Q3 2023 JFrog Ltd Earnings Call
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Ladies and gentlemen, thank you for joining us and welcome to J progress third quarter 2023 earnings Conference call I'll hand, the conference over today to Shanti Erica Chief Legal Officer, Johnny Please go ahead.
Thank you for holding.
Good afternoon, and thank you for joining us as we reviewed.
Both the production J for code scanning with the new SaaS solution protects first party called J population protects companies from unwanted third party packages from entering the organizations and Jay for catalog provides meta data and augmented information about the company's binaries.
Together with <unk> X Ray and advanced security for secret detection and contextual analysis <unk> is the only company that delivers complete security solution with a binary centric approach combined with LTE factory, the leading binary repository Jacob provides a complete <unk> solution for your software.
Supply chain.
This end to end security approach continues to gain traction across verticals. For example, one of the world's largest biotech companies recently adopted our entire security offering on the <unk> platform.
Looking to consolidate point solutions, they saw the value of having software supply chain security integrated with their binary management system. We look forward to helping them address the software supply chain security needs Holistically as they tell us they intend to migrate away from point solutions such as men.
And there are two stock.
And in other highly regulated industry and nuclear security group within the United States Department of Energy recently acquired the <unk> platform to improve the software supply chain security posture.
One of the cyber security specialist in the Nevada National Security sighting, Brian Walkman noted.
Software supply chain platform is necessary for practical means to meet certain governmental and standards requirements more importantly security at all stages of our software development lifecycle is necessary for national security interest our responses <unk> does that end quote.
Next I would like to address growth and cloud adoption marketplace, China growth and our strategic sales motion.
The expansion in the number of our over 1 million customers.
Customers this quarter demonstrate the continuing focus of our strategic sales team on driving large scale software supply chain platform implementation with a key partnership of the major cloud providers.
For example, one of the world's largest cloud computing and virtualization technology companies came to <unk> looking to implement their Dev ops and <unk> cloud first strategy.
Looking to Horst J P platform services themselves in the cloud they rapidly realize they would greatly lower their total cost of ownership due to the lower maintenance and infrastructure costs that would be safe by utilizing J for cloud services.
With nearly 3000 developers. This company is working with <unk> to provide a complete end to end platform implementation, which they acquired through the Microsoft Azure marketplace through our strategic sales and partner teams.
We believe our long term investment in this top down enterprise sales approach driven by our strategic team will continue to provide the north star for J Fox top shelf customers goals.
Finally regarding AI and machine learning, we were proud to announce the availability of Dev ops and depths hiccups industry first support through our machine learning model management in the <unk> platform in late Q3.
As Katie Naughton Senior research analyst for Dev ops at IDC noted in her swamp report quote the MLP model management capabilities expand the <unk> platform into an entirely new space and persona and single system of record that can help automate ml models development.
<unk> ongoing management and security alongside all other components packaged into an application offers a compelling alternative end quote.
Just as we provided common ground for developers and engineers years ago. When they started <unk> now has the opportunity to bring the world of AI and ml ops into the world of Dev ops in depth pickups, just as companies increasingly placed the demand on development teams to support security. They are now pressuring.
<unk> themes to deliver machine learning and AI capabilities in line with their application <unk> now provides a platform for binary management for developers data scientists machine learning engineers and the machine themselves.
As Keith noted that swamp up <unk> is the first and only repository manager to proxy the most popular public AI and ml model repository hugging face were also the first solution embedding security for ml model to scan models before they argues RT factory now natively supports AI.
Others within the <unk> platform to manage and deliver ml capabilities alongside all other binaries within an organization.
Supply chain is a software supply chain and we are proud to be addressing this demand on developers.
With that I will turn the call over to our CFO Jacob human who will provide an in depth breakup of Q3 financial results as well as update you on our guidance for Q4 and for fiscal year 2023 Jacob.
Thank you Shlomi and good afternoon, everyone.
During the third quarter total revenues were $88 6 million.
23% year over year, our stronger than expected revenues in the quarter were driven by continued strength in our cloud business and expansion of large customers on the <unk> software supply chain platform.
In the third quarter of 2023, our cloud business saw sequential expansion in customer usage equal and revenues of $36 million.
