JFrog Ltd.

Ladies and gentlemen, thank you for joining us, and welcome to JFrog's first quarter 2023 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 first quarter 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 Benhaim, and Jacob Shulman, JFrog 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 Q2 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. 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 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, 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 was made available in our Form 10-Q for the quarter ended March 31, 2023, 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 Van Hai. Shlomi? Thank you, Jeff. Good afternoon to you all, and thank you for joining the call.

I'm pleased to report that JFROG's first quarter of 2023 Revenue exceeded our prior guidance range, driven by increased cloud usage by our customers and continued adoption of the mission-critical JPEG platform, even in challenging economic environments. Our 2023 first quarter revenue was $79.8 million, reflecting 25% year-over-year growth. Our cloud usage accelerated in the quarter, delivering revenue of $25 million, increasing 49% year-over-year. Customers with ARR over $100,000 grew to 785 compared to 599 in the year-ago period, increasing 31% year-over-year. Customers with ARR over $1 million increased to 21 versus 16 in the first quarter of 2022, up 31% compared to the year-ago period. Our first quarter results demonstrate strong execution in tough macroeconomic environments highlighting the resiliency of our DevOps, cloud, and security initiatives powered by the JFrog platform. I want to address what specifically made Q1 a strong quarter for JFrog. First, while we continue to operate in challenging environments, our customers have pushed forward, expanding their infrastructure with JFrog as a mission-critical piece of the software supply chain management toolset. While some companies may be delaying or re-scoping projects, we are seeing they ultimately need to move forward with high-value initiatives based on solutions like J4. As a result, in Q1, we did see some deals that had been pushed out from Q4 of 2022 reach the closing stage this quarter. As an example, our strategic sales team was proud to migrate our customer weeks to J4 cloud services based on their strategic DevOps workload migration initiative. Wix is a world leader in the cloud-based web development platform domain, providing powerful services and a vast collection of templates to millions of customers worldwide, simplifying website building for individuals and companies. In order to update their application with speed, security, and reliability, Wix realized their on-premise infrastructure would not allow for the agility and scalability they required, leading them to embrace cloud services for their DevOps pipeline. In partnership with the JFOPS strategic customer team, Wix defines the software supply chain end-to-end from cost of production at scale, saying, quote, every month we are transferring massive amounts of data between our development team, production environment, and our customers. J4 Cloud Services is a high-scale, resilient, mission-critical component of our production system, managing container images and software packages of different technologies in multiple regions with full redundancy and full tolerance for our customer-facing applications, end quote. That is Adam Spector, the VP of Engineering of Wix. He also noted, quote, Migrating our DevOps workflow to JFrog's multi-region, highly available software supply chain platform with artifactory at the center allows our team to better support Wix's growth by providing reliable and innovative services, end quote. GateFox stands out in the DevOps and DevSecOps market by offering a hybrid and multi-cloud solution, which allows our customers to fully manage and secure their binaries across their software supply chain while migrating to the cloud at their own pace. We anticipate partnering with more companies like Wix to power strategic development initiatives at the world's most demanding enterprises. Second, I'm pleased to say Q1 showed early indicators of growth in our partners' ecosystem and ongoing efforts to expand our co-sale and channel partner motion. For example, a large partner in Japan built in a Q-Win for J-PAL, one of the most recognizable insurance brands in Asia via our reseller channel. In another example, a top federal partner was able to secure a net new project leading to an enterprise-plus full platform subscription deal in support of a United States federal agency. We continue to believe the global partner motion, in addition to our robust strategic sales and direct sales motion, will expand in 2023. Third, in Q1, despite customers taking steps to be more efficient in their cloud consumption, we saw acceleration of cloud usage in both pay-as-you-go and annual SaaS customers. As businesses continue to streamline, they rightfully look for ways to be more efficient. With that in mind, J4C continues to solidify its position within companies, enabling efficiency, accelerating speed of development, and delivering secure software releases that provide competitive advantage. We're confident J4C will continue to grow its cloud business in 2023, mainly due to increased usage and ongoing migration from self-managed subscriptions toward hybrid or multi-cloud environments. Now, allow me to expand on some broader themes that we anticipate will continue to fuel JFrog in 2023 and beyond. Let me begin with cloud and hybrid. Our customers tell us and we observe it in the community, that cloud migration and strategic hybrid topology adoption remain a top priority for most enterprises. We believe JFrog is uniquely positioned to support enterprises as they migrate at their own pace, handling both on-prem and cloud simultaneously. Many of these initiatives are multi-quarter or multi-year efforts, and we're proud to help new and existing customers drive success in these areas. This was a common theme our top customers highlighted at our Leap event, an intimate gathering of some of J-PROG's influential customers that included representatives from many of the world's most recognizable enterprises. As part of customers' cloud migration journeys, they were excited to hear that our advanced security solution would be available in a hybrid model to support both emerging and