JFROG LTD. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year
ended
Overview
JFrog's vision is to power a world of continuously updated, version-less
software-we call this
We provide an end-to-end, hybrid, universal DevOps Platform to achieve Continuous Software Release Management, or CSRM. Our leading CSRM platform enables organizations to continuously deliver software updates across any system. Our platform is the critical bridge between software development and deployment of that software, paving the way for the modern DevOps paradigm. We enable organizations to build and release software faster and more securely while empowering developers to be more efficient.
We have designed our subscription structure and go-to-market strategy to align our growth with the success of our customers. Our business model benefits from our ability to serve the needs of all customers, from individual software developers and IT operators to the largest organizations, in a value-oriented manner. All references to our customers included in this Quarterly Report on Form 10-Q refer to paying customers.
We generate revenue from the sale of subscriptions to customers. All of our
subscription tiers are available for self-managed deployments, where our
customers deploy and manage our products across their public cloud, on-premise,
private cloud, or hybrid environments, as well as JFrog-managed public cloud
deployments, which we refer to as our SaaS subscriptions. Due to ease of use,
none of our subscriptions require the use of professional services. For the
three months ended
Our self-managed subscriptions are offered on an annual and multi-year basis,
and our SaaS subscriptions are offered on an annual and on a monthly basis. For
the three months ended
We have an unwavering commitment to the software developer and IT operator communities, and show this commitment by offering varying forms of free access to our products in addition to the paid subscriptions described above. This free access takes the form of free trials, freemium offerings, and open source software, and helps generate demand for our paid offerings within the software developer and IT operator communities.
We had
COVID-19 Update
The COVID-19 pandemic has resulted in travel restrictions, prohibitions of non-essential activities, disruption and shutdown of certain businesses, and greater uncertainty in global financial markets. Such conditions are creating disruption in global supply
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chains, increasing rates of unemployment, and adversely impacting many industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a global economic slowdown.
As of the date of this Quarterly Report on Form 10-Q, the full impact of the COVID-19 pandemic on the global economy and the extent to which the COVID-19 pandemic may impact our financial condition or results of operations remain uncertain. Furthermore, because of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods, if at all.
We have experienced slowed growth during the COVID-19 pandemic. We expect to experience slowed growth and lower orders from our existing customers for upgrades within our platform. We have experienced and expect to continue to experience an increase in the average length of sales cycles and delays in new projects, both of which have adversely affected and could materially adversely impact our business, results of operations, and overall financial condition in future periods. The extent and continued impact of the COVID-19 pandemic on our operational and financial condition will depend on certain developments, including: the duration and spread of the outbreak; government responses to the pandemic; the efficacy of COVID-19 vaccines; its impact on the health and welfare of our employees and their families; its impact on our customers and our sales cycles; its impact on customer, industry, or technology-based community events; delays in onboarding new employees; and effects on our partners, some of which are uncertain, difficult to predict, and not within our control. General economic conditions and disruptions in global markets due to the COVID-19 pandemic and other global events may also affect our future performance.
In response to the COVID-19 pandemic, in the first quarter of 2020, we
temporarily closed all of our offices, enabled our entire work force to work
remotely and implemented travel restrictions for non-essential business. Since
the second quarter of 2020, we intermittently and partially reopened our offices
to the extent permitted by local government restrictions. In
Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Extending Our Technology Leadership
We intend to continue to enhance our platform by developing new products and expanding the functionality of existing products to maintain our technology leadership. Since our initial launch of JFrog Artifactory, we have released several additional products that together create a unified platform for CSRM.
We invest heavily in integrating our products with the major package technologies so that our products can be easily adopted in any development environment. We believe that these integrations increase the value of our platform to our customers, as they provide freedom of choice for software developers and IT operators and help avoid vendor lock-in. We intend to expend additional resources in the future to continue introducing new products, features, and functionality.
Expanding Usage by Existing Customers
We believe that there is a significant opportunity for growth with many of our existing customers. Many customers purchase our products through self-service channels and often materially expand their usage over time. Increased engagement with our products provides our support and customer success teams opportunities to work directly with customers and introduce them to additional products and features, as well as drive usage of our products across large teams and more broadly across organizations. In order for us to continue to expand usage within our existing customers we will need to maintain engineering-level customer support, and continue to introduce new products and features that are responsive to our customers' needs.
We quantify our expansion across existing customers through our net dollar retention rate. Our net dollar retention rate compares our annual recurring revenue ("ARR") from the same set of customers across comparable periods. We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last month of the quarter. The ARR includes monthly subscription customers so long as we generate revenue from these customers. We annualize our monthly subscriptions by taking the revenue we would contractually expect to receive from such customers in a given month and multiplying it by 12. We calculate net dollar retention rate by first identifying customers (the "Base Customers"), which were
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customers in the last month of a particular quarter (the "
We focus on growing the number of large customers as a measure of our ability to
scale with our customers and attract larger organizations to adopt our products.
