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spk04: Ladies and gentlemen, thank you for joining us and welcome to JFrog's second quarter 2023 earnings conference call. I'll hand the conference over to Mr. Jeff Schreiner, VP of Investor Relations. Jeff, please go ahead.
spk09: Good afternoon, and thank you for joining us as we review JFrog's second 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 Ben-Haim. and Jacob Schulman, JFrog's CFO. During this call, we may make statements related to our business that are forward-looking under federal security laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for Q3 and the full year of 2023. The words anticipate, believe, continue, estimate, expect, intend, Will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2022, filed with the FCC on February 9, 2023, which is available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our Form 10-Q for the quarter ended June 30th, 2023, and other filings and reports that we may file from time to time with the FTC. 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 send the call over to JFrog CEO, Shlomi Ben-Han. Shlomi? Thank you, Jeff.
spk10: Good afternoon, everyone, and thank you for joining us. I'm happy to report that JFrog's second quarter revenue exceeded our prior guidance driven by increased cloud consumption, expansion of our security solutions, and continued adoption of the JFOX software supply chain platform. Our 2023 second quarter revenue was $84.2 million, reflecting 24% year-over-year growth. Cloud usage continued to accelerate as we expected, delivering revenues of $27.6 million, increasing 44% year-over-year. We also exceeded our profitability guidance with a non-GAAP profit of $12.1 million while still investing in our core teams. Customers with ARR over $100,000 grew to 813 compared to 647 in the year-ago period, increasing 26% year-over-year. Customers with ARR over $1 million increased to 24% versus 17 in the second quarter of 2022, up 41% compared to the year ago period. These results reflect that the JFrog platform continues to be prioritized as critical infrastructure, and that our three pillars of DevOps, security, and IoT hold strategic value for our customers. Let me expand on what made Q2 another strong quarter for JFrog. Let's begin with the ongoing adoption of JPEG security solutions. Most organizations recognize the need for multiple DevSecOps capabilities, such as software composition analysis, contextual analysis, infrastructure as code security, leak secret detection, and container security, among other key features that are included in JPEG Advanced Security alongside other JPEG offerings. As we noted in our previous call, We have ambitious goals to provide end-to-end security across the software supply chain with a comprehensive set of capabilities bundled together as a consolidated solution. We believe this approach will outpace and displace point solutions in the market. I'm pleased to report that in the short period since the availability of JFrog Advanced Security in the market, we already gained tens of customers that have added this capability to their subscriptions, indicated that enthusiasm for advanced security is gaining momentum in the DevSecOps market. Not only because of the advanced scanners and automation of software packages, but also the native integration with Artifactory that serves our customers as the single source of record. On that note, I'm excited to mention our recent security product release. As we know, in our industry, over time, less and less software is being written as original code. And instead, binaries are being brought in from the outside world, often open source. Many industry estimates know that up to 90% of software is comprised of open source packages, containers, and more, all binaries. Developers often cache public repositories to obtain these libraries from the internet to speed development and add critical features. While developers may be faster, these practices can unknowingly add security and compliance risk in the form of vulnerabilities entering the organization. This creates friction between developers who want to move fast and security teams who don't want to compromise and require a clear understanding of the software's composition and dependency management. In partnership with our community, we built J-Fog X-Ray and Advanced Security as tools integrated natively with Artifactory to protect the software supply chain and everything happening within the organization. JProg has now shifted even further left to build a fence around companies to automatically and seamlessly stop malicious packages and unvalidated open source licenses from ever entering the organization. I'm proud to announce the general availability of JProg Curation, which was released a few weeks ago in mid-July. This solution automates the curation of open source software entering an organization before the development process begins. JProc curation automatically checks for malicious components and policy-violating software and prevents them from ever entering the organization and compromising security of the software supply chain. Policies can be defined centrally by security teams and applied at global scale across organizations. Many of our customers are already exploring J-PROG Curation and we look forward to partnering with them. J-PROG Curation is offered as a by-seat add-on to the Enterprise X or Enterprise Plus subscriptions. Our goal is to enable J-PROG users to gain the highest level of visibility and control over the software development lifecycle by delivering a consolidated solution that focuses on all of an organization's binaries. We will continue to bring innovative security solutions to the market and couple them with Artifactory, which already serves millions as the database of DevOps. JFrog Curation joins the security suite of products offered by JFrog, all of which are available in hybrid and multi-cloud versions. Next, I want to address customers' expansion and tooling consolidation on the J-PROG platform. The