historic workloads. Our holistic security capabilities differentiate us from other ventures, and we're proud to be strategic partners as our customers migrate and manage DevOps and DevSecOps across their journeys. To illustrate this from a business perspective, we recently welcomed a leading payments and financial services provider to the JFrog Software Supply Chain platform. This company had previously relied on Sonotap Nexus to manage their DevOps processes on-prem, but was looking for a more scalable, multi-region capable, and hybrid solution. We're excited to support them in their journey as they advance their cloud-first and customers' app-driven services for more than 30 million customers. Next, I would like to highlight DevOps and security tooling consolidation. As more tasks and responsibilities are shifted left to developers and DevSecOps teams, there is increasing difficulty in managing multiple point solutions for each task. This is especially evident in security tuning, where point solutions can force developers to use handfuls of tools and try to make sense of data, action, and reporting leading to long, incomplete remediation cycles, which can ultimately leave companies vulnerable. We believe we have a great opportunity to displace and consolidate functionality of multiple tool sets and even entire security companies. Any customers look at their DevSecOps tooling portfolio and see Nexus Firewall, Synopsys Blackjack, Snyk, Checkmark, Acrosex, just to name a few, as point solutions for many capabilities. This can include open-source software, curation and scanning, code scanning, container security, environment protection, and more. We understand this fall is not sustainable for developers or the business. By addressing multiple areas of security in one platform, we believe JPOG's holistic DevSecOps tooling is well-positioned to address customers' needs across the software supply chain. As additional value, We combined with the power of the J-PROC platform with Artifactory as a single source of record for DevOps. Our customers can control and secure their entire pipeline from developers to device. Therefore, the J-PROC security approach is to provide a comprehensive platform-driven solution that we're confident will bear fruit as the software supply chain security market matures. We see early indicator of this in Q1. For example, with our J-PROG platform customer, Interven Biosensors, a life science company firing glycoproteomics that aims to make the new era personalized, predictive, and preventative care a reality. After initially choosing J-PROG Artifactory for end-to-end binary lifecycle management, companies like Intervent are positioned to standardize many security capabilities with the JFOG platform, while point solution in the market increasingly becoming redundant to JFOG security capabilities. In addition to commercial adoption of our security tools, we were excited that the recent RSA Security Conference could be recognized by the Global InfoTech Award as the most comprehensive DevSecOps solution. We look forward to building on our commercial success and industry recognition as we continue to listen to our customers' needs across our security portfolio. Third, I would like to focus on the ever-increasing need for both speed and trust in the software release cycle. At our LEAP conference, some of our leading customers were very clear. They have a need for speed but cannot sacrifice security and reliability across the global infrastructure. We were excited to welcome presentations by not just one of the top automotive companies in the world and one of the top IT firms in the world, but also one of the top global gaming development companies with hundreds of millions of players across the last decade. We were proud to see how the rapid release cycle was powered by the JPEG platform providing them with a global scale, highly available, fully federated architecture, keeping the developers productive, and delivering software with trust. Next, I want to highlight an important executive staff update. J-PROG made a strategic hire in March, proudly welcoming our new CIO, Aran Azarza. Aran has over two decades of experience in IT and cybersecurity, developing global systems and implementing leading security strategies. Under his leadership, we look forward to accelerating and scaling our corporate infrastructure, allowing us to serve customers even more efficiently while impacting the bottom line. Well, come on. In closing, I'd like to reflect on JPROC's commitment to profitable long-term growth and cash flow generation. While creating value for both our customers and shareholders, as we focus on execution across the business. Driven by the strength and adoption of the JPEG platform and our expectations for future contributions from the platform security core, we believe our operating model can achieve a five-year revenue CAGR of 22 to 24% through fiscal year 2027, which would apply a potential revenue range of $775 to $825 million. while delivering free cash flow in the range of $200 to $240 million, implying estimated margin of 26 to 29%. With that, I'll turn the call over to our CFO, Jacob Schulman, who will provide an in-depth recap of Q1 financial results, update you on our guidance for Q2 and for fiscal year 2023, as well as provide more details on the assumptions within our long-term model. Jacob. Thank you, Shlomi, and good afternoon, everyone. During the first quarter, total revenues were $79.8 million, up 25% year over year. Our stronger-than-expected revenues in the quarter were driven by ongoing customer adoption of the J4 platform and higher-than-expected contributions from our cloud business. In the first quarter, our cloud business saw a sequential improvement in usage delivering revenue of $25 million, up 49% year-over-year. While the improvement in usage helped drive high quarterly revenues, we don't believe the overall industry trend related to optimization is completely in the rearview mirror. We remain cautiously optimistic that the first wave of customer optimization is likely behind us and anticipate our customers will grow with JFrog in a more efficient manner going forward. We view the recent increase in usage by our customers as a positive signal that the need to generate software continues to be a secular trend and see the customer optimization efforts as short-term adjustments driven by macroeconomic