JFrog Ltd.

Ladies and gentlemen, thank you for joining us and welcome to JFrog's third quarter 2022 earnings conference call. I'll hand the conference over today to Jeff Schreiner, VP of Investor Relations. Jeff, please go ahead.

Good afternoon and thank you for joining us as we review JFrog's third quarter financial results, which were announced following market close today via press release. Leading the call today will be JFrog CEO and co-founder, Shlomi Benhaim, and Jacob Schulman, JFrog CFO. During this call, we may make statements related to our business that are forward-looking under federal securities law 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 the fourth quarter and full year of 2022. 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 other subsequent day. Please keep in mind that we are not obligating ourselves to revise our public 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 discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2021, filed with the SEC on February 11, 2022. 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 September 30, 2022, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as 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 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 CEO Shlomi Benham. Shlomi?

Thank you, Jeff. Welcome, everyone, to our third quarter earnings call. I'm proud to report yet another strong and fruitful quarter for JFog. In Q3, JFog exceeded the high end of our guidance across all metrics, driven by the strength of our platform across our DevOps, security, and IoT pillars. Our third quarter revenue was $72 million, reflecting 34% year-over-year growth. Our cloud revenue increased 60% year-over-year. This is driven by expanded adoption of our platform and continued customer migration to multi-cloud and hybrid environments. The list of global enterprise customers making JFrog a part of their backbone of their DevOps and DevOps process also continues to grow. Customers with ARR over $100,000 grew to 696 compared to 647 in the previous quarter, increasing 49% year-over-year. Customers with ARR over $1 million increased sequentially to 18, up from 17 in the previous quarter, and up 29% year-over-year. Our trailing four quarters net dollar retention was 130%. As the single source of tools and system of records for our company's software deliveries, the JPEG platform, which is the only binary-focused end-to-end solution, continues to be mission critical for our customers. We're proud to be our customers' strategic partners and thankful for their trust. Now, allow me to elaborate on how this played out in Q3 with some key themes. First, the growth in full platform adoption demonstrating maturing needs for end-to-end DevOps and DevSecOps consolidated solutions. A growing interest in our binary-focused security solutions, including our recently released advanced security offering. Third, the ongoing transformation of companies managing their software supply chain process in the cloud and enterprise DevOps migration to the cloud. And fourth, the growing need to bridge DevOps and security with IoT and connected devices. Let's begin with the increased adoption of our platform. We have been very encouraged by the ongoing adoption of our Enterprise Plus subscription by some of the world's largest enterprises. The trend of the growing number of Enterprise Plus customers and its increasing revenue contribution support our view that the market needs more mature end-to-end solutions. Our customers tell us how they use JPEG platform to import, build, manage, secure, and distribute binaries to production, and how vital our solution is to the full software supply chain flow. We recently attended Morgan Stanley's Innovation Summit, a conference the firm has hosted for 20 years where the bank tech leadership reviewed our joint plans moving forward. Just a few years ago, They began with an initial deployment of self-hosted artifactory and expanded to security and distribution, adopting the JFrog platform on-prem and in the cloud. Morgan Stanley's Global Head of Enterprise Technology Architecture, Modernization and DevOps, Trevor Bronson, summarized it best, and I'm quoting, JFrog's focus and vision to provide publish-anywhere, available-everywhere platform uniquely addresses Morgan Stanley's needs for a modern DevOps solution with global scale everywhere we operate, on-prem, in any cloud, and more importantly, near the edge of service. We continue working together to mature the next generation of software distribution with fully managed controls at enterprise scale." We are honored to have a visionary like Morgan Stanley as a customer. and excited to keep improving our platform play at scale as today's world's enterprises demand. A full, scalable 360 binary lifecycle management to automate the software supply chain securely. Second, our security pillar. We recently released our most significant set of security capabilities to date, JFOG Advanced Security. We introduced the world to the first DevOps-centric security solution that is focused on binaries. Why is it unique? JFrog serves as our customer's single source of tools for all binaries, whether it was built in-house or brought in as open source packages. Binaries are the only way development teams can fully control, automate, and secure the entire software supply chain flow, as binary includes all the data about how they were created, built, tested, and what other part of application they depend upon or impact. Any security tool that attempt to provide a software supply chain solution will either need to deeply integrate with JFrog Artifactory or build a binary repository. JFrog has released a set of capabilities that natively integrates with Artifactory. Therefore, JFrog is able to provide security with a unique perspective The concept of better software supply chain security is simple. If you don't control and own the binaries, you can't secure them. With features