Jfrog Ltd Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Sanjit Singh - Morgan Stanley - Analyst : Thank you for taking my questions and congrats on the solid Q3 results. I wanted to get a sense of how you saw Q3 come in. If I rewind back to 90 days ago, you guys did see some deals push out and so would you characterize Q3 as a function of some of those deals closing and generating revenues quarter? Or was it more kind of more broad-based strength beyond just closing deals? And then I had a follow-up.

Question: Sanjit Singh - Morgan Stanley - Analyst : That's great context. And great to hear that these strategic deals are coming over the line. I wanted to -- my follow-up question is around security and Shlomi your comments around 2025 being the year. It's hard to go from -- we have to sort of build that pipeline. And so in terms of what you're seeing right now, to give you that confidence that 2025 will be the year for more material contribution from security, what are some of the proof points that you're seeing right now that gives you that confidence on the advanced security side?Thank you very much. Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Hey Sanjit, this is Shlomi. Security is being part of all big deals that we secured in Q3. And as we reported, those are our strategic customers. So the sales cycle took longer than expected. But then when we won this deal, that was a sizable deal that was triggered by cloud and security, very much aligned with our strategy. When we are looking at the pipeline, they're being very cautious about it and derisking it. We see more opportunities that combine cloud growth and security. And as we mentioned, it is now coupled together on all the big platform deals. So that gives us the confidence that we are getting into 2025 with the same momentum we created it. So that gives us the confidence that we are getting into 2025 with the same momentum we created. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:00PM, FROG.OQ - Q3 2024 Jfrog Ltd Earnings Call

Question: Pinjalim Bora - J.P. Morgan - Analyst : Great. Thank you for taking the questions and congrats from me as well. Shlomi, just wanted to ask you, staying on the security thread a little bit more. I believe if you have a lot of deals that are kind of coming for or came for renewal or coming for renewal in Q2, Q4 that had kind of a big security component signed about a year ago, there were some introductory pricing involved in there. I want to ask you, what is kind of the customer behavior in those deals as they are coming for renewals? Is it possible to kind of understand the conversion rates of those deals, signing into bigger security deals? Any way to understand kind of the uplift you're seeing on the ACV side.

Question: Pinjalim Bora - J.P. Morgan - Analyst : Yeah, understood. One follow-up for Ed. I know you're not really talking anything about 2025, but I wanted to ask you, how should we think about the puts and takes? You're exiting at about 17%, 18% growth seems like the macro environment is still not kind of green lights as of now. On the other hand, you have seems like built a big RPO base that probably gives you more visibility and then there is the security trend. How should we kind of think about 2025 as we think about the models?

Question: Pinjalim Bora - J.P. Morgan - Analyst : Understood. Thank you very much.

Question: Michael Cikos - Needham - Analyst : Hey, guys, thanks for taking the question here. And I just wanted to circle up on two components, really, first closing out the point from Pinjalim, but I know that you're talking about how you're being more conservative in building this guidance from the ground up going forward. So is that a comment as it relates to where we stand today? Because I know you've obviously signaled that you're more cautious in derisking for these large cloud migrations? Or was there potential for incremental prudence to be introduced? Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Hi Mike, this is Shlomi. We are looking at Q3, we are very pleased, very strong beat, very strong delivery on the quarter on all fronts. We are doing Q4 now, and we derisked our pipeline. We looked at the opportunities. But we still remain cautious because what we are seeing is that the big cloud migration, the big security deals, the big platform deals are not yet completely out of the woods. So we have to remain cautious. And to deliver on a strong 2024, we are committed to what we guide you with, but we will take the conservative approach as we communicated in the past.

