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JFrog (NASDAQ:FROG) Q3 Sales Beat Estimates, Stock Soars


Full Report / November 04, 2021
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Software development tools maker JFrog (NASDAQ:FROG) beat analyst expectations in Q3 FY2021 quarter, with revenue up 38.1% year on year to $53.7 million. The company expects that next quarter's revenue would be around $58 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. JFrog made a GAAP loss of $20.4 million, down on its loss of $5.26 million, in the same quarter last year.

JFrog (FROG) Q3 FY2021 Highlights:

  • Revenue: $53.7 million vs analyst estimates of $52.5 million (2.24% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of -$0.04 ($0.05 beat)
  • Revenue guidance for Q4 2021 is $58 million at the midpoint, above analyst estimates of $57.5 million
  • Free cash flow was negative $18.6 million, down from positive free cash flow of $18 million in previous quarter
  • Net Revenue Retention Rate: 129%, in line with previous quarter
  • Customers: 466 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 78.6%, 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.

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 $38.8 million, to $53.7 million.

JFrog Total Revenue

And unsurprisingly, this was another great quarter for JFrog with revenue up a robust 38.1% year on year. On top of that, revenue increased $5.04 million quarter on quarter, a very strong improvement on the $3.57 million increase in Q2 2021, and a sign of re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 32.1% over the next twelve months, although estimates are likely to change post earnings.

Large Customers Growth

You can see below that at the end of the quarter JFrog reported 466 enterprise customers paying more than $100,000 annually, an increase of 51 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 Q3. 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, licenses, technical support and other necessary running expenses was at 78.6% in Q3.

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.

Key Takeaways from JFrog's Q3 Results

With a market capitalization of $3.31 billion JFrog is a relatively smaller company, but its more than $402.3 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.

We were very impressed how strongly JFrog accelerated the rate of new contract wins this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 7.89% on the results and currently trades at $38.27 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 impressive. 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 13.5x, 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 still like it at this price.

The Wall St analysts covering the company had a one year price target of $53.3 per share right before these results, implying that they saw upside in buying JFrog even in the short term.

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