Up 46% year over year, we're happy to see the acceleration in our cloud business growth driven by the continued increase in cloud usage and vertical aberration with public clouds to enable large customers on their marketplaces, we reiterate our baseline cloud growth rate of mid forties during.
Fiscal year 2023.
<unk> managed revenues or on Prem where $58 million.
Up 14% year over year during the quarter.
We continue to see that our customers' road maps and plans are focused on SaaS migration and therefore, they do not expand their own brand footprint at the same pace as in prior years. We will continue to believe that our security solutions can be a potential catalyst to reaccelerate revenue growth and <unk>.
Customer expansion within our self hosted business net dollar retention for the four trailing quarters was 119% a decline of one point sequentially as predicted and DRA stabilizing and we continue to expect our net retention rate for the year to be at this levels.
Our gross retention continued to be 97% with no change in overall customer churn trends.
In Q3, 46% of total revenue came from enterprise plus subscription up from 39% in Q3 of 2022.
Revenue from enterprise, plus subscriptions grew 46% year over year now.
Now, let me discuss our income statement in more detail gross profit in the quarter was $74 1 million.
Representing a gross margin of 83, 7%.
Up by 10 basis points from the second quarter as the economies of scale and cost control offset higher cloud revenue contribution.
Operating expenses for the third quarter was $62 3 million.
Up by $100000 sequentially equal in 72% of revenues compared with $59 4 million or 82, 5% of revenues in the year ago period.
During the third quarter, we continue to remain focused on expense discipline, while investing in scaling our enterprise sales and channel partner teams and introducing multiple new products.
Our operating profit in Q3 was $11 9 million.
Or at 13, 4% operating margin compared to an operating income of $1 2 million.
A one 7% operating margin in the prior year as we continue to execute towards increased profitability as suggested in our long term model.
Third quarter net income equaled $16 6 million or 15 cents per diluted share based on 110 million diluted shares outstanding versus a year ago net profit of $1 8 million or income of <unk> <unk> per diluted share.
Turning to the balance sheet and cash flow. We ended the September quarter with $502 million in cash and short term investments up from $443 million as of December 31, 2022.
Cash flow from operations was a record $26 million in the quarter.
After taking into consideration capex free cash flow was $25 4 million junior.
Generating a 28 six free cash flow margin.
<unk> free cash flow margin is driven by better than expected profitability and strong collection from our customers.
We increased our expectations for free cash flow margin in fiscal 2023, and now believe we will be able to achieve 15% to 16% free cash flow margin as of September 32023, our remaining performance obligations totaled $235 1 million.
Now I'd like to speak about our guidance for the fourth quarter and full year 2023.
For Q4, we expect revenue to be between $92 5 million to $93 $5 million with non-GAAP operating profit between $10 million to $11 million and non-GAAP earnings per diluted share of 12 to 13.
Assuming the share count of approximately 111 million shares for.
For the full year 2023, we anticipate total revenues in the range between $345 1 million.
And $346 $1 million non-GAAP operating income is expected to be between $32 8 million and $33 8 million and non-GAAP earnings per diluted share of <unk> 44 to 45.
Assuming a share count of approximately 109 million shares.
Now, let me turn the call back to Shlomi for some closing remarks before we take your questions Shlomi.
Thank you Jacob we believe that Q3's strong results showcased the alignment with our long term strategic growth plans as we continue to meet technology and business goals.
To <unk> style as global teams. Thank you for your focus solidarity passion and execution Q3 is a testament to our resilience I'm excited to welcome Ed grabbed side as our new CFO beginning January one 2020 for Ed brings vast experience.
To his time at <unk> and in the past four years as part of our finance leadership, Ed. We are confident that Youll leadership will continue to drive <unk> success.
From here I would like to send our CFO Jacob <unk>. The best of wishes on his next journey, while you will be with us through the end of this year I'll take the opportunity now to thank you Jacob for the years of friendship and partnership you will always be a frog.
I would also like to congratulate all read going who was recently appointed as our chief sustainability officer, highlighting <unk> commitment to maintaining and driving responsible business. After many years as our chief Operation Officer I want to thank you all for taking on this very important.
Paul.
In closing our thoughts and prayers continue to be with the families affected by the brutality of the tail on Israel, Israel like J Fox is strong and we will prevail.
