Q3 2024 JFrog Ltd Earnings Call
Thank you ladies and gentlemen, thank you for joining us and welcome to <unk> third quarter 2024 financial results Conference call.
Speaker Change: I'll now hand, the conference over to Jeffrey Schreiner, Vice President of Investor Relations Jessie. Please go ahead.
Jeffrey Schreiner: Good afternoon, and thank you for joining us as we review J frogs third quarter 2024 financial result.
Jeffrey Schreiner: <unk>, which were announced following market close today via press release.
Speaker Change: Leading the call today will be Jay Brown, CEO and co founder Shlomi Ben Haim.
Speaker Change: Grabbed shot J frog CFO.
Speaker Change: 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 Q4, and the full year of <unk>.
Speaker Change: 24.
Speaker Change: Words anticipate believe continue estimate expect intend will and similar expressions are intended to identify forward looking statements or similar indications of future expectations.
Speaker Change: You are cautioned not to place undue reliance on these forward looking statements, which reflect our views only as of today and not as of any subsequent date.
Speaker Change: 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.
Speaker Change: These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations for a discussion of material risks and other important factors that could affect our actual results.
Speaker Change: Please refer to our Form 10-K for the year ended December 31, 2023, which is available on the Investor Relations section of our website and the earnings press release issued earlier today.
Speaker Change: Additional information will be made available in our Form 10-Q for the quarter ended September 32024.
Speaker Change: And other filings and reports that we may file from time to time with the SEC.
Speaker Change: Additionally, non-GAAP financial measures will be discussed on this conference call is not.
Speaker Change: non-GAAP financial measures, which are used as measures of <unk> 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 a reconciliation of those measures to their most directly comparable GAAP financial.
Speaker Change: Measures a replay of this call will be available on the J broad Investor Relations website for a limited time.
Speaker Change: With that I'd like to turn the call over to Jay for our CEO. So let me then hi, Hello.
Jay Brown: Thank you Jeff Good afternoon to you all and thank you for joining our call.
Jay Brown: It was a very active quarter for J, Paul including at our annual user conference swamp up with industry leaders like JP Morgan Chase, Intel Google Snowflake capital, one and others showed a powerful experience with the <unk> platform on stage.
Jay Brown: Our partners, including Github, Nvidia and Docker joined us in announcing new levels of collaboration underscoring our commitment to a unified platform experience.
Jay Brown: Paul is also an opportunity to spotlight and reveal the innovations driving J <unk> future growth, including the release of J, Prague ml, which extends our software supply chain platform as the first to integrate Dev ops Dev ops and MLR in one seamless solution.
Jay Brown: Recently, we expanded our security offerings, we J, Paul granting security with customers recognizing it as critical solution for organizations seeking full visibility from development to production and back.
Jay Brown: A J probably say once you leapt forward you won't go back our customers' shelves disbelief as these wells shown in our growth retention.
Jay Brown: And the opportunities ahead aligned with our strategy keeping us excited focus driven and inspire.
Jay Brown: I am pleased with our success in the third quarter. We believe we demonstrated not only strong execution within J, Paul but more broadly customers are telling us that they see <unk> as the key strategic partner and the software development processes now allow me to cover some of our achievements during <unk>.
Jay Brown: Quarter in more detail J, Paul Q3 was strong on all fronts.
Jay Brown: Our disciplined go to market execution led to some of the largest platform wins and Jay proxies theory fueled by Dev ops workload migration to the cloud coupled with comprehensive software supply chain Securities Jay <unk> unified solution and Paolo enterprises to seamlessly aligned Dev.
Jay Brown: Security and aim at all on a single source of truth, and the bulge that differentiate us and continues to strongly resonate with market demand.
Jay Brown: In Q3, <unk> total revenue was $109 1 million.
Jay Brown: Up 23% the it'll be cloud revenue for the quarter reached 42 4 million.
Jay Brown: Representing 38% year over year growth fueled by strategic cloud migration and steady usage pattern among committed annual customers.
Jay Brown: Based on these Q3 results we remain confident in our full year 2020 full guidance for cloud growth of around 40%.
Jay Brown: Customers in Q3 with over $100000.
Jay Brown: Total of 966 up from 848 in the year ago period, the number of customers with <unk> exceeding $1 million increased to 46 up from 30 in the year ago period, representing 53% it'll be our goal.
Jay Brown: In Q3, our go to market team demonstrated strong execution, winning large deals for our complete platform, primarily driven by demand for our cloud and security offerings as.
Jay Brown: As previously shared some of the significant deals we won face delay due to a slower more rigid procurements environment.
Jay Brown: Let me first address the cloud.
Jay Brown: Our cloud business experienced sequential growth driven by increased migration activity, though overall use these france remained more moderate compared to the previous year.
Jay Brown: <unk> tell us that the scalable and hybrid nature of the <unk> platform gives them the confidence they need to modernize their software development business and we were pleased with an increased migration base and usage in Q3.
Jay Brown: We maintain a cautious outlook regarding large migration deals in our 2024 pipeline as we do not believe customers migration activity is yet turned the corner.
Jay Brown: Next to highlight security the market continues to demand the highest standards for software integrity with a focus on achieving trusted secure and traceable processes from software creation on the left to distribution and production on the right.
Jay Brown: Dev ops and depth pickup therefore, inseparable and the <unk> platform is purpose engineered to meet this requirement.
Jay Brown: In line with this industry shifts enterprises are prioritizing modernization of the holistic software supply chain security.
Jay Brown: They seek to streamline development work flows by consolidating point solution tools, and reducing vendor dependencies, thereby enhancing security and efficiency across the software supply chain.