complete software supply chain flow is the flow of binaries, which uniquely positions J-PROG as mission critical for every enterprise. As customers continue to streamline their operations with our platform, we see them consolidating tooling around the binary centric pipelines for both DevOps and security. For example, one of the Fortune 100 top five healthcare pharmaceutical and retail companies made a decision in Q4 of 2022 to migrate away from Google's container management cloud services and Sonotap Nexus binary repository to the J4 platform, consolidating the complete package management, development pipeline solutions, and container registries under one platform. Only a few months later, in Q2 of this year, they successfully completed the proof of concept with our team as they began to explore consolidation of their multiple security point solutions. As a result of this proof of concept, the customers decided to move away from Snyk to JFrog to cover the software composition analysis needs and are now exploring JFrog's other security capabilities as part of a strategic consolidation and standardization around JFrog's platform. We believe tooling consolidation will continue to be both a macro trend and a DevSecOps tooling imperative. This type of consolidation and ROI for our customers reflects the findings of a recent study conducted by Forrester. Commissioned by JFOG, the Forrester TEI report found that enterprises investing in the JFOG platform could expect a nearly 400% ROI across three years, and that some organizations could expect to save up to 156 hours per developer per year when utilizing JFOG's DevOps and security platform. In their study, An enterprise with thousands of developers could potentially save tens of millions of dollars in costs over 36 months. These results reflect J-PROG's core business value of improving efficiency and productivity across an organization through automation and control of the binary flow. At the same time, Forrester noted in another recent industry report that, quote, J-PROG is great for enterprises that place high value on software supply chain security. Customers are looking across their portfolios to discover ways to reduce technological and integration costs, and the J-PROG platform allows them to fulfill this vision. I now want to focus on ongoing adoption of the J-PROG platform across our three cores and high-value enterprise subscriptions. When JPEG first entered the market, DevOps was not even a phrase. When we introduced X-Ray as our first security solution a few years ago, DevSecOps was in its infancy. And today, we see that developers and development organizations are tasked with security, multiple programming languages, cloud-native technologies, multi-cloud deployment, open-source management, software distribution, and more. With a number of connected devices that must stay updated going into the tens of billions, software truly has no boundaries. We continue to see customers trusting JFrog with its boundless software delivery. For example, a leading biopharmaceutical company turned to JFrog to help them revolutionize medical supply processes with an innovative approach. Using a combination of software and connected devices, they aim to simplify how hospital and medical staff consume and trace organic and inorganic medical inventory. Looking to guarantee the security and integrity of their extensive network of sensor-driven devices in the field, they first considered J4 Connect for their over-the-air software update and as a fleet management solution. However, upon realizing the benefits of JFOG Artifactory as a universal binary repository and JFOG X-Ray and advanced security for mitigating software supply chain attacks, they decided to adopt JFOG's platform as their system of records. Partnering with JFrog helps them to consolidate around a single DevOps and DevSecOps platform. And we look forward to working with companies such as this moving forward to change the way every industry thinks of delivering and managing software from developers to the secure distributed edge. Now, I would like to address JFrog's view of the potential impact of generating artificial intelligence technologies within our software supply chain platform, security solutions, and for individual developers. As we have previously noted, from a business perspective, we believe that AI-powered creation of software will drastically increase the overall code created within organizations, and thus leading to an increase in the number of binaries being generated by developers or machines. As J-PROG continues to be the gold standard in enterprise artifacts management, we look forward to helping companies scale with our software supply chain platform alongside their AI-driven advances. More code equals more builds. More builds equals more binaries, which creates a huge opportunity for J-PROG. We also see J-PROG as an AI enabler for our customers. We already observed J-PoG Artifactories serving the repository for customers' machine learning and AI models. Machine learning models are yet another form of binary and consumed in the organization as software packages. Therefore, managing customers' AI processes and their metadata at scale locally, natively, alongside other technologies generates incremental benefit from the use of the J-PoG platform. The builders of AI models within companies are often Python developers and data scientists utilizing Conda or Serum packages, already natively supported by Artifactory. This reinforces J-PROG as the single source of truth for companies' development processes, as well as potentially their AI and MLOps initiatives. Finally, regarding AI within J-PROG, we are exploring several approaches that will enhance future versions of JPEG, DevOps, and security solutions. And we look forward to providing updates on our progress in the near future. With that, I'll turn the call over to our CFO, Jacob Schulman, who will provide an in-depth recap of Q2 financial results, as well as update you on our guidance for Q3 and for fiscal year 2023.
