JFrog Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for joining us, and welcome to J. Frog's 4th Quarter and Fiscal 2023 Financial Results Conference Call. I'll hand the conference over today to Jeffrey Schreiner, VP, Investor Relations. Jeffrey, please go ahead.

Speaker 1

Good afternoon and thank you for joining us as we review JFrog's 4th quarter full year fiscal 2023 financial results, which were announced following the market close today via press release. Leading the call today will be JFrog's CEO and Co Founder, Shlomi Binheim and Ed Grabshai, 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, including our outlook for Q1 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.

Speaker 1

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, and our most recent report on Form 10 Q, 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 ks for the year ended December 31, 2023 to be filed with the SEC on February 15, 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.

Speaker 1

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 Investor Relations website for a limited time. With that, I'd like to turn

Speaker 2

the call over to JFrog's CEO, Shlomi Benhaim. Shlomi? Thank you, Jeff. Good afternoon to you all and thank you for joining the call. I'm proud to report that JFOC closed fiscal year 2023 on a strong note, with quarterly and annual results that exceeded our guidance.

Speaker 2

Despite macroeconomic and geopolitical headwinds, JFOC delivered on our commitments to the market, driving consistent revenue growth and profitability. Our commitment to meeting extending market demand through a unified platform that integrates DevOps, security and MLOps Across the entire software supply chain, extending to the edge device, once again, bolstered this quarter and throughout the entire year. This is evident in the significant adoption of our platform by the enterprise, which will also be discussed in today's call. In fiscal year 2023, JFrog delivered total revenue of $349,900,000 up 25% year over year. J Fox 4th quarter revenue was $97,300,000 reflecting 27% year over year growth with a gross margin of 84.6 percent $32,000,000 in free cash flow.

Speaker 2

Our cloud revenue to show momentum in Q4 equaling $36,000,000 a growth of 59% year over year. This growth was primarily driven by our cloud first and multi cloud strategy, which powered growth in cloud platform subscription as well as increases in consumption. In Q4, J4 customers with ARR greater than $100,000 grew to 886 compared to 736 in the prior year, increasing 20% year over year. Customers with ARR greater than $1,000,000 increased to 37, up from 19 in the year ago period, growing 95% year over year, which we attribute to our strategic investments in the enterprise top down go to market approach. Now I will address some of the market themes we are observing and stand out set by JFOM.

Speaker 2

Developers and machines on the left as well as production owners and hackers on the right continue to be laser focused on the binary as the key asset being utilized throughout the software supply chain. We believe that DevOps, DevSecOps, MLOps and MLSecOps will continue to converge into a single system of record for the enterprise. The most important asset, binaries, is at the core of every software supply chain and will need to be effectively secured and managed by every organization. As we observe in the market, a fast and trusted software supply chain flow with embedded security is the flow of binaries. This trend drove some of our customers' top priorities in Q4 as well as emerging opportunities in our markets.

Speaker 2

On today's call, I will discuss cloud consumption and cloud migrations. Next, I will cover the enterprise demand for modern holistic security solutions, then the trend of point solution tooling consolidation around the JFrog Software Supply Chain platform, And finally, discuss the emerging opportunities for AI and ML tooling. 1st, I will address our cloud business. Early in 2023, due to the macroeconomic changes and cost optimization efforts by our customers, some cloud initiatives were delayed. Slowly into the year, we saw an improvement in the frequency of on prem to cloud migration projects being restarted alongside spending consumption in the second half of the year as we shared in previous calls.

Speaker 2

The sales teams of platform consolidation and modern security tool adoption together with DevOps capabilities in the cloud becoming the standard. Late in Q3, JFork closed a large scale deal with AT and T to become their single source of record for secure binary management and delivery, including with our advanced security offerings. Working hand in hand with AT and T's leadership teams, JFrog was chosen as a strategic partner to consolidate software supply chain tools with a single platform in the cloud. AT and T's General Manager and Vice President of R and D, Renard Wildenstein, noted, With tens of thousands of developers building applications across our business, we need a single system of freckle to allow us to shift left effectively as well as take advantage of all the benefits cloud has to offer a modern business. We are proud to be working with JFrog as we move towards A consolidated scalable infrastructure to build the next generation of applications to serve 100 of millions of our customers.

Speaker 2

Platform and cloud priorities are not unique to AT and T. Recent public CIO surveys have validated At 2024, cloud spend for application development, DevOps, security and machine learning are anticipated to see improving growth trends relative to the slower environment seen in 2023. JFrog is positioned to answer this exact demand, not only in a hybrid, but also in a multi cloud robust environment. 2nd, we see continued interest holistic DevSecOps solution as part of our platform. JFrog is partnering with enterprises across the globe to improve software development and consolidating DevSecOps solutions, including in highly regulated or compliance driven environments like public service.