We hope for pistol and secured days ahead with that.
You all for joining us for our Q3 earnings call and made the frog be with you now we will be happy to take your questions operator.
Thank you so much and at this time I would like to remind everyone that in order to ask a question press star and the number one on your telephone keypad once again star and the number one and in the interest of time, we ask only one question per caller. Thank you in advance for understanding and we will take a moment to compile the <unk>.
Q&A roster please standby.
Yeah.
Okay. It looks like our first caller is from pendulum Bora from Jpmorgan go ahead. Please.
Hey, guys. This is <unk> on for Pinzon Quad.
Got it for everyone.
Nathan.
Congrats Jacob.
Thank you and looking forward to working with you and as well can you mean.
Maybe just walk us through what Youre seeing in terms of the cloud optimization at this point.
Any other incremental color you can provide on what drove the acceleration in cloud revenue growth.
Yes, I know.
So the trends that we see in Q3 continued the positive momentum on cloud usage as you could see our revenues accelerated driven primarily by usage of our large customers and growth of our large customers and marketplaces. So that's very positive we continue to see that.
The migrations.
Accelerated a bit from prior quarters still below.
Prior year levels.
The overall adoption of our enterprise class platform solution on marketplaces continue to drive drive.
Our cloud revenues and that's the reason for acceleration in the cloud in the quarter.
Okay. Thank you so much.
Next we have a.
Question from Koji Ikeda.
Bofa Securities Koji go ahead.
Yes, hi, Thank you. Thanks for taking the questions just wanted to follow up on the cloud growth the strong growth there and and Jacob you just mentioned the migrations, but earlier in your prepared remarks, Youre also talking about advanced security and its availability within the self.
Self managed portion that could help reaccelerate that segment of the revenue mix and so just trying to think of the puts and takes here thinking out into the future of how we should be thinking about overall migration as a SaaS revenue driver, but also the advanced security, which either could help stabilize or maybe.
Even accelerate.
The self managed piece and what could that we could start seeing that in that piece of the revenue. Thanks guys.
Hi, <unk> and thank you for the question. This is shlomi I'll take this one.
I think that what we see in the cloud.
The growth of 46% year over year growth is also a result of our stock.
<unk> enterprise sales team together with our partner team we discussed that.
The investment that we have done.
This team is focusing on not only migrating customers from sales faster to the cloud to bring new logos to the cloud. This team is also focusing on looking holistically at the Dev ops and depths of cops requirements of our customers, Therefore advanced security accumulation and the new capabilities.
We announced recently a swamp and before ill also included we spoke about one of the biggest telecommunication in North America, just migrate to the cloud together with day for this company also adopted <unk> advanced security with a meaningful.
Part of the subscription the other company, which was discussed.
Nuclear Security company also adopted the food platform together with securities. So we see.
Some kind of a movement not only to have it.
Dev ops end to end software supply chain.
Solution, but also to have a comprehensive built in security within the platform rather than using point solution.
Okay. Thank you so much once again, a reminder, folks star one on your Touchtone phone if you'd like to ask a question once again star one.
All right. Our next question is from Sanjeev Singh with Morgan Stanley. Please go ahead.
Hi, Oscar.
Thanks, Tahira bottle ahead with your question.
Hello can you hear me, yes, we can hear you go ahead.
Okay sorry.
Yes, it's nice to hear about your investment in southern marketing to drive adoption in the large enterprise but.
If we look at the last couple of quarters.
<unk> as a percentage of revenue at sort of.
Lower.
Should we think how should we think about that is.
There are plans to increase your head count and that the prior ban or I'd say at this point you have.
That need it.
<unk>.
Sales force.
Yeah.
So to drive that adoption.
Thank you.
Yes, sure so over the past years, we've made significant investments into our go to market capabilities.
A few years back we started to build in our enterprise sales team strategic sales than last year with our in building our partnership and channel team. So we will continue to make investments and we built a security overlay and somewhat some additional capabilities on holistic.
Top down approach.
To go to market approach. So those investments are bearing fruit and that's why we see that SLM investment as a percent of revenue.
Becoming more scalable and we see more leverage we will definitely continue to invest in those capabilities.
