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Edited Transcript of FROG.OQ earnings conference call or presentation 11-Feb-21 10:00pm GMT

·48 min read

Q4 2020 Jfrog Ltd Earnings Call Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of Jfrog Ltd earnings conference call or presentation Thursday, February 11, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jacob Shulman JFrog Ltd. - CFO * Shlomi Ben Haim JFrog Ltd. - Co-Founder, CEO & Chairman of the Board ================================================================================ Conference Call Participants ================================================================================ * Brad Robert Reback Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst * Ittai Kidron Oppenheimer & Co. Inc., Research Division - MD * Jason Noah Ader William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications * Jon Philip Andrews Needham & Company, LLC, Research Division - Senior Analyst * Matthew Melotto Parron JPMorgan Chase & Co, Research Division - Analyst * Michael C. Vidovic KeyBanc Capital Markets Inc., Research Division - Associate * Robbie David Owens Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Sanjit Kumar Singh Morgan Stanley, Research Division - VP * JoAnn Horne Market Street Partners, LLC - Co-Founder and Partner ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for joining us, and welcome to the JFrog Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. I'll hand the conference over today to JoAnn Horne of the JFrog Investor Relations team. JoAnn, please go ahead. -------------------------------------------------------------------------------- JoAnn Horne, Market Street Partners, LLC - Co-Founder and Partner [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us as we review JFrog's fourth quarter and 2020 fiscal year financial results, which were announced following the market close via press release earlier today. Joining us will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Jacob Shulman, JFrog's CFO. During this call, we will 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 the first quarter of 2021. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements which reflect our views only as of today, not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our prospectus and our Form 10-Q filed with the SEC on September 15, 2020, and November 5, 2020, respectively, which are available in the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our annual report on Form 10-K for the year ended December 31, 2020, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as measures of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [3] -------------------------------------------------------------------------------- Thank you, JoAnn. Good afternoon, and thanks for joining us for JFrog's 2020 fourth quarter and fiscal year earnings call. This is our second earnings call as a public company, reflecting the first time we will be announcing our performance versus prior quarter's guidance. And I'm proud to say we exceeded the revenue numbers we had provided. Before we start, I'd like to take the opportunity to express my appreciation to JFrog's employees for the great job and going beyond expectations in 2020. Well done. Now I'm excited to share both our 2020 annual and Q4 results with you. Q4 was a strong finish to what has been a milestone year for JFrog. Results were driven by large customers' adoption, further expansion into the APAC region, partnerships in the ecosystem and ongoing technology innovation in the JFrog Platform. As a brief overview of the business and financials, I'm pleased to report that for the fiscal year of 2020, ending on December 31, 2020, JFrog's overall revenue grew 44% over the previous year to $150.8 million, with 133% net dollar retention for the trailing 4 quarters. In Q4, JFrog's revenue climbed to $42.7 million, a growth of 39% over the same period last year. Our multi-cloud business achieved substantial growth of 69% due to the increased demand of our consumption-based DevOps services. Our free cash flow for the fourth quarter came in at a record of $11.9 million. Despite the COVID-19 pandemic, JFrog grew significantly in 2020, successfully securing new customers while achieving remarkable retention of our installed base in all verticals and across all company sizes. This growth and demonstrated customer retention supports our belief that DevOps solutions and more specifically software packages are driving the next wave of digital transformation and innovation for modern businesses. Now I would like to talk about the past 12 months overall. 2020 was an unforgettable year for JFrog. In addition to worldwide conditions that affected all people and businesses, 2020 was monumental in the broad DevOps space. Just a year ago, in February 2020, JFrog launched the first universal, hybrid, multi-cloud, end-to-end DevOps platform with JFrog Artifactory at its core. This included both cloud and self-managed offering for our complete platform, delivering flexibility and a unified UI for the enterprise. It's in JFrog's nature not only to innovate and create categories but also to look forward to the next leaps the industry will take and the requirements of companies in those upcoming realities. We were proud to meet the challenges the community and customers reflected back to us in the continued software release management realm and what they needed not only for today but also for tomorrow's needs, specifically the need to scale seamlessly with both product and business model alignment, the need to integrate universal software package management, security scanning, software distribution and CI/CD tools. These requirements are, we believe, critical to meet the demands of modern software development organization in the cloud-native era. In March and through the year, the physical and digital effects of the pandemic crystallized DevOps and software updates as mission-critical to the business. Digital transformation was accelerated with corporate strategies around cloud migration and IT maturation placed on the front lines. As we all faced the unexpected situation in the spring and summer and a start of our COVID-19 operation plan, we were very clear with our sales and support team. You must focus on customer retention. I'm very proud to say we achieved this goal while also growing our customer base. As a demonstration of demand for end-to-end solution like the JFrog Platform, our customers' entry point also grew with new customers often joining JFrog at our higher-level subscription. This signals how mission-critical DevOps has become to the software industry. The combination in 2020 of excellent customer retention and then fueling growth through new avenues, such as the free community offering, drive our belief that 2021, while still influenced by the pandemic, will allow for continued growth in both customers' acquisition as well as expansion through our strategic sales team. Throughout 2020, we continue to invest in our people and expand our platform offerings to support the growing needs of customers who told us they were facing increased pressure to deliver more and faster in the digital age. Software innovation became the key and sometimes only competitive differentiators. Here are a few highlights. We spearheaded the FrogCare free program