self managed and it will be reported as self managed. If it's SaaS, it will be reported as SaaS and by seat in both cases, right.

Speaker 8

Got it. No, that's super helpful. And then one follow-up here, if I may. Wanted to ask about the $1,000,000 customers and the $100,000 plus customers. You added $3,000,000 ARR customers, which is the most I think you've ever added in a quarter sequentially.

Speaker 8

So congratulations there. The $100,000 maybe a little bit light versus recent quarters. So just trying to understand the dynamic between the $1,000,000 plus and the $100,000 plus?

Speaker 2

Yes. So Koji, when we are looking at it, obviously, we are very pleased not only because of the size of the field, but also the subscription that these guys are Upgrading to and the amount of capabilities from the JFrog platform that they are actually using while we are monitoring it. In the last six quarters, we added at least $1,000,000 customer to this group, which also demonstrate an adoption or a growing adoption of our platform. Regarding the over $100,000 Customers, 813. I'm looking at it, if I may, in a Different perspective.

Speaker 2

To add over 150 customers to this group, in In the last year, during the recession, with all the new technologies that are coming and all the changes that we see in the market, I actually am pleased with the growth and I'm expecting it to go even higher than that When I'm looking at the pipeline and hoping to see the changes in the market.

Speaker 8

Got it. Thanks so much guys. Thanks for taking the questions.

Operator

Your next question is Michael Turits, KeyBanc Capital Markets.

Speaker 9

Hey, Shwami and Jacob. Good job on the quarter. You said that you are that optimization is largely behind you. Yes, Microsoft and some others have talked about there being several quarters still to go on optimization. So Can you maybe describe what might be different in terms of your cycle around optimization with some of the hyperscalers?

Speaker 9

And this could be An overlapping question. What's going on in terms of new projects and whether they're not they're beginning to rebound, New software development projects.

Speaker 2

Michael, I will take this question. I think big hyperscalers provide multiple Different types of different workloads. And it's hard for me to comment what kind of workloads impacted by optimization, what's not. What we're seeing is that the DevOps continues to be a physical infrastructure. And we see that in terms of data transfer We continue to see growth sequentially on our systems.

Speaker 2

So really maybe the difference between what we've seen and what hyperscalers see is that the fact that they provide variety of different workflows, Maybe that's what the impacts there kind of picture.

Speaker 9

So just another Qualitatively then why does it make sense that your optimizations would have troughed, if you will, and start to rebound earlier than theirs from Medigy. Again, obviously, I'm not asking to comment on their business, but it's a broad business where you're seeing it seems like an earlier rebound.

Speaker 2

Yes. As we previously discussed, we monetize our SaaS deployments by data transfer and storage And storage more low hanging fruit, which we did see those optimization efforts accelerated about In Q3 and Q4 of last year, those were kind of more shorter time to optimization. Data transfer optimization is typically more longer kind of efforts required. Sometimes it doesn't even make sense for customers to focus on that because it requires significant engineering effort. So what we believe is that customers will continue to Monitor the usage.

Speaker 2

They will continue to strive to grow efficiently, but the usual impact of optimizations would be Michael, I'll add to it. It's Shlomi here. There is just much that you can dry out your infrastructure Reservoirs. With everything that comes in, the security automation, software supply chain is getting enriched And also need to deal with AI as we mentioned. Some of our customers already started to use our infrastructure as the Infrastructure for AI.

Speaker 2

This can be optimized up to a limit. And as Jacob mentioned, not necessarily can be compared to the big cloud companies. And we hear our customers telling us, some of them are also On the pending mode waiting for budget to be released, so they will be able to migrate to the cloud and grow even faster.

Speaker 9

Great, guys. Thanks very much.

Operator

Next up is Jonathan Reichhaver, Cantor Fitzgerald.

Speaker 10

Yes. Hey, guys. Thank you for getting me in. So, GitHub recently claimed that Approximately 46% of this customer's code is already written by Copilot. They So you said they expect that to go through 80% sooner rather than later.

Speaker 10

And they've also made some comments along the lines that CoPilot It has accelerated customer growth and is making GitHub more competitive around managing Git repositories. Now to your comments earlier, Shlomi, it seems fairly obvious that LLMs will drive increasing market need for Artifactory Management broadly, but how do you see the competitive impact Pointed out due to LLMs. What is your strategy there?

