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JFrog (NASDAQ:FROG) Posts Better-Than-Expected Sales In Q1, Provides Optimistic Full Year Guidance


Full Report / May 09, 2022
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Software development tools maker JFrog (NASDAQ:FROG) beat analyst expectations in Q1 FY2022 quarter, with revenue up 41.2% year on year to $63.6 million. Guidance for next quarter's revenue was $65.5 million at the midpoint, which is 1.13% above the analyst consensus. JFrog made a GAAP loss of $19.7 million, down on its loss of $7.89 million, in the same quarter last year.

JFrog (FROG) Q1 FY2022 Highlights:

  • Revenue: $63.6 million vs analyst estimates of $61.1 million (4.16% beat)
  • EPS (non-GAAP): $0, in line with analyst estimates
  • Revenue guidance for Q2 2022 is $65.5 million at the midpoint, above analyst estimates of $64.8 million
  • The company lifted revenue guidance for the full year, from $274 million to $277.5 million at the midpoint, a 1.27% increase
  • Free cash flow of $3.88 million, down 76.6% from previous quarter
  • Net Revenue Retention Rate: 131%, in line with previous quarter
  • Customers: 599 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 78.2%, down from 81.3% 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 say, "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 year, growing from quarterly revenue of $45 million, to $63.6 million.

JFrog Total Revenue

And unsurprisingly, this was another great quarter for JFrog with revenue up 41.2% year on year. But the growth did slow down a little compared to last quarter, as JFrog increased revenue by $4.46 million in Q1, compared to $5.53 million revenue add in Q4 2021. 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 34.6% year on year to $65.5 million, in line with the 33.5% 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 29.6% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter JFrog reported 599 enterprise customers paying more than $100,000 annually, an increase of 62 on last quarter. That is a bit less contract wins than we saw in the last quarter but quite a bit still above what we have typically seen over the last year, suggesting sales momentum is coming off slightly after a stronger quarter.

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 131% in Q1. That means even if they didn't win any new customers, JFrog would have grown its revenue 31% year on year. That is 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 78.2% in Q1.

JFrog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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.

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 $3.88 million in Q1, down 49.3% year on year.

JFrog Free Cash Flow

JFrog has generated $19.8 million in free cash flow over the last twelve months, a solid 8.82% 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 Q1 Results

With a market capitalization of $1.99 billion JFrog is among smaller companies, but its more than $427.6 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We enjoyed seeing JFrog’s impressive revenue growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, there was a slight slowdown in new contract wins. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 1.67% on the results and currently trades at $18.77 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. There are a number of reasons why we think JFrog is a great business. First, its revenue growth has been strong. 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.

JFrog's price to sales ratio based on the next twelve months is 6.2x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, JFrog's qualities as a business really stand out and we do like the look of the company at current prices.

The Wall St analysts covering the company had a one year price target of $44.3 per share right before these results, implying that they saw upside in buying JFrog even in the short term.

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