Speaker 2

IBU Traffic Technologies, a leading provider of civil engineering IT systems in Germany, recently chose JFOG to instill trust and efficiency in their software development and application security efforts. IBU has spent the last 45 years Partnering with local governments to build IT systems that ensure efficient and environmentally friendly public transport To ensure top notch service and smooth transportation for city residents, IBU partners with JFOG to meet their holistic security needs, including investments in J PAL Curation, cost scanning, also known as SaaS, and the prioritization of CVEs with contextual analysis for their developers. Iview chose JFrog Curation and JFrog Advanced Security to consolidate DevSecOps capabilities using one platform with a single source of record at its base. In another example, we were excited to bring on board Israel's leading health provider, Clalit. With over 5,000,000 subscribers and a workforce of 50,000 employees, Clalit stands as one of the largest HMOs in the world.

Speaker 2

In the Q4 of 2023, Clalit, an active user of Artifactory and X-ray, approach JFrog with a request to migrate from Snyk and incorporate JFrog advanced security into their system. This strategic move aimed to streamline their solution and enhance capabilities, especially in-depth sec ops areas like code scanning within the JFork software supply chain platform. Clalit Security Project Manager, Rohir Ahony, said, Integrating additional security features within a single reliable source of tools like Artifactory aligns with our strategy To centralize our operations on 1 software supply chain platform, leading to cost savings and improved scalability and development efficiency, The JFrog platform with Artifactory at its core that seamlessly integrates with JFrog Advanced Security effectively fulfill this objective. CIOs and CISOs are seeking to streamline the complexity caused by numerous tools and point solutions, which not only duplicate each other's functions, but also fail to provide end to end visibility across the software supply chain. Our customers tell us that those tools must integrate with the binary repository like JFrogarty factory to safeguard and effectively trace their binaries.

Speaker 2

We believe the trend of security tool consolidation in a single platform will continue. With JFrog uniquely providing an end to end solution covering from a developer's environment to production, creating a holistic DevSecOps toolset. 3rd, I want to address growth in the enterprise adoption of the JPG platform. The move toward a unified universal platform for the enterprise is not only a technology or tool initiative, but also a change we see in how companies are being structured to streamline digital delivery. We see roles like CIOs and CISOs becoming 1 and cloud migration projects targeting multiple aspects like tooling consolidations to achieve speed and trust throughout the software flow.

Speaker 2

One example of a visionary company is Vimeo, a leading video platform provider, boasting 300,000,000 global users. As part of the digital transformation initiatives, Vimeo recently took a step forward in their journey, moving from a self hosted Artifactory only subscription an enterprise level cloud subscription. This upgrade positions Vimeo to effectively scale their DevOps and DevSecOps initiatives across their global teams in a single platform, ensuring the secure and timely delivery of updates to cater to their vast customer base. Mark Arthur, the Chief Information Security Officer of Vimeo, emphasized their commitment to providing top notch digital experiences to their users while prioritizing the highest levels of security in their software development pipeline. He stated, The JPOXX platform's cloud offering empowers businesses like Vimeo to rapidly expand, reduce maintenance overhead and offload management costs.

Speaker 2

It meets the evolving needs of our growing audience. JPG Software Supply Chain platform infuses confidence by serving as a single source of record with Artifactory at the center and providing visibility across Vimeo's DevSecOps walkthrough. Our portfolio contains thousands of companies like Vimeo that started with Artifactory only. Your story gives us confidence that the adoption of an end to end software supply chain platform is not an option for the enterprise, but an imperative to support modern business needs. We look forward to assisting these portfolio companies as their maturing needs drive them forward cloud and higher value subscriptions.

Speaker 2

Now I want to address opportunities in MLOps and MLSecOps within the JFrog platform. As we continue to observe the rapid adoption of AI and ML technologies across the market, many of the same enterprise software things Remind us of the early days of open source. As developers are running quickly in a machine learning and AI gold rush, Companies are telling us that they have similar fears from 20 years ago. What's in that artifact? How does it comply with business policies?

Speaker 2

How do we track which model is being used? How do we know who brought the model into the organization and more. We believe the MLOps market is in the very early days And as it matures, JPOG is well positioned to deliver unique value that addresses these familiar things, Focusing on the main ML asset, yet another binary. Caching, versioning, hosting, Storing, training, securing and more are all performed on AML models. Companies that blindly adopt AI technology without this binary discipline will be challenged to keep up with innovation while possibly exposing themselves to a higher risk and complexity at scale.

Speaker 2

As an example, following our support For the caching, malicious model scanning and license compliance features for the popular ML model repository hugging phase, We recently announced a partnership with AWS to integrate the JFrog platform with their ML Development and Deployment Solutions, SageMaker. Our customers ask JFrog and AWS to meet 2 critical requirements, integrate a leading tool for building and training models from AWS and the ability to host, manage and secure those models as part of the software supply chain flow through JFrog. We remain in the early stages of standard building around AI and ML technologies and look forward to driving further JPG platform extension into the MLOps area. Finally, I would like to add a few words about the enterprise go to market changes we have successfully applied. AT and T, Vimeo, IVU Technologies and Clalit are all demonstrating what we have shared as our go to market strategy over the past few years.