And we will continue to grow our sales and marketing expenses in absolute dollars.
But in the long term.
Predicted in our long term model, we expect to see more leverage and therefore as a percent of revenue. These expenses will continue to go down in the long term.
Okay. Thank you very much next we have a question from Miller jump with <unk> and company go ahead Miller.
Hey, Thank you for taking my question and congrats on the strong results.
I guess I was just curious could you talk about maybe the advance or give me the opportunity you see for advanced security and curation this year going into the fourth quarter given the concentration of renewals there and just any color you could give on what you're baking into guidance for that.
Yes. Thank you for this question.
We guided the market.
<unk>.
Jacob Securities earlier, this year to set up.
<unk> capabilities.
Added to the platform.
Last quarter, we announced.
<unk>, which is an additional product that will take the organization from the get go.
We we think that what we see here is the adoption of <unk>.
Holiday did security solution, which will become material in the next year.
And this is how we guided the market currently we are very pleased with the adoption.
Tens of customers that already adopted due to its part of the platform usage.
The security additions will become material into next into next year.
Okay. Thanks, So much next we have a question from Kingsley Crane with.
Canaccord Genuity Corp. Kingsley go ahead.
Hi, Thanks for taking the question so.
Swamp up you mentioned that.
The products you were releasing with dramatically consistent with the growth drivers of cloud and security so they kind of fit nicely and with the long term model of 30% plus.
Plus growth so as we move forward how much of that.
How much of your existing product portfolio, we can contribute to that cause that growth figure or in other words.
You know how much more products do we need to be released in order to hit that target.
Thank you Kimberly.
What we announced in one pop was pockets are holding that.
We announced several tools.
For the full software supply chain platform.
That we implemented in the market.
We are focused on security comfort, then Jay population and catalog, which was announced in P&L swamp up. We're also planning to have some security capabilities.
One time.
Shifting right we.
Added static analysis security on the left too.
Security code.
And by that we provide an end to end security solution on top of that we also announced the AI and ml capabilities as part of the platform natively supporting.
Security scanning for ml models and storage of module factory. If you look at the global picture altogether.
Jacob platform today provide a full end to end solution for Dev ops and desktops from code to production and in the next few quarters, we already have items in our old map to complete even further rights to what we discussed.
And if I may add to that so when we release our long term model. We're already had this new product either at the market launched in the market or just about to be launched in the market. So we definitely took those products into account when we.
Released in shares our long term targets with you.
Okay. Thank you both one more reminder, star one on your Touchtone phone, if you'd like to ask a question and our next caller is <unk> Kidron with Oppenheimer. Please go ahead.
Thank you and Shlomi.
Shlomi, our thoughts with you and the whole team in Israel of course.
Shlomi I wanted to make sure I understand the.
Security.
Customers buying your security solutions, we found artefacts that's still not a possibility if so when will that happen and in.
Maybe for you.
Jacob on the expansion rate before the new product coming along and clearly with this better execution on.
On the upsell and distraction with $1 million customers, how should we think about.
Net dollar expansion rate here going forward for the next couple of quarters.
Okay.
Hi, Cai.
What we see as reported.
Our net dollar expansion.
Stabilized.
121 19.
Victor.
Guided into self hosted solutions Intel security solution is based on a fix model on top of the platform.
We look to see some acceleration bill, though our strategy is very focused on the cloud and the cloud migration in there as well so Q2 would be a strong driver to support the net dollar retention guidance that we provided we provided.
Security in both cases, both deployment and.
Environment cloud and still posted is based on by developers and not only by consumption. So we think it will.
Paul.
Net dollar retention.
It would be aligned with our guidance.
Yes, good morning.
Okay.
Of note, though.
This level.
And as the.
Obviously too soon for us to to provide the guidance for 2024.
Okay, well, let me just to make sure I understand.
Can I buy your security advanced security and curation without buying artifacts.
No.
Currently security our solution Securities part of the platform coming good optic factory in X Ray in the future. We may consider to have it as a standalone solution.
Frankly, it's a cool solution coming with the platform.
I appreciate it thank you.
Thank you and our next caller is Brad Reback from Stifel. Brad go ahead.
Great. Thanks, very much shlomi as we think about sort of the emergence of AI and ml large language models.
