JFrog Ltd. Q1 2023 Earnings Call
Speaker 1: the conference over today to Jeff Schreiner, VP of Investor Relations. Jeff, please go ahead.
Speaker 2: Good afternoon and thank you for joining us as we review J. Fraud's first quarter 2023 financial results, which we're now following market closed today via press release.
Speaker 2: including statements related to our future financial performance, including our outlook for Q2 and the full year of 2023. The word to 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.
Speaker 2: 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 10K for the year-end of December 3, 1st.
Speaker 2: 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 on our form 10Q for the quarter ended March 31, 2023.
Speaker 2: I'm pleased to report the JAPO'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 JAPO's platform, even in challenging economic environment. Our 2023 first quarter revenue was $79.8 million, reflecting 25% year-over-year goals. Our cloud usage accelerated in the quarter, delivering revenue of $25 million, increasing 49% year-over-year.
Speaker 2: Our first quarter results demonstrate strong execution in that macroeconomic environment, highlighting the resiliency of our DevOps, cloud, and security initiatives, followed by the J-PROG platform. I want to address what specifically made Q1 a strong quarter for J-PROG. First, while we continue to operate in challenging environments, our customers have pushed forward, expanding their infrastructure with J-PROG as a mission-critical piece of the software supply chain management tool.
Speaker 2: While some companies may be delaying or risk-coping projects, we are seeing they ultimately need to move forward with high-value initiatives based on solutions like JAPO. As a result, in Q1, we did see some bills that had been pushed out from Q4 of 2022, which the closing stage this quarter.
Speaker 2: As an example, our strategic sales team was proud to migrate our customers weeks to J4 Cloud Services based on their strategic DevOps workload migration initiative.
Speaker 2: Weeks is a world leader in the cloud-based web development class on the name, providing powerful services and the vast collection of templates to millions of customers worldwide, simplifying websites, buildings, for individuals and companies.
Speaker 2: In partnership with the JIFO Strategic Astronaut Team, Wix defines the software supply chain end-to-end from both the production and scale, saying, quote, every month, we are transferring massive amounts of data between our development team, production environment, and our customers. JIFO 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-spacing applications.
Speaker 2: That is Adam Spector, the VP of Engineering of Wix. He also noted, quote, migrating our DevOps world code to J for multi-region, highly available software sub-Light and platform with our de-factority centers, allows our team to better support Wix's growth.
Speaker 3: by providing reliable and innovative services. End quote.
Speaker 3: J-Prox 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 the software supply chain, while migrating to the cloud at their own pace. We anticipate partnering with more companies like Wix.
Speaker 3: to power strategic development initiative at the world's most demanding enterprises.
Speaker 3: Second, I'm pleased to say Q1 showed early indicators of growth in our partner's ecosystem and ongoing efforts to expand our coastal and channel path of motion.
Speaker 3: For example, a large partner in Japan, both in a key win for J-POP, one of the most recognizable insurance brands in Asia via our reseller channel.
Speaker 3: In another example, a top federal partner was able to secure a net new project leading to an enterprise class full platform subscription deal in support of a United States federal agency. We continue to believe.
Speaker 3: 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 phase-y go and annual SaaS customers.
Speaker 3: As businesses continue to streamline, they rightfully look for ways to be more efficient.
Speaker 3: With that in mind, JAPO continues to solidify its position within company, enabling efficiency, accelerating speed of development, and delivering secure software releases that provides competitive advantage. With confidence, JAPO will continue to grow its cloud business in 2023, mainly due to increased usage.
Speaker 3: and ongoing migration from self-managed subscriptions toward hybrid or multi-cloud environment. Now allow me to expand on some broader themes that we anticipate will continue to fuel J-prog 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.
Speaker 3: We believe JFrog is uniquely positioned to support enterprises as they migrate at their own pace handling both on-prem and cloud simultaneously.
Speaker 3: Many of these initiatives are multi-quotal 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 that our lip event and intimate gathering of some of J-PROG's influential customers that included representative for many of the world's most recognizable enterprises.
Speaker 3: As part of customer's cloud migration journey, 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 differentiates us from other?? be more easy to diversify.
Speaker 3: and we're proud to be strategic partners as our customers migrate and manage DevOps and DevSecOps across their journeys.
