Thank you for standing by, and welcome to the JFrog Q2 Fiscal 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Schreiner, Vice President of Investor Relations. Please go ahead..

Good afternoon, and thank you for joining us as we review JFrog's second quarter financial results, which were announced following market close today via press release. Leading the call today will be JFrog's CEO and Co-Founder, Shlomi Ben Haim, and Jacob Shulman, JFrog's CFO.

During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the third quarter and full year of 2022.

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 and not as of any subsequent date.

Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2021, filed with the SEC on February 11, 2022, which is available on the Investor Relations section of our website and the earnings press release issued earlier today.

Additional information will be made available in our Form 10-Q for the quarter ended June 30, 2022, 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 a measure of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Please refer to the tables in our earnings release for 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?.

DevOps, security and IoT. In our core DevOps area, we were honored to share the swampUP stage with the tech lead of the Swift project at Apple, which is the new standard for iOS developers.

Swift package management is moving from a software-centric approach to a binary-centric approach, and the team has worked closely with JFrog to develop the first enterprise-grade software package support for Swift in JFrog Artifactory.

Building on our solid foundation in JFrog Xray, we also announced new advanced capabilities for end-to-end software supply chain security.

This includes detecting malicious software packages, scanning the discovered secrets such as API keys and passwords, and infrastructure as code security scanning to detect cloud security, misconfigurations before it's set up on the cloud. This was the most consequential set of security capabilities ever announced by JFrog.

These new capabilities will be offered to customers as an additional package on top of our existing subscriptions beginning in late Q3. When we acquired Vdoo last year, we committed to delivering integration in 2022. The development and the introduction of our Advanced Security Package demonstrate the execution of that promise.

Finally, we announced integrations with ServiceNow and Microsoft teams that enhance JFrog offerings across marketplace and make JFrog solution too integrated to fail.

Both Microsoft and ServiceNow products need access to JFrog Artifactory as the repository that stores all binaries and enables full automation of the DevOps pipeline and to Xray, which secures them at all stages.

For JFrog customers, these integrations will create a DevOps environment from developers all the way to runtime with best-of-breed products that coexist and avoid vendor lock-in. Before we turn to our financial review, I would like to address the macroeconomic changes the world is now experiencing.

A downturn in the global economy requires companies to look at their business efficiency, product diversity, cash management and path to profitability. Our renewal rates in both on-prem and cloud have remained robust and continue to perform very well. In addition, our cloud revenues continue to see positive usage trends.

However, during the second quarter, we started seeing elongated sales cycles for large new business deals compared to trends we have seen in the past. We would also note that Asia Pacific, which is currently our smallest geographic region in terms of revenues has seen slower levels of DevOps adoption relative to our prior expectations.

Given our customers' view of JFrog DevOps platform as a critical component to modernize their software supply chain, we anticipate only a small potential impact on overall customer usage. We acknowledge and have accounted for the current macroeconomic headwinds emerging globally in our guidance.

We are confident that JFrog is well positioned to succeed. We believe JFrog continues to grow long-term revenue at 30% or greater, even as overall global IT budgets may be pressured during the second half of the year.

With that, I would like to turn the call over to our CFO, Jacob Shulman, who will provide an in-depth recap of our quarterly results and update you on our outlook for both Q3 and full year 2022.

Jacob?.

Thank you, Shlomi, and good afternoon, everyone. During the second quarter, total revenues were $67.8 million, up 39% year-over-year. Momentum in our cloud business continued with revenues of $19.2 million, up 68% year-over-year, driven by increased levels of customer usage and continued migration of customers from self-managed to SaaS.

In the prior year's quarter, we had stated our cloud growth had bottomed. In the [fourth] quarter, since, we have seen continued acceleration and customer adoption of our cloud solutions and JFrog DevOps platform delivered on our commitment to the market.

While we are pleased to see this continued momentum, however, we would like to remind you that our cloud business is subject to variability. We continue to believe that the baseline growth rate for our cloud business is in mid-50% range with potential upside from increased customer usage as we saw in the first half of 2022.

Self-managed revenues, often called on-prem were $48.6 million, up 31% year-over-year.

Our on-prem business continues to provide consistent growth on a year-over-year basis but the level of growth has recently slowed as the majority of new customers continue to land on the cloud and the trend of migration to cloud from the on-prem and [ adding ] hybrid solutions has accelerated.

Our success in Q2 demonstrates the value of large enterprises [indiscernible] hybrid deployments. We continue to expect a portion of new customers will continue to land with our on-prem solutions first but we recognize migration and new lands have been transitioning towards the cloud in the recent quarters.

