JFrog Ltd.

Good afternoon, and thank you for joining us as we review JFrog's fourth quarter and full year fiscal 2023 financial results, which were announced following the market closed today via press release. Leading the call today will be JFrog's CEO and co-founder, Shlomi Benhaim, and Ed Grabscheid, 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. your caution 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 31st, 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-K for the year ended December 31st, 2023 to be filed with the SEC on February 15th 2024, and other findings 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 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 reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFROG Investor Relations website for a limited time. With that, I'd like to turn the call over to JFROG's CEO, Shlomi Van Hyn. Shlomi?

Thank you, Jeff. Good afternoon to you all, and thank you for joining the call. I'm proud to report that JFROG closed fiscal year 2023 on a strong note. with quarterly and annual results that exceeded our guidance. Despite macroeconomic and geopolitical headwinds, JFOG 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 bowed foot 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, JFOG delivered total revenue of $349.9 million, up 25% year-over-year. JFOG's fourth quarter revenue was $97.3 million, reflecting 27% year-over-year growth, with a growth margin of 84.6% and $32 million in free cash flow. Our cloud revenue continues to show momentum in Q4, equaling $36 million, a growth of 59% year-over-year. This growth was primarily driven by our cloud-first and multi-cloud strategy, which powers 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 million increased to 37, up from 19 in the year-ago period, growing 95% year-over-year, which we attribute to our strategic investment in the enterprise, top-down, go-to-market approach. Now, I will address some of the market themes we are observing and stand out sets by JFO. 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 a flow of binaries. This trend drove some of our customers' top priorities in Q4, as well as emerging opportunities in our markets. 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 JFOG Software Supply Chain platform. And finally, discuss the emerging opportunities for AI and ML tooling. First, 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 extending consumption in the second half of the year, as we shared in previous calls. We saw themes of platform consolidation and modern security tool adoption together with DevOps capabilities in the cloud becoming the standard. Late in Q3, J4 closed a large scale deal with AT&T to become the single source of record for secure binary management and delivery, including with our advanced security offerings. Working hand in hand with AT&T's leadership teams, JFog was chosen as a strategic partner to consolidate software supply chain tools with a single platform in the cloud. AT&T's general manager and vice president of R&D, Renat Wilberstein, noted, quote, with tens of thousands of developers building applications that cost our business, we need a single system of record 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 JFog as we move towards a consolidated, scalable infrastructure to build the next generation of applications to serve hundreds of millions of our customers." End quote. Platform and cloud priorities are not unique to AT&T. Recent public CIO surveys have validated At 2024, cloud spent 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. Second, we see continued interest in holistic DevSecOps solution as part of our platform. JFog 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. 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. IVU 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, IVU partnered with JFOG to meet their holistic security needs, including investments in JFOG curation, code scanning, also known as SAS, and the prioritization of CVEs with contextual analysis for their developers. IVU 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 healthcare provider, Clalit. With over 5 million subscribers and a workforce of 50,000 employees, Clalit stands as one of the largest HMOs in the world. In the fourth quarter of 2023, Clalit, an active user of Artifactory and Xray, approached 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 DevSecOps areas like code scanning within the JFrog Software Supply Chain platform. Clalit Security Project Manager, Rohir Ahoni, said, quote, integrating additional security features within a single reliable source of tools like Artifactory aligns with our strategy to centralize our operations on one 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, end quote. 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 their binary repositories, like JFrog Artifactory, to safeguard and effectively trace their binaries. We believe the trend of security tool consolidation in a single platform will continue. With JFog uniquely providing an end-to-end solution, covering from a developer's environment to production, creating a holistic DevSecOps toolset. Third, I want to address growth in the enterprise adoption of the JFog 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 one and cloud migration projects targeting multiple aspects like tooling consolidations to achieve speed and trust throughout the software flow. One example of a visionary company is Vimeo, a leading video platform provider boasting 300 million global users. As part of their digital transformation initiatives, Vimeo recently took a step forward in their journey, moving from a self-hosted, artifactory-only subscription to 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 pipelines. He stated, quote, the JFOG platform's cloud offering empowers businesses like Vimeo to rapidly expand, reduce maintenance overhead, and offload management costs. It meets the evolving needs of our growing audience. JBorg's software supply chain platform infuses confidence by serving as a single source of records with Artifactory at the center and providing visibility across Vimeo's DevSecOps workflow." End quote. Our portfolio contains thousands of companies like Vimeo that started with Artifactory only. Their 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 toward cloud and higher value subscriptions. Now, I want to address opportunities in MLOps and MLSecOps within the JFork platform. As we continue to observe the rapid adoption of AI and ML technologies across the market, many of the same enterprise software pains 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? 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 pains, focusing on the main ML asset, yet another binary. Caching, versioning, hosting, storing, training, securing, and more are all performed on ML 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. As an example, following our support for the caching, malicious model scanning, and license compliance features for the popular ML model repository, Hugging Face, We recently announced a partnership with AWS to integrate the JFOG platform with an ML development and deployment solution, SageMaker. Our customers asked JFOG and AWS to meet two 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 JFOG. We remain in the early stages of standard building around AI and ML technologies and look forward to driving further JFOG 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&T, Vimeo, IVU Technologies, and Clalit are all demonstrating what we have shared as our go-to-market strategy over the past few years. J-PROG 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 physical 2023, we were pleased to extend our customer count to approximately 7,400 versus 7,200 in the prior year. I will turn the call over to our CFO, Ed Grabscheid, who will provide an in-depth recap of Q4 financial results and update you on our outlook for both Q1 and fiscal year 2024.