As of
Acquiring New Customers
We believe there is a significant opportunity to grow the number of customers that use our platform. Our results of operations and growth prospects will depend in part on our ability to attract new customers. To date, we have relied on our self-service and inbound sales model to attract new customers. Prospective customers can evaluate and adopt our products through our free trials, freemium offerings, and open source software options. The costs associated with providing these free trials, freemium offerings, and open source software options are included in sales and marketing. While we believe we have a significant market opportunity that our platform addresses, we will need to continue to invest in customer support, sales and marketing, and research and development in order to address this opportunity.
Additionally, we believe our products address the software release needs of customers worldwide, and we see international expansion as a major opportunity. We have been operating and selling our products in international markets since our inception. While we believe global demand for our products will continue to increase as international market awareness of our brand grows, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that free cash flow, a non-GAAP financial measure, is useful in evaluating the performance of our business.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property and equipment. We believe this is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance sheet. Free cash flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of free cash flow are that this metric does not reflect our future contractual commitments and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our free cash flow to fluctuate in future periods as we invest in our business to support our plans for growth.
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The following table summarizes our cash flows for the periods presented and provides a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, a non-GAAP financial measure, for each of the periods presented:
Three Months Ended March 31,
2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ 8,811
(1,135 ) (1,149 )
Free cash flow $ 7,676 $ (2,398 )
Net cash used in investing activities $ (27,890 ) $ (7,887 ) Net cash provided by (used in) financing activities $ 1,282
Components of Results of Operations
Revenue
Our revenues are comprised of revenue from self-managed subscriptions and SaaS subscriptions. Subscriptions to our self-managed software include license, support, and upgrades and updates on a when-and-if-available basis. Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public cloud.
Subscription-Self-Managed and SaaS
Subscription-self-managed and SaaS revenue is generated from the sale of subscriptions for our self-managed software products and revenue from our SaaS subscriptions. For subscriptions to our self-managed software products, revenue is recognized ratably over the subscription term. For our SaaS subscriptions, revenue is recognized based on usage as the usage occurs over the contract period.
License-Self-Managed
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized upfront when the software license is made available to our customer.
Cost of Revenue
Subscription-Self-Managed and SaaS
Cost of subscription-self-managed and SaaS revenue primarily consists of expenses related to providing support to our customers and cloud-related costs, such as hosting and managing costs. These costs primarily consist of personnel-related expenses of our services and customer support personnel, share-based compensation expenses, public cloud infrastructure costs, depreciation of property and equipment, and allocated overhead. We expect our cost of subscription and SaaS revenue to increase in absolute dollars as our subscription and SaaS revenue increases.
License-Self-Managed
Cost of license self-managed revenue consists of amortization associated with acquired intangible assets.
Operating Expenses
Research and Development
Research and development costs primarily consist of personnel-related expenses, share-based compensation expenses, associated with our engineering personnel responsible for the design, development, and testing of our products, cost of development environments and tools, and allocated overhead. We expect that our research and development expenses will
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continue to increase as we increase our research and development headcount to further strengthen and enhance our products and invest in the development of our software.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses, share-based compensation expenses, sales commissions directly associated with our sales and marketing organizations, public cloud infrastructure costs associated with our free trials, freemium offerings, and open source software options, and costs associated with marketing programs and user events. Marketing programs include advertising, promotional events, and brand-building activities. We plan to increase our investment in sales and marketing over the foreseeable future, as we continue to hire additional personnel and invest in sales and marketing programs.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses, share-based compensation expenses, associated primarily with our finance, legal, human resources and other operational and administrative functions, professional fees for external legal, accounting and other consulting services, directors and officer's insurance expenses, and allocated overhead. We expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect our general and administrative expenses to increase for the foreseeable future.