Speaker 3: To illustrate this from a business perspective, we recently welcomed a leading payments and financial services provider to the J-PROXO supply chain platform. This company had previously relied on sonatape Nexus to manage their DevOps processes on-prem.
Speaker 3: 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' up-driven services for more than 30 million customers. Next, I would like to highlight DevOps and security tooling consolidation.
Speaker 3: As more tasks and responsibilities are shifted left to developers and DevSecOps team, there is increasing difficulty in managing multiple point solutions for each task. This is especially evident in security tuning.
Speaker 3: where Point Solutions can force developers to use handfuls of tools and try to make sense of data, actions, and reporting leading to long incomplete remediation cycles which can ultimately leave companies vulnerable.
Speaker 3: We believe we have a great opportunity to displace and consolidate functionality of multiple tool sets and even entire security companies.
Speaker 3: Any customers look at their DevSecOps tooling portfolio and see Nexus Firewall, Synopsys, BlackRock, Snyk, Checkmark, Aquasec, just to name a few, as point solutions for many capabilities.
Speaker 3: This can include open-source software, curation and scanning, code scanning, container security, environment protection and more.
Speaker 3: We understand this fall is not sustainable for developers or the business. By addressing multiple areas of security in one platform, we believe J-POG's holistic DevSecOps tooling is well positioned to address customers' needs across the software supply chain.
Speaker 3: As additional value, we combined with the power of the J-POP platform with Artifactory as a single source of records for DevOps. Our customers can control and secure their entire pipeline from developer to device. Therefore, the J-POP security approach is to provide a comprehensive platform-driven solution
Speaker 3: Our J-POP platform customers intervene biosensors, the life science company filing glycoproteomics that aims to make the new era personalized, predictive and preventative care a reality.
Speaker 3: After initially choosing J4GULT factor April and to end binary life cycle management, companies like Intervent are positioned to subsidize many security capabilities with the J4 platform while point solution in the market increasingly becoming redundant to J4GULT capabilities.
Speaker 3: In addition to commercial adoption of our security tools, we were excited that the recent RSA Security Conference would be recognized by the Global Infotech Awards as the most comprehensive DevSecOps solution.
Speaker 3: 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, we look forward to building on our commercial success 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.
Speaker 3: Some of our leading customers were very clear. They have a need for speed, but cannot sacrifice security and reliability across their global infrastructure.
Speaker 3: 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.
Speaker 3: We were proud to see how their rapid release cycles were powered by the JFoR platform, providing them with a global scale, highly available, fully federated architecture, keeping the developers productive, and delivering software with trust.
Speaker 3: Next, I want to highlight an important executive staff update. GIF has made a strategic hire in March, proudly welcoming our new CIO, Arana Zalzal.
Speaker 3: Iran 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. Welcome on!
Speaker 3: In closing, I'd like to reflect on J-ProC commitments to profitable long-term growth and cash low generation, while creating value for both our customers and shareholders as we focus on execution across the business.
Speaker 3: Given by the strength and adoption of the JAPL platform and our expectations for future contributions from the platform security goal, we believe our operating model can achieve a five year revenue of 22 to 24 percent who fiscal year 2027, which will defy
Speaker 3: 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%.
Speaker 3: With that, I'll turn the call over to our CEO , 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.
Speaker 3: Thank you, Shlomi, and good afternoon, everyone. In the first quarter, total revenues were $79.8 million, up 25% year over year.
Speaker 3: Our stronger than expected revenues in the quarter were driven by ongoing customer adoption of the JFrog 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.
Speaker 3: While the improvement in usage help drive high water revenues, we don't believe the overall industry trends related to optimization is completely in the riverview mirror.
Speaker 3: 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.
Speaker 3: We view the recent increase in usage by IR 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.
Speaker 3: during fiscal year 2023, with any potential upside generated by increased Dr. Meruvich. Self-managed revenues are on prem, for $54.8 million, up 17% year over year during the first quarter. Overall expansion within self-costed has slowed relative to prior year results.
Speaker 3: given the shift by large customers towards hybrid deployments with their favorite expansion into the cloud.
Speaker 3: 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.
Speaker 3: Net dollar retention for the four trailing quarters was 124%, a decline of 4 points due to the micro headwinds. If you notice a Illinois focus line above the yellowUB handle which tags the Across saying that the
Speaker 3: Our gross retention continued 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.