spk11: Jacob. Thank you, Shlomi, and good afternoon, everyone. During the second quarter, total revenues were $84.2 million, up 24% year over year. Our stronger than expected revenues in the quarter were driven by continuous threats of our cloud business and adoption of higher subscription tiers across the JFrog Software Supply Chain platform. In the second quarter, our cloud business saw sequential expansion in customer usage, equaling revenues of $27.6 million up 44% year over year. While we continue to see a slower pace of cloud migrations compared to the prior year, we are pleased with improving user strength during the first half of 2023. Going forward, we believe cloud optimization will remain an ongoing exercise within large enterprises as customers continue to focus on efficient growth. We reiterate our baseline cloud growth rate of mid-40s during fiscal year 2023. Self-managed revenues or on-prem were $51.8 million, up 17% year-over-year during the quarter. Overall expansion and revenue growth within our self-hosted business remains constrained relative to prior years as customers transition towards cloud and hybrid deployments which has reduced organizational focus on future expansion within self-hosted deployments. We have received positive feedback from customers regarding JFrog Advanced Security and initial interest in JFrog curation, with many of these engagements being self-hosted deployments. We remain optimistic that our security solutions can be a potential catalyst to re-accelerate revenue growth and customer expansion within our self-hosted business. Net dollar retention for the four trailing quarters was 120%, a decline of four points sequentially due to ongoing macro headwinds and low retention within our self-hosted business. We have started seeing stabilization of NDR around this level and continue to expect our net dollar retention for the year to be around 120%. Our gross retention continues to be 97% with no change in overall customer return terms. In Q2, 45% of our total revenue came from Enterprise Plus subscriptions, up from 36% in Q2 of 2022, an increase in revenue contribution of 56% year-over-year. Now, let me discuss our income statement in more detail. Gross profit in the quarter was $70.4 million, representing a gross margin of 83.6%, essentially flat with a year-ago period. and in line with expectations as economies of scale and cost control offset high cloud revenue contribution. Upgrading expenses for the second quarter were $62.2 million, down $1 million sequentially, equaling 73.9% of revenues, compared with $58.8 million, or 86.8% of revenues in the year-ago period. During the second quarter, we benefited from timing of certain expenses being pushed into the third quarter. We continue to remain focused on expense discipline while continuing to strategically invest in go-to-market initiatives and technology innovation. Our operating profit in Q2 was $8.2 million or a 9.7% operating margin compared to an operating loss of $2 million or negative 3% operating margin in the prior year due to better than expected cost efficiencies. Second quarter net income equal $12.1 million, or 11 cents per diluted share, based on 108 million diluted shares outstanding, versus a year ago net loss of $2.2 million, equating to a loss of 2 cents per diluted share. Turning to the balance sheet and cash flow, we ended the June quarter with $470 million in cash and short-term investments, up from $443 million as of December 31st, 2022. Cash flow from operations was $16.7 million in the quarter. After taking into consideration CAPEX, free cash flow was $16.2 million, generating a 19.3 free cash flow margin. We reiterate our expectations for low double-digit free cash flow margins in fiscal 2023. As of June 30th, 2023, our remaining performance obligations totaled $213.6 million. Now I'd like to speak about our guidance for the third quarter and full year 2023. Our full year 2023 expectations continue to estimate strong growth in our cloud business and ongoing expense discipline. For Q3, we expect revenue to be between $87 million to $88 million, with non-GAAP operating profit between $6 to $7 million and non-GAAP earnings per diluted share of $0.08 to $0.09, assuming a share count of approximately 110 million shares. I would note that third quarter operating expenses will include costs related to our employee merit increases and our SwampUp user conference, which will cause a sequential step-up. For the full year of 2023, we anticipate total revenue in a range between $343.5 million to $345.5 million. Non-GAAP operating income is expected to be between $24 million and $25 million, and non-GAAP earnings per diluted share of 26 cents to 28 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.
spk10: Thank you, Jacob. We continue to believe that J-PROG is well-positioned to achieve our planned goals in the coming quarter, and our customers' ongoing commitments and partnerships alongside us validate the mission-critical nature of our platform. Before we close, I want to thank the entire J-PROG team for a strong quarter. Your resilience and passion is stronger than any macro headwind. And the results speak for themselves. Q2's success belongs to you. I also want to invite everyone to attend our annual SwampUP DevOps and DevSecOps user conference in San Jose on September 13. I'm looking forward to updating the community on our major products and strategy announcements, alongside amazing industry and J4 customers' stories from companies like Fidelity, Riot Games, Netflix, and others. Thank you all for joining us for our Q2 earnings call, and may the frog be with you. Now, we'll be happy to take your questions. Operator?