Interest and Other Income, Net
Interest and other income, net primarily consists of income earned on our cash equivalents and short-term investments. Interest and other income, net also includes foreign exchange gains and losses.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of income taxes related to the
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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenue for each of the
periods indicated:
Three Months Ended March 31,
2021 2020
(in thousands)
Revenue:
Subscription-self-managed and SaaS
3,749 2,524
Total subscription revenue 45,087 32,821
Cost of revenue:
Subscription-self-managed and SaaS(1) 8,236 6,190
License-self-managed(2) 191 214
Total cost of revenue-subscription 8,427 6,404
Gross profit 36,660 26,417
Operating expenses:
Research and development(1)(3) 13,836 9,295
Sales and marketing(1)(2)(3) 19,765 14,023
General and administrative(1)(3) 13,671 5,198
Total operating expenses 47,272 28,516
Operating loss (10,612 ) (2,099 )
Interest and other income, net 360 564
Loss before income taxes (10,252 ) (1,535 )
Income tax expense (benefit) (2,357 ) 590
Net loss $ (7,895 ) $ (2,125 ) _________________________________________
(1) Includes share-based compensation expense as follows:
Three Months Ended March 31,
2021 2020
(in thousands)
Cost of revenue: subscription-self-managed and SaaS $ 762 $ 140
Research and development 1,829 766
Sales and marketing 2,723 673
General and administrative 6,436 377
Total share-based compensation expense $ 11,750 $ 1,956 (2) Includes amortization expense of acquired intangible assets as follows:
Three Months Ended March 31,
2021 2020
(in thousands)
Cost of revenue: license-self-managed $ 191 $ 214
Sales and marketing 182 182
Total amortization expense of acquired intangible assets $ 373 $ 396
(3) Includes acquisition-related costs as follows:
Three Months Ended March 31,
2021 2020
(in thousands)
Research and development $ 351 $ 347
Sales and marketing - 114Total acquisition-related costs $ 351 $ 461
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Three Months Ended March 31,
2021 2020
Revenue:
Subscription-self-managed and SaaS 92 % 92 %
License-self-managed 8 8
Total subscription revenue 100 100
Cost of revenue:
Subscription-self-managed and SaaS 18 19
License-self-managed 1 1
Total cost of revenue-subscription 19 20
Gross profit 81 80
Operating expenses:
Research and development 31 28
Sales and marketing 44 42
General and administrative 30 16
Total operating expenses 105 86
Operating loss (24 ) (6 )
Interest and other income, net 1 1
Loss before income taxes (23 ) (5 )
Income tax expense (benefit) (5 ) 1
Net loss (18 )% (6 )%
Comparison of the Three Months Ended
Revenue
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Subscription-self-managed and SaaS $ 41,338 $ 30,297 $ 11,041 36 %
License-self-managed 3,749 2,524 1,225 49
Total subscription revenue $ 45,087 $ 32,821 $ 12,266 37 %
Total subscription revenue increased
Cost of Revenue and Gross Margin
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Subscription-self-managed and SaaS $ 8,236 $ 6,190 $ 2,046 33 %
License-self-managed 191 214 (23 ) (11 )
Total cost of revenue-subscription $ 8,427 $ 6,404 $ 2,023 32 %
Gross margin 81 % 80 %
Total cost of revenue increased
Our gross margin remained relatively unchanged for the three months ended
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Operating Expenses
Research and Development
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Research and development $ 13,836 $ 9,295 $ 4,541 49 %
Research and development expense increased
Sales and Marketing
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Sales and marketing $ 19,765 $ 14,023 $ 5,742 41 %
Sales and marketing expense increased
General and Administrative
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
General and administrative $ 13,671 $ 5,198 $ 8,473 163 %
General and administrative expense increased
Share-based Compensation Expense
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Cost of revenue:
subscription-self-managed and SaaS $ 762 $ 140 $ 622 444 %
Research and development 1,829 766 1,063 139
Sales and marketing 2,723 673 2,050 305
General and administrative 6,436 377 6,059 1,607
Total share-based compensation expense $ 11,750 $ 1,956 $ 9,794 501 %
Share-based compensation expenses increased
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Interest and Other Income, Net
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Interest and other income, net
Interest and other income, net decreased
Income Tax Expense (Benefit)
Three Months Ended March 31,
2021 2020 $ Change % Change
(in thousands)
Income tax expense (benefit) $ (2,357 ) $ 590 $ (2,947 ) (499 )%
Effective income tax rate 23 % (38 )%
We recorded income tax benefit of
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through sales of equity securities and cash generated from operations. Our principal uses of cash in recent periods have been funding our operations, investing in capital expenditures, and various business and asset acquisitions.
As of
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ 8,811
$ (27,890 ) $ (7,887 )
Net cash provided by (used in) financing activities $ 1,282
Operating Activities
Net cash provided by operating activities of
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an increase of
Net cash used in operating activities of
Investing Activities
Net cash used in investing activities of
Net cash used in investing activities of
Financing Activities
Net cash provided by financing activities of
Net cash used in financing activities of
Commitments and Contractual Obligations
There were no material changes to our commitments and contractual obligations
during the three months ended
Off-Balance Sheet Arrangements
Through
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, including the anticipated impact of COVID-19. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods.
Our critical accounting policies and estimates were disclosed in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report. There have been no significant changes
to these policies and estimates during the three months ended
Recent Accounting Pronouncements
See the section titled "Summary of Significant Accounting Policies" in Note 2 of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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