Question: Michael Cikos - Needham - Analyst : Great. Thank you very much guys. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:00PM, FROG.OQ - Q3 2024 Jfrog Ltd Earnings Call

Question: Ryan MacWilliams - Barclays - Analyst : Thanks for taking the question. Just on the cloud side, how would you say macro is currently impacting cloud usage at this point? And did you notice any linearity for cloud consumption throughout the quarter, like maybe getting better towards the end of the quarter or since in 4Q? Would love to hear about how those usages are undergoing. Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Hey Ryan, this is Shlomi. Thank you for joining the call. Listen, we see in our pipeline, some of our biggest customers still planning on migrating to the cloud, but it's not ready yet to be executed in full steam ahead, so proof of concepts are being made. The cloud vendor has been chosen. Deals are being negotiated not only with us, but also on the marketplace, it takes a bit longer. This is why our approach about cloud migration is more conservative than it used to be in the past. The second thing is that these customers, if they are customers and not prospects, they are not investing in the self-hosted while planning the move to the cloud. And that's kind of a double click also on what happened until they decide to kind of shift gears and start to move to the cloud. And we will work -- we will partner with them until they would be ready, but that takes a bit longer in today's macro.

Question: Ryan MacWilliams - Barclays - Analyst : That makes sense. Thanks.

Question: Kingsley Crane - Canaccord Genuity - Analyst : Congrats on the quarter. Thanks for taking the question. I want to start with cloud growth. 40% growth in the year, I think that implies some pretty significant acceleration in Q4. And you called out a couple of things, a full quarter of large scale ones in Q3, annual customer commitment and then smaller migrations to the cloud. Is there any way to stack rank those? And then I guess as a follow-up, is there any sort of consumption true-up expected similar to last Q4.

Question: Kingsley Crane - Canaccord Genuity - Analyst : Okay. Thank you. That's it for me.

Question: Shrenik Kothari - Baird - Analyst : Yeah, thanks for taking my question. Great execution. Shlomi, you mentioned it's no longer a question of if companies will adopt end-to-end security but when. Of course you showcased hundreds of logos at swampUP and saw these, I would say, larger deals are showing up in RPO. Just curious, with customers still in early stage of kind of deploying these advanced securities, like how are you kind of helping them overcome the deployment integration bottlenecks. Are you needing to kind of ramp up your sales marketing efforts? Are you really pushing hard on training support about kind of deeper integration into the DevSecOps workflows? Just curious -- or a bit both, then I have a quick follow-up. Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Well. Hi, Shrenik. I hope that I heard the question right. If you're asking about our strategy of how to take these technologies that was some of it innovated and announced at swampUP, how we take it to the market. I guess this is what you asked. Our strategy is that the JFrog platform will consolidate all the solutions that you need around software supply chain management with one platform. Therefore, the end-to-end security from the creation of the code, all the way to production, including Runtime Security that was announced at swampUP and therefore, the MLOps technology following the acquisition of Qwak to provide our customers the ability to use the same platform for MLOps and not just DevOps and DevSecOps. All of these add-ons are available for our customers on the Enterprise X and the Enterprise Plus subscription. And if you are not there, it will generate an upgrade. And if you are there, it would be a by-seat mechanism that will allow them to implement these technologies on top of the platform. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:00PM, FROG.OQ - Q3 2024 Jfrog Ltd Earnings Call

Question: Shrenik Kothari - Baird - Analyst : Got it. Thanks a lot. Appreciate it.

Question: Miller Jump - Truist Securities - Analyst : Great. Taking the questions. So Shlomi, I wanted to go back to your comments on Ryan's question earlier. You talked about cloud migrations, causing some customers to kind of drag their feet, signing deals on the self-managed side as well. But just looking at the top line this quarter, self-managed was the larger driver of outperformance against our estimates. So I'm just trying to understand, like, are customers getting more comfortable staying on-prem? Or are you saying there's no change there? Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder No. Actually, if you remember, Miller, what we called last quarter, the twilight zone, this is where they are staying because they know strategically that they are going to migrate to the cloud, but they don't have the bless of the business of their managers or even the bold to complete the process. So while staying on the self-hosted, not because they chose to, but because they don't have any other option, they cannot invest in adopting security, in adopting MLOps, in adding more servers. So what happened is that they keep the business running with what they had for years, and they are planning with us the strategic migration to the cloud. We believe that this momentum that we saw in Q3 with the big deal will go on to the fourth quarter in 2025, but we have to be very conservative because we are not yet out of the woods. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:00PM, FROG.OQ - Q3 2024 Jfrog Ltd Earnings Call

Question: Miller Jump - Truist Securities - Analyst : I understood. Thank you.

