JFrog (NASDAQ:FROG) Reports Sales Below Analyst Estimates In Q4 Earnings, Stock Drops

Full Report / February 08, 2023
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Software development tools maker JFrog (NASDAQ:FROG) fell short of analyst expectations in Q4 FY2022 quarter, with revenue up 29.2% year on year to $76.5 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $78.5 million at the midpoint, or 3.07% below analyst estimates. JFrog made a GAAP loss of $23.2 million, down on its loss of $22.7 million, in the same quarter last year.

JFrog (FROG) Q4 FY2022 Highlights:

  • Revenue: $76.5 million vs analyst estimates of $77 million (0.58% miss)
  • EPS (non-GAAP): $0.04 vs analyst estimates of $0.02 ($0.02 beat)
  • Revenue guidance for Q1 2023 is $78.5 million at the midpoint, below analyst estimates of $81 million
  • Management's revenue guidance for upcoming financial year 2023 is $342 million at the midpoint, missing analyst estimates by 3.77% and predicting 22.1% growth (vs 36% in FY2022)
  • Free cash flow of $6.42 million, up 68.1% from previous quarter
  • Net Revenue Retention Rate: 128%, in line with previous quarter
  • Customers: 736 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 77.4%, down from 78.3% 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 $42.7 million in Q4 FY2020, to $76.5 million.

JFrog Total Revenue

Even though JFrog fell short of revenue estimates, its quarterly revenue growth was still up a very solid 29.2% year on year. On top of that, revenue increased $4.56 million quarter on quarter, a solid improvement on the $4.18 million increase in Q3 2022. Happily, that's a slight re-acceleration of growth.

Guidance for the next quarter indicates JFrog is expecting revenue to grow 23.2% year on year to $78.5 million, slowing down from the 41.3% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $342 million at the midpoint, growing 22.1% compared to 35.5% increase in FY2022.

Large Customers Growth

You can see below that at the end of the quarter JFrog reported 736 enterprise customers paying more than $100,000 annually, an increase of 40 on last quarter. That is a bit less contract wins than last quarter and also quite a bit below what we have typically seen over the past couple of quarters, suggesting that the sales momentum with large customers is slowing down.

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 128% in Q4. That means even if they didn't win any new customers, JFrog would have grown its revenue 28% 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.


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 77.4% in Q4.

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 have followed 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 $6.42 million in Q4, down 61.4% year on year.

JFrog Free Cash Flow

JFrog has generated $17.1 million in free cash flow over the last twelve months, a decent 6.11% of revenues. This FCF margin is a result of JFrog asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from JFrog's Q4 Results

With a market capitalization of $2.46 billion JFrog is among smaller companies, but its more than $443.2 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 good to see JFrog still deliver strong revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that JFrog's revenue guidance for the full year missed analysts' expectations and it indicates quite a significant slowdown in growth. Overall, this quarter's results were not the best we've seen from JFrog. The company is down 5.79% on the results and currently trades at $22.6 per share.

Is Now The Time?

JFrog may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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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