Speaker 2

JFrog not only built and expanded our technology offering, but also moved From inbound bottom up sales processes to enterprise top down motion, we best serve the enterprise and we strive to build value around enterprise pains. Therefore, our team was focusing 2023 on extending our customer portfolio with companies that meet this profile and land with a higher ASP and a higher propensity to expand faster. With this approach in mind, in fiscal 2023, we were pleased to extend our customer count approximately 7,400 versus 7,200 in the prior year. With that, will turn the call over to our CFO, Ed Rupscheid, who will provide an in-depth recap of Q4 financial results and update you on our outlook for both Q1 fiscal year 2024. Ed?

Speaker 3

Thank you, Shlomi, and good afternoon, everyone. During the Q4 of 2023, total revenues were $97,300,000 up 27% year over year. For the full fiscal year 2023, revenues were $349,900,000 up 25% year over year. As noted by Shlomi, we saw continued reacceleration in cloud customer usage during the Q4 With revenues equaling $36,000,000 up 59% year over year and representing 37% of total revenues 1st 30% in the prior year. For fiscal year 2023, our cloud revenues equaled $119,300,000 up 50% year over year and equaled 34% of total revenues versus 28% in the prior year.

Speaker 3

During the Q4, we saw 6 points of one time growth year over year or roughly $1,500,000 within our cloud revenues. The majority of one time contributions came from higher than typical revenue true ups. The growth above our guidance of a rate in the mid-40s for our cloud business in 2023 is driven by increasing customer usage trends and strong growth within our greater than $1,000,000 customer cohort. Self managed revenues Our on prem were $61,300,000 up 14% year over year during the Q4. For the full year 2023, self managed revenues increased 15% compared to the prior year.

Speaker 3

We expect the trend of slower expansion within our self hosted business to continue through 2024 as more new customers land and expand and our cloud solutions. Net dollar retention for the 4 trailing quarters has stabilized as projected at 119%, a decline of 9 points year over year due to macro headwinds and slower cloud migration trends. Our gross retention rate remained at 97%. During 2023, we saw another year of strong customer adoption of the complete JFrog platform, driven by customers looking to and secure their software supply chain. In Q4, 49% of total revenues came from Enterprise Plus subscriptions, up from 43% in Q4 2022.

Speaker 3

Driven by the strong execution of our top down go to market strategy and platform consolidation revenue contribution from Eplus subscriptions grew 50% year over year in 2023. Now I'll review the income statement in more detail. Gross profit in the quarter was $82,300,000 representing a gross margin of 84.6% compared to 83.7% in the year ago period. The increase in gross margin relative to the year ago period is attributable in part to optimization within our cloud hosting costs and ongoing cost discipline efforts. We expect annual gross margins will remain between 83% 84% in the near future and then trend towards below 80s aligned with our long term model as cloud revenues a greater portion of our total revenue.

Speaker 3

Operating expenses for the 4th quarter were $66,100,000 up $3,900,000 sequentially equaling 68 percent of revenues, up from $62,500,000 or 82% of revenues in the year ago period. We continue to remain focused on expense discipline while investing and scaling our enterprise sales team and channel partner ecosystem. Our operating profit in Q4 was $16,200,000 or 16.6 percent operating margin compared to an operating profit of $1,600,000 or 2.1% operating margin in the year ago period, a 14.5% improvement in operating margin. In 2023, we delivered another year of non GAAP net income profitability with earnings per share of $0.51 based on approximately 109,000,000 weighted average diluted shares compared to $0.04 per share in the prior year and 105,000,000 weighted average diluted shares. Turning to the balance sheet and cash flow, we ended the year with $545,000,000 and cash and short term investments, up from $443,200,000 as of December 31, 2022.

Speaker 3

Cash flow from operations was $32,600,000 in the quarter. After taking into consideration our CapEx requirements, Free cash flow was $32,000,000 or 33 percent free cash flow margin, representing a quarterly record for JFrog. For the full fiscal year 2023, we generated $74,200,000 in operating cash flow $72,200,000 and free cash flow or 21% margin, a free cash flow annual record. We remain committed to our free cash flow margin targets provided within our long term model implying an estimated midpoint of 28% over the coming years. As of December 31, 2023, our remaining performance obligation totaled $259,800,000 Now I'd like to speak about our outlook and guidance for the Q1 and full year of 2024.

Speaker 3

Our outlook for 2024 implies continued strength within our cloud business, driven by expectations for increasing customer usage along with stable growth in migrations similar to the second half of twenty twenty three. We estimate fiscal 2024 baseline cloud growth around the mid-40s for the full year. Given the dynamics of our self hosted and cloud business in 2023, We now expect our net dollar retention ratio to be in the high teens exiting the fiscal year 2024. We will continue to expand operating expenses on a dollar basis during 2024, but see continued room for operating leverage driven by ongoing costs optimizations offset by investment in strategic sales and channels combined with targeted R and D spending on future growth opportunities. For Q1, we expect revenues to be between $98,000,000 $99,000,000 equaling around 23% year over year growth at the midpoint.