Jay Brown: This trend has been buoyed by our customers and prospects over the recent quarters and was evident in our Q3 wins, which has predicted included J Prague advanced security and Jay population as key drivers.
Jay Brown: It's not the question any more about if a company will adopt a holistic platform that incorporates end to end software supply chain security, but the question of when.
Jay Brown: As mentioned in Q3, we held our 10th annual user conference Swamp up in Austin, Texas.
Jay Brown: As the industry continues to demand more from development team, we gathered with our customers and the community to drive the future of Dev Ops Dev pickups and MLR.
Jay Brown: We were excited to announce the availability of <unk> security delivering as part of our platform. The very first step pick up solution that allows companies to have full integrity and softer linear edge traceability from cost to production and back across every development and pipeline phase.
Jay Brown: In addition, we showcase the second phase of our strategic partnership with Github announcing co engineered solution.
By both companies advanced security capabilities, and importantly, bring AI capabilities via the copilot integration with Jay for curation and J Pro catalog.
Speaker Change: CEO Thomas Donkey join me on a keynote session shared growth together with <unk>. We have led the slides <unk> out of the bottle and of course, we're bringing the power of <unk> to get up Copilot now you can ask copilot about your packages.
Speaker Change: In our factory and about your internal processes and configuration.
Speaker Change: Perfect to your company and this is just the beginning and quote.
Speaker Change: We also announced a strategic collaboration with Nvidia to bring secure optimize machine learning models into the software supply chain and serve our joint customers without the factory has been Pts named model trusted registry.
Speaker Change: These announcements, but also shared in our shareholder and analyst briefing, we conducted onsite in Austin and are available on our IR website.
Speaker Change: At Swamp up Dr. Jay <unk> Dot com.
Speaker Change: Before we dive into financials and Q3, we demonstrated strong execution across our product strategy and delivery ecosystem partnerships platform expansion tens wins free cash flow and overall business efficiency. This success is in line with our strategy and we are.
Speaker Change: We're excited about the opportunities ahead with that I'll turn the call over to our CFO Ed <unk> will provide an in depth recap of our Q3 financial results and our outlook for Q4 and full fiscal year of 2020 for Ed.
Ed: Thank you Shlomi and good afternoon, everyone.
Ed: During the third quarter of 2024 total revenues were $109 1 million up 23% year over year.
Ed: As noted by Shlomi cloud revenues in the quarter equaled $42 4 million up 38% year over year, representing 39% of total revenues versus 35% in the prior year.
Ed: Self managed revenues or on Prem were $66 $7 million.
Ed: Up 15% year over year during the third quarter.
Ed: We anticipate self managed revenue growth trends to remain stable in the fourth quarter, but note some customers who are planning to migrate to the cloud or pause their investment in on Prem deployments.
Ed: Net dollar retention for the four trailing quarters was 117% in line with our guidance our gross retention rate remained at 97%.
Ed: A key motion driving our growth has been customer expansion through the adoption of enterprise plus our full platform subscription as.
As we expand our platform capabilities with security and ml ops, we believe further penetration into our existing customer base presents an opportunity for continued growth.
Ed: In Q3, 50% of total revenue came from enterprise plus subscriptions up from 46% in the prior year.
Ed: Revenue contribution from enterprise, plus subscriptions grew 35% year over year.
Now I'll review the income statement in more detail.
Ed: Gross profit in the quarter was $90 3 million, representing a gross margin of 82, 8% compared to 83, 7% in the year ago period.
Ed: The decrease in gross margin relative to the year ago period is primarily due to the higher mix of cloud revenues, which carries a lower gross margin profile than corporate average.
We maintain expectations for annual gross margin targets remaining between 83 and 84% in fiscal year 2024.
Ed: Operating expenses for the third quarter was $75 5 million up $2 $2 million sequentially, equaling 69, 3% of revenues up from $62 3 million or <unk>, 73% of revenues in the year ago period.
Ed: Current quarter expenses include contributions from the acquisition of <unk>, which closed in early July.
Ed: We remain focused on expense discipline, while continuing to maintain the proper level of investment to capture future growth opportunities.
Ed: Our operating profit in Q3 was $14 7 million.
Ed: Or 13, 5% operating margin compared to an operating profit of $11 9 million or 13, 4% operating margin in the year ago period.
Ed: Diluted earnings per share equaled 15 based on approximately $115 3 million weighted average diluted shares compared to <unk> 15 per share in the prior year on $110 2 million weighted average diluted shares.
Ed: Turning now to the balance sheet and cash flow. We ended the third quarter of 2024 with $467 8 million in cash and short term investments.
Ed: <unk> from $591 3 million.
Ed: As of June 32024.
Ed: I would like to note that we utilized $163 7 million in cash for the initial consideration paid for the acquisition of quark in early July.
Cash flow from operations was $27 6 million in the quarter after taking into consideration our capex requirements free cash flow was $26 7 million or.
Ed: Or 24, 5% free cash flow margin.
Ed: As of September 32020 for our remaining performance obligations totaled $346 1 million.
Ed: Now I'd like to speak about our outlook and guidance for the fourth quarter and full year of 2024.
Ed: For the fourth quarter, we expect revenue to be in the range of $113 5 million to $114 5 million.
Ed: We forecast non-GAAP income from operations to be in the range of 14 million to $15 million and non-GAAP net income per share to be in the range of 13%.
Ed: <unk> 15.
Ed: Based on $117 million estimated diluted weighted average shares outstanding.
Ed: For the full fiscal year 2024, we expect revenues to be in the range of $425 9 million to $426 9 million.
Ed: non-GAAP income from operations to be in the range of $56 4 million to.
Ed: To $57 4 million and non-GAAP net income per share to be in the range of 59.
