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JFrog: Hind Legs Kicking Hard Amidst Storms In The Market
Anchored by Artifactory, JFrog is making a platform play in a fragmented DevSecOps market
Introduction: Growth Disruption
It is tough to be invested in growth companies these days. With markets tanking and multiples compressing, many are revisiting (or revising) their theses, as if such companies had all but transformed overnight into the next Blackberries. Any semblance of troubled times is viewed as an immediate invitation for Wall Street to cut target prices, and naysayers on social media to pronounce an inevitable fate of joining the corporate graveyard.
Investors – or rather, traders – are dumping former stock market darlings, like Upstart ($UPST) and Unity Technologies ($U), at the slightest signs of weakness. Lower-than-expected quarterly numbers (or worse, reduced guidance) are viewed as immediate red flags. In addition, many market participants have become hyper-focused on free cashflows, because the days of issuing convertible debt at 0% interest rate with fat conversion premiums are over.
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Pivoting to New Growth Areas: Heightened Skepticism and Rising Risk Premiums
Room for error has decreased: there are no excuses to miss street estimates, as far as the markets are concerned. Allowances to expand into new market segments to sustain hypergrowth, unless closely related to core expertise, are limited due to perceived execution risks. Strategic pivots are no longer rewarded without question. This is a true demonstration of rising risk premiums. Case in point is Netflix ($NFLX) and its recently announced plan to launch an ad-supported subscription tier. That move would have garnered enthusiasm – in terms of stock price – if it had been declared last year, like how their intention to push into gaming was initially embraced. Now, any growth plan outside of core domain expertise is met with skepticism, or in the case of Netflix, outright rejection.
JFrog – A Developer-First Company Performing Better in a Turbulent Market
One under-the-radar software name that did not benefit from pull forward demand during lockdown, but is now emerging with better numbers, is JFrog ($FROG). The company sells an end-to-end solution that automates the build-to-deploy stages of software release cycles. It counts almost 7,000 customers, and 85% of Fortune 100 companies as clients. The lynchpin of their offering is Artifactory, a market leader for software package management. Leveraging on the strengths of Artifactory, the company has been focusing on expanding its functionalities into other parts of the release workflow, including the following: testing and security (JFrog XRay); deployment (JFrog Distribution and JFrog Edge); and CI/CD (JFrog Pipelines).
JFrog Enterprise+ combines all of their functionalities into a single offering, available on the cloud via a SaaS subscription, on-premise via a self-managed license, or in a hybrid environment.
In Q1 2022, JFrog reported results that exceeded expectations. Some of the quarterly highlights include:
Instead of slowing revenue growth, JFrog topline accelerated and exceeded 40% for the first time since Q2 2020. For much of 2020 and 2021 when lockdowns forced many companies to reprioritize IT spending, upgrading solutions for software releases were not on top of everyone’s mind. Immediate needs then were to digitize workflows, facilitate remote working, and secure endpoints
JFrog’s cloud revenue growth accelerated for the third consecutive to 64%, aided by usage of its security-enhanced solutions and sales through cloud marketplaces. Management sees a baseline growth rate of 50%+ for its usage-based cloud segment. SaaS accounts for 26% of total revenue, but it is rising fast. Note that Enterprise+ only became available as a SaaS offering in Q2 2020. JFrog sees more new customers preferring to land Enterprise+ subscription directly on the cloud, adding to its SaaS momentum
$100K+ ARR cohort grew by 52%, adding 62 net new customers in Q1 2022 to a current total of ~600. Quarterly additions in the last three quarters have been above 50, a meaningful improvement from earlier periods
Total customer count is disclosed annually, and FY 2021 grew 9.9%. Management expects FY 2022 growth number to be higher
Trailing 12-month DBNR expanded to 131% (indicating a much stronger upsell motion in Q1 2022) and management reiterated its confidence that it would stay above 130%. This corroborates with JFrog’s assertion that adoption and usage of its full end-to-end solution are accelerating. Gross retention continues to be in the high 90s, proving its stickiness
FY 2022 revenue outlook was raised, albeit modestly. Management repeated that it could sustain 30%+ growth for the foreseeable future, a rare vote of confidence in a nervous market with more growth companies pulling back on forecasts, especially those that enjoyed elevated (or pull-forward) demand during 2020-2021
Balance sheet continues to be debt-free, with >$400 million of cash and cash-equivalents; JFrog is free cashflow positive
Product Roadmap Shifts Left To Seek Larger Wallet Share
JFrog is wading deeper into DevSecOps, extending its offerings to bring its software supply chain management to a wider range of use cases, including security solutions and enabling deployments for devices on the edge. Acquisitions of Vdoo and Upswift were made to increase additional capabilities and talent to build a full DevSecOps platform.