Net dollar retention for the 4 trailing quarters was 132% in line with our prior commentary. As of the quarter end, we had 647 customers with ARR of over $100,000, up from 599 customers as of March 31, 2022, and up 56% from 415 customers at the end of the second quarter of 2021.

In addition, we grew the number of over $1 million ARR customers again in the quarter, adding 1 in this quarter equaling to a total of 17, up 42% year-over-year. As we discussed in the past, adoption of the full platform is a key factor in the increasing size of our customers.

In Q2 of 2022, 36% of total revenue came from Enterprise Plus customers up from 32% in Q2 of 2021. Now let's review the income statement in more detail. Gross profit in the quarter was $56.8 million representing a gross margin of 83.7% compared to 83.4% in the year-ago period.

We expect gross margins to remain between 83% and 84% during the second half and trend towards 80% over the long term as cloud revenues become a greater portion of total revenue. Operating expenses for the second quarter were $58.8 million or 87% of revenues, up from $39.6 million or 81% of revenues in the year-ago period.

As we noted, the second quarter will be the low point of [indiscernible], as we enacted merit increases to employees, which caused a step-up in spend in this quarter. We continue to invest strategically within R&D and build out our strategic sales and channel relationships.

Non-GAAP operating loss in Q2 was $2 million or negative 3% operating margin compared to an operating income of $1 million or 2% operating margin in the year-ago period. Non-GAAP net loss in the quarter was $2.2 million or a loss per share of $0.02 based on approximately 99 million weighted average shares outstanding.

Turning to the balance sheet and cash flow. We ended the quarter with $430.2 million in cash and short-term investments, up from $427.7 million as of March 31, 2022. Cash flow from operations was $4 million in the quarter. After taking into consideration CapEx, free cash flow was $3 million.

We continue to remain free cash flow positive and have been so in every quarter since becoming a publicly-traded company. We remain committed to accelerating our free cash flow margin towards our long-term target of 30%.

Before we turn to guidance, I wanted to add to Shlomi's comments on our view about the potential impact of global macroeconomic headwinds. Despite the macroeconomic headwinds, we are confident that the business will grow 30% or greater this year and beyond.

However, as Shlomi mentioned, we do acknowledge the changes in some geographies and slowdown in enterprise new deals approval cycle and delivered financially prudent to take additional levels of conservatism as a precautionary measure to reflect the macro impact.

We also continue to be committed to our goal, will be breakeven for the fiscal year 2022. Therefore, in order to stay aligned with our guidance, we have accelerated initiatives to improve our operational efficiencies.

For Q3, we expect revenue to be between $70.5 million to $71.5 million with non-GAAP operating profit between negative $0.5 million to positive $0.5 million and non-GAAP earnings per diluted share of negative $0.01 to positive $0.01, assuming a share count of approximately of 106 million shares.

For the full year of 2022, we are slightly increasing our revenue guidance to the range between $278.5 million and $280.5 million. Non-GAAP operating income is expected to be breakeven between negative $1 million to positive $1 million.

And non-GAAP earnings per diluted share of negative $0.01 to positive $0.01, assuming a share count of approximately 107 million shares. Now let me turn the call back to Shlomi for some closing remarks before we take your questions.

Shlomi?.

Thank you, Jacob, and Happy Birthday, my friend. And thank you, my team, JFrog employees for your steadfast dedication and high standards. Your passion leads to this success. Again, we saw that our strategic investment, platform expansion and end-to-end DevOps coverage aligned with the growing market demand.

Second quarter numbers show that JFrog is positioned well to keep the growth momentum while staying an efficient business financially. I want to thank you all for your attendance today. May the Frog be with you. And now we'll take your questions.

Operator?.

[Operator Instructions] Our first question comes from Sanjit Singh of Morgan Stanley..

Congrats on Q2. I guess I want to start the conversation around the confidence for sustaining 30% growth. Really appreciated the sort of thinking on and the commentary on what you're seeing in the macro and some of the longer [gaming] sales cycles.

But if we break it down into the drivers for 30% growth, what gives you that confidence that in a potentially tougher budget environment, you'll continue to sustain that level of growth?.

Thank you for your question. Thank you for joining us today. This is Shlomi. Regarding the macro economy changes that we are seeing as detailed in the script, we are seeing actually an increased demand for our cloud solution, more usage in the cloud coming from new customers and existing customers.

So the trend of the cloud growth is going on, has started in the second quarter of 2021. What we also see in observing is some kind of slowdown on life cycles of big deal approval, especially when it comes to major deals, big deals and a slowdown on some of the regions.