Speaker 3

With non GAAP operating profit between $12,500,000 to $13,500,000 and non GAAP earnings per diluted share of $0.13 to $0.15 assuming a share count of approximately 113,000,000 shares. For the full year of 2024, we anticipate a revenue range between $424,000,000 $428,000,000 Non GAAP operating income is expected to be between $56,000,000 $58,000,000 and non GAAP earnings per diluted share of $0.58 to $0.60 assuming a share count of approximately 116,000,000 shares. Now I'll turn the call back to Shlomi for some closing remarks

Speaker 2

Thank you, Ed. Less than a week ago, Israelis observed their annual Family Day, A day to acknowledge and express gratitude for the family members in their lives. It has been over 4 months Since many families were torn apart by the brutality of the terror organization, Hamas, as we speak, Over 130 hostages, including infants, mothers, elderly individuals and civilians are still being held in underground cages in Gaza. We pray for a fast and safe return of the hostages to their loved ones, to their families, and we stand in solidarity with Israel, hoping for a peaceful future in the region. To the JFOC team, your resolve and resilience amidst these challenges are unmatched, And I'm proud to represent your hard work in 2023.

Speaker 2

You exceeded our commitment to the market and delivered In a challenging macroeconomic and geopolitical environment, my team, you have the spirit of clients and hearts of Forbes. I can't wait to win 2024 with you. To our shareholders, we continue to believe that JFORG is well positioned to achieve success as we focus on sustainable growth drivers across DevOps, Security and MLOps, all delivered to the enterprise by our software supply chain platform. We are committed to the long term model shared with you early last year and are happy to report on the solid execution in 2023. Our performance is the result of your trust in us.

Speaker 2

Thanks for attending our call today. Happy Valentine's Day and may the frog be with you. Operator, we are now open to take questions.

Operator

Our first question comes from the line of Sanjit Singh with Morgan Stanley. Please go ahead.

Speaker 4

Thank you for taking the questions. And I guess one word, wow, spectacular quarter, particularly the cloud results. And so let me start with the cloud business. I don't think I've seen acceleration in the cloud business, particularly in Q4 in a number of years. And so, Ashok, I mean, I was well hoping if you could give me some detail on why you saw the inflection that you did by our math that sort of incremental dollar adds were up Well over 200% year over year.

Speaker 4

And so it seems like a pretty major inflection, when a lot of other cloud consumption companies have A seasonally weak December, those types of dynamics, you guys didn't see that. So we just love to better understand underneath the covers what's driving the acceleration?

Speaker 2

Yes, Sandeep, thank you for the kind feedback. Yes, we performed very well on the last quarter, especially in the cloud with 59% year over year growth. And what we have seen is what we projected in the second half of twenty twenty three, Unlike the freezing momentum we had in the beginning of the year, we started to see our customers, especially the enterprise, Something to climb back up with the consumption. While migration to the cloud is still coming with some hesitation, Consumption is back, especially around the infrastructure and especially when you bet your software delivery Software Supply Chain, Security and DevOps on the cloud infrastructure. We were very happy to see this coming back as projected.

Speaker 2

And as we guided for the next year, we are seeing this momentum in consumption keeps happening. I'd like to add

Speaker 4

to that.

Speaker 3

Sure, please. Yes, Q4 is a seasonably high renewal quarter for us. So some cloud customers at the end of those contract terms may require revenue true ups based on their differences between the actual data consumption and contractual commitments. So those true ups that we discussed, the majority of those are happening because of this circumstance. It hasn't been material in the past, But we thought we'd call them out in this call.

Speaker 4

And just sort of as a follow-up to that, any way to like quantify those trade ups and those impacts in Q4? And then looking more broadly into 2024, it seems like we're on the cusp of a new sort of innovation cycle. And given the way sort of JFrog prices its solutions and now you have a growing cloud business, if software development projects are coming in a meaningful way this year, how does that sort of impact JFrog from a financial revenue top line growth perspective? You can sort of draw on improving potential budget environment, software development project coming back. How does that how do you expect that to influence the numbers going to 2024 and beyond?

Speaker 3

So the Right now what we see is that consumption continues to have improvements. And we saw that in the second half of this and we anticipate that to be the same through 2024. Migrations have not increase, although we saw a slight increase in the second half of twenty twenty three, we anticipate stabilization of those Large customer migrations in 2024. We're certainly not back to the same levels that we saw during 2022. If the budgets and we see a broadening of the budgets, then we may see improvements and the large customer migrations and that could potentially increase.

Speaker 3

But for now, we're staying tactically cautious and we're seeing our cloud in the mid-40s growth. Excellent.

Speaker 4

Thank you very much.

Operator

Our next question comes from the line of Pindjalim Bora with JPMorgan. Please go ahead.

Speaker 5

Hi, this is Rachit on for Pendulum. Can you help us understand the puts and takes about The advanced security and the curation and how you're thinking about it in terms of the contribution for 2024?

Speaker 2

Yes, hi. This is Shlomi. I'll take this one. Security is embedded in our platform. During 2023, we started to release quarter by quarter more and more solutions around the DevSecOps landscape to secure the software supply chain.

Speaker 2

JFOC Advanced Security was the 1st JFOC relation then followed. There are more to come And we see customers now looking to consolidate point solutions around one platform. So as we guided the market, We assume that security will become a material part of our revenue in 2024.

Speaker 5

Thank you.