While adoption of Enterprise+ continues to rise, only about 5% of its approximately 7,000 customers are on that tier. In terms of revenue, Enterprise+ accounts for 35% of Q1 2022 total.
Note that the DevSecOps market is characterized by a high degree of fragmentation. Developers tend to adopt best-of-breed offerings for each part of the software development lifecycle, mixing and matching on a project-to-project basis.
Perhaps it is evident by examining JFrog’s average revenue statistics among its largest enterprise customers. At its first Investor Day held in February 2022, JFrog disclosed that its ~85 Fortune 100 customers represented 15% of total revenue, with an average revenue of $400,000 per customer. Fortune 500 customers (numbering around 225) accounted for 20% of the business, with an average revenue of $200,000 per customer. Given majority of JFrog’s business is still on-premise, and the price tag of a single Enterprise+ license is $115,000, one may infer that even among its enterprise clients, only a handful of licenses are purchased by each. But potential for average revenue per customer to rise is highlighted by management, as evidenced by its recent success with a telecommunication company that began with an ARR of $30,000 in 2014, and rose to $2 million in 2021.
Upmarket Motion to Induce Top-Down, Larger Deals with Emphasis on Security
Current customer decisions to deploy JFrog may be made more at the project level among developers, than by C-suite executives. This puts a limit on how large a deal size can get, even with a Fortune 100 customer. JFrog’s ambition to become a standard for DevOps processes and displace point solutions, is realizable if customers make the decisions at the top, not at project levels. Contrast this to the likes of Datadog ($DDOG) and Cloudflare ($NET). These two developer-friendly companies have their largest customers spending $10-20 million per annum each, corroborating their end-to-end platform dominance with their clients, and buy-ins from CIOs.
Accordingly, we see a recent pivot by JFrog for a more top-down heavy selling motion to push for larger deals and increased wallet share. From a bottoms-up, developer-first approach, JFrog is doubling down on partnerships and strategic alliances with major cloud providers, resellers, system integrators, and professional service providers. In addition, JFrog is building a strategic sales team to better cover its enterprise clientele.
The cornerstone to JFrog’s product strategy is security, much like how Elastic ($ESTC) – another developer-first software player undergoing massive management changes to go top-down heavy – is leaning into security to boost its platform (Search + Observability + Security) growth. JFrog’s solutions allow users to achieve control and reliability early in the software release cycles via automation of security workflows. Specifically, JFrog Xray provides security information to customers to help uncover vulnerabilities in public and private repositories. By incorporating security across the entire DevOps cycle, JFrog is positioning its binary-first platform as the secure, centralized platform to displace multiple point solutions for enterprise customers.
Such pivots, however, do not come cheap: operating expenses – particularly sales, marketing and R&D – will inflate with these recent moves. The saving grace for JFrog is, half the Fortune 500 companies and their developers are current users of Artifactory, so their (webbed) foot is already in most enterprise doors.
Will JFrog Swim Faster? Key Metrics to Watch For
It is hard to ascertain how successful JFrog will be in its quest to become an enterprise DevSecOps platform, when it is still early in its current pivots. Markets are not giving JFrog any credit for its strategy – the premium that its stock used to command has faded away with current risk-off mode. Competition in the fragmented DevSecOps market is strong as well. GitLab, a key rival, is flushed with cash and making its own pivots to provide end-to-end capabilities. JFrog is describing its security to be far more advanced and mature than Gitlab’s comparable offerings, and therefore more suited to enterprise customers. Proof, however, is in the pudding, and below are indicators to look out for in the coming quarters:
To see the key JFrog metrics to watch in coming quarters and views on current/potential valuation, click here to subscribe. It is free, and you will receive a link to a separate subscriber-only JFrog post
Crossing the chasm is not exactly an issue for JFrog, with millions of users already familiar with its products. To make the next leap into the billion-dollar revenue club, JFrog needs to get the adoption wheel spinning in a different plane simultaneously – from the top. That selling motion is an entirely different animal, and this frog may need to grow some new muscles to tackle it.
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