Speaker 3: 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 our blood business impacted gross margins on a year-over-year basis.
Speaker 3: A gradian expenses for the first quarter was $63.5 million, up only $1 million sequentially, equal in 80% of revenues, compared with $53.2 million or 84% of revenues in the year-go period. Our year-over-year growth in a gradian expenses reflects...
Speaker 3: or 0.9% of the breaking margin in the prior year.
Speaker 3: We delivered another quarter of positive net income equal in $5.9 million or six cents per deluded share based on one hundred and seven million deluded shares outstanding. There's a year ago income of one hundred fifty eight thousand dollars or zero cents per deluded share.
Speaker 3: 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.
Speaker 3: Cash flow for maturations was negative $1.1 million in the quarter. After taking into consideration PAPEX, pre-cash flow was negative $1.4 million or negative 2% pre-cash flow margin.
Speaker 3: Our operating cash flow and free cash flow margins were negatively impacted during the water due to the timing of billings and prepayments for license renewals.
Speaker 3: This does not change our expectations for low double digit three-caresful margins in fiscal 2023.
Speaker 3: As of March 31, 2023, our remaining performance obligations totaled $210.6 million.
Speaker 3: Before providing our guidance, I would like to discuss in more detail the underlying assumptions in our long-term target model.
Speaker 3: Our estimated five-year revenue CAGR of 22 to 24 percent 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.
Speaker 3: We believe, on an annual basis, contributions 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.
Speaker 3: Our assumption for our self-hosted business implies growth driven primarily by expansion of use cases and adoption of our M2N platform, including the security core.
Speaker 3: Given higher expected needs of our south revenues, we would anticipate our gross margin to trend lower toward the range of 80%.
Speaker 3: 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.
Speaker 3: Overall spending on the non-GAAP GNA to trend toward a range of 8 to 10 percent by 2027 down from the 14.6 percent 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 percent compared to the 0.5 percent margin reported in fiscal year 2022.
Speaker 3: Assuming an additional 5-6% for Delta between non-GAP operating income and free cash flow implies a potential fiscal year 2027-3 cash flow margin range of 26-29%.
Speaker 3: This will suggest on the dollar basis three cash flow greater than two hundred million dollars by 2027 We believe this long-term target model reference J for commitment to profitable growth Something embedded in the company's DNA for years
Speaker 3: We see that the option of the JProps platform and the addition of its recent security core as critical infrastructure software solutions allowing our customers to manage, secure, and distribute binaries across the software supply chain.
Speaker 3: 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.
Speaker 3: We reiterate our belief that our trailing 12-month net-dollar regression ratio will be in a low 120 for the fiscal year 2023. We forecast continued expansion of our agrarian and three-casual margins through fiscal year 2023, given our continued focus on profitable growth.
Speaker 3: For Q2, we expect revenue to be between $82.5 million to $83.5 million, with non-GAAP operating profit between $3 to $4 million and non-GAAP earnings per diluted share of $0.04 to $0.05, assuming a share count of approximately 108 million shares.
Speaker 3: 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 $0.19 to $0.21.
Speaker 3: assuming a share count of approximately 110 million shares. Now let me turn the cold back to Swami for some close remarks before we take your questions. Swami, thank you, Jacob. We are excited to see that our customer base across multiple vertical geographies and implementation types continue to see J-PROD as mission critical.
Speaker 3: As we leave the head in 2023, I want to thank the J-PROC team for delivering on a quarter that exceeded the goals we have. The frog's passion lead worked to support our customers and drive success in a complex market because of the above security and IOP. Thank you all for your attendance and may the frog be with you.
Speaker 1: And now, we'll be happy to take your questions. Operator? At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker 4: Your first question comes from the line of Sanjeet Singh with Morgan Stanley . Thank you. Congrats to the team on a solid start to the year. I wanted to start a little bit with the demand trends that you saw throughout the quarter. You guys, you know, service tech companies, but also
Speaker 4: large enterprise companies as well as banks and coming off some of the headlines around Silicon Valley Bank. Well, we're sort of some of the demand trends from a booking perspective in the back half of March and then the early reads on April and May.
Speaker 3: Yes, hi Sanjay, thank you for the question. This is Shlomi. So regarding the demand that we've seen in the first quarter, it was actually as described, split into three things that we've seen. First, our strategic theme going direct after...