So we wanted to take some conservative approach with our guidelines, and these are the observations that we've seen so far..

I would add to that, Sanjit. First of all, we believe there is a lot of room of penetration for us in existing customers. Our expansion rates continue to be very attractive. And we see a lot of opportunities in our existing customers. For many of them, we continue to be mission critical.

So in our discussions with the customers and how they plan their future deployment of DevOps, we've seen a lot of opportunities for us to expand and maintain this revenue grow..

That's very helpful. And Happy Birthday, Jacob, as well. Hopefully, you get the chance to do something earning -- something else on earnings calls, the next go around.

My follow-up question, Shlomi, for you, is, as the market is moving more and more towards cloud, if we call this as sort of the DevOps category, what are sort of the patterns that you're seeing from customers? How are they approaching the cloud decision, right? Because you guys own a couple of important pieces of the cycle.

There's other parts of the software release cycle that maybe using other vendors. And so when customers say, okay, I'm moving to the cloud, are they thinking about doing this in a sort of different approach than they did it on-prem and meaning in terms of consolidating the number of vendors? Or are they going with the best-of-breed approach.

In your conversation with customers, how are they approaching the cloud architecture decision for this category?.

That's a very good question. And I'm sure that all the DevOps providers are [busy with this] question. What we see in the market is split between 3 different categories. First of all, most of the new [vendors] are starting to the cloud. This is where the new industry is going to, less on-prem, new customers.

What we see in the enterprise, especially with the expansion of our customers is 2 movements, a, migrating to a hybrid environment. Nobody just switching on and switching off the on-prem solution. So a hybrid environment gives them the time to migrate IT assets one by the other, by region or by team.

And the third category are those that are looking for multi-cloud solution, and then they will start with 1 cloud migration and then duplicated to a multi-cloud environment, multi-region environment. This will be a more fulfillment of the strategy of moving to the cloud.

On all 3 categories, Sanjit, what we see is that migration to the cloud is not an easy move, especially retail infrastructure. It's a heavy lifting, and I'm very happy to see that JFrog can provide them with this long runway to take it step-by-step..

[Operator Instructions] Our next question comes from Brad Reback of Stifel..

Great.

Can you hear me?.

Yes, we can hear..

Great. So a couple of quick questions.

Shlomi, as a customer migrates from on-prem to the cloud, can you give us a sense of the economic uplift you get from that?.

Yes. So migration to the cloud, Brad, usually comes with an ARR growth. And what we see in the market is that it's mainly come from data transfer. This is the 1 of the consumption units that we measure. So more data transfer in the cloud, more binary movements in the cloud between regions, between different deployments.

The second thing that we've seen is that when you move your assets to the cloud and you save on headcount that you used to employ, you now get JFrog as a service, DevOps as a service. You invest more in the asset and making sure that it's getting closer to your developers.

So what we are seeing, as also reported in the script, that the ARR growth is also because of migration from a lower subscription to the full platform in the cloud..

And I would add to that, Brad, that many times, we see when customers transition to cloud, they also add additional capabilities because they maybe did not have sufficient mobile in-house to use the full DevOps platform. So when we compare these migrations, we do see a range of upsells somewhere in the range between 20% to 80%.

It really depends on the customer use case. For example, 1 of the largest deals that we closed this quarter, we saw upsell of this large customer, 67%. That's one example..

That's great. And then, Jacob, for you, your comment on efficiencies.

Is that [indiscernible] the existing spend? Or does it also encompass slowing down hiring in the back half of the year?.

Brad, you broke up a bit.

So can you please repeat the question?.

Sure. I hope you can hear. Sorry, I'm in a tough spot. The comment on efficiencies.

Is that just slowing existing spend already? Or is it also a function of slowing hiring in the back half of the year?.

Yes. We will carefully review our hiring in strategic areas. So -- and we obviously will continue to instill our efficiencies in other areas such as cloud efficiency and other projects. But the headcount is also the growth is under review..

Our next question comes from Mike Cikos of Needham & Company..

I did want to just expand on that last point, when we were talking about those efficiencies that you guys have previously discussed.

Can you help us [ understand ] by elaborating where are those efficiencies coming from? And have those been put in place at this point? Or is that still to come?.

Yes. So in addition to a careful review of headcounts, the additional efficiencies would be our view of our cloud efficiencies. Many of initiatives to improve our cloud efficiency have already been in place, and we are seeing our gross margins on our cloud business improving quarter-to-quarter.