in the early days of the pandemic to offer cloud-based DevOps to organizations actively fighting COVID-19. We were proud to have global interest in this program from companies involved in medical research, contact tracing, equipment manufacturing and more. We doubled down on software distribution as one of the key drivers for JFrog's platform adoption. No other DevOps vendor is focused on securely delivering software packages to the edge of scale, enabling the secure, fast movement of software packages that support hybrid environment, microservices and beyond. As a binaries company, we believe there is an extensive market downstream from actual software development into distribution, and our customers are supporting this notion. This applies not only to software distribution to end users but also among development teams. We focus on productivity, even creating peer-to-peer software distribution protocols that allow global teams to stay in sync as they share software packages rapidly and effectively, in fact faster than other provider support. We launched a free community offering in the cloud to give all developers access to the JFrog Platform. This offering is proving to be a globally adopted, friction-free way to evaluate JFrog products prior to purchase and consolidation by companies. These offerings allow the first self-service way to try the JFrog Platform in the cloud of your choice, which is also providing us with new data and insight into the customer journey. The product and experience improvement driven by these data are already fueling greater customers' experiences. We also demonstrated our commitment to universality with multiple new technologies supported for both software package management and security tools. We started the beta program to test end-to-end project management tools. We enhanced usability and corporate security functions for JFrog Xray, and we expanded our integrations and certifications with companies like Atlassian, Splunk, Datadog and more. All of these innovations and evolutions are driven by our approach of listening to the user and remaining fully universal to cover the entire technology stack of a company. We must always be hybrid, multi-cloud and multi-regional to meet the flexible needs of business. We must allow our customers to release updates securely and seamlessly to achieve a versionless world, a world of liquid software. Let me be clear. This isn't about just offering development tools. JFrog is laser-focused on updating and securing all software packages and delivering them to the edge. This is the true end game for digital transformation. If you can't update software to the edge rapidly and securely, your solutions are simply not meeting the needs of the digital business. We have increased investment in Q4 that we believe bring our DevOps platform one step closer to the embedded software updates and lay the foundation for how DevOps in the IoT industry will look like in the future. To build on this a bit more, I want to reiterate why universality is so important when it comes to DevOps solutions and software package management. In fact, we see our consistent universality approach available on all subscription being followed by the industry. A few vendors are supporting only 4 to 6 technology types, with support levels sometimes being very narrow or simplistic without a reset of data to power the software package life cycle. Instead, JFrog supports approximately 30 technology types, more than any other solution in the market, while also providing rich data sets that allow automation, security and acceleration of software build and delivery. We are excited to see our approach validated with industry emphasis now being placed on managing software packages. But with JFrog, once a company is standardized, there is nowhere else for them to go to manage all of their technologies in one place. If a DevOps vendor cannot support the entire life cycle of developing, packaging, securing, orchestrating and distributing software packages, they're forcing development organizations to adopt multiple point solutions and manage countless integrations themselves. Our customers tell us these homegrown or point solutions are not sustainable in an always-on, ever-demanding world that consumes software updates. This is why we're building and innovating with the JFrog Platform to help companies deliver on their premises in a secure, reliable, scalable way that supports all of their technology choices. This is why JFrog with Artifactory at the core became the control point for development life cycle. To support this, we saw in Q4 that over 90% of revenue came from customers subscribed to our multiproduct offers that go beyond JFrog Artifactory. Just a year after the release of our unified end-to-end solution, 26% of revenue came from our platform's Enterprise+ subscription, which gives customers access to all JFrog's products. This rapid adoption is double what it was in 2019, due to the added services and value we give our high-level customers. Turning to sales. As we've discussed before, JFrog is driven by inbound, inside sales motion, allowing us to keep true to our commitment of delivering products that are in demand by developers. As such, we placed equal emphasis on exposing JFrog solutions to the new business opportunity as well as maturing our customers' base in a land-and-expand model. As a result of these efforts, we ended 2020 with 6,050 unique customers, up from 5,600 at the end of 2019. As of December 31, we had 352 customers with ARR greater than $100,000, of which 10 customers were over $1 million in ARR. We again demonstrated sustainable growth with adoption and expansion by the enterprise in the cloud, hybrid and self-hosted solutions. Alongside our inside sales team, our growing strategic sales team has already begun to build success as they standardize JFrog across our top accounts. To illustrate this, in Q4, we saw a large increase in the number of customers adopting the full end-to-end JFrog Platform. In fact, one of the largest organizations in the credit space migrated to JFrog, away from competitive mix due to the competitor's inability to scale and standardize across technologies and geographical regions. Our strategic accounting expanded to a 6-figure deal with a potential of further expansion in 2021. Overall, we saw significant growth quarter-over-quarter in adoption of our full platform cloud subscription, reflecting strong demand for hybrid, end-to-end DevOps solutions. This strongly validates our approach and signals a rapid maturation of requirements in the DevOps marketplace. For example, one of the most recognizable companies in the payment processing world recently upgraded from a lower-level subscription that was just about managing software packages to our complete platform subscription. They told us their ultimate goal was to take their projects from being managed manually at a developer level to managing the process of delivering software to the edge. They needed the complete universality, scale, security and distribution capabilities we uniquely provided, and that differentiated us from the competition. As more companies look to revolutionize their customers' experience in order to remain competitive, customers continue to look to JFrog to deliver faster. We see long time customers, including one