Speaker 3: some pipeline that was pushed out from 2022 and fulfilled it. Second, by partners that promoted the JAPR platform and our partner team works closely with them, both for new opportunities and existing customers expansion and third.
Speaker 3: Obviously the cloud, which was the main change between the last quarter of the previous year and this first quarter of this year, clouds consumption looks like coming back, especially because of the fact that J-Prog provides.
Speaker 3: an infrastructure cloud service, so optimization goes to a limit as you understand, and we started to see the numbers climbing back. Farmed to the budget, with regards to the cloud consumption, the quarter started very similar to the Q4 trends, and then accelerated as we progress through the quarter.
Speaker 4: basically says that growth will sustain 22 to 24 percent. So we can you talk about what gives you the confidence to in this highly uncertain environment to you know to have the confidence to go out there with a five-year view on growth in on free cash flow margins and you could give us any sort of context I think Jacob walked us through some of the assumptions but
Speaker 4: Are there going to be a function of additional products? Is it going to be a function of security becoming a larger part of the business? Are you going into other market segments to sort of unpack the growth equation for us? So yes, we base the models basically on two vectors that we believe we will see additional sustain it.
Speaker 3: on-prem is still goes as we project. So we think that it will have a further contribution in the next five years. Second, we invested a lot in security. We released this quarter, the first hosted version of JFOG advanced security.
Speaker 3: In the last quarter of 2022 released the cloud version of it, we believe that security will play a significant role and will bring material revenue impact in the next five years.
Speaker 1: I appreciate the context, Somi. Thank you. Your next question comes from the line of Pinchalo and Boro with J.P. Morgan.
Speaker 5: Hey, guys. This is Noah on Flippingilum. Thanks for taking our questions. First, what has been the impact, if any, from the advanced security skew for self-managed that launched in March? And just also have a quick follow-up. 2
Speaker 6: Yes, the self-hosted version of Advanced Security was just launched in early March and it did not have any material impact on the quarterly results. We're happy to see the customer engagement. We have first customers in production but it's for the quarter itself it wasn't material.
Speaker 5: Got it. And then I guess, you know, what would be the rationale behind introducing a number of developers as a pricing lever for advanced security? And it also, it seems like the price for the Enterprise X. And the reason again, is that with the tapping data and the chest Secretary of Justice process, this onlyabulary out of context we're able toreto state foreclosure by democratizing assist predictiveexc calibrating can cause a Before and Before? impact on the federal been doing that. But this is this is a away from it loop,
Speaker 5: for cloud came down dramatically. What was driving that decision?
Speaker 6: Yes, so Advanced Security is a new product for us and there are several goals we wanted to achieve by introducing this metric. First of all, it should be a seamless metric between SaaS and self-hosted.
Speaker 6: Second, it should be comparable to the competition into the market. So as we said, we have a lot of expectation that this solution will replace and help to consolidate other solutions, other point solutions in the market. So to help our customers to compare the business value also with the technical value, that also the decision was to go by seed. So to help our customers to compare the business value, we have a lot of expectation that this solution will replace and help to consolidate the business value.
Speaker 3: around DevSecOps to a buy fit model. This is one aspect but we also have to remember that this is coming our security solution, JFrog Advanced Security Solution comes on top of the current subscription so we had to come up with the model that also makes sense for our customers to pay more than the base subscription.
Speaker 1: Great, thank you so much. Your next question comes from the line of Brad Reback with Stifel.
Speaker 4: That's great. Thanks very much. Salome or Jacob, as you sort of think about the optimization commentary that you guys presented here, any sense of the accelerating usage coming from net new workloads as opposed to customers just finding fewer ways to save money?
Speaker 3: with the best practices in the market is for storage of binaries and data transfer of binaries. So optimization goes around this for both new customers and existing customers. Our cloud business is split between annual commitment and monthly commitment. On the monthly commitment we see more new business, this is I think what you refer to in the...
Speaker 6: add to that as we see our customers adopting full platform so our platform is not just used in developer environment also used in production environment so definitely cloud usage is driven by not just standardization of customers or for development around but new workloads that reflect the operational activities as well.
Speaker 7: That's great, very helpful. And then just high level, I've gotten a few questions on this. Is there any disproportionate vertical exposure in the customer base or is it fairly broad based? Thanks.