Does that play to help accelerate usage of the cloud.
The factory.
Yes, great. Thanks, Brad.
And the MLR.
These are.
<unk> technologies that are being adapted rapidly by all organization and also the enterprise looking into it as you are familiar with our portfolio.
The majority of our customers are enterprise customers with thousands of developers and to be Frank with you. Most of them are trying to first.
Kind of go down the Playbooks and deregulation of how to use AI, how you secure AI.
To make it and how do you become more efficient with it before you, let machine code and build binaries and distribute it for you. So.
We planted the seeds <unk> is the first and only company in the world.
Practically provide AI solutions for our customers, we planted the seed not only for <unk>, but also for security.
Factory natively Oxy hygiene face the public repository and X ray automatically scan all ml model before getting into the season to the software supply chain.
The rapid growth and the rapid adoption of AI and.
In <unk>, we believe.
This will be.
Just another package to Jacob user and will accelerate the adoption of our platform.
We will put us in a very good position in terms of.
Competition that might come up in the future.
We will serve our customers and community better with unit growth strategy that we provide currently its too early to say how will this impact.
Impact the long term model.
That's great thanks very much.
Thank you and our next caller is Jonathan <unk> from Cantor Fitzgerald, Jonathan go ahead.
Yes. Thank you.
Slowly an interesting point that has come up in discussions we've had with J for our customers.
The other basin artifact that we bring to third party see Icd's solutions and specifically the significant reduction in time and.
And cost savings.
Can you just comment on that dynamic how important it might be when you look at new land and also what is the implication of that pipeline is pipeline less of an opportunity just given how well you work with others the ICD tools.
Yes, thanks for the question John.
<unk>, our factory and Jacob platform overall.
It's based on an open API walking with all to make Youll see ICD towards in the market. We are immediately supporting these type action Jenkins get lipsey, ICD circles, Ci and obviously either.
It is also mandatory for everyone, who UCI to use the buying as I recall the ability because the moment you UCI on top of appeal Salt Scott.
You create the binary and then the deployment into our factory in putting out for multi criteria by ACI and.
And also making the food software supply chain is being made.
In and out for a multi pack away.
<unk> <unk> pipeline <unk> pipeline is accelerating the automation of the <unk> platform integrates with all the ICD tools and help you promote binaries from every quality gate all the way to production vehicles pipelines also provide a friendly UI.
For users to manage the dependencies and to manage the social.
Cool.
All binary.
We don't see J, Paul pipeline as a catalyst for the adoption of our platform.
Cattle to all major catalyst for <unk>.
So actually what we see is that using <unk> pipeline makes our use of more.
Faster and secured.
As the secure pipeline by using it.
Okay.
Having a strong impact in terms of the value proposition, but not necessarily impact the <unk> or the or the adoption of the other price plus package correct.
Correct.
Okay. Okay. Thank you.
Okay. Thank you it looks like our next call is from Mike <unk> with Needham <unk> Company, Mike go ahead.
Great. Thank you. Thank you for getting me on the call here and I apologize if I missed this in the prepared remarks or the Q&A.
I know I'm juggling, a couple of different earnings calls like I imagine my peers are as well.
I think the first question if I could for Shlomi.
We're kind of struck last quarter when the company was saying that the optimization headwinds, where we're largely behind the company and I apologize if I missed this but could you provide us an update does that does that still stand here, where we are today is it fair to think that those optimization headwinds for GE progress now firmly in the rearview mirror and then.
Just had one follow up.
Yes, Mike we did the.
Talk about the use of strengths and we continue to see continuous growth of usage. So we do believe that this wave of optimization is behind US we continue to see the adoption of our platform by larger customers on marketplaces.
However, having said that we also see slower pace of migrations comparing to prior year.
So definitely macro headwinds in terms of impact on base of migration is still there, but cloud usage continues to grow and best friend that we've been experiencing for a couple of quarters now.
Got it got it okay. Thank you for calling that out and I think maybe one other item I think earlier this year as well I know that the company was trying to.
Adjusted free tier and I think you guys said decided to limit the number of users that fell under that free tier.
And maybe by creating that limited capacity.
There was a thought that that could benefit the model in some capacity from a monetization standpoint.