spk04: Thank you, sir, and ladies and gentlemen, if you have a question today, please press star 1 on your telephone keypad. We'll take our first question today from Pingeline Bora, J.P. Morgan.
spk03: Hey, guys. This is Noah on for Kindle.
spk06: Thanks for taking your questions. Just wanted to double-click a bit on the recent curation add-on feature you just recently rolled out. Can you just maybe elaborate on how this is helping you shift more left in the DevOps lifecycle? And are you now targeting a potential different buyer as you sort of roll out this new product? Thanks.
spk10: Hi, Ben, Janine. Yes, and we are very excited about the release of JFrog Curation. Actually, that was part of the plan of expanding our DevSecOps solution and shift even further left, as mentioned. The buyers of JFrog Curation are actually a combination of the CIO office and the CISO office. The developers would like to have an automated way to enforce policies that are coming from the CISOs. And by that, to avoid having each of the caching from public hubs of software binaries to get into the organization and to automate this full process. So basically, it's a partnership between the CISO and the CIO. This demand came from the DevOps and the DevSecOps engineers, so not yet really a pure security stakeholder, but a combination of both.
spk03: Got it. Thank you.
spk04: The next question comes from Sanjit Singh, Morgan Stanley.
spk12: Hey, this is Chris Quintero on for Sanjit. Congrats on the results and thanks for taking our questions. I wanted to ask around the disparity between the slow work on a 100K customer ads versus the 1 million plus customer ads I think was your best ever. So just trying to square both of those would be really helpful.
spk11: Yes, I will take this question. So our goal is to expand all customers and we see diversification of the customers between different segments. So specifically to expansion of million dollar customers, what we're happy to see is that this customer is actually coming from industries that kind of outside of our traditional strong segments, technology and banking, those coming from other industries. And it just shows that the DevOps and DevSecOps capabilities that we offer are important across multiple industries. We also see that our Enterprise Plus products platform and subscription continues to provide a lot of value. You're absolutely right that an absolute number of in Q3, we added less than prior quarter. However, we see a lot of engagement over the last 12 trailing months. It's comparable to prior periods. So we really don't see any change in the trend here. It's probably just more like timing issues.
spk12: Got it. Makes sense. And then I also want to ask around kind of the optimizations that you're seeing around J-Frog Cloud Center from customers. Any kind of, you know, more clarity you can give there and maybe kind of where we are in terms of timing and maybe, you know, what we are with those optimizations.
spk11: Yes. As we noted on our prepared remarks, we continue to see expansion of our usage by our customers. Previously, we noted that we started the year like a January was very slow and still subject to optimizations. Then in March, we did see the pickup in usage, which trend continues in April and throughout the quarter. So we believe that those initial headwinds of optimization behind us. Going forward, we do expect that customers will continue to put emphasis on efficient growth, but in terms of usage, We do our customers using more of our platform, and therefore we expect that our cloud revenues will continue to grow in these 40s throughout the year.
spk03: Thank you.
spk04: Next up is Kingsley Crane, Canaccord.
spk14: Hi, thanks for taking my question. So I'd like to ask about duration. I think one of the most interesting aspects of it is that It is focused around developer velocity. Obviously, your platform appeals to all kinds of stakeholders. But I think in terms of an individual product, this is one of the more exciting ones for developers. So how do you think that will play out in terms of encouraging adoption? And then are you thinking of sold more drive upsell into premium bundles or gain more revenue through pricing a la carte?
spk10: Yes. So thank you, Kingsley. Curation, in terms of the adoption, will increase the usage of JFOX security solutions, the holistic software supply chain security. It comes as an option, as an add-on to the Enterprise X and the Enterprise Plus subscription. And it's, as mentioned, a buy sheet, buy year model. So we are expecting to see the expansion coming from the adoption of J4 curation as well, not only by the number of Enterprise Plus and Enterprise X users, but also by the number of developers in the organization, in the enterprise that we use.
spk14: Okay. Thanks, Shlomo. That's very helpful. And then one on the financials. So I want to talk about NRR. So I think that 120% is a great number. But if NRR is a trailing 12-month metric, I think declining four percentage points in one quarter is significant. So, I think that would suggest that the end-quarter performance is well below. So, I guess, does that imply a re-acceleration or a higher NRR in the back half in order to reach 120 for the full year? Thank you.