Operator

Our next question comes from the line of Mike Sicos with Needham and Company. Please go ahead.

Speaker 6

Hey, thanks for taking the question guys. If I could come back to I think it was building all from your response to Sanjit's Second question, regarding what's in the guidance here. And so I know that you guys are saying, hey, consumption continues to show these improvements. We've seen it in the second half of calendar 'twenty three. We expect that to persist in 'twenty four.

Speaker 6

That I understand. I think what confused me and this might have been your comment I really just want to crystallize this year, but I think the comment was migration saw a slight increase in 2Hcy23, But we anticipate stabilization in 2024. And I just can you better contextualize that for me? Like, Are we expecting stabilization off that second half base or are we just assuming that the migrations continue to remain Almost a little bit more hesitant when thinking about customers' propensity to go through that migration.

Speaker 2

Yes. Hi, Mike. This is Shlomi. I'll take this one. What we see in the cloud is a result of 2 avenues of growth.

Speaker 2

Avenue number 1 is the consumption, more data transfer, more storage, and our customers are going with us, those that are already in the cloud. What happened in the beginning of 2023, the end of 2022 is that some of the strategic migration projects were put on hold by the customers. Our on prem customers and prospects in the market kind of delayed What cloud migration to the cloud? And while we started to see a momentum of climbing back with the consumption with those that are already in the cloud, We didn't see kind of the same growth on the migration project that were released to start moving to the cloud. Now why is that?

Speaker 2

Mainly because of the fact that if you strategically took a decision to move to the cloud and you didn't start yet, You want the macroeconomic to stabilize and then you will kick off the project again. While if you are already in the cloud, It's easier for you to scale with the consumption. What we assume is that in 2024, we will see more projects of cloud migration happening and still the same momentum of consumption. And therefore, we wanted to stay conservative with how we project the growth in 2024 and guided to mid-forty percent again. Understood.

Speaker 6

Thank you. Thank you for laying that out, Shlomi. I really do appreciate it. And I also just wanted to come back. In your prepared remarks, I know you cited, the customer count, which we get on an annual basis.

Speaker 6

And I appreciate we're at 7,400 now a year ago, we were at 7,200. But I was interested, there was a specific comment that you had in relation to the customer count, which said, These newer customers you're adding to the portfolio are coming on with higher ASP lands and a higher propensity to expand. And I wanted to get some more color on those two dynamics as well. Could you either give some more color or detail Regarding those ASP lands that you're seeing, it makes sense intuitively just given the expansion of the platform that we have where we are today versus just a year ago. But wanted to see if we could get something more on that dynamic.

Speaker 6

Thank you.

Speaker 2

Yes, Mike. Well, you follow JFrog For quite some while, you remember the day that the bottom up inbound sales was 90% of our revenues. And we slowly in the past 3 years shift from a bottom up, from a developer up to a top down outbound mechanism. Part of what we have done, we also identify what logos we want to go after. And you cannot treat the $1,000,000 land the same as you will do with the $1,000 logo that lands and expands flow.

Speaker 2

So we aimed our team towards this direction. We aimed our solution, technologies and platform towards this direction. We started to work with partners and channels towards this direction and still score 200 net new customers' logos within our portfolio. What we see with these logos is that they are not only lending with a higher ASP, They also go faster than the logos that started from free tier or from open source and slowly grew. Now this is not to say that we are dropping the ball on the SMB.

Speaker 2

But when I guide the team, I need to make sure that they are focused not only on what logo we are after, but also what value can we bring to the enterprise versus what value can you bring to the SMB. Therefore, I'm very pleased with this result, and this would be the focus moving forward as well.

Operator

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

Speaker 7

Hey guys, thanks for taking the questions. Just a couple from me here. Wanted to ask a question on optimizations. In the prepared remarks and the guidance, there was a mention of optimizations. I just wanted to be very clear here.

Speaker 7

Are you calling out that some companies might still be having optimizations? Is that more or less what's going on? Do you anticipate optimizations to continue? Does the guidance incorporate a fair amount of optimization assumptions? Or did I just completely misread hear that and our optimizations more or less in the

Speaker 8

rearview mirror for you guys.

Speaker 3

Hi, Koji. This is Ed. No, the comment was not about optimization from customers. This is more internal in the optimizations that we have internally to drive leverage in our P and L.

Speaker 7

Got it. Now thank you for that clarification. And then I wanted to have a follow-up on the net revenue retention. Clearly here at 119%, it looks like it's stabilized. Is it safe to say it's bottomed And it should expand from here.

Speaker 7

And just to really think it through, if it were to dip again, what would be the causes of that?

Speaker 2

Yes. So Koji, we feel

Speaker 3

that the net dollar retention rate has stabilized and we're saying we'll be within The high teens, the high teens means between $117,000,000 to $119,000,000 but we feel like we've stabilized net dollar retention at this point.

Operator

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

Speaker 9

ahead. Thanks guys. And thanks for your comments, Shlomi, at the end of your prepared remarks, important. Had a question. I'm kind of tying some of the points that Artis had mentioned on the call.