of the largest banks in Europe, expand their subscription with us from several departments with a wide mix of subscription to a full platform standardization across the company. They tell us that we help them consolidate development environment, manage and secure open-source components, build and deliver software more quickly, and allow them to deliver the best user experience as a digital bank. But it's not just expanding customers. We have started seeing new logos landing on high-level subscriptions. In fact, one of the most recognizable companies in cybersecurity chose JFrog in Q4 with a new business contract in 6 figures as they were looking for a solution that could scale and secure the DevOps pipeline and distribute software effectively. Another large corporation, one of the largest investment banks in the world, came to JFrog to support their end-to-end DevOps requirements across hybrid and multi-cloud topologies. They found JFrog to be their partner, as the only vendor to support their broad infrastructure, and signed a net new contract in the mid-6 figures. As JFrog has moved from a single-product company to a 6-product platform, our [persona] and stakeholders continue to expand within customers' organization. We plan for -- to extend sales cycles that would come with this upmarket move, and the business drivers have corresponded with our core investment areas. Software package management, embedded pipeline automation, SecOps and distribution all aligned with our hybrid business model and a sale to generate opportunities from both the bottom-up and top-down. As a final point on sales, we continue to expand in the Asia Pacific region with huge opportunities from some of the world's largest economy. We have hired and expanded our sales and support leaders in China, Japan and India to increase the focus and expand the footprint of JFrog in these territories. I would also like to briefly address our cloud businesses. While our self-hosted and self-managed subscription business remains strong and growing, the hybrid capabilities of JFrog continue to drive cloud adoption. JFrog allowed businesses to choose where and when they want to consume services, even extending to multi-cloud topologies to deliver maximum flexibility. As a result of this flexibility and ongoing cloud migration, SaaS revenue growth has significantly exceeded self-managed solution growth for the past several quarters. Though accelerated during COVID-19, our hybrid model is part of our multiyear strategy and included the vast investment over the past 3 years. We are also driving our sales pipeline through strategic partnerships with major cloud providers. In fact, in Q4, we hosted 3-day event with AWS, Google Cloud and Microsoft Azure that explore DevOps in the modern landscape, best practices and case studies. The event attracted thousands of attendees, with the majority also registering for hands-on workshops. Our partnerships with the cloud providers continue to expand into strategic co-selling and co-marketing opportunities that we expect to drive further cloud and hybrid expansion. As an example, one of the largest cloud and IT operating companies in North America came to JFrog through our partner, AWS, with a private marketplace offer price over $0.25 million in ARR as landing -- as a landing point. We look forward to more co-selling activities with our partners to drive similar new businesses. One of our key marketing strategy to drive new businesses is to build top-of-funnel activities via the free cloud offering as well. This investment not only generate sales opportunities but also provide the users with a frictionless setup of the full platform free of charge. We're seeing growing results from this long-term strategy beginning to bear fruit in Q4. I'm excited to say we continue to see rapid adoption of this free version, but also, as anticipated, thousands of registrations are choosing JFrog, starting as users and then entering the sales funnel and beginning to convert to paying subscribers. Importantly, we haven't seen this new offering decrease the amount of demand for on-prem, downloadable trial, reflecting a well-balanced hybrid customer base. This cloud conversion is securing not just with low-level subscriptions, but we also see free users ultimately signing up for larger enterprise-wide subscription after being exposed to JFrog value. With this enterprise-scale subscription originating from the free offering and across clouds as well as geographies, we are pleased to be able to give back in support of the community as well as generate a reliable pipeline for the DevOps platform business. We are excited about the many innovations we are working on in Q1 and beyond to continue to drive evermore value, including further worldwide cloud expansion specifically into the APAC region and introducing JFrog in new cloud providers' marketplaces. Community adoption across the globe continues to be a priority for us as well. We continue to invest in tools and solutions that address the real community pain. Our roots as developers in this community drive us to always be better to serve this base, to improve and innovate our road map as we continue to work on features, integration and ecosystem improvements to enable adoption at scale. For example, in late 2020, our teams further improved the JFrog command line interface to enable easier ecosystem integrations with any developer's tool stack. We delivered partner integration that allow developers to more easily work with life cycle tools such as Atlassian, Datadog, Jenkins, agile DevOps and more. We updated developers' connection with popular cloud-based DevOps tools, such as HashiCorp. We released key updates and integrations to popular build and collaboration tools, including improved Atlassian Jira and Bitbucket integration, Splunk Observability integration and more. We are committed to support our partners and acknowledging the fact that every vendor in the DevOps ecosystem uses software package metadata, requiring tools like JFrog's Artifactory repository. We are also committed to providing developers the freedom to choose what to integrate with Artifactory as their database of DevOps. In early Q1, we further announced a formal partnership with Docker, the leader in software container technology. Phase 1 of this agreement will allow seamless access by developers to Docker Hub, the #1 container hub in the world. This partnership witnessed our commitment to seamless application development for cloud-native and microservices-based technologies. Developers all over the world can now enjoy the combined power of the best Docker registry provided by JFrog with free access for cloud users to Docker Hub as the leading center for containers. To summarize, we believe we have significant opportunities to expand our platform portfolio in 2021. Based on the data we have collected on the market demand, customers' feedback and broad market movement, we are enhancing the only package distribution solution as a major focus in 2021. Businesses clearly need a full circle of trust, making sure that software packages are not just being built but also secured, distributed and deployed all the way to on-prem. We are doubling down on security across the pipeline. Recent headlines have solidified that DevOps is the epicenter of a digital business and