spk11: Yes. So, you're absolutely right, DC, that our net low retention rates declined 4%. 4% from prior quarter. This was actually in line with our expectations. If you recall, when we guided the year, we did expect our net dollar retention to go down to around these levels. Currently, we see stabilization around these levels and expect to finalize, finish the year with NRI around these levels.
spk03: Okay, fair enough. Very helpful. Thank you. Brad Reback from Stifel is up next.
spk07: Great. Thanks very much. Jacob, on the cloud consumption trends, did July look a lot like June, or did it actually continue to accelerate?
spk11: Brad, I don't have yet the data for July. I cannot comment. During the month, we continue to see strong performance, but I don't have final numbers for July yet.
spk07: Got it. No problem. And then, Shlomi, I think last quarter you talked about the global partner network and the momentum you were seeing there. I'm not sure if I missed it earlier in the prepared remarks, but any commentary on sort of rest of the world would be great. Thanks.
spk10: Yes, that's a good point. Our Partners in Alliances program continues to accelerate. Actually, I mentioned SwampUp, our user conference, happening on September 13th. For the first time, we are also having a partner day, a day before, to celebrate and to enable the over 100 partners that in the past year we built the program with. Aside of that, the co-sell and co-marketing motion of working with all three clouds, AWS, GCP, and Azure, is also accelerating through the marketplace. So we are very pleased to see it, not only by cloud goals, but also self-hosted partners, and not only self-hosted partners, but also by region, by geography, and not just DevOps, but also new security partners that joined the portfolio.
spk07: Great. Thanks very much.
spk04: Mike Sikos from Needham & Company has the next question.
spk02: Hey, guys. Thanks for getting me on here. I just wanted to cycle back To Jacob's earlier comment around the NRR, I think it was that we expect to finish the year around this current level. And really, where I'm going with this is I'd just like to see what gives you the confidence to see Jade Frog finishing the year at these levels. Is it based on maybe the tone of conversations with customers, the renewal base that you have coming due? Just anything there would really be incremental.
spk11: Yeah, so when we think about our netball retention forecast, first of all, we're looking at the renewal with our customers and obviously talking to them and evaluating their plans. We're also seeing continued consumption trends on SaaS and commitments of our annual customers on SaaS. And finally, we're looking at the kind of overall economic environment and demand environment. And we see instabilization in that regard, and that's what gives us kind of analysis of the pipeline, analysis of the opportunities that's in front of us for the second half of the year. That's what gives us confidence that the network retention will stay around this level.
spk02: Great. And also, I appreciate the commentary around the customers that are adopting advanced security as well. I think a lot of us are excited about that offering. Can you help us through how your sales force or your go-to-market effort is driving awareness within your existing customer base to drive adoption? And I guess what has been some of the early findings from those customers who have adopted, at least as you think about feedback and building up those customer testimonials to drive additional success around advanced security? Okay.
spk10: Yes, Mike, so just as you, we are also very excited about the results. To remind the public, we announced JFrog Advanced Security full hybrid availability in the first quarter of this year, and to see so many of our customers are showing interest, and some of them, tens of them, already paid for additional subscription. Obviously, these are great news for us. The main thing that our go-to-market team is focusing on is to map the renewals that we have ahead of us and see who are the X-ray customers that already uses J4 P1 security, X-ray software composition analysis, and also then, obviously, the capabilities that J4 Advanced Security Suite offer. And the second effort, goes to the market education, so attracting new customers. Some of them were mentioned in the call today that are coming to JFrog mainly because of the consolidation. So they want to start and see one software supply chain that not only provides one capability or two capabilities to secure your DevOps and DevSecOps team, but also um the repository the distribution process and everything around that so these are the main two catalysts for the adoption um the fact that it's also available in the cloud and on-prem gives us obviously the freedom to operate in different deployment environments so that's a plus as well and the last thing is that since we are very transparent with our roadmap we are speaking about x-ray and ga for advanced security as available in the market in the last quarter. But now we added curation. So really what we see from our customers is a demand for a holistic one-stop shop for their software supplies and security that also includes future roadmap items that also help us to build the pipeline.
spk02: That's great to hear. I really appreciate the commentary, Shlomi. Thank you very much, guys. Thank you.
spk04: Your next question is Jason Ater, William Blair.