Ed: To 61.
Ed: Based on 116 million estimated diluted weighted average shares outstanding.
Ed: Now, let me provide more context around our guidance.
Ed: We anticipate our cloud revenue to achieve around 40% year over year growth in 2024 with year to date cloud growth currently at 42%.
Ed: Fourth quarter cloud growth will be supported by a full quarter of contribution from large scale wins in the third quarter <unk>.
Ed: Annual customer commitments as well as contribution from smaller scale migrations to the cloud.
Ed: We believe our cloud growth forecast for 2024 still represents strong execution and what remains to be a challenging spend and procurement environment.
Ed: We continue to be cautious in our forward outlook Derisking large scale pipeline opportunities from our current guidance.
Ed: We have not observed a material shift in sentiment in regards to the overall spending environment and still observe customers being sensitive to the timing of large scale budgetary commitments.
Ed: During the third quarter, we saw security become a critical driver of larger customer deals and view the J fraud platform combined with security as the industry standard for enterprise customers looking to manage and secure their software supply chain and consolidate point solutions.
Ed: We continue to anticipate that Jay <unk> advanced security and J Ferrar curation will achieve material revenue contribution in 2025.
Ed: Given our fourth quarter guidance, we reiterate our net dollar retention range for the full year 2024 in the mid teens.
Ed: Finally, the acquisition of <unk> closed in the beginning of July revenue contribution in the third quarter associated with this transaction was less than half a percent as we integrate kwok into J fraud over the coming periods. We will provide further updates regarding our outlook for growth and profitability.
Speaker Change: Now I'll turn the call back to Shlomi for closing remarks before we take your questions.
Speaker Change: Thank you Ed.
Shlomi: Our Q3 achievements and successes belongs to our global team delivered by the third full innovation and followed by our customers happiness, our team delivered a robust quarter with growth in cloud and security, leading the way pronged I'm incredibly proud of each of you and constantly.
Speaker Change: <unk> bio resilience and spirit.
Speaker Change: We remain focused and committed to achieving a solid 2020 fall in line with our guidance and while macroeconomic challenges persist. We believe the foundation laid are bearing fruits.
Speaker Change: Before we take your questions. Let's also remember that it has now been over a year since the terrorist attacks on Israel begun and as we speak one hundreds and one of our brothers and sisters remained held captive by amassing gather.
Speaker Change: We pray for peace in the region and for the fast and safe return of those hostages to their families.
Speaker Change: Thank you for attending our call today and made it probably with you.
Speaker Change: Operator, we are now open to take questions.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star and the number one on your telephone keypad.
Speaker Change: Also please limit yourself to one question and one follow up.
Speaker Change: The first question comes from the line of Sanjeev Singh with Morgan Stanley.
Speaker Change: The line is open.
Speaker Change: Thank you for taking my questions and congrats on the solid Q3 results I wanted to get a sense of how you saw Q3 come in if I rewind back to 90 days ago, you guys did see some deals push outs and so would you characterize Q3 as a function of some of those deals closing and generating revenue.
Speaker Change: In this quarter or was it more.
Speaker Change: Kind of a more broad based strength beyond just closing closing slipped deals and then I had a follow up.
<unk>. This is Ed. Thank you for the question. So we're really pleased with the results. We thought it was a strong quarter of execution. The over performance that we saw during Q3 was largely due to these significant projects that we talked about that we derisk from our forecast we saw several of those deals closed in Q3.
Speaker Change: One of those being a deal that was pushed from Q2.
Speaker Change: So therefore, the over performance of what we saw was largely due to the fact that we saw many of those large deals being closed.
Speaker Change: That's great context.
Speaker Change: And great to hear that these are strategic deals are coming coming over the line.
Wanted to my follow up question, there was around security and some of your comments around.
Speaker Change: 2025 being the year.
Speaker Change: It's hard to go from.
Speaker Change: We have to sort of build that pipeline and so in terms of what youre seeing right now.
Speaker Change: To give you that confidence that 2025 will be.
Speaker Change: The year four.
Speaker Change: We have more material contribution from security.
Speaker Change: What are the proof points that youre seeing right now that gives you that confidence on the security side. Thank you very much.
Hey, Sanjay this is shlomi.
Speaker Change: Security is being part of all big deals that we secured in Q3.
Speaker Change: And as we reported those are our strategic customers. So the sales cycle took longer than expected, but then when we when we want this deal that was sizable.
Speaker Change: It was triggered by cloud and security very much aligned with our strategy.
Speaker Change: When we are looking at the pipeline they are being very cautious about it and derisking. It we see more opportunities that combine cloud growth and security and as Lee mentioned it does now coupled together on all of the big platform. This.
Speaker Change: So that gave us the confidence that we are getting into 2025 with the same momentum we created.
Speaker Change: Thank you for the context, let me.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Julian <unk> from JP Morgan.
Speaker Change: Your line is open.
Speaker Change: Oh, great. Thank you for taking the questions and congrats from me as well.
Speaker Change: Shlomi just wanted to ask you are seeing on the security thread a little bit more.
Speaker Change: You have a lot of deals that are kind of coming for came for renewal coming front in Q2 Q4.
Speaker Change: That had kind of a big security component signed about a year ago. There were some introductory pricing involved Linda one asking us Q what is kind of the customer behavior in those deals as they are coming for renewables.
Speaker Change: Okay is it possible to kind of understand the conversion rates.
Speaker Change: Of those deals.
Speaker Change: Turning into bigger security deals.
Speaker Change: Way to understand kind of the uplift that you're seeing on the ACB sites.