security decisions made at a central point have ripple effects throughout the organization. We are working to ensure that security never slows down to your company and that your pipelines are signed and secured. Just recently, JFrog Xray was announced as best DevSecOps solution as voted by the community. This award honors the best DevSecOps solution that enables security to be included earlier and continuously throughout the software development pipe cycle. We were honored to be the community's choice. We'll also continue to drive technology universalities, CI/CD innovations, cloud technology and regional expansion and ecosystem integration to ensure that the package-centric approach serves the entire organization regardless of technology preference. All of this investment and focus area will support growth throughout 2021, positioning us for scale and success as the markets recover. Because JFrog is on a mission to change the way software is being built and released, we will keep offering superior technology and superb services for dev and ops to make sure JFrog becomes the [destiny] of software development for our consumers. With that, I'd like to turn it over to our CFO, Jacob Shulman, for more detailed financial results. -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [4] -------------------------------------------------------------------------------- Thank you, Shlomi, and good afternoon, everyone. I will provide a brief overview of our fourth quarter and full year 2020 financial results and discuss our outlook for 2021, both Q1 and the full year. As a reminder, please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP measures can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished to the SEC. So let's turn to our financial results. We are pleased to have finished the year on a solid quarter. The remote work trends again drove faster growth in our cloud business. Total revenues for the 3 months ended December 31, 2020, were $42.7 million, up 39% year-over-year. Self-managed revenues, also often called on-prem, were $32.9 million, up 32%. Cloud revenues, again, grew significantly faster, up 69% to $9.8 million or 23% of total revenues compared to 19% of total revenues last year. For the full fiscal year, total revenues were $150.8 million, up 44% year-over-year. Self-managed revenues were $118.2 million, up 38%. Cloud revenues for the year were up 71% to $32.6 million or 22% of total revenues compared to 18% in 2019. Net dollar retention for the trailing 4 quarters was 133%. As of quarter end, we had 352 customers with ARR of over $100,000, up from 313 customers as of September 30, our fastest sequential increase in 5 quarters. Of this group, 10 customers had ARR greater than $1 million, adding an additional $1 million customer in Q4. At year-end, we had approximately 6,050 customers compared to approximately 5,600 customers at the end of 2019. We continue to believe COVID's most significant impact is on the length of the sales cycle. In addition, more and more customers are landing on high-level subscriptions, which also requires longer sales cycles. As Shlomi discussed, our fully integrated platform continue to differentiate JFrog in the marketplace and the recognition of that value is accelerating. In Q4, 26% of total revenue came from Enterprise+ customers, up from 13% in Q4 of 2019. For the full year, Enterprise+ customers represented 20% of total revenue, increasing from 10% at the end of 2019. Now let's review the income statement in more detail. Gross profit in the quarter was $35.2 million, representing a gross margin of 82.6% compared to 81.2% in the year ago period. For the fiscal 2020, gross profit was $124.3 million, representing a gross margin of 82.4% compared to 82.2% in fiscal 2019. During the year, we made significant investments in improving the efficiency of our operations particularly in our cloud business, which improved our margins. R&D expense for the quarter was $10.2 million or 24% of revenue compared to 22% of revenue in the year ago period. We have continued to invest significantly in R&D, including the rollout of our free tier, along with expanding the capabilities of Xray and Distribution. Sales and marketing expenses for the quarter were $16.1 million or 38% of revenue compared to 37% in the year ago period. We benefited from a number of cost-saving measures this quarter as a result of COVID, including a reduced travel budget and converting marketing programs to virtual mode. Sequentially, we saw an increase in sales and marketing largely due to costs associated with our free cloud community offering. We expect the spend on the free tier will stabilize here as we benefit from the infrastructure improvements I mentioned earlier. G&A expense for the quarter was $6.8 million or 16% of revenue compared to 14% in the year ago period. G&A reflects an increase in our public company costs. Non-GAAP operating income for Q4 was $2.2 million or a 5.1% operating margin compared to $2.3 million or a 7.4% operating margin in the year ago period. For the full year, non-GAAP operating income was $13 million or 8.6% operating margin compared to $5.9 million or a 5.7% operating margin in 2019. We continue to balance investments in growing the business and leveraging the opportunity in front of JFrog with profitability. Our target for the near future is to remain in the low to mid-single-digit operating margin. Non-GAAP net income in the quarter was $2.2 million or $0.02 per diluted share based on approximately 103.6 million weighted average diluted share outstanding. Non-GAAP net income for the full year was $13.5 million or $0.13 per diluted share based on approximately 101.3 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the year with $598 million in cash and short-term investments. Cash flow from operations was $12.8 million in the quarter. After taking into consideration CapEx, free cash flow was a record $11.9 million. For the full year, free cash flow was $25.9 million. Now let's look at how our progress in 2020 positions us for a strong 2021. For the full year, we expect revenue of between $196 million to $204 million with non-GAAP operating income between $5 million and $7 million, and an approximately 4% increase in fully diluted shares. At the midpoint of the guidance, revenue growth is approximately 33%. For Q1, we expect revenue of $44 million to $45 million with non-GAAP operating income of $0.5 million to $1.5 million and non-GAAP EPS of $0 to $0.01, assuming a share count of approximately 104 million shares. At the midpoint of the guidance, we expect growth of 36%, following on a very strong pre-COVID Q1 in 2020. Let me provide some color on the cadence of quarterly revenue growth this year. The first quarter is benefiting from the strong net dollar retention in Q1 '20. In the second quarter, year-over-year growth will be weaker as we sold lower upsells in Q2 '20, which was the first full quarter impacted by COVID. We expect the second half of 2021 will be stronger as we will benefit from a rebound in new customer additions as well as leverage investments made over the past year. Now let me turn the call back to Shlomi for some closing remarks before we take your questions. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [5] -------------------------------------------------------------------------------- Thank you, Jacob. 