Speaker 6: It is fairly broad-based. We have a very diversified customer base. None of our customers represents more than 2% of our revenue. The largest verticals for us would be the financials and the tech industry.
Speaker 2: Hey guys, you have Mike Sico-Somolan here and thanks for taking the questions. If I could just build off the last question for a second. I know that you guys are citing financials in the tech industry as the largest two verticals and I think it was a little surprising to me given the level of enterprise exposure that you guys have and let's say that financial services exposure specifically.
Speaker 2: that you guys didn't seem to be impacted by maybe some of this broader financial shop to the system we're seeing with some of the regional banks.
Speaker 2: Can you help us think through maybe why your solution or why the growth with your customers seem to be a little bit more immune versus some of the chatter we've heard from other companies that are reporting this season? And then I have a follow-up as well. Yes, Mike. I think that when you look at the market, whether it comes from one sector versus the other, the infrastructure.
Speaker 3: is a matter of will you or will you not build software. I don't know any bank or any other organization that will stop, that will stop build and release software and this is our business. So we have a reason to believe that this is a bit more sustainable.
Speaker 3: then applications or other services that are provided in the cloud. The second friend that we see is that both on-prem and cloud are going to coexist and stay in different industries. And the fact that we provide both of them and sometimes both of them at the same time to the same organization, give our customers the flexibility.
Speaker 6: spread out in different regions, global organizations, and therefore, Mike, we do see ourselves more installed in top-tier financial institutions and to a less extent exposed to smaller regional events.
Speaker 2: Got it. Thank you. That was, that was going to be something I was going to drive it next year, because I appreciate you calling out the lack of exposure to those regional banks. And then, I guess if I could just have my, my follow up here, I know that a lot of people are circling around the commentary you guys offered regarding the accelerating cloud usage through 1Q. I think it'd be helpful, at least from my perspective, I know that you said 1Q started...
Speaker 2: with very similar trends to what you guys had seen in 4Q. So two points here. One, during 1Q, when did the trend start to normalize or return to a more typical, I guess, growth algorithm versus where you guys have been in 4Q in the start of 1Q?
Speaker 2: then any commentary you'd be able to provide on how that trend played into April . I imagine that that's one of the things you guys are factoring into your guidance here for 2Q but I think both of those data points would be helpful around the cloud consumption. Yes, so we did see our...
Speaker 6: cloud usage growing faster in the months of March. In April , we did see similar trends. Obviously, our guidance assumes certain level of
Speaker 6: Conservatism, we said on the call that we don't think that the optimization is fully behind us. We do expect that our customers will continue to grow more efficiently. And so there's still a lot of uncertainty in the market. And therefore, our guidance does assume some level of conservatism.
Speaker 1: I appreciate the commentary. Thank you, guys. Your next question comes from the line of Kingsley Crying with Canacord.
Speaker 8: Hi, thank you. So one for Schlomi and one for Jacob. It seems like a significant portion of the meeting opportunity for advanced security is in on premise. So our incremental is the advanced security update compared to only having it for clouds in the past. And then how much of this is baked into the fiscal 22 guidance? Yes?
Speaker 3: So the JPG Advanced Security and the self-hosted version is actually answering our hybrid philosophy and strategy. The majority of our customers are still using a self-hosted version, therefore we think there is a lot of room for growth there.
Speaker 3: and it's based on an identical model as the cloud, which is a by-feet. So we think that there's a lot of room to go with the self-hosted JFrog advanced security. The second reason that the...
Speaker 3: we were excited to announce that this quarter was that most of the point solution that we are aimed to displace with the JFrog platform and with advanced security on top of it.
Speaker 3: self-hosted solution. So we know that the market is fragmented and we are coming with the solution both for the cloud and self-hosted with the financial model that is aligned also with the target of this space.
Speaker 6: Yeah, so in the case that we said that we expect material contribution from advanced security products in fiscal 2024. So we are on pin up. We're very happy with customer engagement. We see a lot of opportunities. And we expect material contribution from advanced security in 2024. Okay. Thank you for the color. And so one more. So you're solidly profitable today. Thank you.
Speaker 8: I just want to think about capital deployment moving forward. So what's the appetite for M&A in terms of valuation and ability to integrate an asset and then also stock at these levels? And stock buyback be something you would ever consider?
