Software development tools maker JFrog (NASDAQ:FROG) reported Q4 FY2023 results topping analysts' expectations, with revenue up 27.1% year on year to $97.26 million. Guidance for next quarter's revenue was also better than expected at $98.5 million at the midpoint, 1.2% above analysts' estimates. It made a non-GAAP profit of $0.19 per share, improving from its profit of $0.04 per share in the same quarter last year.
JFrog (FROG) Q4 FY2023 Highlights:
- Revenue: $97.26 million vs analyst estimates of $92.85 million (4.7% beat)
- EPS (non-GAAP): $0.19 vs analyst estimates of $0.12 ($0.07 beat)
- Revenue Guidance for Q1 2024 is $98.5 million at the midpoint, above analyst estimates of $97.32 million
- Management's revenue guidance for the upcoming financial year 2024 is $426 million at the midpoint, beating analyst estimates by 1% and implying 21.8% growth (vs 24.9% in FY2023)
- Free Cash Flow of $31.98 million, up 25.9% from the previous quarter
- Net Revenue Retention Rate: 119%, in line with the previous quarter
- Customers: 886 customers paying more than $100,000 annually
- Gross Margin (GAAP): 79%, up from 77.4% in the same quarter last year
- Market Capitalization: $3.75 billion
Named after the founders' affinity for frogs, JFrog (NASDAQ:FROG) provides a 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 competes with GitHub, which is owned by Microsoft (NASDAQ:MSFT), GitLab (NASDAQ:GTLB), and private company Sonatype.
As you can see below, JFrog's revenue growth has been very strong over the last two years, growing from $59.24 million in Q4 FY2021 to $97.26 million this quarter.
This quarter, JFrog's quarterly revenue was once again up a very solid 27.1% year on year. On top of that, its revenue increased $8.62 million quarter on quarter, a very strong improvement from the $4.47 million increase in Q3 2023. This is a sign of re-acceleration of growth and great to see.
Next quarter's guidance suggests that JFrog is expecting revenue to grow 23.4% year on year to $98.5 million, in line with the 25.3% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $426 million at the midpoint, growing 21.8% year on year compared to the 24.9% increase in FY2023.
Large Customers Growth
This quarter, JFrog reported 886 enterprise customers paying more than $100,000 annually, an increase of 38 from the previous quarter. That's in line with the number of contracts wins we've observed over the last year, suggesting that the company can maintain its current sales momentum.
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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 119% in Q4. This means that even if JFrog didn't win any new customers over the last 12 months, it would've grown its revenue by 19%.
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 79% in Q4.
That means that for every $1 in revenue the company had $0.79 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 $31.98 million in Q4, up 398% year on year.
JFrog has generated $72.17 million in free cash flow over the last 12 months, a solid 19.8% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from JFrog's Q4 Results
We were also excited its revenue outperformed Wall Street's estimates. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 11.8% after reporting and currently trades at $41.5 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.
There are several reasons why we think JFrog is a great business. While we'd expect growth rates to moderate from here, its . Additionally, its customers are increasing their spending quite quickly, suggesting they love the product, and its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long-term growth from JFrog given its price-to-sales ratio based on the next 12 months is 9.3x. And looking at the tech landscape today, JFrog's qualities stand out, we think that the multiple is justified and we still like it at this price.
Wall Street analysts covering the company had a one-year price target of $37.58 per share right before these results (compared to the current share price of $41.50).
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