Ed. Thank you, Shlomi, and good afternoon, everyone. During the fourth quarter of 2023, total revenues were $97.3 million, up 27% year over year. For the full fiscal year 2023, revenues were $349.9 million, up 25% year-over-year. As noted by Shlomi, we saw continued reacceleration in cloud customer usage during the fourth quarter, with revenues equaling $36 million, up 59% year-over-year, and representing 37% of total revenues versus 30% in the prior year. For fiscal year 2023, our cloud revenues equaled $119.3 million, up 50% year-over-year, and equaled 34% of total revenues versus 28% in the prior year. During the fourth quarter, we saw six points of one-time growth year-over-year, or roughly $1.5 million 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 million customer cohort. Self-managed revenues or on-prem were $61.3 million, up 14% year-over-year during the fourth quarter. For the full year 2023, self-managed revenues increased 15% compared to the prior year. We expect the trend of slower expansion within our self-hosted business to continue through 2024 as more new customers land and expand in our cloud solutions. Net dollar retention for the four trailing quarters has stabilized as projected at 119%. a decline of nine 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 consolidate and secure their software supply chain. In Q4, 49% of total revenues came from Enterprise Plus subscriptions, up from 43% in Q4 2022. 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 $82.3 million, 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 and 84% in the near future and then trend towards the low 80s aligned with our long-term model as cloud revenues become a greater portion of our total revenue. Operating expenses for the fourth quarter were $66.1 million, up $3.9 million sequentially, equaling 68% of revenues, up from $62.5 million, or 82% of revenues in the year-ago period. We continue to remain focused on expense discipline while investing in scaling our enterprise sales team and channel partner ecosystem. Our operating profit in Q4 was $16.2 million or 16.6% operating margin compared to an operating profit of $1.6 million 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 51 cents based on approximately 109 million weighted average diluted shares compared to 4 cents per share in the prior year and 105 million weighted average diluted shares. Turning to the balance sheet and cash flow, we ended the year with $545 million in cash and short-term investments. up from $443.2 million as of December 31, 2022. Cash flow from operations was $32.6 million in the quarter. After taking into consideration our CapEx requirements, free cash flow was $32 million, or 33% free cash flow margin, representing a quarterly record for JFrog. For the full fiscal year 2023, we generated $74.2 million in operating cash flow and $72.2 million in 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 31st, 2023, Our remaining performance obligation totaled $259.8 million. Now I'd like to speak about our outlook and guidance for the first quarter and full year of 2024. 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 2023. 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 cost optimizations offset by investment in strategic sales and channels combined with targeted R&D spending on future growth opportunities. For Q1, we expect revenues to be between $98 million and $99 million, equaling around 23% year-over-year growth at the midpoint. with non-GAAP operating profit between $12.5 to $13.5 million, and non-GAAP earnings per diluted share of 13 cents to 15 cents, assuming a share count of approximately 113 million shares. For the full year of 2024, we anticipate a revenue range between $424 million and $428 million. Non-GAAP operating income is expected to be between $56 million and $58 million, and non-GAAP earnings per diluted share of 58 cents to 60 cents, assuming a share count of approximately 116 million shares. Now, I'll turn the call back to Shlomi for some closing remarks before we take your questions.