JFrog (FROG)

Software development tools maker JFrog (NASDAQ:FROG) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 22% year on year to $122.4 million. Guidance for next quarter’s revenue was better than expected at $122.5 million at the midpoint, 1.2% above analysts’ estimates. Its non-GAAP profit of $0.20 per share was 21.5% above analysts’ consensus estimates.

Company Overview

Named after the founders' affinity for frogs, JFrog (NASDAQ:FROG) provides a software-as-a-service platform that makes developing and releasing software easier and faster, especially for large teams.

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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, JFrog’s sales grew at a solid 26% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

This quarter, JFrog reported robust year-on-year revenue growth of 22%, and its $122.4 million of revenue topped Wall Street estimates by 4.4%. Company management is currently guiding for a 18.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.2% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is noteworthy and suggests the market sees success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

JFrog’s ARR punched in at $503.2 million in Q1, and over the last four quarters, its growth was impressive as it averaged 23% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes JFrog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

This quarter, JFrog reported 1,051 enterprise customers paying more than $100,000 annually, an increase of 33 from the previous quarter. That’s a bit fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that JFrog will likely need to upsell its existing large customers or move down market to accelerate its top-line growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

JFrog is efficient at acquiring new customers, and its CAC payback period checked in at 37.7 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

JFrog’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 117% in Q1. This means JFrog would’ve grown its revenue by 16.7% even if it didn’t win any new customers over the last 12 months.

JFrog has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

JFrog’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 76.1% gross margin over the last year. That means JFrog only paid its providers $23.94 for every $100 in revenue.

JFrog produced a 75.3% gross profit margin in Q1, marking a 4.1 percentage point decrease from 79.5% in the same quarter last year. JFrog’s full-year margin has also been trending down over the past 12 months, decreasing by 2.6 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

JFrog’s expensive cost structure has contributed to an average operating margin of negative 21.6% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if JFrog reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Looking at the trend in its profitability, JFrog’s operating margin decreased by 3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. JFrog’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, JFrog generated a negative 18.8% operating margin.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

JFrog has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 26.5% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

JFrog’s free cash flow clocked in at $28.15 million in Q1, equivalent to a 23% margin. This result was good as its margin was 6.4 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict JFrog’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 26.5% for the last 12 months will decrease to 20.6%.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

JFrog is a well-capitalized company with $563.5 million of cash and $12.17 million of debt on its balance sheet. This $551.3 million net cash position is 12.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue beat and operating income beat convincingly. It was also great to see JFrog’s full-year EPS guidance top analysts’ expectations.  On the other hand, its new large contract wins slowed. Overall, this print had some key positives. The market seemed to be hoping for more, and the stock traded down 3.1% to $34.10 immediately after reporting.

Updated: May 16, 2025 at 10:10 PM EDT

Before deciding whether to buy JFrog or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

JFrog doesn’t top our investment wishlist, but we understand that it’s not a bad business. To kick things off, its revenue growth was solid over the last three years. And while JFrog’s forecasted free cash flow margin suggests the company will ramp up its investments next year, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

JFrog’s price-to-sales ratio based on the next 12 months is 9.4x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $44.44 on the company (compared to the current share price of $42.25).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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