Question: Koji Ikeda - Bank of America - Analyst : Thanks for taking the questions. Just one for me. And I wanted to double-click here on kind of the reserveness of the buyer into committing with JFrog on a bigger scale today. And so is there something very specific in the way that JFrog is being used or deployed within enterprises that's driving this more reserved posture. And Shlomi, you maybe alluded to this a little bit in your answer to another question. It sounds like there's also a component of the buyer needing to catch up a little bit with the understanding of what JFrog is offering today to really invest in the future with JFrog? I'm just trying to understand this a little bit more. Thanks. Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Thank you, Koji. So what is it that we see? We see that in Q3, JFrog won three of the most sizable deals ever in the company's history. These deals were not born in Q3. They were born a year ago and even more. And some of our customers not only grew by doubling their spend on JFrog, but by adding more technologies, not just DevOps, now also DevSecOps and even other technologies like the Connect for IoT devices. Strategically, our customers start to understand that software supply chain needs to be managed by one platform, and they have to choose. And I'm very glad that they chose JFrog. What the buyers -- to your question about the buyers, they start to see the JFrog budget line growing. And from being discussed on a VP level to a C-level, Board level, this is a completely different playbook, and we are very happy that we got there. This is what we saw in the pipeline when we communicated Q2. This is what we see now. But again, we will be very conservative with what happened in the macro and with the size of the deal that are not being signed by a CEO minus 4 or minus 5, but sometimes by the Board approvals themselves. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:00PM, FROG.OQ - Q3 2024 Jfrog Ltd Earnings Call

Question: Andrew Sherman - TD Cowen - Analyst : Thank you and congrats on the quarter. Great to hear about these big deals closing. Wondering about Q4 pipeline? Are there more of these type of big deals in the pipeline? And what's your visibility into those? How have you factored in closure rates and the timing of any deals there? Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Yeah. That's obviously something that we see for a few quarters, right? There is no pipeline for big deals or mega deals as we call it at JFrog that was born a quarter before. So the answer is yes. We see those sizable deals in the future quarters as well pipeline, but we derisked the pipeline. And we are looking at every deal from the bottom up and top down, we communicate with our customers about the strategy. Sometimes it's even our decision to push it a bit because we can win a deal now and maybe miss the opportunity to add security to it. So when we strategically speak with our customers, we might take a bit longer. It's not only the macro, it's also the strategy of the adoption of the full platform. So to optimize the opportunity and also to take into consideration the macro environment, we are derisking the pipeline on a daily basis as we reported before. And to your question, we are very excited about what we see in the pipeline moving forward.

Question: Andrew Sherman - TD Cowen - Analyst : Excellent. Thank you.

Question: Jeff Hickey - UBS - Analyst : Great. Thanks so much for taking just a couple of questions. I wanted to ask if we could get any color on monthly customers. I think you described steady usage patterns on the cloud side amongst committed customers. Last quarter, you derisked the cloud guide this year partially from the monthly side. Are those trends that you're seeing there really consistent with where we were back in early to mid-August. Or has there been any kind of change from what you're seeing internally? Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Yes. Thank you, Jeff. I'll start and Ed will chime in. What we are strategically doing is incentivize our cloud monthly users to go annual. And the main reason for that is not only growth, but reducing volatility. And this is what we discussed last quarter. And what we see is that the retention of our customers in the cloud is high. And we see two groups. Those that are ready to go annual and to become enterprise, not only by their profile, but also by their usage and those that are happy with a couple of thousands of dollars of ARR a year and that the platform will serve them, but I don't see them as top of funnel, and this is what we did. Currently, we are very happy with the progress of migrating some of them to an annual base and hopefully, to reduce the volatility and the true-up movement that we had last year. And -- moving on to the future, we want to see more of these customers adopting more than just the DevOps monthly solution, but also security. And this will be part of our strategy for upgrade in 2025.