Speaker 9

Love to get more better understanding as the relative contribution of migrations Versus new to your cloud business, can you give us a little bit more quantitative, if not qualitative assessment of the relative contribution of those 2 to the growth. And related to that, Shlomi, I know your focus has been clearly on expanding customers. But if cloud, if sales is self serve, is there no room for better or faster new customer Additions, it feels like, the technical complexity of ramping as a new customer should be significantly lowered. Why should that not unlock by itself faster new customer additions?

Speaker 2

Yes. Hi, Ty. You have a very good question. It's not just consumption versus migration. It's also migration and prospects in the cloud.

Speaker 2

So what I would say to that point is that the majority of our prospects I'm not even considering self hosted. It's not the 10 years ago market that it was a debate. Most of our prospects will start in the cloud unless they are in a highly regulated environment and therefore they will look for a self hosted solution. So new customers who usually land in the cloud, we provide a multi cloud solution, we provide a hybrid it gives them all the options. Regarding the new logo count, well listen, This is a company that built the platform and added technology, the new persona, entered new addressable market, moved from open source bottom up to top down enterprise sales.

Speaker 2

I committed to you guys that we will be focused on a very strong execution and deliveries of what we promised. And in order to do that, we have to choose our battles. And in order to choose our battles, I'm asking my team, What is it that you have in your pipeline and we have to choose from the pipeline what will deliver on the results that would be aligned with the guidance and the long term model. So maybe in the future, we will invest more, but there is That's much we can do without distracting the company. I think we chose well.

Speaker 9

Okay. Very good. And then as a follow-up, I can't help but feel somehow that the tone in the call now is a little bit different than what it was in the last 2, 3 quarters in the sense that Through 'twenty three, you are very much focused on security, and clearly rolling out advanced security and curations. And while you did mention DevSecOps clearly on this earnings call, it wasn't what you've kind of led with, which was the case 2, 3 quarters ago. So I want to make sure I'm not missing anything here.

Speaker 9

As I think about 2024 and perhaps even a little peak into 2025. When you look at your growth drivers, is cloudpushing customers into the enterprise Plus tier, a bigger driver to you than what security like how should we qualify how big of a contributor Do you think about do you think security is for you over the next year or 2? Is it a small driver or big driver? I just want to make sure I'm not losing focus here.

Speaker 2

Thank you for this question. Security was in our focus for the past 2 years since we acquired V2. We've built a full security suite With JFOC Advanced Security, with JFOC UATION, with the static analysis, we started to migrate customers from point solution to our security solution, but it was only released few quarters ago as you remember. Now security is embedded into our platform. And the main differentiator that JFOC brings to the market as a security provider is that we also bring it with the Altifactorated center with a single source of breakouts, we protect your assets from the get go all the way to the releases.

Speaker 2

So Assure security is a very important piece when we are offering our customers to upgrade to higher subscription, Enterprise X and Enterprise Plus. Still, cloud growth is a very important item in our Growth planning and having cloud going not only on DevOps, but with security, I think we will see Other numbers in consumption and we might even see companies coming to JFork because of security first, Although it's still not the majority of our revenue, not in 2024 and not in 2025, it will become material, but not The majority of our revenue.

Operator

Our next question comes from the line of Miller Jump with Truist. Please go ahead. Great.

Speaker 10

Thank you for taking the question and I'll echo my congrats on the strong results. I guess just starting customers over $1,000,000 in ARR really picked up steam in the second half. Given the go to market investments that you saw driving this, Is this something that you all feel you actually might have the ability to accelerate with more investment there? Or is it a matter of customers getting more mature and demanding the full platform?

Speaker 3

Hi, Miller. This is Ed. So it's really at this point, it's difficult to know. This is a customer decision And it requires commitments of budgets and resources. And at this point, it's unknown.

Speaker 3

We have good line of sight in the first half of the year. But in terms of the second half, we don't have as much visibility. So it's really at this point difficult for us to know if that accelerates.

Speaker 2

And then I will add to Hi, Patrick. Miller, sorry, this is Shlomi. I just want to add to it. We are looking at the customers over $1,000,000 Obviously, outstanding results and we build this momentum throughout the year. But there is also a growth in the over $100,000 customers These customers are slowly climbing.

Speaker 2

There are still a lot of customers that are falling between $500,000 to $999,000,000 that we are not reporting. So we need to bring more value to let them kind of embrace the full solution from JFrog and then I think you will see this momentum keep happening.

Speaker 10

Definitely, that's helpful and we're looking forward to the continued execution there. I guess maybe one more for Ed, just on the cloud side. Could you just remind us What you're seeing in terms of growth characteristics from your cloud customer base versus self managed customers in terms of maybe like a net retention basis and how that could impact the model as get more mix shift to the cloud?

Speaker 3

Yes. So we have significantly higher net dollar retention rates coming from our cloud versus our self hosted. This is the reason why we continue to invest in the cloud and the migrations from self hosted to cloud because we've seen better outcome in terms of our growth and the net dollar retention rates on the cloud side.

Operator

Our next question comes from the line of Mark Bauchner with Stifel. Please go ahead.

