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JFrog's (NASDAQ:FROG) Q3 Sales Top Estimates


Full Report / November 02, 2022
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Software development tools maker JFrog (NASDAQ:FROG) reported Q3 FY2022 results that beat analyst expectations, with revenue up 34% year on year to $71.9 million. The company expects that next quarter's revenue would be around $77 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. JFrog made a GAAP loss of $23.5 million, down on its loss of $20.4 million, in the same quarter last year.

JFrog (FROG) Q3 FY2022 Highlights:

  • Revenue: $71.9 million vs analyst estimates of $70.6 million (1.88% beat)
  • EPS (non-GAAP): $0.02 vs analyst estimates of $0.00 ($0.02 beat)
  • Revenue guidance for Q4 2022 is $77 million at the midpoint, above analyst estimates of $76.5 million
  • Free cash flow of $3.82 million, up 28.9% from previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Customers: 696 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 77.9%, in line with 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 very strong over the last two years, growing from quarterly revenue of $38.8 million in Q3 FY2020, to $71.9 million.

JFrog Total Revenue

And unsurprisingly, this was another great quarter for JFrog with revenue up 34% year on year. Quarter on quarter the revenue increased by $4.18 million in Q3, which was in line with Q2 2022. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates JFrog is expecting revenue to grow 29.9% year on year to $77 million, slowing down from the 38.7% 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 28.3% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter JFrog reported 696 enterprise customers paying more than $100,000 annually, an increase of 49 on last quarter. That's in line with the number of contracts wins we are used to seeing over the last year, suggesting that the company is able to maintain its current sales momentum.

JFrog customers paying more than $100,000 annually

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 Net Revenue Retention Rate

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 130% in Q3. That means even if they didn't win any new customers, JFrog would have grown its revenue 30% year on year. Despite the recent drop this is still a great retention rate and a clear proof of a great product. We can see that JFrog's customers are very satisfied with their software and are using it more and more over time.

Profitability

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 77.9% in Q3.

JFrog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like JFrog to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that JFrog is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. JFrog's free cash flow came in at $3.82 million in Q3, turning positive year on year.

JFrog Free Cash Flow

JFrog has generated $27.2 million in free cash flow over the last twelve months, a solid 10.3% of revenues. This strong FCF margin is a result of JFrog asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from JFrog's Q3 Results

With a market capitalization of $2.45 billion JFrog is among smaller companies, but its more than $434 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 good to see JFrog deliver strong revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, there was a 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 flat on the results and currently trades at $23 per share.

Is Now The Time?

When considering JFrog, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think JFrog is a good business. We would 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 twelve months is 6.8x. There is definitely a lot of things to like about JFrog and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $29 per share right before these results, implying that they saw upside in buying JFrog even in the short term.

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