spk08: Yeah, thank you. Jacob, question for you. I'm just trying to figure out what's going on in Q4 with your guidance, because you guided to 26 to 28 for the full year. But you're at, if my numbers are correct, you're at basically 25 for the first three quarters based on your guidance for Q3. So that implies Q4 would have like, you know, three cents of earnings and that would be the lowest of the year. Can you talk us through what's going on there?
spk11: So our actual results for the year for the first six months are about 17 cents plus about nine, eight to nine cents, so it's about 24. So I think if you look at the operating profitability, we expect operating profitability in Q4 to be comparable, slightly higher than in Q3. And I expect that the EPS for Q4 probably going to be in the kind of same level of comparable to Q3. So I hope that makes sense.
spk08: But that math doesn't work. I mean, because if you say 27 cents is the midpoint for the full year, and you just said 25 cents for the first three quarters, right, then that would imply two cents for Q4. So maybe there's something going on below the line in Q4, but I get the operating income trends, and it looks like that's continuing to be pretty healthy, but Q4 EPS looks like it would be quite a bit below where the rest of the year has been. We can move that offline if you want, but I just wanted to flag that.
spk11: Thank you for your note, and I don't expect any outstanding items below the line in Q4.
spk08: Okay, all right. And then maybe, Shlomi, I wanted to follow up on the last question just on the go-to-market side for security. I guess, what are you guys learning about the go-to-market side for security and how that might be different for some of these packages that you are now offering for security that is different than what you've had to do in the past in terms of go-to-market?
spk10: Yes, so regarding security, what we see is that it's a bit different. First of all, when it comes to DevOps, the bottom-up mechanism is very popular. Usually it's being adopted by developers or DevOps engineers and scale up by the size of the PO, maybe to the CTO or the CIO, and so on. Maybe strategic decisions are being taken top-down, like let's say migration to the cloud, But most of what we've seen and most of what we have built was from the ground up. In security, it's a bit different. The decision is first being taken by the security leaders and then apply in the different groups of the company. What we also see And this is quite interesting. We start to see a partnership between the CIO and the CISO when it comes to software supply chain security. On one hand, the CIO, the VPR&D, they want to be super fast. The security guys are trying to catch up with it. So any kind of automation that applies into the software supply chain is obviously helping those two to bridge their needs. So we usually meet more than one persona over one PO When it comes to security, most of it would be top-down, and most of these opportunities will take more than the average quarter or four-month cycle to complete.
spk08: Great. And are the budgets – usually the CISO has its own budget pool versus the CIO and the developer teams. So is that – Is that creating friction because you have to actually tap into two different budget pools?
spk10: So the strategy that we chose is a strategy of consolidating all the security solutions into – not all of them, but the majority of the security solutions from the Git scanning to the binary scanning to the distribution – to consolidate it with capabilities like secret detection, like software composition analysis. We discussed in the call the displacement of SNIC, the displacement of sonotype. Those were displaced by consolidation to a platform. Usually when this is happening, there is a budget already marked by the CISO, and it's being compared to a security tool they already have. If there is a new capability like JPEG curation, obviously it will be discussed to start with, with the CIO, and then they will probably bring the security stakeholders.
spk08: Okay, just to clarify, that's very helpful, Shlomi. Just to clarify, the security tools that are sold into the DevOps toolchain, are those part of the CIO's budget, or are those part of the CISO budget? Or is that just depends on the company?
spk10: Exactly. It depends on the company and the enterprise. Most of what we saw, over 80% of the opportunities that we deal with are a combination of discussion with both the CISO office and the CIO office. And we were also very pleased to see that in some organizations, big one, including leading financial institutes or retail, The CIO and the CISO offices were already merged into one.
spk08: Okay, great. Thanks very much. Good luck. Thank you.
spk04: Your next question is Koji Ikeda, Bank of America.
spk13: Hey, guys. Thanks for taking the questions. A couple from me. Just kind of going back to curation, you know, you mentioned earlier the sheet-based model. So how do you think about the TAM for curation? Is it all the developers out there? Security folks, ops folks, I mean, is it all of them? You know, how do you think about the TAM? And then second part of the question on curation is because it's seat-based, where is it going to show up in the revenue recognition? Is it going to be in subscription self-managed to start and eventually break it out? Just trying to understand where it will fit so we could, you know, begin to understand where it's contributing to growth.
