Software development tools maker JFrog (NASDAQ:FROG) reported Q1 FY2023 results that beat analyst expectations, with revenue up 25.3% year on year to $79.8 million. The company expects that next quarter's revenue would be around $83 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. JFrog made a GAAP loss of $20.8 million, down on its loss of $19.7 million, in the same quarter last year.
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JFrog (FROG) Q1 FY2023 Highlights:
- Revenue: $79.8 million vs analyst estimates of $78.4 million (1.81% beat)
- EPS (non-GAAP): $0.06 vs analyst estimates of $0.03 ($0.03 beat)
- Revenue guidance for Q2 2023 is $83 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $343.5 million at the midpoint
- Free cash flow was negative $1.4 million, down from positive free cash flow of $6.42 million in previous quarter
- Net Revenue Retention Rate: 124%, down from 128% previous quarter
- Customers: 785 customers paying more than $100,000 annually
- Gross Margin (GAAP): 76.9%, down from 78.2% same quarter last year
“JFrog's first quarter revenue and non-GAAP profitability exceeded our guidance range, driven by improved usage of our cloud services, solid execution by our direct enterprise sales team, and a growing co-sell motion with our partners amidst a challenging macro environment,” said Shlomi Ben Haim, JFrog CEO and Co-founder.
With the name chosen due to the founders' fondness for frogs, JFrog (NASDAQ:FROG) provides software as a service platform that makes developing and releasing software easier and faster, especially for large teams.
As Marc Andreessen says, "software is eating the world" which means the volume of software produced is exploding. But building software is complex and difficult work which drives demand for software tools that help increase the speed, quality, and security of software deployment.
Sales Growth
As you can see below, JFrog's revenue growth has been very strong over the last two years, growing from quarterly revenue of $45.1 million in Q1 FY2021, to $79.8 million.
This quarter, JFrog's quarterly revenue was once again up a very solid 25.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.27 million in Q1, compared to $4.56 million in Q4 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates JFrog is expecting revenue to grow 22.4% year on year to $83 million, slowing down from the 39.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.5% over the next twelve months.
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Product Success
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
JFrog's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 124% in Q1. That means even if they didn't win any new customers, JFrog would have grown its revenue 24% year on year. Despite it going down over the last year this is still a good retention rate and a proof that JFrog's customers are satisfied with their software and are getting more value from it over time. That is good to see.
Key Takeaways from JFrog's Q1 Results
With a market capitalization of $1.86 billion JFrog is among smaller companies, but its more than $447.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was great to see that JFrog’s rate of new contract wins is accelerating. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was less good to see the deterioration in revenue retention rate. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 4.75% on the results and currently trades at $18.51 per share.
Should you invest in JFrog right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.