Speaker 6: First of all, our board is constantly looking at ways to optimize capital structure and consider different options. In terms of M&A, we see a lot of opportunities in the market, web-grade and fragmented market. So we believe in the future there will be opportunities, which we will act on if they come. There's a lot of future opportunities for us to start developing markets and even start designing markets throughateral All this content, and now there's a lot more resources out there. When a professional publishing company writes a Slack, is a yes-go, yes-CLog product being
Speaker 9: Okay, very helpful. Thank you. Your next question comes from line O. Koji Okada with Bank of America. Hey, guys. Thanks for taking the questions. I wanted to go back to some of the commentary that you had from a prior question and also in the prepared remarks about optimizations and...
Speaker 9: where you don't believe that optimizations are fully behind. You know, you said you feel the first wave is behind, but optimizations are not fully behind. And it seems like you're alluding to there might be a second wave here, or maybe I'm reading into it too much, but what are you hearing or seeing out there that makes you believe there may be another wave or another optimization?
Speaker 6: ways could be coming, is there a certain geography or vertical that you're thinking about, or help us understand that kind of commentary that you had? We don't expect second wave. What we see is that continued effort by our customers to use cloud in more efficient manner. As you know, as you know, as we charge by data transfer and storage, storage is more immediate optimization, provides more immediate optimization results, and data transfer more long-term optimization process.
Speaker 6: So, we see that our customers are very cost-oriented. The budget is still tight and they want to be in the budget because otherwise they would require additional approvals. So, what we see is that customers continue to use the products because of its infrastructure play. They continue to grow with us.
Speaker 3: but they will continue to grow with us in a more efficient manner going forward. Coge, I would add to it the different segments that we see. There are companies, big enterprises, that are in the process of migrating to the cloud and might slow down because they still have their on-prem.
Speaker 3: solution for infrastructure, they use JFrog, they are in the process of migrating and might slow down with how much workload they move to the cloud. And there are the others that already migrated or signed with us already with a cloud solution to start with and these guys will probably have to prioritize infrastructure versus other activities that they have.
Speaker 3: in the cloud. In both scenarios we are being very careful with what we project and we don't want to say that the optimization is behind us but the big wave of optimization that we saw in the last quarter of the previous year was more significant than what we saw this quarter. This is why we have reason to believe that the market is slowly coming back.
Speaker 9: Got it. No, thank you. And then on the 2027 target, the revenue target, assuming a 20 to 2 to 24% keg are there, just wondering what sort of embedded assumptions you have in that, specifically from an NRO perspective. Thanks guys. Thanks for taking the question.
Speaker 6: Yeah, we expect our net dollar retention to be in high teens up to 120% over the course of this period.
Speaker 1: Thank you very much. Your next question comes from the line of Ataya Codrome, Open Hago.
Speaker 2: Thanks, and nice quarter. Since Poggi asked about the fiscal 27 guide, I'll start with that as well.
Speaker 6: the reasoning behind it? We do expect high contribution from SAS. We do expect as a result of that it's probably more impact on free cash flow because SAS tend to be
Speaker 6: more shorter-term contracts today at least. We don't have many multi-year contracts in the SaaS business and SaaS becoming a bigger portion. That's what will probably impact slightly the free cash flow. In terms of profitability, I think we provide the same targets.
Speaker 2: Okay, and then on the upside in the cloud in the quarter, can you double click on that a little bit? Is there any color you can provide on how broad that was? Were there one or two, three customers that really jumped up their usage? Any
Speaker 3: vertical or region where this was more pronounced. I'm just trying to kind of find a common denominator there. Yes, Hittai. So first to the question whether it was one customer or across the board. We saw it everywhere, not by geography, not by sector, not by one customer. It was a trend.
Speaker 3: I think that most of the companies were instructed at the end of the previous year to cut costs on hosting and they moved very fast and as Jacob mentioned before the low hanging fruit storage and the cleanup of the repositories and now they had to start the year and start to...
Speaker 2: It started at the end of the quarter, and this is where we saw it starting to climb back. Okay, and then lastly for me on the advanced security, nice to see that come on premise, I guess on the hosted. I guess slowly I'm trying to get into
Speaker 2: The long-term potential of this, the attach rate of this to your base, do you think there will be differences that the attach rate of advanced security to all SAS customers is going to be any different than non-SAS customers? And can you talk about what is the dollar uplift usually for a SAS customer adding this versus a non-SAS customer adding this? Thank you.
