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Earnings Season Coming to a Close; JFrog Q2 2022 Review
Deal cycles, IT budgets and that constant "constant currency adjustment"
Written by Benjamin Tan of www.consumeyourowntechinvesting.com
Coming back to work after being away for a couple of weeks in the month of August - hence not tracking quarterly results as they were released - does not feel like I missed out on anything. Many companies that reported stellar results (Elastic, Datadog, and Cloudflare come to mind) have not seen much sustained rerating of their share prices. But those that adjusted their long-term outlook (or indicated intentions to do so) as a result of shifting macroeconomic factors and other reasons, saw massive derating. Okta is one such company that suffered in the aftermath of Q2 results. These companies will likely be trading sideways for a couple more quarters, until clarity returns to their future trajectories.
Budgets, Vanity Projects, and Hiring
Budget cuts, deal scrutiny, and more conservatism are impacting almost every sector of the economy. Inflation, rising interest rates, and overall sentiment have resulted in changes to buying behaviors, from every day purchases to corporate budgets. My friend just commented on how she wanted to save money by shopping at Waitrose - versus Liberty London - because her (floating) mortgage payments rose by significant amounts in the last few months! Many CPG and e-commerce companies slowed down marketing spend of late, since the urge to splurge among consumers has dampened, except perhaps on travels. Recent results of social media companies and Alphabet - all key beneficiaries of digital advertising dollars - corroborate with this phenomenon. The contraction is having its multiplier effect, from hiring decisions to high-concept projects getting nixed.
Wondering if Apple is still pushing ahead with its electric vehicle ambition?
Deal Cycles, IT budgets and Foreign Exchange
Specific to enterprise software - even the most mission critical offerings that customers cannot live without - some common themes in the recent most quarter include:
Longer deal cycles, especially for those six-figure or larger deals that now require more layers of approvals and negotiations
Pace of customer adds is under pressure. With customers tightening their belts and less venture funds going around, free or cheaper software options become more attractive, even if they may be inferior. Think Slack versus Microsoft Teams, as an example
Customers from sectors that benefited previously from lockdown - food delivery, e-commerce, streaming - are now seeing less business, and have since reduced forward purchase commitments to software services, including critical services like observability and cybersecurity. If business volume is down and hiring slows, there is less data to observe and accounts to protect
Non-US dollar revenues from overseas markets have reduced headline numbers due to exchange rates; more companies are emphasizing constant currency adjustments these days
In general, forward metrics like billings and remaining performance obligations from June or July quarters are slowing for many companies. Lagging indicators like revenue numbers may not yet show weakness, but they will likely follow in the coming quarters, unless the spending environment picks up considerably.
Specific Reviews of Enterprise Software Companies
I am still catching up with the latest quarterly results, but to follow up on my last article on JFrog, I shall do a Q2 review of them here first. The rest will be discussed in the coming weeks.
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JFrog: Key Metrics are Trending in the Right Direction
“Our strategic sales team, again, broke all-time records with multi-year hybrid, full platform deals signed with some of the world's leading enterprises….JFrog's success this quarter was…first, the scaling gap of the cloud, cloud migration and cloud marketplace expansion. Second, the maturation and adoption of security solution in DevSecOps domain that covers the organization software supply chain. Third, the strong validation of the binary-centric platform. And fourth, our emerging success in DevOps for IoT and connected devices”
Q2 appears to validate JFrog’s upmarket motion to induce larger deals and increase wallet share:
Continued DBNR momentum at 132%. Enterprise motion and platform adoption are gaining steam; cloud usage growth has also accelerated DBNR
Cloud revenue growth continues to gain speed. In Q2, it grew by 68% (compared to 63% reported in Q1) driven partly by cloud marketplace channels and customers' cloud migrations
$100k cohort growth accelerated to 56% (Q1: 52%)
Enterprise+ tier now 36% of total revenue (new high); management said on the earnings call: “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.”
Billings grew by 55% (Q1: 9%)
RPO grew by 45% (Q1: 33%)
JFrog also made additional disclosures in Q2. For the first time since IPO, it disclosed its gross retention to be 97%, which is similar to the 98% demonstrated in Q1 and Q2 of 2020. Additionally, it is exemplifying land and expand motions with specific customer examples:
Security remains the lynchpin in JFrog’s product strategy, positioning its binary-first platform as the premium, secure, and centralized platform to displace multiple point solutions for enterprise customers:
“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”
Buried somewhere in the earnings transcript is an update on the previously disclosed collaboration with Apple, which has the potential to unlock millions of iOS developers to use JFrog Artifactory:
“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”
Still, JFrog is not immune to macroeconomic factors. Large deal cycles are elongating and management is considering efficiency measures to maintain profitability. While JFrog is debt-free and has plenty of cash, extra prudence in this environment is still on the cards. Hiring plans are under review; some internal projects may be postponed or stopped; and the company is opening up every contract and see if costs can be optimized. JFrog did, however, reiterate its confidence to achieve 30%+ long term growth, even as overall global IT budgets may be pressured during the second half of 2022.
More earnings reviews to be published in the coming weeks. Subscribe to get them in your inbox.
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