Question: Jeff Hickey - UBS - Analyst : Got it. That's really helpful color. And then one quick follow-up. Ed, just on the net dollar retention guidance, reiterating for mid-teens, you're at 117 right now, and that's a trailing 12 month metric. Is there anything else we should keep in mind as we're just through the growth algorithm outside of maybe just a relative conservatism you mentioned earlier.

Question: Brad Reback - Stifel - Analyst : Great. Thanks very much. Ed, can you give us a sense of the $74 million sequential increase in RPO, how much of that was current RPO versus long-term?

Question: Brad Reback - Stifel - Analyst : Great. That's super helpful. And then last numbers question, hopefully for the night. Gross margin obviously down ticked each quarter this year, and I know you talked about [83 to 84] for the year, but looks like we'll exit less than that. How should we think about that stabilizing going forward? Is it in the low 80s or maybe into the 70s?

Question: Brad Reback - Stifel - Analyst : Got it. Thanks very much.

Question: Jason Celino - Keybanc Capital Markets - Analyst : Hey, thanks for bringing me in. Actually a free cash flow question, so not quite the last numbers question on the night. It looks like the free cash flow guide is coming up nicely by more than kind of the revenue raise. Just curious what's kind of leading to that?

Question: Jason Celino - Keybanc Capital Markets - Analyst : Okay. That makes sense. And then Shlomi, with the GitHub partnership, I think you talked about being in the co-innovation phase at the moment. Curious if you can share any anecdotal top-of-funnel metrics or anecdotal drivers of -- for advanced security and curation, like what that looks today maybe before -- versus before the GitHub partnership announcement? I guess what I'm trying to ask is if you've seen some immediate pipeline or top of funnel interest from -- over the last couple of quarters? Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Yes, that's a good question. I don't think that any of our customers will buy security only because of the co-engineered integration with GitHub or the single pane of glass for security on one platform. But it's a very strong differentiator. And even customers that are using GitHub, customers that are using Atlassian Bitbucket, even these customers are exposed to this integration of the best-of-breed platform, JFrog and GitHub, and they are sensitive to it. It's also being presented that way on our pricing page as a feature, as a differentiator for Enterprise X and Enterprise Plus users. So I think it creates some momentum on the top of funnel, but it's not -- it cannot be the only reason. It's just one of the catalysts.

Question: Jason Ader - William Blair - Analyst : Yeah, thank you. Good afternoon guys. Just a couple of quick ones for me. Ed, I just want to clarify, did you say that you -- that the self-managed subscription business would have a similar growth rate in Q4 as Q3. Did I hear that incorrectly?

Question: Jason Ader - William Blair - Analyst : Okay. I'm just trying to square that because to get to 40% growth in cloud for the full year, that would assume around $48 million in cloud-managed subscription in Q4, which means that self-managed would have to be down somewhat sequentially and 8% growth year-over-year, which would be a much lower growth rate, not even double-digit growth rate in self-managed unless I'm missing something like with licenses if licenses are way down in Q4. But otherwise, the math just doesn't work. So I'm trying to figure that out.

Question: Jason Ader - William Blair - Analyst : Okay. But then you can't get to 40% for the year on cloud. That's the point. Just the math doesn't work. You gave a $114 million midpoint guidance. So maybe we can take this offline. The math doesn't work.

Question: Jason Ader - William Blair - Analyst : Okay. Just it won't -- if your growth rate in self-managed is close to the growth rate in Q3 year-over-year, the cloud number will not get you to 40% growth, it will get you to like [38%] for the year. I'm just telling you that's the math.

Question: Jason Ader - William Blair - Analyst : Okay. But it sounds like it's going to be below 40%. Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Jason, I think we can take it as a follow-up. Our guidance for The Street is 40% on the cloud, the self-hosted with no significant change, do the math later, if you want, but that's what we commit.

Question: Jason Ader - William Blair - Analyst : Got you. And I know you're not giving guidance, but what are the puts and takes or what would drive net dollar retention higher? Would it be security? Would it be some of these larger renewals? I'm just -- again, I'm just trying to understand what... Shlomi Ben-Haim - Jfrog Ltd - Chairman of the Board, Chief Executive Officer, Co-Founder Jason, net dollar retention is triggered by security add-ons and cloud migrations.