Speaker Change: Hi, pendulum. This is Ed I'll go ahead and start with that so we went general announcement of the security in the second half of last year and as you mentioned, we did a lot of introductory pricing those are now coming up to renewals and we're starting to see the adoption of those and expansion of seats on those customers. The focus is.
Speaker Change: Really been on these large projects these migration in large projects and where we're seeing sizable deals in terms of the number of seats in security and those are what's the leading most of these projects that we talk about these projects. Once we have a proof of concept we have a win in terms of <unk>.
Speaker Change: No they're committed to Jay fraud, the timing of those projects are still uncertain. That's why we're de risking those.
Speaker Change: And if I may add pendulum. Thank you for the question.
Speaker Change: What what we.
Speaker Change: Designed into the offering is that.
Speaker Change: <unk> security <unk> and now <unk> time.
Speaker Change: Bob.
Speaker Change: Of the enterprise <unk> and enterprise plus subscription as an add on.
Speaker Change: So what we see is not only that the introductory prices gave us.
Speaker Change: Kind of the runway that we needed in order to penetrate the market and to displace other products, but also to consolidate our customers around the platform play and not just security as an add on.
Speaker Change: Yep understood one follow up for Ed I know youre not really sorry.
Speaker Change: And when you think about train 25, but I wanted to ask you how should we think about the puts and takes ADR youre exiting at about 17, 18% Roe.
Speaker Change: It seems like the macro environment is still not kind of green lights has us now on the other hand, you have seemed like build a big <unk> base that probably gives you more visibility and then there is the security trend how should we kind of.
Speaker Change: Thinking about 'twenty 'twenty five as we.
Speaker Change: Think about our models.
Speaker Change: Yes. Thank you for your comments and question on that pendulum, we're not at the moment, commenting on 2025 as we normally do we will do that at the end of the fiscal year and during our fourth quarter, but one comment I would like to make is that we're being more conservative in the way that we are.
Speaker Change: Building, our outlook and as we build our.
Speaker Change: Our overall guide.
Speaker Change: Guidance going forward.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Mike Chico's from Needham.
Speaker Change: Your line is open.
Speaker Change: Hey, guys. Thanks for taking the question here.
Speaker Change: And I just wanted to circle up on on two components.
Speaker Change: Clearly first closing out the point from pendulum, but.
But I know that you are talking about how you are being more conservative in building this guidance.
On the ground up going forward.
Speaker Change: So is that a comment as it relates to where we stand today, because I know you've obviously.
Speaker Change: A signal that youre more cautious and de risking for these large cloud migrations or is there potential for incremental prudence to be introduced.
Speaker Change: Hi, Mike This is swamy.
Speaker Change: We are we.
Speaker Change: We are looking at Q3, we are very pleased very strong very strong delivery on the quarter on all fronts. We are in.
Speaker Change: We are doing Q4, now and we Derisk our pipeline we looked at the opportunities, but we are still remain cautious because what we are seeing is that the big cloud migration. The big security deals. The big platform. These are not yet completely out of the woods. So we have to remain cautious and to deliver on a strong.
Speaker Change: 2024, we are committed to what we guide you with.
Speaker Change: But we will take the conservative approach as we communicated in the past.
Speaker Change: I appreciate that and then I guess my follow up I know it's.
Speaker Change: It's probably a secondary even admittedly maybe more of a tertiary metric, but if I look at billings and our appeal.
Speaker Change: This quarter, specifically both of those metrics were.
Speaker Change: Significantly stronger.
Speaker Change: Versus what it's been more recently.
Speaker Change: And I just wanted to get a better sense should we equate that to maybe some of the catch up in these larger deals that pushed from Q2 to Q3 or is there anything else to say.
Speaker Change: Kind of point to to help us understand those dimensions.
Speaker Change: Yeah, Hi, Mike It's Ed. Thanks for your question, Yes, and thank you for noticing that it was a very strong quarter and much of that is the contribution that we saw in these very large deals and in addition to that when you start to look at <unk>. The fact that now we are starting to see many of these deals be multiyear deals.
Speaker Change: So that's taken into consideration obviously in the <unk> as well.
Speaker Change: I mentioned.
Speaker Change: My previous call that some of those sizable deal debt.
Speaker Change: Kind of pushed from the second quarter to the third and may be some will be pushed into future our sizable not only because of the potential but also because of this strategy strategic play that our team is working according to and if the deal can be larger.
Speaker Change: And it requires me to wait a bit more but to bring a multi deal multi cloud multi technologies in a completely different size, we will wait and we will deliver and what you're seeing the IPO as a result of that exact spread strategy.
Speaker Change: Yeah.
Speaker Change: Great. Thank you very much guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Ryan Macwilliams from Barclays.
Your line is open.
Speaker Change: Thanks for taking the question.
Speaker Change: Just on the cloud side, how would you say macros currently impacting you used to do at this point and you noticed any linearity for cloud consumption throughout the quarter like maybe getting better towards the end of the quarter or since <unk> <unk>, sorry to hear about how those usage trends are going.
Speaker Change: Hey, Ryan this is shlomi. Thank you for joining the call.
Speaker Change: Listen we see in our pipeline.
One of our biggest customers still planning on migrating to the cloud.
Speaker Change: But it is not ready yet to be executed in full steam ahead.
Speaker Change: Proof of concepts are being made.
Speaker Change: <unk> has been chosen.
Speaker Change: Deals are being negotiated not only with us but also on the marketplace. It takes a bit longer. This is why our approach about cloud migration.
Speaker Change: Is more conservative than it used to be the path. The second thing is that these customers. If they are customers are not prospects.
Speaker Change: I'm not investing in <unk>, while planning the move to the cloud and that kind of.