Speaker 11

Great. Thank you and thanks for all the detail. I think on security, you guys talked about it being material after

Speaker 6

really seen

Speaker 11

it a few quarters ago. So just hoping to get sort of a comparison on MLOps and where you guys see that, the early POC activity And how you see that maturing in comparison to how security has matured over the last few quarters? Thank you.

Speaker 2

Yes, hi. So regarding security in the world of MLOps, what we call MLSecOps, What we see now, the quarter after we released the support for adding phase and the native Supporting our factory and x-ray for scanning malicious models is that no enterprise ignore The revolution that AI brings, so they all try to set some standards and policies around what is the right and safe way to use ML models within their software supply chain. Artifactory serve ML as a package, models as a package, yes, another binary and therefore x-ray scan them. So we know already that our customers are setting the single source of Pega for MLOps with what we released. What you should expect in the future during 2024 and 2025 is the extension of the MLOps and MLSecOps solution coming from JFrog.

Speaker 2

It goes hand in hand, security and ML model, ML hosting in the platform. So that's how we plan to extend our solution for MLOps and not just DevOps.

Operator

Our next question comes from the line of Kingsley Crane with Canaccord. Please go ahead.

Speaker 12

Hi. Congrats on the fantastic quarter. So, Shlomi, I want to start with you. Appreciated your comments About how you're helping customers build with MLOps. Within the DevOps space, I think you're relatively unique in that you're more highly concentrated in really large enterprises.

Speaker 12

Just curious what you're seeing in terms of AI ML developer activity, how much that has changed in the past year? Trying to get a better sense of how much of this is concentrated within large versus some of these newer found companies in the past 2, 3 years?

Speaker 2

Yes, that's a great question. Some of it will come from our Very early experience in the world of AMLOFS and some of it from the service we are leading and customers' consultation. It is very clear now that the DevOps service providers within the organization, the security service providers within the organization We'll also cover the service that is required to support the adoption of MLOps and MLSecOps. Therefore, Artifactory is playing a key role as the repository for model and proxy and caching for model And X-ray and our security solutions are covering the aspects of M and SecOps to secure it while using it. So I think that what we should expect is DevOps engineers and ML engineers becoming one to provide services to the consumers with inside the organization, data scientists, Python developers and so on.

Speaker 2

With regard to what we hear from the customers is that they are planning AI is running 1,000 times faster than every disruption we saw in the past. And they are planning to have some of these assets in production during 2024. Therefore, we were early in 2023 starting to work on it, released it to GA in the last quarter of the year and now our platform is getting more and more mature to support the demand that is coming from our own customers, the DevOps engineers that are now supporting the MLS initiative.

Speaker 12

Thanks, Lemmy. That's really great to hear and really helpful. And so just to add, dollars 1,000,000 customers and $100,000 customers, they're both progressed Really nicely in this past year. Just want to hear more thoughts about what you think is the biggest unlock for you? And How much could we attribute to an increase in development activity versus just maybe vendor consolidation?

Speaker 3

So really what as Shlomi mentioned previously on the call that we have quite a customers that are sitting between that $500,000 to $999,000 This really becomes an unlock through technology. So developing technology, adding new features and then being able to increase ASPs to drive above $1,000,000 So we see opportunity there in terms of driving that increase to the $1,000,000 customer. In addition to that, we talked about as we build our tops model, we invest in the enterprise, the go to market, we're landing at a much higher ASP and we're bringing in better quality customers and those customers have more durable growth That will get us to the $100,000,000 customer quicker. Yes. And

Speaker 2

to add to it, when we are building the plans for 2024, I think that the momentum that we will see from 1 quarter to another will be similar because customers are also starting the year, starting to plan their budget. Not everyone jumps and spend it all on the Q1. So we build this alongside with our product and R and D roadmap to make sure that when the value is there, they will not hesitate to take the bet with JFOG as they did in 2023.

Operator

Our next question comes from the line of Yifu Lee with Cantor Fitzgerald. Please go ahead.

Speaker 13

Thank you for taking my question and congrats on the strong finish to 2023. First one for Shalomi, like in terms of your cash balance, Great to see that you went from about $400,000,000 to over $500,000,000 right now. Any thoughts of, like, large M and As or even tuck ins to, like, And then I have one for Ed, a quick follow-up for Ed.

Speaker 2

That's a great question. I don't know what large M and A means every time I hear Or

Speaker 13

tuck ins. Or tuck ins.

Speaker 2

M and A are part of our strategy. We have a school team that set the radar for the next few years as we discuss our M and A strategy. As you know, JPOG acquired 9 companies in the past years And we plan to grow inorganically as well. Some areas that we are looking at, obviously, Reinforce our security to the left and to the right and also to shorten the time to market With MLOps, MSSecOps and AI initiative, I'm saying shorten the time to market because as you probably know, Every few days there is a new company that claims that they are the next AI company and we want to make sure what we bring in It's not just the talent, but also the technology that will support our enterprise demand.

Speaker 13

Thanks for that, Shlomi. And a quick follow-up on the financial side with Ed. In terms of the linearity for the quarter, can you just kind of discuss like how did the quarter trended and what you are seeing so far year to date? That's it for me. Thank you and congrats.