spk10: Yes, Koshi, hi, and I'll take the first part of the question, then Jacob can elaborate more about where it will be recognized. The time of J-population is very much aligned with the time of the DevSecOps market. Actually, we are after... the opportunity to cover all the developers from outside the organization. So the reason that there is an alignment between the value and the way we price it is that it goes by the number of developers that consume software packages from outside the organization. So let's say that you go to a public repository and you want your software supply chain to be curated from the get-go. it would be multiplied by the number of developers that are consuming this service. And obviously, with the combination of Artifactory and JPEG Advanced Security that sits on top of Artifactory and secure your software supply chain from inside the organization, there is an alignment between the models. So it's basically all organizations are now using, based on researches, 90% of the software that is being made in the world is coming from open source initiatives, software that is being cached from outside the organization, and therefore it's relevant to all the organizations by the number of developers and so on. So we are looking at the same time. The second thing – so it's the same time with a bigger market share. The second thing around that is obviously the fact that – The competition with this solution is completely different than the DevSecOps market that is very fragmented. There are not so many curation solutions out there that are putting a fence between the organization and the public hub, and preventing you from bringing the next Log4j from the get-go. So it's not just the time, it's also what is the size of the market share that we can grab by having this solution embedded to our platform.
spk11: And with regards to the split between deployment types, it would be really, since it's an add-on to existing subscriptions, it will be dependent on the main subscription that the customer subscribes for. If it's self-managed, then it will be reported as self-managed. If it's SaaS, it will be reported as SaaS. And by seat in both cases.
spk13: Got it. No, that's super helpful. And then, One follow-up here, if I may. Wanted to ask about the million-dollar customers and the $100K-plus customers. You added three million-dollar ARR customers, which is the most I think you've ever added in a quarter sequentially. So congratulations there. But the $100K may be a little bit light versus recent quarters. So just trying to understand the dynamics between the $1 million-plus and the $100K-plus. Okay.
spk10: Yeah, so Koji, when we are looking at it, obviously we are very pleased not only because of the size of the PO, but also the subscriptions that these guys are upgrading to and the amount of capabilities from the J4 platform that they are actually using while we are monitoring it. In the last six quarters, we added at least one million dollar customer to this group, which also demonstrates and adoption or a growing adoption of our platform. Regarding the over $100,000 customers, the 813, I'm looking at it, if I may, in a bit different perspective. To add over 150 customers to this group in the last year during the recession with all the new technologies that are coming and all the changes that we see in the market, I actually am pleased with the goal, and I'm expecting it to go even higher than that when I'm looking at the pipeline and hoping to see the changes in the market.
spk13: Got it. Thanks so much, guys. Thanks for taking the questions.
spk04: Your next question is Michael Turris, KeyBank Capital Markets.
spk01: Hey, Shlomi and Jacob. Good job on the quarter. You said that you are, that optimization is largely behind you. And yet, Microsoft and some others have talked about there being several quarters still to go on optimization. So, can you maybe describe what might be different in terms of your cycle around optimization with some of the hyperscalers? And this could be, you know, an overlapping question. You know, what's going on in terms of new projects and whether they're not, they're beginning to bound new software development projects.
spk11: Michael, I will take this question. I think big hyperscalers provide multiple different types of different workloads. And it's hard for me to comment what kind of workloads impacted by optimization, what not. What we've seen is that the DevOps continues to be a critical infrastructure. And we see that in terms of data transfer and storage, we continue to see growth sequentially on our systems. So, really, maybe the difference between what we've seen and what hyperscalers see is that the fact that they provide a variety of different workflows, maybe that's what impacts their kind of picture.
spk01: Mm-hmm. So just, you know, in other words, qualitatively, then why does it make sense that your optimizations would have troughed, if you will, and started to rebound earlier than theirs from anything? And again, obviously, I'm not asking to comment on their business, but, you know, it's a broad business where you're seeing what seems like an earlier rebound.
spk11: As we previously discussed, we monetize our SaaS deployments by data transfer and storage, and storage more low-hanging fruit, which we did see Those optimization efforts accelerated about in Q3 and Q4 of last year. Those were kind of more shorter time to optimization. Data transfer optimization is typically more longer kind of efforts required. Sometimes it doesn't even make sense for customers to focus on that because it requires significant engineering efforts. So what we believe is that customers will continue to monitor their usage. They will continue to strive to grow efficiently. But the initial impact of optimizations will be left behind.