Speaker 3: Yes, so when we are looking at the portfolio, we have three different options. One is fully self-hosted, second is hybrid, and third is fully cloud. We started with the cloud, obviously that was a faster time to market because the customer doesn't have to install anything and there is no other. It just has an Amitabh Shevar action killing you.
Speaker 3: second when we already had some practices. We think that in today's JFrog customers portfolio the majority are still self-hosted and the big enterprise are using multiple tools. The majority of them will use more than 10 different tools to cover this DevSecOps.
Speaker 3: So JFrog Advanced Security is very appealing in terms of consolidation, in terms of performance features and keep the software supply chain secure, focusing on the value that the platform brings. And we hope that while they will migrate to the cloud, because as you see we pushed the cloud business as well in parallel, while they migrate to the cloud it will be an easy smooth move because they will already have it installed.
Speaker 9: and practice in the organization. Thank you. Your next question comes from the line of Miller-Jump with Truist Securities.
Speaker 5: All right, thanks for taking the question and congrats on the solid execution in the quarter. So I guess first one, kind of want to start on hiring. A lot of your competitors have pumped the brakes on hiring or, you know, even made cuts to headcount in the beginning of the year. So can you guys just talk about how you think about hiring in the current environment?
Speaker 6: So our plan and execution and a path to profitability have started many years ago. And this is what's embedded in the company's DNA. So in the first place, we did not hire so many employees. So we don't have, didn't have to go through reduction in force. Second, we do, we did slow hiring.
Speaker 6: provide some ROI, we focus on execution, we focus on performance. And therefore, we continue to do a kind of improvement on an ongoing basis and therefore we didn't have to go through these big headcount reductions.
Speaker 5: Yeah, that makes sense. And then I guess another question, just a trend that you called out last quarter was kind of the pay as you go customers shifting to annual contracts. Is that something you continue to see in Q1? And you know, I guess is there any impact that we should think about there as far as your guidance?
Speaker 6: Yeah, the transition of pay-as-you-go customers to annual is a natural progression of these customers. Typically, new customers start as pay-as-you-go because they're not yet familiar with the product, they don't know yet how they're going to be utilizing them, and therefore they want to be cautious, they're not willing to commit to long term.
Speaker 6: Once they use the products, they become familiar, only then they know that they want to commit and get to the maybe some discounts depending on the size of the commitment. So it's a natural progression of our customer journey and it's actually beneficial for JFrog because the longer commitment...
Speaker 6: the better roadmap we could work on with the customer and the better value they could see from the product. So we continue to see some customers transitioning from Pay-as-you-go to annual commitments this quarter, but Q4 was more pronounced given this additional budget strict requirements that were imposed on some of our users.
Speaker 3: And to be very clear about that, that's a stake of mention also part of our strategy. We would prefer to have customers to meet it to an annual contract and to build the roadmap with them, build the platform with them as it's aligned with the strategy. This will only happen if they will be committed to a long run.
Speaker 4: So yes, we will see it, but it's also very much aligned with the way we indirect our strategic sales team to push it. Your next question comes online of Jonathan Rohaber with Cantor. Yeah, hey guys. Nice.
Speaker 2: Anything you might be doing around innovation and or packaging or pricing that might change that opportunity to pipeline.
Speaker 3: Yes, thank you for this question. Pipeline is a JFrog CI-CD solution to better automate the process within the platform. Now remember, the business that we are in is moving binaries from one stage to another. JFrog Pipeline is probably the best way to automate.
Speaker 3: these processes, not just in terms of from build to test to release, but also in terms of automating security as part of the DevSecOps solution we provide. JFrog Pipeline completely integrates with whatever CI-CD tool you have in the market. Whether you use
Speaker 3: GitHub action or Jenkins or other tools, Gapoc pipeline will integrate with that. And this is actually another motivated feature or product that leads our customers to adopt the full platform. In our leap event that was mentioned in the script, we shared with our top customers
Speaker 3: the new capabilities of software releases from one stage, one environment to another. This is all behind the scenes powered by JFrog Pipeline. So it's an integrated piece of our platform which makes our platform more automated and ready for the next generation. So talk about that.
Speaker 10: go to market motion with pipelines then because I would imagine that customers already using Jenkins or some other CICD tool that they would have to be sold quite heavily on the need for a pipeline.