Speaker 3

Sorry, I didn't quite understand the question at first. The linearity of

Speaker 13

the Like, I was wondering if you could count on the linearity for the quarter. How did it trended from October to November to December? It didn't sound like there was any drop off, like even though there was a holiday in December. And then if you could comment on the, So far year to date, the performance till early February.

Speaker 3

Thank you for the clarification. From a linearity perspective, yes, we didn't see First of all, December seasonably is a drop off and we did see some drop off. But for the most part, we saw a pretty straight linearity for the quarter. We haven't seen much change in January at this point, but we're not going to comment on Q1.

Operator

Our next question comes from the line of Rob Owens with Piper Sandler. Please go ahead.

Speaker 9

Yes, great. Thanks for taking my question. Just one for me, curious on sales and marketing as we think about 2024 and just Sales capacity additions, especially with the top down selling motion, just how aggressive are you going to be to add sales staff moving forward and also what you're doing from a partnering perspective? Thanks.

Speaker 2

Yes. So thank you, Rob. As you remember, we discussed it multiple times. We are hiring enterprise experience sales representative together with the right executive on the marketing side, customer success. It's a full cycle.

Speaker 2

It's not just the sales account manager. In addition to that, we invest a lot In increasing our partners in China's ecosystem, not just our partnership with the AWS, GCP and Azure, but also standalone companies that are promoting our solution and active channels. On top of that, We also increasing the numbers of our overlay reps that can bring the security experience to the market. So we see those 1st sales representative that are coming from security background. This is these are all additions to the strategic sales team that we discussed before and to the entire enterprise sales team that we build together now.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Nick Altman with Scotiabank. Please go ahead.

Speaker 8

Awesome. Thanks guys. Earlier, you guys had made some comments on how customers are landing at higher And you're actually seeing sort of greater expansion motions from some of these customers. Can you just maybe talk about What's driving that? And when you look over the next several years, how durable is that trend?

Speaker 8

Or do you think it's kind of more of a near term trend that you're just kind of seeing over the last couple of quarters here?

Speaker 2

Yes. Thank you, Nick. What really drive the higher ASP, especially when you set to technologies, technologies, they are Allergic to fluffy values, if they are not solid and concrete, they will not respond to it. So what really drives that is that you answered the pain. And from the outside in, the pain that we hear about is help me to consolidate the numerous tools that we currently use in order to run one delivery process.

Speaker 2

So having consolidations of tool in one platform is one reason for customers to land higher. The second reason is that when they move from another to JFrog. They are already educated with what they want to achieve. They already know how DevOp solves, how security works. And when they move to JFrog, most cases, it will come with the expectation to scale.

Speaker 2

So they are willing to commit to higher numbers. They are willing to commit to a higher volume. They know that JBox gets to infinity unlike the other tools, And therefore, they lend higher with their ASP. There are other reasons, but these are the main 2. And obviously, when it comes with the cloud momentum, The consumption and the commitment for the year is another parameter, but these are the main three.

Speaker 8

Awesome.

Speaker 7

And then just another question kind

Speaker 8

of building off Rob's earlier question around the go to market. I assume you guys recently had your sales kickoff. And I know you're focused on sort of the top down sales motion. But just coming out of the sales kickoff, what was sort of the messaging? What go to market What go to market tweaks are being made, if any?

Speaker 8

And any meaningful changes to how quota carrying reps are compensated in 2024? Thanks.

Speaker 2

Yes. Well, as we speak, sales kickoffs are happening all over the world. Our sales team, what they hear is that the geography based execution coming with a full platform that includes security, Having a full platform that can also be hybrid, this is how they should focus their efforts on. To the partners and channels team, we are expanding the solution to land higher with a full holistic solution for DevOps and DevSecOps. But obviously, the focus of JFOP in 2024 will be the joint solution of DevOps and security together, and this is what my team here.

Operator

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

Speaker 2

I'd like to thank you all for joining us today. Happy Valentine's and may the folks be with you. Take care, guys.

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Key Takeaways

  • JFrog reported FY2023 revenue of $349.9 M (up 25% YoY) and Q4 revenue of $97.3 M (up 27% YoY), delivering a quarterly record $32 M in free cash flow and non-GAAP EPS of $0.51 versus $0.04 a year ago.
  • Cloud revenue accelerated to $36 M in Q4—up 59% YoY and representing 37% of total revenues—driven by a cloud-first, multi-cloud strategy and a rebound in customer consumption.
  • Enterprise momentum strengthened as customers with ARR above $100 K grew 20% to 886 and those over $1 M nearly doubled (95% YoY) to 37, reflecting the shift to a top-down go-to-market and platform consolidation approach.
  • For FY2024, management guides total revenue of $424 M–$428 M, expects cloud baseline growth in the mid-40s%, net dollar retention exiting the year in the high teens, and non-GAAP EPS of $0.58–$0.60.
  • JFrog is expanding its unified software supply chain platform to integrate DevOps, embedded DevSecOps and early MLOps capabilities—partnering with AWS SageMaker to cache, version and secure machine learning models.
AI Generated. May Contain Errors.
Earnings Conference Call
JFrog Q4 2023
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