like leak-secure detection, contextual analysis, and malicious package scanning, just to name a few included in JFrog Advanced Security, we are branching out of the software composition analysis area to secure the left and right of the factory. The market acknowledged developers became the targets of hackers, and the world already suffered from incidents like Lock4j, Spring Shell, or other vulnerable binaries that expose the old organization to a risk. This combination of holistic security with the power of the JFOG platform, controlling and watching the binary's life cycle, will address the need for a new era of software supply chain security threats. We are happy to see industry leaders like Google Cloud looking at binary authentication as a critical aspect for software supply chain security. We are positive that more security solutions will follow JFrog and acknowledge binaries as the primary asset to secure in a modern software delivery flow. Third, cloud goals, migration, and standardization. JFrog leads the philosophy of hybrid and multi-cloud DevOps strategy and our customers tell us that it is here to stay. For most enterprises, this essential infrastructure migration is a multi-year effort that involves a gradual strategic change over time. JFrog's hybrid approach enables them to move workloads on their own pace while adhering to standards and regulations. In Q3, one of the world's top three largest automobile manufacturers joined JFrog as a new customer, This multi-million dollar deal that was completed in partnership with Cloud Marketplace included a full adoption of the JFrog platform and notably originated through community efforts around Conan, JFrog's open source C++ package manager, preferred by many automotive and IoT groups. These customers look at DevOps and DevSecOps SaaS solutions that can scale and centralize global development. They emphasized the need for binary management, universality, security, and distribution, which was perfectly aligned with the JFrog solution. They migrated from Sonotek Nexus to the JFrog platform, looking to standardize on the cloud and evolve during the era of electric vehicles. Another example of shifting DevOps to the cloud with JFrog came from an existing customer, one of the most recognizable heavy equipment manufacturers in the U.S., signing a deal with over $500,000 AR. In addition to migration, this company was also looking to standardize their software distribution process and remove manual, time-consuming tasks across all their software delivery pipelines. And now, to the early emergence of DevOps for IoT. In Q2, we announced the availability of J4 Connect. Now, in Q3, we saw the first large deal generated by J4 Connect in tandem with the JFOK platform. An international defense electronics company chose JFOK to manage one of Western Europe's technology-advanced armed forces' full DevOps flow to enable over-the-air software updates to the edge. In this case, the edge is heavy military equipment, such as combat vehicles. In a software-driven era, modern defensive equipment can't operate without updated software. However, today, a soldier is required to update each edge with a flash drive manually. In a real-world implementation of our liquid software vision, this process will be automated and will bridge DevOps practices with over-the-air solutions, allowing continuous updates to the field. Again, binaries are the only software asset that is being deployed on the device. can now be managed and distributed by Artifactory, continuously secured by JFrog Security, deployed and monitored all the way to the edge by JFrog Connect. We look forward to working with more customers to build and mature this adoption at the edge, yet another task that will land on the developer's plate in the future. The CEO of Ford Motor Company noted it clearly a few weeks ago as he shared the next era of transformation for his organization, and I'm quoting, the next revolution in auto is digital. And Ford intends to lead that revolution. We are turning our vehicles into generators of data that will receive continuous updates, end quote. We are proud. The JPROX Liquid software and continuous update vision leads this change and becoming a reality. I now want to address the ongoing macroeconomic challenges and geopolitical impact many of our customers and communities are facing. Customers around the globe are looking at ways to increase efficiency and to improve their cash flow and operations through vendor consolidation and more focused strategic areas of investment. With our business efficiency and growing market demand for DevOps and security holistic offerings, we are positioned well to face macroeconomics headwinds. We see the opportunity that customers will use an essential infrastructure like JFrog platform to consolidate across DevOps and DevSecOps and replace legacy processes or point solutions. However, JFOG is not immune to these macro-driven headwinds, and we continue to see longer sales cycles, additional budget approval requirements, and project delays. As we step into the last quarter of 2022, I would also like to note that we stayed committed to our plans to finish the year breakeven as we operate and run a solid business that not only builds value for our shareholders innovate and pioneer the DevOps market, serve thousands of customers, but also being a home for over a thousand Frogs worldwide. We take pride not only in our technology and business success, but also its resiliency during troubled times. Before I hand the call to Jacob, I want to extend a warm welcome to the newest member of JFrogs board, Yvonne Wassenaar. With over 30 years of experience in enterprise software, cybersecurity, and cloud, Yvonne leaped into our board as she brings JFrog a wealth of industry expertise and go-to-market acceleration strategies that will help drive the company's advancement in DevOps, security, and IoT markets. With that, I'll turn the call over