spk10: Michael, I'll add to it. Show me here. There is just much that you can dry out your infrastructure reservoirs. With everything that comes in, the security automation, software supply chain is getting enriched and also need to deal with AI, as we mentioned. Some of our customers already started to use our infrastructure as the infrastructure for AI. This can be optimized up to a limit. And as Jacob mentioned, not necessarily can be compared to the big cloud companies. And we hear our customers telling us. Some of them are also on a pending mode waiting for budget to be released so they will be able to migrate to the cloud and go even faster.
spk01: Great, guys. Thanks very much.
spk04: Next up is Jonathan Reichhaver, Cancer Fitzgerald.
spk05: Yeah, hey, guys. Thank you for getting me in. So GitHub recently claimed that approximately 46% of its customers' code is already written by Copilot. They actually said they expect that to go through 80% sooner rather than later. They've also, you know, made some comments along the lines that Copilot, you know, has accelerated customer growth and is making GitHub more competitive around managing Git repositories. Now, you know, to your comments earlier, Shlomi, it seems fairly obvious that LLMs will drive increasing market need for artifact management broadly, but how do you see the competitive impact playing out due to LLMs, and what is your strategy there?
spk10: Yeah, well, that's a great question, and as you know, there are lots of discussions around AI and the regulations around AI and the panic around AI and the potential of AI and opportunity of AI. But let's kind of take it to the level that everybody understands. More code, whether it's made by co-pilot or by developers, creates more binaries, and more binaries create more opportunities for J-PROG because we are the standard makers in the binary storage of the organizations today. Not only that, The most exciting thing about managing AI models and MLOps models is the fact that they are yet another form of binary. So whether you handle it or you build it inside the organization or you bring it from outside the organization, Artifactory can be the only tool that supports you unless you just want to dump it on a regular file server. The last thing that I would say is that this The coders that you mentioned that are using Copilot to build AI are basically Python developers or data scientists that are using packages like Conda and CRAN. All three of them are already natively supported in Artifactory. So for them, It's just a familiar place that they are going to to fetch their model, and not just the AI model, but also the models that are coming with AI to train the machine. So we see big opportunities around that. As we mentioned in our call, we are looking forward to share with the industry what we build natively to support this demand. And as it goes back to the previous question, Infrastructure optimization will get to a limit that, you know, from that point on, it will get back to what we used to see in the previous years.
spk05: Okay. So, I think what you're saying, Shomi, is, you know, the opportunity is really around the ability of Artifactory to support all these AI models, which is just another form of binaries, and that just, you know, broadens the opportunity for J-Priority, right?
spk10: Artifactory is almost a default solution for that. You know, when I asked Chair GPT about it, that's the question I got, so that's the most authentic way for me to validate that. And the other thing is x-ray, because you don't just want to have a dummy storage, you also want to have the right tool to enforce the policy before you bring any type of models from public repositories of AI. So you want a tool like X-Ray that will say that if this AI model is coming with the wrong licenses, it cannot get into the organization. And that protects your software supply chain. You need tools like curation to block it from the get-go. So the proxy will not be subject to any type of malicious code or or open source license violation. So the old solution of JFOG is set to grab the force of this opportunity.
spk03: Yeah, okay. Very helpful. Thank you.
spk04: Next up is Rob Owens, Piper Chandler.
spk00: Great. Thanks for taking my question. And I want to drill down a little bit again into the cloud optimization being behind you and I don't know if you've ever broken out for us the difference in gross retention rates between self-hosted and subscriptions. Is there something in those trends that may show you that a lot of the optimizations behind you at this point, either from a gross or net retention perspective? Because I guess that might play into some of those questions around net retention for the back half of the year. Thanks.
spk11: Yes. The only... information of color that we provided on the difference between SAS and self-hosted is that SAS net dollar retention is higher than corporate and self-hosted is lower than corporate. Again, we believe that the storage optimization is kind of a low-hanging fruit and those who wanted to do that most likely have done that because we started seeing first optimization efforts about four quarters ago. And that's sufficient time for customers to look at their storage environments and make necessary steps. For the data transfer optimization, it's, we believe, gonna be ongoing effort. And that's why we said the first wave of optimization is behind us and going forward will be just seeing more efficient growth of our customers.
spk00: All right, thank you very much.
spk04: There are no further questions at this time. I'll turn the call back to Shlomi for closing remarks.
spk10: Thank you all for joining us on this quarter earnings call, and thank you for your questions. We are looking forward to keep executing and delivering more news from the Swamp Join us at Swamp Up September 13 in San Jose. And by then, may the frog be with you. Thank you.
spk04: This concludes today's call. Thank you for attending. You may now disconnect.
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