There is still a lot of room for us to continue to do and this is what we intend to do. We're also looking at different projects and obviously, we'll continue with highest ROI projects. And we'll review carefully what the projects maybe needs to be postponed or even stopped..

And sorry, just to further elaborate on that, like if we're talking about the initiatives to improve cloud as an example.

Like is that just you [indiscernible] better rates just as you guys continue to build scale and volume? Or is it you're optimizing your own internal infrastructure? Like can you provide some more color?.

Some of it is optimized in existing infrastructure. Some of it is maybe re-architecturing some of the infrastructure that will generate significant efficiencies. So it's a combination of different..

I would add, Mike, that when we build efficiency, obviously, we are focusing on 2 elements. One, is the growth of the company; b, is our commitment to end up the breakeven. So headcount goals is something that we review.

Our investment in our strategic features and the differentiators we create in the market is another thing, but also the relationship with the vendors just like any other companies, we are opening up every contract and see if we can optimize it. Just like any other companies, we are opening up every contract and see if we can optimize it..

That's very helpful. I really appreciate the color there. And if I could just squeeze 1 more in. When you guys are talking about the, I guess, elongated sales cycles in the current macro. I totally appreciate some of the challenges there that we've definitely heard from other companies we speak with.

But can you help us think about -- is there a difference in those cycles when you look at North America or the U.S.

versus other international markets or even between the expansions you're seeing with existing customers versus landing that new [indiscernible]? Can you help parse that out for us?.

Yes, Mike. Great question. Listen, first of all, I have to admit that I'm excited to see those very big deals coming towards our direction. I think our strategic team [indiscernible] it quarter after quarter.

So to be honest with you, those very big deals every quarter we break a record is also something that we learn about cycles of approval of this 7-digit deals. However, what we see on the mass usage, on the mass expansion on the new customers' deal, we see that if you lend with major build, let's say, a platform adoption and more.

It requires 3 level approval. This is new to the domain.

On the expansion, with customers, this is split between 2, a, if you're moving to a new strategy, let's say that you're implementing a hybrid environment, and you're not just now renewing more and taking more of the on-prem assets but you're also subscribing to the cloud, then it requires also technology C-level approval and so on.

So overall, on big deals, we see longer cycles, both on the expansion and the new business. We don't see that impact on the smaller deals. Regarding the geopolitical question you had, what we see in EMEA is very similar to what we see in North America. We don't see any kind of headwinds coming from the geopolitical situation in Ukraine.

Actually, EMEA responds to the economic changes as North America, as I mentioned before.

And in APAC, we see that the adoption of DevOps, especially in the enterprise, especially migration to the cloud is taking longer than what we expected at the beginning of the year or late last year, but it's still happening, just a different cycle that has to do with the DevOps and technology adoption and migration..

That was all very, very helpful. I really appreciate the color, Shlomi. And I'll pass on my Happy Birthday to you,, Jacob, as well..

Thank you, Mike..

Our next question comes from Jason Ader of William Blair..

Jacob, my daughter's birthday is today, too, so you're in good company. She's 21. So she can drink legally. I wanted to ask you about the security package -- the Advanced Security Package that you announced.

Maybe just elaborate a little bit on that and how it's going to be priced, which subscriptions -- sort of which tiers it will be in? And maybe what kind of uplift do you think you could get from the Advanced Security Packages?.

Jason, this is Shlomi. I'll take this question. With the security, what we call the Advanced Security Package will come, as mentioned, on top of the [indiscernible] subscriptions that we offer so far. And this is the part of the fruits that the integration of Vdoo technology, Vdoo team with the Xray team created in the past years.

If you remember, we talked about our strategic investment in security and what value can we bring to the world of software supply chain protection as the binary people. This is very unique to the market. And we see a growing trend of hackers that are coming after developers.

When hackers are coming on after developers, you need different capabilities, and this is the new package that we are releasing to the market. We shared it at swampUP. Our customers and prospects were blown by it.

We see the interest coming in the market as it is [indiscernible] and add to it the fact that we currently have 1 of the largest research team, information that we have about what is hacked already and storing in everybody's binary is something that JFrog can give as a holistic solution. Now that strengthens double-clicks on the holistic solutions.

Security is great. There are a lot of security companies in the market, a lot of them coming from Israel as well. But when you give it together with the repository, with the distribution capabilities, the security is on steering.

So we're expecting to see this addition coming as expansion in our portfolio and also offering us new opportunities in the market as we put our security capabilities..

And to sum up, I will add to that, Jason, that this package will be available to customers in late Q3. So we will know more about the contribution in Q4 updates in Q4 and we'll take it -- we'll know more once the package is on the market..