to our CFO, Jacob Schulman, who will provide an in-depth recap of Q3 results and update you on our outlook for both Q4 and fiscal year 2022. Jacob. Thank you, Shlomi, and good afternoon, everyone. During the third quarter, total revenues were $72 million, up 34% year over year. Expansion in our cloud business continued with revenues of $21 million, up 60% year-over-year, representing 29% of total revenues, driven by new customer wins and increased usage within security and DevOps solutions. We are pleased with continued growth momentum in our SaaS business, despite some optimization of usage by our customers that we experienced during the quarter. We saw customers adjusting their usage patterns to get some cost savings as well as utilize better pricing by moving from pay-as-you-go subscription to minimum annual commitments. Nevertheless, we believe our SaaS business will continue to grow rapidly by expansion of DevOps and security solutions, as well as new customer lands on the cloud. We reiterate our belief that the baseline growth rate for our cloud business remains in the mid-50% range, with potential upside from customer usage as we have seen so far in 2022. Self-managed revenues, or on-prem, were $51 million, up 26% versus the third quarter of 2021. On a year-over-year basis, growth in our self-managed revenues continued to be persistent, even as vast majority of our new customers are first landing on the cloud, and many large on-prem customers are gradually migrating toward hybrid deployments. We believe JFrog's hybrid solution allows freedom of choice, providing more control over how and when customers transition to the cloud. We view our support for hybrid coupled with continued growth in self-managed deployments as future drivers of solid growth in our on-prem business. Net dollar retention for the four trailing quarters was 130% in line with our prior commentary. As of the quarter end, we had 696 customers with ARR of over $100,000, up from 647 customers as of June 30, 2022, and up 49% from 466 at the end of Q3 of 2021. We also grew the number of over 1 million ARR customers to 18, up 29% year over year. As we discussed in the past, adoption of the full platform is a key factor in the increasing size of our customers. In Q3 of 2022, 39% of our revenue came from enterprise plus customers, up from 34% in Q3 of 2021. Now let me discuss the income statement in more detail. Gross profit in the quarter was $60.6 million, representing a gross margin of 84.2% compared to 84.5% in the year-ago period. We expect gross margins will remain between 83% and 84% in the near future, and then trend toward the low 80s over the long term as cloud revenues become a greater portion of our total revenue. Operating expenses for the third quarter were $59.4 million, or 82% of revenues, up from $44.1 million, or 82% of revenues, in the year-ago period. Our operating expenses grew approximately 600,000 sequentially as we initiated previously announced operational efficiencies. While we continue to invest strategically within R&D and build out our enterprise sales and channel relationship for the long term, we also have continued to look for ways to enhance productivity and reduce costs. Non-GAAP operating profit in Q3 was $1.2 million or a 1.7% operating margin compared to an operating profit of $1.3 million or a 2.5% operating margin in the year-ago period. We turn back to profitability this quarter, as non-GAAP net income in the quarter was $1.8 million, with earnings per share of 2 cents, based on approximately 105 million weighted average diluted shares outstanding, compared to a loss per share of 2 cents in the previous quarter. Turning to the balance sheet and cash flow, We ended the quarter with $434 million in cash and short-term investments, up from $430.2 million as of June 30, 2022. Cash flow from operations was $5.1 million in the quarter. After taking into consideration CapEx, free cash flow was $3.8 million. We remain committed to accelerating our free cash flow margin toward our long-term targets of 30% over the coming years. As of September 30, 2022, our remaining performance obligations totaled $189.8 million. As Shlomi noted, the overall global macro environment remains challenging. However, I'm proud to say that our renewal rates remain high, usage remains high, and some of the world's biggest companies are turning to JFrog to make them more efficient, more secure, and more scalable. We have already implemented some cost savings initiatives and will continue to do so as we navigate these uncertain times. We remain consistent with our forward guidance methodology, working to balance the macro challenges faced by the global economy and the opportunities we see to expand JFrog's role in the software supply chain. For Q4, we expect revenue to be $76.5 million to $77.5 million, with non-GAAP operating profit between $1 and $2 million, and non-GAAP earnings per diluted share of 1 to 2 cents, assuming a share count of approximately 106 million shares. For the full year of 2022, we anticipate a range between $280 million and $281 million. Non-GAAP operating income is expected to be between $1 million and $2 million, and non-GAAP earnings per diluted share of $0.01 to $0.02, assuming a share count of approximately 106 million shares. We're guided to breakeven levels for fiscal 2022, and even with the catalysts created by the current environment, we'll continue to execute on this commitment. Now let me turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi? Thank you, Jacob. As I'm wrapping up, I'd like to thank my team. I'm proud and honored to work alongside the team driving this ground-shaking innovation. We look forward to partnering with our customers to drive their digital transformation and adopt a modern DevOps security and IoT solution with our platform. Thank you all for your attendance today and may the frog be with you. And now, we'll be happy to take your questions. Operator?