Speaker Change: Doubleclick.
Speaker Change: So on what happen until they decide to kind of shift gears and start to move to the cloud and we will walk we will partner with them until they will be ready, but that takes a bit longer in today's muscle.
And just to follow up on that migration point is there any way to further incentivize those migrations like maybe taking more price on the self hosted side and let's just say the macro does become clear in the fourth quarter.
Speaker Change: Are these migrations ready to go like could you activate more quickly to the cloud and they can accelerate their planning to moving over.
Speaker Change: Sure.
Speaker Change: Quarter migration process for me.
Speaker Change: Yes, that's a very good point.
Speaker Change: When we speak about the incentive you don't punish youll customers that allow struggled with today's Michael by raising the price on the self Austin.
Speaker Change: Unless you don't want to partner with them in the future but.
Speaker Change: But we will think as we do every year about the pricing for the self hosted solution next year and that might motivate our future migrate to the cloud those that are currently in the pipeline. We are partnering with them to make sure that we accomplish at full successful migration.
Speaker Change: That will not only lead to the migration per se, but also a cohort that will show year over year growth as they keep using our platform.
Speaker Change: And so it makes sense. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Kimberly <unk> from Canaccord.
Speaker Change: Your line is open.
Kimberly: Hi, congrats on the quarter. Thanks for taking my question.
Speaker Change: I want to start with cloud growth.
Speaker Change: 40% growth on the year I think that implies.
Speaker Change: Some pretty significant acceleration in Q4, and then you called out a couple of things a full quarter of large scale ones in Q3 annual customer commitment and in smaller migrations to the cloud is there any way to sac.
Speaker Change: Rank those and then I guess as a follow up.
Speaker Change: Is there any sort of consumption true up expected similar to last Q4. Thanks.
Speaker Change: Hi, <unk>. This is Ed thanks for your question.
Speaker Change: There's no way really to stack rank those those are the three contributing factors to what we see as we move into Q4.
Speaker Change: Cloud usage, so far has been kind of consistent with what our expectations had been in terms of the sequential growth.
Speaker Change: Europe when you look at it last year compared to this year I want to remind everybody first off that we had a onetime benefit in Q4 of 2023, we don't anticipate a similar level.
Speaker Change: A true up onetime benefit during Q4 of same time this year.
Speaker Change: But on a sequential when you remove that onetime benefit it will be somewhere around the same range from a dollars perspective.
Speaker Change: And then overall I think what Youll see is that the execution in terms of our strategy around cloud has still delivered very strong cloud growth in a tough budgetary environment.
Speaker Change: Okay. Thank you for just for me.
Thank you.
Speaker Change: Our next question comes from the line of shrink <unk> from Baird.
Speaker Change: Your line is open.
Speaker Change: Hey, guys. Thanks for taking my question and great execution.
Speaker Change: You mentioned, it's no longer question of if companies will adopt <unk>.
Glenn: But glenn.
Speaker Change: Of course, you showcased on rest of logo that bump up in <unk> I would say larger deals are showing up in <unk>.
Speaker Change: Just curious what the customer is still an early stage of kind of decline These advanced securities.
Speaker Change: How are you kind of helping them overcome.
Speaker Change: The deployment integration bottlenecks.
Speaker Change: Our leading to kind of ramp up the sales marketing efforts or are you.
Speaker Change: Rarely are pushing hard on creating support about kind of deeper integration into the downcycle ops workflows just curious.
Speaker Change: Both.
Speaker Change: Quick follow up.
Speaker Change: Well high shrink I hope that I heard the question right, you're asking about our strategy of how to take.
Speaker Change: These technologies that was some of it to innovated in.
Speaker Change: Announced that swamp up how we take it to the market.
Speaker Change: I guess that this is what you asked.
Speaker Change: Our strategy is that the <unk> platform will consolidate all of the solutions that you need around software supply chain management with one platform. Therefore, the end to end security from the creation of the code all the way to production, including <unk>.
Speaker Change: <unk> was announced its lump up and therefore the MLR.
Speaker Change: <unk> technology following the acquisition of quark.
Speaker Change: To provide our customers the ability to use the same platform for MLR to not just Dev ops and depth of cops.
Speaker Change: All of these add ons are available for our customers on the enterprise accident, the enterprise class subscription.
Speaker Change: And if you all know that it will generate an upgrade and if you are there it would be.
Speaker Change: <unk> mechanism.
Speaker Change: We'll allow them to implement these technologies.
On top of the platform.
Speaker Change: Got it appreciate it very helpful and a quick follow up.
Speaker Change: And slowly.
Speaker Change: <unk>.
Speaker Change: In terms of the strategic partners.
Speaker Change: It's kind of includes the unification of the advanced security in bringing AI copilot integration.
Speaker Change: Can you give us some color in terms of this deeper integration or is it already playing are.
Speaker Change: How is it expected to play out and perhaps graduating five specifically and beyond and.
Speaker Change: And how should we think about kind of start influencing oral adoption retention.
Speaker Change: Amongst the sound percent customer base of course Upselling.
Speaker Change: And what are the key kpis that debt.
Speaker Change: We're tracking to measure that.
Speaker Change: Wonderful question. There are three actually three factors that will determine whether this partnership is as good or not right. One is the retention of our customers.
Speaker Change: Through bringing Paul speak to new customers on board and three is to generate more innovation together with with our partner some of it might be a business innovation of what we can sell together currently we are at the face of co engineering, and pushing very hard, including just a week ago. It get.
Speaker Change: <unk> universe.
Speaker Change: They get up conference that we announce more capabilities with co pilot.
Speaker Change: We are on all three fronts, Dave <unk> security and AI co pilot.
