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JFrog (NASDAQ:FROG) Q2 Sales Beat Estimates But Stock Drops


Full Report / August 25, 2021
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Founded in 2008, JFrog provides software as a service platform that makes developing and releasing software easier and faster, especially for large teams.

JFrog (FROG) Q2 FY2021 Highlights:

  • Revenue: $48.6 million vs analyst estimates of $48.1 million (1.06% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0.01 (12.4% beat)
  • Revenue guidance for Q3 2021 is $52.5 million at the midpoint, above analyst estimates of $51.7 million
  • The company lifted revenue guidance for the full year, from $201 million to $203.5 million at the midpoint, a 1.24% increase
  • Free cash flow of $18 million, up 134% from previous quarter
  • Net Revenue Retention Rate: 129%, in line with previous quarter
  • Customers: 415 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 81.3%, in line with previous quarter


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.

Software is eating the world and the volume of software produced is exploding. Companies like JFrog are in a good position to benefit from this trend, since they provide the tools that software developers use to do their jobs.

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 $36.4 million, to $48.6 million.

JFrog Total Revenue

And unsurprisingly, this was another great quarter for JFrog with revenue up an absolutely stunning 33.5% year on year. On top of that, revenue increased $3.57 million quarter on quarter, a very strong improvement on the $2.39 million increase in Q1 2021, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 32.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter JFrog reported 415 enterprise customers paying more than $100,000 annually, an increase of 20 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 129% in Q2. That means even if they didn't win any new customers, JFrog would have grown its revenue 29% year on year. Despite it going down over the last year 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, licences, technical support and other necessary running expenses was at 81.3% in Q2.

JFrog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great 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 a pressure from competition to lower prices.

Key Takeaways from JFrog's Q2 Results

With market capitalisation of $4.11 billion JFrog is among smaller companies, but its more than $615.2 million in cash and positive free cash flow over the last twelve months give us confidence that JFrog has the resources it needs to pursue a high growth business strategy.

It was good to see JFrog deliver strong revenue growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was unfortunate to see the slowdown in new contract wins. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is down -7.58% on the results and currently trades at $42.5 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 numerous reasons why we think JFrog is one of the best software as service companies out there. First, its revenue growth has been exceptional. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its customers are increasing their spending quite quickly, suggesting that they love the product.

The market is certainly expecting long term growth from JFrog given its price to sales ratio based on the next twelve months is 18.5. And looking at the tech landscape today, JFrog's qualities really stand out. We are big fans at this price, even more so considering the company is actually trading at a multiple lower than many similar companies with similar growth rates.

The Wall St analysts covering the company had a one year price target of $60.3 per share right before these results, implying that they saw upside in buying JFrog even in short term.