2020 was a challenging and unexpected year for every business, yet JFrog exceeded the guidance we had provided. We believe JFrog continues to be positioned well in the market to address the growing need of digitally rich businesses. Our success to date is a testament to our core business values. JFrog hybrid, universal DevOps end-to-end platform give companies an easy way to manage, secure, build and release software updates fearlessly and with a joyful customers' experience. As we close 2020 and move into 2021, I couldn't be more proud of the Frogs, our employees, who have taken us through an unforgettable year. The platform innovation, the journey through our IPO and their never-ending commitment to quality and success have inspired our entire team. I would like to thank our community and customers who partnered with us on this journey in 2020. We couldn't have done it without you, and we look forward to more success together. Thanks for your attention. Best wishes for a healthy new year, and may the frog be with us all. And now we'll be happy to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will come from the line of Sanjit Singh from Morgan Stanley. -------------------------------------------------------------------------------- Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [2] -------------------------------------------------------------------------------- Congrats to the team on a year of 40%-plus revenue growth. I wanted to start with the momentum you're seeing on Enterprise+. That had a big jump in the quarter. And I wanted to get a sense, Shlomi, what's sort of driving that. Did you see a benefit kind of after the SolarWinds compromise with Xray? Or is it more about Pipelines? If you could sort of unpack the momentum we're seeing in that Enterprise+ subscription, that will be a good place to start. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [3] -------------------------------------------------------------------------------- Yes. Sure, Sanjit. Great to hear you again and greeting from Israel. Thank you for your question. Actually, it's 3 different questions, and I'll try to address it one by one. Regarding the growth we see in the adoption of the Enterprise+, the one thing we see very, very impactful is the Distribution software packages' ability that we added to the platform a bit more than a year ago. Companies are not anymore satisfied with just CI/CD and security solution. They also want to make sure that software packages are reaching their destination. And with JFrog Platform, they have an embedded solution from build to secure to release their software packages. This is what we call the circle of trust. That's one of the main drivers for customers to adopt the Enterprise+ solution. The second thing that you have asked about is security and SecOps and referring to SolarWinds, and this is a very good question because we expect all of our customers to understand that in a world of software automation and software acceleration where machines are building software and bringing software from the outside world, you should secure your repositories, especially software packages that comes in all shape and types from the public market and from the internal development team. So with Xray, you can actually scan and secure your Artifactory, your repository. That's also a proxy software from the outside. It natively sits on Artifactory. Now back to the original question. When you get all 6 products under 1 subscription, the Enterprise+ subscription, which represent the platform and the full access to all of our products, obviously, this drives a lot of attention to the market. And JFrog provides an end-to-end solution with a hybrid notion so you can have it in the cloud and on-prem. So we see more and more customers are using our platform not just on their self-hosted solution but also in the cloud and multi-cloud. -------------------------------------------------------------------------------- Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [4] -------------------------------------------------------------------------------- Understood. And then if I can go back to sort of the components of growth. The dollar-based net expansion is sustaining above 130%. That's great to see. On the new customer -- on the customer base growth side of the equation, that was about 7% growth this year versus 20% last year. And obviously, that was sort of impacted by COVID. But I wanted to understand what the impact of the free offering has on your paid customer growth and whether that -- there's some sort of pent-up demand you're sort of seeding the market today to maybe drive that free-based conversion later this year or maybe next. Is that the right way to think about potential improvements on the new customer growth side? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [5] -------------------------------------------------------------------------------- Yes. So we committed -- we aimed ourselves to have a greater than 130% net dollar retention. And obviously, we exceeded that and we are very proud of the team. But one thing that we did in the management level and the highest management level in JFrog, once COVID started, we actually put together a 3 scenarios' playbook. And one of the elements that we were very clear with our sales and support team was no matter what happened, we keep our customers and we make sure that we retain our customers at whatever cost it means, whatever engagement it requires, whatever level of support it requires. We worked very hard, and this goal was achieved during the pandemic. Obviously, new logos in the first quarter of the pandemic, Q2, and the second quarter of the pandemic, Q3, had a lot of them, had some budget reviews and budget concerns. Some of them also expressed some difficulties to reach out to procurement and legal. So the sales life cycle got a bit longer. So the new logo slowdown that we see was a combination of both our focus on retaining our installed base, making sure that our net dollar retention is high as committed. And the second thing is what happened due to the pandemic. The third thing, and you mentioned it and you are very right, we launched in the end of Q3 and throughout Q4 the free tier. The free tier is very promising, providing us the insights from the customers' journey. But also, what we see is thousands of new logos starting to use JFrog full platform, exposed to all of our abilities, all of the capabilities of the platform, but now they are not limited by time. This is not a downloadable trial. This is actually a cloud-based, consumption-based free tier for them to use when we expect to see them convert as they adopt our tool and use more of our cloud services. -------------------------------------------------------------------------------- Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [6] -------------------------------------------------------------------------------- Shlomi, congrats on Q4. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [7] -------------------------------------------------------------------------------- Thank you very much, Sanjit. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Next question will come from the line of Brad Reback from Stifel. -------------------------------------------------------------------------------- Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [9] -------------------------------------------------------------------------------- Jacob, as we think about the significant growth in the SaaS product and how that's going to become a larger and larger percent of revenue going forward, how should we think about the mix change and the potential impact to gross margin from that? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [10] -------------------------------------------------------------------------------- Yes. So obviously, our cloud margins are lower than on-prem margins. Therefore, as cloud revenues represent bigger portion, we'll see some impact on our overall gross margin. We did not see that in 2020 because we did a lot of work on streamlining our infrastructure and improving our cloud margins. Our long term, we will see convergence towards about 80% gross margin. But in the short term, we will see around similar levels, margins. As we continue to grow and cloud business continue to grow, only then we will see a gradual conversion towards 80%. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question will come from the line of Jack Andrews from Needham. -------------------------------------------------------------------------------- Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [12] -------------------------------------------------------------------------------- I want to ask about the customers who have reached the $1 million threshold for you. Are there any lessons learned as you've taken a look at these customers' journeys that could be applied more broadly to your customer base? And how many customers do you think might be able to potentially reach that threshold over time? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [13] -------------------------------------------------------------------------------- Yes. Jack, that's a great question. And we build the platform, aiming to have customers at this size. We understand that DevOps and software automation is kind of driving the digital transformation, which according to any survey that we read recently is the #1 priority of a CIO. So obviously, the budget is there, the need is there, the demand is there, the pain is there, and we see more and more customers upgrading to higher subscriptions and to multiple zones. Now what will drive over $1 million PO in ARR? The #1 is a full hybrid solution not just self-hosted but also in the cloud in order to be able to provide the flexibility to the organization to push software closer to the developers and to the consumers. The #2 thing is the multiple projects that you have in a company. And when you need to consolidate that into one platform, that obviously provide benefit to the organization and a bigger opportunity for us to grow. And then the third thing is the multi-cloud solution. JFrog is the only DevOps provider that offers you not just a hybrid solution but also a multi-cloud solution so you can actually choose where and when you want to push your software to. And if JFrog have end-to-end solution that not just serves you on-prem to your thousands of developers, in this specific case of the over $1 million ARR account, and pushes to all clouds, that's obviously a great avenue for us to generate growth. -------------------------------------------------------------------------------- Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [14] -------------------------------------------------------------------------------- Appreciate that -- the perspective there. Just as a follow-up question, I wanted to ask specifically about how you're thinking around -- a little bit more about what you're doing in CI/CD in particular and how you're thinking about the opportunity of Pipelines. I mean do you view this as sort of a greenfield market? Or is there a potential displacement with other CI/CD tools that people are using today? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [15] -------------------------------------------------------------------------------- Yes. So the CI/CD -- we used to say CI/CD like it's a one market. We start to see that CI is what is closer to the developers, what we call left to Artifactory. CD is more closer to your production deployment environment, run time environment, what we call right to Artifactory. Artifactory is the control point now of every organization. And JFrog Pipelines fully embedded into the platform and natively speaks with Artifactory and Xray provide you with a few benefits over the other CI/CD tools. The first thing is that JFrog Pipeline is agnostic to any tools that you have on the CI side and integrate seamlessly with old CI tools. The second thing is that continuous deployment coming from your binaries is something that every continuous deployment solution will have to use. So instead of going to a different repository, Pipeline is natively integrated with Artifactory. Another benefit that we added to Pipeline just recently is what we call signed pipeline and -- that secure your build and secure the software delivery through the different gate. So as we see Pipeline getting more and more mature and more and more integrated to the platform, we think that it will bring new benefits to the world of CI/CD, and we'll complete the circle of trust of not only build and test but also deploy and push software packages to the on-prem. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And our next question will come from the line of Alex Kurtz from KeyBanc. -------------------------------------------------------------------------------- Michael C. Vidovic, KeyBanc Capital Markets Inc., Research Division - Associate [17] -------------------------------------------------------------------------------- This is Michael on for Alex. Congrats on the quarter. So how do you see the expansion of Artifactory server licenses and existing customers? Is it like growth sector versus landing new accounts? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [18] -------------------------------------------------------------------------------- Michael -- Alex, I think that -- I'm sorry. Michael, right? Did I get your name right? -------------------------------------------------------------------------------- Michael C. Vidovic, KeyBanc Capital Markets Inc., Research Division - Associate [19] -------------------------------------------------------------------------------- Yes, Shlomi. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [20] -------------------------------------------------------------------------------- Yes. Michael, I think that what we see now is that every organization started to understand that in the world of cloud-native, when containers are the #1 software package that every organization will use, you still use multiple technologies. We spoke about universality. We spoke about the radical universality approach that we have in JFrog. We now support over 30 different technology types, and this increases the demand and the adoption of Artifactory at the core in every organization. The second thing that is aligned completely with our technology is the fact that Artifactory is part of every subscription. From the free tier -- sorry, from the open source to the free tier, to our higher subscription, Artifactory is based at the core and every product -- every other product that we have is added on top of it with a different value. So to your question, we will see more and more adoptions of Artifactory, not just in a self-hosted solution but also in the cloud, on every cloud. -------------------------------------------------------------------------------- Michael C. Vidovic, KeyBanc Capital Markets Inc., Research Division - Associate [21] -------------------------------------------------------------------------------- Okay. Great. And I'd like to just ask one more. On the billings side, could you give any color on what helped drive the outperformance in the quarter? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [22] -------------------------------------------------------------------------------- Yes. We believe that the best metric to assess our performance is actually ARR and billings, dependent on various factors, including sometime customers enter into multiyear agreements, which actually happened in Q4. Therefore, we believe that the best KPI to assess our growth is net dollar retention and ARR. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- And our next question will come from the line Ittai Kidron from Oppenheimer. -------------------------------------------------------------------------------- Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [24] -------------------------------------------------------------------------------- Congrats on a great quarter and super-interesting speech, Shlomi. I wanted to kind of dig into Pipelines. It certainly feels like the CD side is broken. And so I think Pipelines is really -- offers a very unique opportunity. I guess I'm kind of wondering, would you -- just given the growing maturity of Pipelines and given how the market truly needs a good CD type of solution out there and given the agnostic nature of Pipelines, as you've described just a minute ago, I guess I kind of wonder if there's an opportunity do you see for selling Pipelines independently, not part of only your Enterprise+ subscription. Would you be looking to also potentially sell that product independently aggressively? Or you would just want to make that as a driver for Enterprise+? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [25] -------------------------------------------------------------------------------- Yes. Ittai, great to hear from you again. I think that you actually pointed right that the real pain that we see in the market is in the world of CD, continuous deployment. I don't want to say broken, but continuous deployment, this environment, is not yet completed. Vendors are adopting new technologies, as we speak. Kubernetes is challenging everyone. Peer-to-peer distribution is something that we just recently released, and it boosted distribution in every organization that work with our platform and powered by Pipeline. Now Pipeline is the result of an acquisition we've done 3 years ago. We acquired a company called Shippable. They built a CI/CD tool based on binaries and the metadata that binaries brings with them. We were very excited about that. And since then, we are working closely with the team that grew significantly in order to improve the integration with our platform. Now to be clear, Pipeline is available on every package, every tier of our cloud offering. The Pipeline is also part of our free tier. Pipeline is a CI/CD tool that natively sits and speaks with the Artifactory and Xray and JFrog Distribution. Now to your question about maybe offer Pipeline as a stand-alone product, maybe in the future, we will consider it. Currently, what we see, Ittai, is that the power of the platform, the end-to-end solution, what JFrog can give you, not just one security tool that scans your repository, not just as a CI/CD. To be honest, the CI world is commoditized. CD is very challenging, and it cannot come without a very powerful distribution. It cannot come without a very powerful access to the metadata of all binaries. But when it comes with this kind of assets, when it comes with this benefit, Pipeline is far more advanced than all the CD tools that you will see in the market. Pipeline comes with a vision of not just managing your automation between one gate to another but also seamlessly secure your pipeline, seamlessly push your software packages and distribute quickly to every edge. And when we look to the future, as you know, we think that DevOps journey -- the DevOps journey is not ending in the data center. It will end on the device and the edge devices. And we see Pipeline a great [catalysator] in this journey. So we might consider, in the future, selling Pipeline as a stand-alone. Currently, we see the benefit of all 6 products playing together, stronger and more valuable to all of our customers. -------------------------------------------------------------------------------- Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [26] -------------------------------------------------------------------------------- Got it. Okay. Very helpful. And then, Jacob, thanks for walking us through the cadence over the quarters, just getting all the moving pieces, but maybe you can talk about it also in the context of the net retention rate? Clearly, it's been slowly coming down here. I guess with people landing at higher tiers, how does that complicate retention rate stability? Help us think about what should we really expect from that metric as we go through these complicated year-over-year comps over the next 2, 3 year -- 2, 3 quarters? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [27] -------------------------------------------------------------------------------- Yes. Ittai, our midpoint of our guidance for 2021 implies 33% growth. So obviously, revenue growth is primarily driven by expansion of existing customers. Therefore, we'll continue to target our net dollar cash to be approximately 130% or above of that. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- And our next question will come from the line of Jason Ader from William Blair. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [29] -------------------------------------------------------------------------------- My question is what is the biggest gating factor for you in getting more customers to adopt the end-to-end platform, Enterprise+? And how important is it for you to keep building out a field sales force as you strive to increase the attach rates for Enterprise+? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [30] -------------------------------------------------------------------------------- Yes. I think that what you see in JFrog now, that we are working very hard to have first access to our new customers and existing customers, by the way, to a full platform. It is a completely different playbook to allow our customers having or running a trial on 1 product or even 2 products versus the full platform. And therefore, we've created the free tier, the free offering in the cloud, by the way, available on every cloud, on every region to expose those customers to all of our products. So what we can see is that -- the starter journey using the full platform, and we're also looking forward to convert the thousands of new users we have on the free tier as we move on. Regarding the strategic team, what you mentioned as the field team, our strategic team is focused on the top 100 customers. This is the team that we hired in order to expand our footprint within our top 100 customers. This team is already -- working already in action, already started to bring results. We mentioned some of those successes and wins in the script. The biggest companies in the world are now looking at the second wave of digital transformation. And obviously, this team can introduce them to more and more solutions coming from JFrog. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [31] -------------------------------------------------------------------------------- And Jacob, one follow-up for you. Is there any change in the average new customer ARR as you guys have more success with the bundled platform? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [32] -------------------------------------------------------------------------------- Yes. Jason, we did start to see, as Shlomi alluded to it, customers landing on high-level subscriptions. Still, majority of customers today land on entry-level subscriptions, but gradually, we will see increase in land and average ARR per new customer. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [33] -------------------------------------------------------------------------------- So that's -- it's kind of a consistent trend line you expect kind of up into the right? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [34] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- And our next question will come from the line of Rob Owens from Piper Sandler. -------------------------------------------------------------------------------- Robbie David Owens, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [36] -------------------------------------------------------------------------------- Great. Jason, you mentioned in evaluating the business, that's going to look as NRR and ARR. And I think you guys give the ARR relative to large accounts, but are you willing to offer what the overall ARR is right now and what the growth rate's been there? -------------------------------------------------------------------------------- Jacob Shulman, JFrog Ltd. - CFO [37] -------------------------------------------------------------------------------- Overall ARR met our targets, and this is the metric that we're currently not disclosing. Net dollar retention is the primary metric to assess our growth in revenue. -------------------------------------------------------------------------------- Robbie David Owens, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [38] -------------------------------------------------------------------------------- Okay. Sounds good. And then as I look at some of the international expansion that you guys are doing, that incremental sales capacity, will you follow a similar model where it's going to be more inside-sales-driven initially before you have field sales? Or are you looking to have field sales there right away? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [39] -------------------------------------------------------------------------------- It's -- we are expanding our presence and footprint in different territories and obviously work very hard with our strategic team to analyze what territories we want to penetrate first. It's a combination of the maturity of DevOps in these territories and also the potential, the size of the market. In different places like China and Japan, obviously, it's a completely different playbook in Japan. We see a lot of integration and relations that we build with the -- with larger companies that serve as system integrators. In China, it requires a lot of professional services sometimes. So we have partners in this field. And locality is also very important in these territories in terms of support language and supporting our users there. So we are coming with the same subscription and adopting some of these territories' demand, the need in order to scale our footprint in this new area. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- And our next question will come from the line of Brad Sills from Bank of America. -------------------------------------------------------------------------------- Unidentified Analyst, [41] -------------------------------------------------------------------------------- This is actually [Sherry] on for Brad Sills. Congrats on a strong end to the year. So you saw strong customer growth this quarter. So I wanted to ask if you would maybe call out any verticals, industries or geographies where you saw particularly strong adoption. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [42] -------------------------------------------------------------------------------- Yes. It's a great question. We spoke about the new territories. Obviously, Japan, China, India, Australia, the APAC territory is almost a greenfield for DevOps. The great thing about that is that while coming in late, they are adopting immediately the enterprise solution. They don't start with CI/CD or -- so they start with enterprise solution and they scale immediately. Those are 1 -- or 2 of the biggest organizations in these territories are already in touch with us, and we are in process and we see the demand there. Regarding new verticals, we believe that we should reinforce our footprint in the federal and government vertical. This requires more than just a field team or a strategic team that is expert with this vertical but also regulations that we are completing now and preparations and FedRAMP that we are in the process of completing. JFrog will exceed the ARR generated from this vertical in 2021. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- And for our last question, it will come from the line of Sterling Auty from JPMorgan. -------------------------------------------------------------------------------- Matthew Melotto Parron, JPMorgan Chase & Co, Research Division - Analyst [44] -------------------------------------------------------------------------------- This is Matt on for Sterling. I know that the net retention rate is disclosed on a trailing 12-month basis. So I was just curious, what did the net retention rate look like just in the December quarter? And have you seen the customer expansion trends improving? -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [45] -------------------------------------------------------------------------------- Yes. Matt, as discussed previously, we believe that the best metric to assess our performance is trailing 4 quarters' net dollar retention rate. We disclosed stand-alone back in Q2 only as a onetime disclosure because of -- to illustrate the COVID impact. And from now on, we'll be focusing only on trailing 4 quarter net dollar retention. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- And I'm not showing any further questions. I'd like to turn the call back over to Shlomi for any closing remarks. -------------------------------------------------------------------------------- Shlomi Ben Haim, JFrog Ltd. - Co-Founder, CEO & Chairman of the Board [47] -------------------------------------------------------------------------------- Guys, first of all, thank you so much for your attention and for taking the time to join us today. We are very happy and very pleased with the strong quarter that we shared the results with you. We wish you a great rest of the day, and may the frog be with you. Thank you very much. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.