Speaker 3: There are two ways to look at it. The first thing is that pipeline is part of our platform subscription and it would be a reason for you to upgrade from a lower subscription to a higher subscription in our model. Second, pipeline is also consumption based both on a self-hosted...
Speaker 3: and in the cloud. So if you use more, then more than the base, then you pay more. The motivation on the customer side would be around better faster releases that would be more secured. And we keep adding more and more features to it. Some of it is integrating with your CI-CD, which will chosen by the developers as step before. And some of it while you are implementing the platform.
Speaker 4: Okay, that's helpful. Thank you very much. Your next question comes from the line of Rob Owens with Piper Sandler. Yeah, good afternoon and thanks for taking my question.
Speaker 11: with all the focus around generative AI and its applicability across devsack ops. What do you bring from your purview number one thought process around?
Speaker 11: where it could benefit your product set and interesting follow up I guess the prior question. And then number two just from where you said potential impact on the industry. Does this lend to more opportunity for JFrog down the road? Thanks.
Speaker 3: Yes, obviously a great question, thank you. Listen, AI by definition is here to replace human.
Speaker 3: and human innovation in the process of building, releasing and securing software in our domain. JFrog is a binary company. We are dealing with binaries. So obviously, the more you create, the more you build, you create more binaries and this is for us, will be a great opportunity. So we were forever a machine language company.
Speaker 3: So, AI is blessed because it will generate more business for J-POP. What we have to make sure is that this business is not being disrupted by automation of how you maintain binaries as well. But this is from the get-go what we've built with Artifactory. Obviously, we are very excited about the opportunity.
Speaker 3: You know, 10 years ago, CICD generated machine walk versus developers and created more walk for binaries, for binaries people. So AI is a big opportunity for a company like JAPO. The second side of it is the security piece that we are managing.
Speaker 3: Security can be powered by AI, not only around scanning and around finding vulnerabilities in CVEs, but also in remediation. So when you have to replace a binary that is stored in artifactory and put it in production, this can be done by AI.
Speaker 3: And we are excited about these opportunities. We are looking at the different ways of implementing responsible AI, because as you probably know, some of the regulations are also being created as we speak now. So it's not just about what feature or what trend we want to cling on.
Speaker 3: is how responsible should we be when we build the automation that remove the human intervention from the process and implement a smart and responsible AI. And we are looking at it on the highest strategic level of project. Regarding the market.
Speaker 3: What would be the result of AI? The result of AI would be how many developers can be replaced.
Speaker 3: by implementing AI and this means source code. It doesn't mean binaries because whether you feel
Speaker 3: software with people or with machines, you build binaries, you deploy binaries, you take binaries all the way to production. And what we have to make sure is that we better integrate with this ecosystem and follow the next generation of DevOps and DevSecOps that is also powered by AI and not just by developers. Thank you for the color.
Speaker 4: Your final question comes from Michael Turris with KeyBank Capital. Hey guys, this is Billy on for Michael. Do you have any information on the results in the quarter?
Speaker 8: It seems to make sense that since you're not a seat-based model, it seems reasonable you'd be less impacted or not directly impacted by developer headcount reductions. Have you seen any slowing in development projects and the pace of software development as a result of developer headcount reductions across the industry?
Speaker 3: So our customers are telling us that they have to prioritize things. That's I think the real world behind this kind of balancing that we see in the market. They have to prioritize maybe a year ago that they would just throw money on all kinds of experiments. This year they will take it in a bit more disciplined way.
Speaker 3: The second thing is that if you were in a process of migrating to the cloud, it will require a period of a parallel infrastructure environment. Moving your legacies to the cloud doesn't happen in a day.
Speaker 3: it will happen over a period, maybe sometimes a multi-year project. And some of them push this decision further, although they know that strategically they will go there, they push it further. So in both ways, whether you prioritize or you are not enabling a hybrid environment, this will have an impact on our projection.
Speaker 1: There are no further questions at this time. We'll turn the call back over to Shilomi for closing remarks.
Speaker 3: I'd like to thank you all for your attendance today we had a wonderful quarter and we are looking forward to share with you more results in the coming quarters may the frog be with you thank you
Speaker 1: This concludes today's conference call. Thank you for attending. You may now disconnect.