challenges, not a shift in how infrastructure software is utilized. We still anticipate our baseline growth rate within our cloud business will remain in the mid-40s during fiscal year 2023, with any potential upside generated by increased customer usage. Self-managed revenues on-prem were $54.8 million, up 17% year-over-year during the first quarter. Overall expansion within self-coasted has slowed relative to prior year results, given the shift by large customers towards hybrid deployments, which have favored expansion into the cloud. We believe the announced release of JFrog advanced security for self-hosted, which occurred during the first quarter, can be a catalyst for revenue growth and customer expansion. Net dollar retention for the four trailing quarters was 124%, a decline of four points due to the micro-headlines. Our growth retention continues to be 97%, with no change in overall customer return trends. In Q1, 44% of total revenue came from Enterprise Plus subscriptions, up from 35% in Q1 of 2022. Now, let me discuss our income statement in more detail. Gross profit in the quarter was $66.2 million, representing a gross margin of roughly 83% compared to 84% in the year-ago period. Higher mix of outlawed business impacted gross margins on a year-over-year basis. Aggregating expenses for the first quarter was $63.5 million, up only $1 million sequentially, equaling 80% of revenues, compared with $53.2 million, or 84% of revenues, in the year-ago period. Our year-over-year growth in operating expenses reflects ongoing investments in our go-to-market motion, security, and strategic sales team. Non-GAAP operating profit in Q1 was $2.7 million, or a 3.4% operating margin, compared to an operating profit of $543,000 or 0.9% operating margin in the prior year. We delivered another quarter of positive net income equaling $5.9 million or 6 cents per diluted chair based on 107 million diluted chairs outstanding versus a year ago income of $158,000 or 0 cents per diluted chair. Turning to the balance sheet and cash flow, we ended the March quarter with $447 million in cash and short-term investments, up from $443 million as of December 31, 2022. Cash flow from operations was negative $1.1 million in the quarter. After taking into consideration topics, free cash flow was negative $1.4 million, or negative 2% free cash flow margins. Our operating cash flow and free cash flow margins were negatively impacted during the quarter due to the timing of billings and repayments for license renewals. This does not change our expectations for low double-digit free cash flow margins in fiscal 2023. As of March 31, 2023, our remaining performance obligations totaled $210.6 million. Before providing our guidance, I would like to discuss in more detail the underlying assumptions in our long-term target model. Our estimated five-year revenue CAGR of 22% to 24% through fiscal year 2027 assumes the current macroeconomic condition would persist for several quarters and implies our cloud business will remain the primary driver of growth. We believe on an annual basis, contribution to cloud growth will likely be driven primarily by customer expansion of subscription tiers and use cases, our new advanced security add-on, and to a lesser extent, cloud migrations. Our assumption for our self-hosted business implies growth driven primarily by expansion of use cases and adoption of our end-to-end platform, including the security core. Given higher expected mix of our SaaS revenues, we would anticipate our gross margin to trend lower toward the range of 80%. In line with our prior targets, as a percentage of revenues, we anticipate spending on a non-GAAP R&D would be a range of 20% to 22%. Investment in sales and marketing on a non-GAAP basis should move from 38% in fiscal year 2022 to a range of 26% to 28% by 2027. overall spending on the non-GAAP G&A to trend toward the range of 8% to 10% by 2027, down from the 14.6% reported in fiscal year 2022. Based upon our forecast for revenue, gross margin, and non-GAAP operating expense, we would anticipate a range of non-GAAP operating income of 21% to 23% compared to the half percent margin reported in fiscal year 2022. Assuming an additional 5% to 6% for delta between non-GAAP operating income and free cash flow implies a potential fiscal year 2027 free cash flow margin range of 26% to 29%. This would suggest, on a dollar basis, free cash flow greater than $200 million by 2027. We believe this long-term target model reaffirms JFRO's commitment to profitable growth. something embedded in the company's DNA for years. We see the adoption of the JFrog platform and the addition of its recent security core as critical infrastructure software solutions, allowing our customers to manage, secure, and distribute binaries across their software supply chain. Finally, I'd like to speak about our guidance for the second quarter and full year 2023. Our full year 2023 expectations continue to estimate strong growth in our cloud business. We reiterate our belief that our trailing 12-month net dollar retention ratio will be in the low 120s for the fiscal year 2023. We forecast continued expansion in our operating and free cash flow margins through fiscal year 2023, given our continued focus on profitable growth. For Q2, we expect revenue to be between $82.5 million to $83.5 million, with non-dub operating profits between $3 to $4 million, and non-GAAP earnings per diluted share of 4 to 5 cents, assuming a share count of approximately 108 million shares. For the full year of 2023, we anticipate a revenue range between $341.5 million and $345.5 million. Non-GAAP operating income is expected to be between $19 million and $20 million, and non-GAAP earnings per diluted share of 19 cents to 21 cents, assuming a share count of approximately 110 million shares. Now let me turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi? Thank you, Jacob. We are excited to see that our customer base across multiple vertical geographies and implementation types continues to see J-PROG as mission critical. As we leap ahead in 2023, I want to thank the JFrog team for delivering on a quarter that exceeded the goals we set. The Frogs passionately work to support our customers and drive success in a complex market across DevOps, security, and IoT. Thank you all for your attendance, and may the Frog be with you. And now, we'll be happy to take your questions. Operator?