Can you remind us what what the initial findings on conversion.
Sure.
The revenue if any.
Have come through the model at this point.
Yes, Mike when we decided to kind of.
Do you think the top of the final readout three to you.
Earlier in 2022.
The main reason was the all of the additions that we provided with with security and Iot capabilities that you cannot just back on the free tier basic Dev ops solution. It didn't serve not distracted that opex strategy and not the go to market strategy, which became top down strategic architect that.
The conversion that we've seen from the <unk> well.
Customers, usually small groups of developers that converted plastic factory and Depaul subscription and we decided that it doesn't serve the top of the funnel I'm happy to report as you can see that what we have built with our enterprise strategic sales.
One of the.
Results being demonstrated this quarter with the amount of customers that are going over $100000 or about $1 billion.
This is not coming complete deal as you probably understand.
Okay. Thank you so much our next caller is Nick Altmann with Deutsche Bank. Nick go ahead.
Hi, This is John <unk> on for Nick Thanks for taking the questions.
Can you talk about how September and October trended from a macro perspective relative to expectations.
And whether you have seen any meaningful change in overall and by improved density from customers. Thanks.
No we did not see any changes in the terms in October continued to be comparable with Q3.
Okay. Thank you.
Next caller is from Ethan weeks with Piper Sandler you didn't go ahead.
Okay, great. Thanks for taking my question. This is Ethan on for Rob.
It seems like there's still a large amount of organizations out there using either for your open source binary repository management solutions.
And as we think about the amount of innovation and product releases you've had on the security side do you think this could provide a catalyst maybe first a lot of these organizations to start considering a commercial solution or if not maybe what.
How do I think it'd be in the future as we think about new customer growth and converting some of these onto your platform. Thank you.
Yes.
I'll take this one we built the Gina krog traction from from the bottom up from the developers up and obviously starting with open source.
The concerns around the factory as the single it's also critical for the organization.
What we what we know now zoster is that it takes more than just one open source solution.
When you want to build a comprehensive total supply chain solutions.
Especially on an enterprise infrastructure level.
Have to adopt some security tools.
Have to adapt beautiful quality high availability multi site topology and very often.
Want to move everything to the cloud.
Which obviously has nothing to do with open source or not it's about having it as a service so for sure yes at the top of funnel.
A lot of.
Customers are looking at the old consoles.
So Frank.
Our tools and the free trial.
But the open source is still serving gas among developers.
The enterprise with Jacob Shine.
It's a very temporary solution.
<unk> being the place there.
Okay. Thank you and our final question comes from Michael <unk> with Keybanc capital markets. Michael go ahead.
Hey, this is Billy on for Michael just wanted to ask with curation crossing between kind of both developers and security have you seen that acting at all as a gateway to broader conversations with the CSO.
Should we think about curation is the next logical customer expansion from the core product before adopting advanced security.
Okay.
Yeah. Thank you. This is a wonderful question accumulation is very very unique because curation.
And on the common ground of the CIO and this season.
What I mean by that.
Companies realize that they can become far more efficient with adopting <unk>.
Open source kitchens.
By scanning it before even getting into the organization and therefore population is very appealing and growing very fast. The pipeline. We are very pleased with what we see that people immediately understand it doesn't matter if you're coming for the security side or the desktop site you immediately understand the value of.
Preventing malicious packages to get into your organization your software supply chain. So we absolutely think that this will accelerate the adoption of public security solution. This is also why on the go to market is separated from <unk> security, but still based on the same.
The business model.
In the future, we will add more capabilities that will provide a full comprehensive pick up solutions, but already now we see that nobody is just building from scratch and everybody brings open source packages and therefore, you want to secure them into Kuwait them to bless them. We felt they are getting into.
Lots of supply chain once they are in danger of advanced security take an X ray take position and secure pipeline. So my answer is absolutely, yes, and I'm looking forward to see how this is changing the landscape of how open source software packages that are being deals.
Thank you and there are no further questions at this time, so I will turn the call back to Shlomi for closing remarks.
Well, thank you everyone.
Thank you for taking the time to join US today, we create for a more peaceful quiet days here in Israel.
And may to talk with you. Thank you very much.
And this concludes today's call. Thank you for attending and you may now disconnect.
Okay.