At this moment, we are not pursuing.
Speaker Change: Co sell mechanism with Microsoft we might consider it in the future together with our partners.
Speaker Change: Got it thanks, a lot appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Miller jump, which lifts securities.
Speaker Change: Your line is open.
Speaker Change: Great. Thank you for taking the questions.
Speaker Change: So as Shlomi I wanted to go back to your comments on Ryan's question earlier, you talked about cloud migration, causing some customers to kind of dragged our feet signing deals on the self managed side as well, but just looking at the topline this quarter. Our self managed was the larger driver of outperformance against our estimates.
Speaker Change: I'm trying to understand like our customers getting more comfortable staying on prem or are you, saying there is no change there.
Speaker Change: No actually if you remember me, they're what we call the last quarter of the Twilight Zone. This is this is where they are saying because they know strategically that are going to migrate to the cloud, but they don't have the blend of the business of the manager manager all even the bulb.
Speaker Change: To complete the process so while staying on this so fast did not because they chose to but because they don't have any other option they cannot invest in adopting security and adopting MLR ops in adding more service. So what happens is that they keep the business running with what they have.
Speaker Change: For years, and they are planning with us the strategic migration to the cloud we believe that this.
Speaker Change: Yes.
Speaker Change: Momentum that we saw in Q3 with the big deal.
Speaker Change: Will gone too.
The fourth quarter in 2025, but we have to be very conservative because we are not yet out of the woods.
Speaker Change: Okay.
Speaker Change: Okay. So I guess I also just wanted to double click on the consolidation opportunities that you all called out okay.
Speaker Change: In these cases are you having to wait for other vendors contracts too and to expand what the customer and if that is the case do you expect Q4 to actually have relatively more of those opportunities in the rest of the year.
Speaker Change: Consolidation is.
Speaker Change: It's a matter of what technology, we are talking about I've never seen an enterprise customer that never had a security vendor or even five or 10, covering those software supply chain and nobody just switch from one tool to another over a day not even over a year, but what we hear from the CIO.
Speaker Change: What I hear from our customers what you heard at swamp up when we have when you met our customers is that they want to consolidate they don't want to have multiple vendor they don't want to have.
Speaker Change: At technology that is compromising on how they do software supply chain security. So it would be probably in the beginning running in parallel and slowly kind of sun setting the <unk>.
Speaker Change: Competitors point solutions. This is what we hear from the market. This is being expressed very loudly by the T cells and the Ceos of our customers.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Koji Ikeda from Bank of America.
Speaker Change: Line is open.
Speaker Change: Hey, Shlomi, Hey, Ed Thanks for taking the questions just one for me and I wanted to double click here on <unk>.
Speaker Change: The reserve of the buyer into committing with J frog on a bigger scale today.
Speaker Change: And so is there something very specific in the way that Jay frog is being used or deployed within enterprises, that's driving this more reserved.
Speaker Change: Sure.
Speaker Change: And Shlomi you maybe alluded to this a little bit in your answer to another question. It sounds like there's also a component of the buyer needing to catch up a little bit with the understanding of what Jay frog is offering today to really invest in the future with J frog I'm, just trying to understand this a little bit more thanks.
Speaker Change: Thank you Koji.
Speaker Change: So what is it that we see we see that in Q3 <unk> one three of the most sizable deals ever in the company's history. This needs. We're not bond in Q3, there were born a year ago, and even more and some of our customers not only grew by doubling.
Spend on Jay fog, but by adding more technologies not just Dev ops now also <unk> and even other technologies like the connect for Iot devices.
Speaker Change: <unk>, our customers start to understand that software supply chain needs to be managed by one platform and they have to choose and.
Speaker Change: I'm very glad that they chose J, Bob what the buyer.
Speaker Change: On to your question about the buyers they start to see the <unk> budget line.
Speaker Change: Boeing and from being discussed on a VP level to a fee level board level. This is a completely different playbook and we're very very happy that we got there. This is what we saw in the pipeline. When we communicated Q2. This is what we see now but again, we would be very conservative with.
Speaker Change: What happened in the macro and with the size of the deal.
Speaker Change: Not being signed by our CEO minus four minus five but sometimes.
Speaker Change: By the board approvals themselves.
Speaker Change: Thanks Shlomi.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Andrew Sherman from TD Cowen.
Speaker Change: Your line is open.
Speaker Change: Oh, great. Thank you.
Speaker Change: Congrats on the quarter, great to hear about these big deals closing.
Wondering about Q4 pipeline and are there more of these type of big deals in the pipeline and what's your visibility into those and how have you factored in closure rates and the timing of deals there.
Speaker Change: Yes.
Jay Brown: That's obviously something that we see for few quarters right. There is no pipeline full of big deals all all Mega deals as we call it the J broad.
Jay Brown: It was both on the quarter before so the answer is yes, we see those.
Jay Brown: Sizable deals in the future quarters, as well pipeline, but we derisk the pipeline.
Jay Brown: And we are looking at every deal from the bottom up and top down we communicate with the.
Jay Brown: With our customers about the strategy, sometimes it's even our decision to push it a bit because we can win a deal now and may be missed the opportunity to add security to it. So when we strategically speak with our customers we might take a bit longer it's not only the macro it's also the.
<unk> of the adoption of the full platform so to optimize the opportunity and also to take into consideration the macro environment. We are derisking the pipeline on a daily basis as we reported before.
Jay Brown: To your question, we are very excited about what we see in the pipeline moving forward.
Speaker Change: That's great Shlomi and one more for you.
Speaker Change: On the AI right when do we think we could see that show up in revenues for you I know, we're still early but.
Speaker Change: AI by in areas are huge and.
