JFrog (NASDAQ:FROG) Beats Q2 Sales Targets But Contract Wins Slow Down

Full Report / August 02, 2023

Software development tools maker JFrog (NASDAQ:FROG) beat analysts' expectations in Q2 FY2023, with revenue up 24.1% year on year to $84.2 million. The company also expects next quarter's revenue to be around $87.5 million, roughly in line with analysts' estimates. JFrog made a GAAP loss of $15.5 million, improving from its loss of $23.8 million in the same quarter last year.

JFrog (FROG) Q2 FY2023 Highlights:

  • Revenue: $84.2 million vs analyst estimates of $83 million (1.41% beat)
  • EPS (non-GAAP): $0.11 vs analyst estimates of $0.05 ($0.06 beat)
  • Revenue Guidance for Q3 2023 is $87.5 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year of $344.5 million at the midpoint
  • Free Cash Flow of $16.2 million is up from -$1.39 million in the previous quarter
  • Net Revenue Retention Rate: 120%, down from 124% in the previous quarter
  • Customers: 813 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 78.1%, in line with the same quarter last year

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.

Typically any software built these days uses a large number of reusable components that provide functionalities developers don’t want to spend time building themselves. JFrog provides a central storage that ensures that everybody on the engineering team is using the same version of the components, and automates testing, compliance review and deployment of the new code.

For example, when developing an enterprise app, whenever remote teams collaborate with other team members in the local office using multiple software tools, all team members can get access to the right piece of code and software updates all the time using Jfrog’s universal software repository. This ensures smooth application development from start to finish.

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.

The company is competing with GitHub, which is owned by Microsoft (NASDAQ:MSFT), and private companies like GitLab and Sonatype.

Sales Growth

As you can see below, JFrog's revenue growth has been over the last two years, growing from $48.7 million in Q2 FY2021 to $84.2 million this quarter.

JFrog Total Revenue

This quarter, JFrog's quarterly revenue was once again up a very solid 24.1% year on year. On top of that, its revenue increased $4.35 million quarter on quarter, a very strong improvement from the $3.27 million increase in Q1 2023. This is a sign of acceleration of growth and great to see.

Next quarter's guidance suggests that JFrog is expecting revenue to grow 21.5% year on year to $87.5 million, slowing down from the 34.1% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 21.4% over the next 12 months.

Large Customers Growth

This quarter, JFrog reported 813 enterprise customers paying more than $100,000 annually, an increase of 28 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

JFrog customers paying more than $100,000 annually

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

JFrog Net Revenue Retention Rate

JFrog's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 120% in Q2. This means that even if JFrog didn't win any new customers over the last 12 months, it would've grown its revenue by 20%.

Despite falling over the last year, JFrog still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. JFrog's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 78.1% in Q2.

JFrog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, JFrog's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. JFrog's free cash flow came in at $16.2 million in Q2, up 447% year on year.

JFrog Free Cash Flow

JFrog has generated $25.1 million in free cash flow over the last 12 months, a decent 7.8% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from JFrog's Q2 Results

With a market capitalization of $3.02 billion, JFrog is among smaller companies, but its $469.8 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were happy that its revenue growth and non-GAAP operating profit outperformed Wall Street's expectations. It was also good to see JFrog improve its gross margin this quarter, even if just slightly. Guidance for the next quarter was above expectations, and the company also maintained full year revenue guidance, which is slightly above expectations. On the other hand, it was unfortunate to see a slowdown in new large contract wins and its net revenue retention rate is moving lower. Overall, this was a solid quarter for JFrog. The stock is up 2.22% after reporting and currently trades at $29 per share.

Is Now The Time?

When considering an investment in JFrog, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think JFrog is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been strong over the last two years. On top of that, its customers are increasing their spending quite quickly, suggesting that they love the product and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long-term growth from JFrog given its price to sales ratio based on the next 12 months is 7.7x. There's definitely a lot of things to like about JFrog and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

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