Speaker 2

Yes. Well, that's a great Question, and as you know, there are lots of discussions around AI and the regulations around AI and the panic around AI and the potential of AI and Opportunity of AI. But let's kind of take it to the level that everybody understands. More codes, Whether it's made by co pilot or by developers creates more binaries and more binaries create more opportunities for JFrog because We are the standout makers in the binary storage of the organizations today. Not only that, The most exciting thing about managing AI models and MLOps models Is the fact that they are yet another form of binary.

Speaker 2

So whether you handle it or you build it inside the organization or you bring it from The organization, Artifactory can be the only tool that supports you unless you just want to dump it on a regular file server. The last thing that I would say is that these coders that you mentioned that are using Copilot to build AI Basically Python developers or data scientists that are using packages like Conda and Seran. All three of them are already natively supported in Artifactory. So for them, it's just a familiar place that they are going to, To fetch their model and not just the AI model, but also the models that are coming with AI to train the machine. So we see big opportunities around that.

Speaker 2

As we mentioned in our call, we are Looking forward to share with the industry what we build natively to support this demand. And as it goes back to the previous question, infrastructure optimization will get to a limit that from that point on, It will get back to what we used to see in the previous years.

Speaker 10

Okay. So I think what you're saying, Shlomi, is the opportunity is really Around the ability of Artifactory to support all these AI models, which is just another form of binary. And that just Broaden the opportunity for JFrog, correct?

Speaker 2

Altifactory is almost a default solution So that when I asked Chegg CPT about it, that's the question I got. So that's the most authentic way for me to validate that. And the other thing is X-ray, because you don't just want to have a dummy storage, you also want to have the right tool To enforce the policy before you bring any type of models from public repositories of AI. So you want A tool like X-ray that would say that if this AI model is coming with the wrong licenses, it cannot get into the organization And that protects your software supply chain. You need tools like QA Shen to block it from the get go.

Speaker 2

So the proxy Will not be subject to any type of malicious code or open source license violation. So the whole solution of JFrog Is set to grab the fruits of this opportunity.

Speaker 10

Yes. Okay. Very helpful. Thank you.

Operator

Next up is Rob Owens, Piper Sandler.

Speaker 11

Great. Thanks for taking my question. And I want to drill down a little bit again into the cloud optimization being behind you. And I don't know if you've ever broken out for us the difference in gross retention rates between Self hosted in subscriptions. And is there something in those trends that may show you that A lot of the optimizations behind you at this point, either from a gross or net retention perspective, because I guess that might play into Some of those questions around net retention for the back half of the year.

Speaker 11

Thanks.

Speaker 2

Yes. We The only information or color that we provided on the difference between SaaS and Self Hosted is that SaaS Net dollar retention is higher than corporate and self hosted is lower than corporate. Again, we believe that the storage optimization is kind of low hanging fruit and Those who wanted to do that most likely have done that, because we started seeing first optimization efforts about 4 quarters ago. And that sufficient time for customers to look at their storage environments and make necessary steps for the data transfer optimization. It's and we believe it's going to be ongoing effort.

Speaker 2

And that's why we said that first wave of optimization is behind us and going forward we'll be just seeing more efficient growth of for our customers.

Speaker 11

All right. Thank you very much.

Operator

There are no further questions at this time. I'll turn the call back to Shlomi for closing remarks.

Speaker 2

Thank you all for joining us on this quarter earnings call and thank you for your questions. We are looking forward to keep executing And delivering more news from the Swamp. Join us at Swamp UP September 13 in San Jose And by then, may the frog be with you. Thank you.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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Key Takeaways

  • JFrog’s Q2 results beat guidance with $84.2M revenue (+24% YoY), $27.6M in cloud revenue (+44% YoY) and $12.1M non-GAAP profit.
  • Expansion in high-value accounts continued, with ARR >$100K rising 26% to 813 customers and ARR >$1M up 41% to 24 customers.
  • The recent launch of JFrog Advanced Security and JFrog Curation has attracted early adopters seeking to left-shift security by blocking malicious or non-compliant binaries.
  • Enterprises are consolidating DevOps and security tooling on the JFrog platform, supported by a Forrester study finding ~400% ROI over three years and significant developer time savings.
  • Guidance for Q3 and FY23 remains strong, with Q3 revenue expected at $87M–$88M and non-GAAP EPS of $0.08–$0.09, and full-year revenue of $343.5M–$345.5M with EPS of $0.26–$0.28.
AI Generated. May Contain Errors.
Earnings Conference Call
JFrog Q2 2023
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