Speaker Change: That could potentially drive more storage revenue per year, I would think quite a bit about your thoughts on that.
Speaker Change: Yes, great question.
Speaker Change: Let's make it very clear.
Speaker Change: Putting flopper side.
Speaker Change: Hi, equals models models equal binaries.
Speaker Change: If we plan the right seeds in the ground out we will see the first the question about when I wish I have an answer for you I know that all of my customers, including the paying customers for the MLR solution.
Speaker Change: At the experiments mall and most of them, even those that were brave enough to take it to production, our looking at compliance and regulation and security and adoption and scale and budget. So many open questions. There that I think it will take.
Speaker Change: A bit longer than just few quarters. When we will have more clarity. Obviously, we will included in our guidance. Currently we are investing in R&D and paving.
Speaker Change: The path for future growth with this growth engine.
Speaker Change: Excellent. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jeff Hickey from UBS.
Speaker Change: Your line is open.
Speaker Change: Great. Thanks, so much for taking just a couple of questions I wanted to ask if we could get any color on monthly customers. I think you described steadied usage patterns on the cloud side amongst committed customers last quarter, you had de risked the cloud guide this year.
Speaker Change: Partially from the monthly side are those trends that youre seeing there really consistent with where we were back in early to mid August or has there been any kind of change.
Speaker Change: From what Youre seeing internally.
Speaker Change: Yes, Thank you, Jeff I'll start and Ed will chime in.
Speaker Change: What we are strategically strategically doing.
Is.
Speaker Change: Incentive incentivize our cloud monthly users to go annually and the main reason for that is not only cost, but reducing volatility and this is what we discussed last quarter.
Speaker Change: And what we see is that the retention of our customers in the cloud this high.
Speaker Change: And we see two groups those that are ready to go annual and to become enterprise not only by the profile, but also by data usage and those that are happy with couple of thousands of dollars a year and that the platform will serve them, but I don't see them as top of funnel.
Speaker Change: This is what we do Rick.
Speaker Change: Currently we are very happy with the progress of migrating some of them to an annual base and hopefully to reduce the volatility and the true up.
Speaker Change: Movement that we had last year.
Speaker Change: <unk>.
Speaker Change: Moving on to the future we want to see more of these customers adopting more than just the Dev ops monthly solution, but also security and this will be part of our strategy for upgrades in 2025.
Speaker Change: Yes, and just to carry on with what Shlomi, saying the cloud usage for those monthly customers has been stable compared to what we saw previously and it's consistent with our expectation and those monthly customers are around 20% and have come down over time, and we expect as we can.
Speaker Change: <unk> to move forward with the strategy of moving those monthly customers to annual customers that the contribution from them, which would start to decline over time.
Speaker Change: Got it that's really helpful color and then one quick follow up and just on the net dollar retention guidance reiterating for mid teens.
Speaker Change: We're at 117, right now and that's a trailing 12 month metric.
Speaker Change: Is there anything else we should keep in mind is we're just going through the growth algorithm outside of maybe just the relative conservatism you mentioned earlier.
Yes, Jeff that's a good question I wouldn't take too much from that besides the fact that we remain very conservative in the outlook approach and thats being factored into the guidance in the mid teens that were.
Speaker Change: Projecting going forward.
Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Brad Reback from Stifel.
Your line is open.
Speaker Change: Okay, great. Thanks, very much Ed can you give us a sense of the $74 million sequential increase in <unk>, how much of that was current <unk> and versus long term.
Speaker Change: Sure we had $245 million of that is current RP O and growth on our current RP O is around 24% on a year over year basis.
Speaker Change: Great. That's Super helpful. And then last numbers question hopefully for the night.
Speaker Change: Gross margin, obviously down ticked each year each quarter. This year and I know you talked about 83 to $84 for the year, but.
Speaker Change: Looks like we'll exit less than that how should we think about that stabilizing going forward is it in the low eighties or maybe into the seventies.
Speaker Change: Okay.
Speaker Change: Yes, so what we see as we start to see more cloud revenue and a change in the mix we have a lower margin profile for cloud we continue to focus on optimization in terms of our cloud.
Speaker Change: Cost of revenue, however that as that mix shifts you would expect that gross margins would start to decline over time. This is what we saw during Q3, we had a greater mix in terms of our cloud on a year over year basis, 39% of our revenue is coming from cloud versus last year at 34% and I would expect.
Speaker Change: As we move forward and that becomes a bigger piece of our total revenue.
Speaker Change: Our gross margins would start to decline.
Speaker Change: Got it thanks very much.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jason Celaeno from Keybanc capital markets line is open.
Speaker Change: Hey, Thanks for fitting me in.
Speaker Change: Actually a free cash flow question. So now quite the last numbers question on the night.
Speaker Change: It looks like the free cash flow guidance coming up nicely by more than kind of the revenue raise just curious what's kind of leading to that.
Speaker Change: Well, what's leading to that is the fact that we closed several very very large deals is what we talked about during the quarter. So the execution during the quarter with.
Speaker Change: Yes.
Speaker Change: Three of the largest deals in the history of the company is contributing.
Speaker Change: To the free cash flow in addition to.
Speaker Change: Just a very strong collections in general we do have some customers that are multiyear that pay upfront.
Speaker Change: The timing of the free cash flow can shift from quarter to quarter.
Okay that makes sense.
Speaker Change: And then shlomi.
Speaker Change: Partnership I think you talked about being in the co innovation phase.
Speaker Change: At the moment.
Speaker Change: Curious if you can share any anecdotal top of funnel.
Speaker Change: Top of funnel metrics or anecdotal.
Speaker Change: Drivers of.