It's available as a beta program. Will be available commercially in Q3..

Okay. So it will be included in, obviously, in Enterprise Plus.

Is it going to be in pro and enterprise as an option? Or how is that going to work from a tier standpoint?.

It's going to be included in our Enterprise X, Enterprise Plus in the on-prem. And before that, it's going to be available for cloud, Enterprise X and Enterprise Plus customers..

[Operator Instructions] Next question comes from [Laurie Lee] of Bank of America..

This is Laurie on for Koji. So just a quick question on NDR. You expanded 1 point in the quarter.

Can you comment on what is the main driver for that? And also, if there are any chances that you could observe for the usage and from like -- and also tier upgrades?.

Yes, I will take that. First of all, I heard just the first portion of your question. So maybe we could repeat later on the second question. So the expansion of our net dollar retention rate comes primarily from expansion of our cloud customers.

We did see acceleration of our cloud customer goal, driven by transition to the platform and also increased usage, and that was the main contributor to the expansion of overall net dollar retention rate. And I didn't catch the second portion of the question, so I would appreciate if you could repeat that..

Yes.

Just wondering on the usage, how much is that from like existing products for the same tier versus customer operate to a different tier?.

Yes. We did see increase in the platform adoption in the cloud. It either comes from upsell of the cloud customers or migration from Enterprise Plus customers on-prem to the cloud. I don't have the exact numbers, but our overall -- our Enterprise Plus revenue continued to grow significantly today represents 36% of our quarterly revenue..

Yes.

And then just a follow-up on the previous -- talking about the longer sales cycle, has that impact on the lending ARR as well?.

No, it doesn't. Just a longer cycle of the big deals to come..

Our next question comes from Michael Turits..

This is Billy on for Michael Turits.

I just want to ask how you guys are thinking about R&D investment dollars for the year ahead? Are you more focused on the product road map and new products or more focused on enhancing the current platform offerings with integrations, enhanced capabilities, et cetera?.

Yes. So there are several areas of focus for us. First of all, security is a real focus for us. And then we know that the significant effort is [indiscernible] our first Advanced Security Package into the market. Second effort is in IoT area. We launched JFrog Connect products, and we see a lot of demand.

This product still needs to be scaled to the level of the platform with digital features. So that's the second major area of investment. And third area of investment, as I said, is making our cloud very efficient, robust business. So those are the 3 major areas of investments.

Obviously, Artifactory is our main bread and butter today, and we also want -- there's a very rich road map for improvement and an additional feature for Artifactory as well..

Our next question comes from Rob Owens..

More on the security side of things with everyone talking about a broader shifting left.

Just wondering if there's an opportunity to consolidate across a lot of these security capabilities and just what you're seeing in the market right now?.

Yes. Well, shifting left is a trend, but what we are focusing on is not just protecting the developer, but protecting the software supply chain. It comes from the developer and then end up in production and in runtime. The 1 asset that is uniquely aligned on all stages is the binary.

So since we are storing it, and hosting it for you, we can provide you a holistic solution for this whole stages in terms of security. Now shifting left is important because the majority of our users are developers themselves. So if we want to provide them with holistic solution, we also have to shift left towards that direction.

So all kind of statical analysis that the markets have enough solution, but it will be included in our solution.

All type of protecting the development environment, protecting the -- and curating the binaries the platform outside the organization will be included, but we are focusing on the [binary 360] life cycle and protected all the way from the left to the right, all the way to the production environment..

Great. And there's been a lot of news flow about larger companies lowering the number of new developers they are going to hire in this environment.

So just curious, given that dynamic, do you think you start to see that play out in deal sizes? Or on the other hand, does this really afford an opportunity given probably a more normalized pace of hiring moving forward for you to consolidate the opportunity around a lot of these fragmented categories?.

Yes. It's a good question. We see that most of the value that we provide to the market comes in the enterprise level and more specifically, as the development environment is being scaled, cloud and on-prem, by the way.

So the reason for that is that when you start to have a bigger team that needs to collaborate, needs to automate, need to distribute the multiple locations and security also need to be more efficient in all of this environment. This is where JFrog shines mainly because of the binary flows.

So while I know that it will be super-appealing and attractive for developers in a small developer's shop. We are starting with the Enterprise Plus and the Enterprise X and we will take it from there to see, observe and report to you how the adoption is right now..

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Shlomi Ben Haim for any closing remarks..

I would like to thank you for joining us today. Thank you for your time, and may the Frog be with you..

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day..