Speaker Change: For advanced security operation like what that looks today, maybe before versus before the Github partnership announcements I guess, what I'm trying to ask it.
Speaker Change: Seen some immediate pipeline our top of funnel interest from over the last couple of quarters.
Speaker Change #100: Yes, that's a good question.
Speaker Change #100: I don't think that any of our customers will buy security only because of the.
Speaker Change #100: Co engineered integration, we'd get up all the single pane of glass full security on one platform, but it's a very strong differentiator.
Speaker Change #100: And even customers that are using <unk>.
Speaker Change #100: <unk> customers that are using atlassian big bucket. Even these customers are exposed to this integration of the best of breed platform Jabil can get up and they are sensitive to it. It's also been presented that way on our pricing page as it is a feature of the differentiator for enterprise ex and enterprise plus.
Speaker Change #100: Users so I think it creates.
Speaker Change #100: Some momentum on the top of funnel, but it's not it cannot be the only reason, it's just one of the catalysts.
Okay, no that makes sense. Thank you.
Speaker Change #100: Okay.
Speaker Change #100: Thank you.
Speaker Change #101: Our next question comes from the line of Jason Ader from William Blair.
Speaker Change #102: Your line is open.
Speaker Change #103: Yes. Thank you good afternoon guys.
Speaker Change #103: Just a couple of quick ones for me.
Speaker Change #103: I just wanted to clarify did you say that you had to self managed.
Speaker Change #103: Subscription business would have a similar growth rate in Q4 as Q3.
Speaker Change #104: Did I hear that incorrectly.
Speaker Change #105: I didn't I didn't I don't believe I said that but what I would.
Speaker Change #106: Jason the way to think about it is Q4 is our highest renewal quarter. Therefore the.
Speaker Change #106: Self managed because of the upfront portion you would you would see that.
Speaker Change #106: We would get revenue contribution.
Speaker Change #106: In Q4, we expect that the <unk>.
Speaker Change #106: Self managed growth will be basically in line with what we've seen over the last few quarters.
Speaker Change #107: Okay, I'm, just trying to square that because.
To get to a 40% growth in cloud for.
Speaker Change #107: For the full year.
Speaker Change #107: That would assume around 48 million.
Speaker Change #107: Cloud managed subscription.
Speaker Change #107: In Q4, which means that self managed would have to be down somewhat sequentially.
Speaker Change #108: And 8% growth year over year, which would be a much lower growth rate than what even double digit growth rate in self manage unless I'm missing something like with licenses with licensees are way down in Q4, but otherwise the math just doesn't work so I'm trying to figure that out.
Speaker Change #109: Yourself yourself managed will be around the same rates, maybe up or down a percentage point most likely down.
Speaker Change #110: Okay, but then you can't get to 40% for the year on cloud.
That's the point.
Speaker Change #110: It's just the math doesn't work with the guidance you gave of $114 million midpoint guidance.
Speaker Change #111: So maybe we could take this offline with.
Speaker Change #111: Demand for <unk>.
Speaker Change #111: We guided to around 40% for the year.
Speaker Change #111: Okay.
Speaker Change #111: It just we won't if your growth rate and self managed.
Speaker Change #111: As close to the growth trading Q3 year over year.
Speaker Change #111: Cloud number we will not get to a 40% growth that will get you to like 38 for the year I guess I'm just telling you that's the math.
Speaker Change #112: Yes, that's correct, it's around 40% and we will talk to you. After the call. We could we can help you with that but it's around 40% for the full year.
Speaker Change #112: Okay.
Speaker Change #113: It sounds like it's going to be below 40%.
Speaker Change #114: Jason I think we can take it as a follow up.
Our our guidance for the street is 40% on the cloud to sell fostered with no significant change.
Speaker Change #114: This is what we guided this is what we think the pipeline then we can do the math later, if you want that.
What we committed.
Speaker Change #115: Okay, Alright, and then just.
Speaker Change #115: On the net retention.
Speaker Change #116: I know you said sort of mid teens exiting the year right.
Speaker Change #117: I just wanted to get a sense if you believe.
Speaker Change #116: Yes.
Speaker Change #118: Net retention first of all you think it's going to be stable with Q3 and Q4.
Speaker Change #119: And then what are the puts and takes kind of going forward.
Speaker Change #120: And where do you expect that to get to let's say in a year I mean is there a specific target in your mind.
Speaker Change #120: And then have you get there like what <unk>, what drives that to that target.
Speaker Change #121: Yes. So we're focus for this call on Q4, and the full fiscal year and what we see going into Q4 as stabilization of our net dollar retention rate around the mid teens.
Speaker Change #122: As predicted.
Speaker Change #123: Got you and then I know youre, not giving guidance, but what are the puts and takes.
Speaker Change #124: What would drive.
Speaker Change #124: Net dollar retention higher would it be security.
Speaker Change #125: Would it be some of these larger renewals.
Speaker Change #126: I'm just trying to again I'm, just trying to understand like what they have done.
Speaker Change #126: So Jason net dollar retention net dollar retention.
Speaker Change #127: Triggered by security add ons and cloud migration.
Security items and congregation okay. Thank you.
Speaker Change #128: Thank you due to time constraints, we will end the Q&A session here I will now turn the call back over to Shlomi for closing remarks.
Yes, hi, guys.
Shlomi: We had a very strong quarter. This is not happening by itself I have 1700 heroes working for <unk> resilience smart and committed to deliver a very strong 2024, and we will deliver we want to thank you for joining us here today and from the swamp made the progress.
Speaker Change #129: Take care.
Speaker Change #130: This concludes today's call. Thank you for joining you may now disconnect.
Speaker Change #129: Yes.
Speaker Change #129: [music].