Business context and reporting period
JFrog Ltd. provides a hybrid DevOps platform through self-managed and SaaS subscriptions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $67.8 million | $48.7 million | $131.5 million | $93.7 million |
| Revenue growth | 39% | — | 40% | — |
| Gross profit / margin | $52.6 million / 78% | $39.6 million / 81% | $102.4 million / 78% | $76.2 million / 81% |
| Operating loss | $22.4 million | $14.2 million | $41.5 million | $24.8 million |
| Net loss | $23.8 million | $13.1 million | $43.5 million | $21.0 million |
| Basic and diluted loss per share | $0.24 | $0.14 | $0.44 | $0.23 |
Revenue was entirely subscription revenue. Q2 self-managed subscription revenue was $48.6 million and SaaS revenue was $19.2 million; SaaS accounted for 28% of revenue, up from 24% a year earlier. For the six months, SaaS represented 27%, versus 23%.
For the first half, operating cash flow was $9.0 million, down from $28.0 million. Free cash flow, a non-GAAP measure defined as operating cash flow less property and equipment purchases, was $6.9 million, versus $25.7 million. Net cash used in investing activities was $27.7 million and net cash provided by financing activities was $5.6 million.
At June 30, cash and cash equivalents were $55.2 million and short-term investments were $375.0 million, totaling $430.2 million. Current assets were $510.2 million and current liabilities were $193.7 million. Deferred revenue was $157.1 million, including current and noncurrent amounts. Total liabilities were $232.3 million and shareholders’ equity was $625.4 million. The filing reports operating lease liabilities but no borrowings or other financial debt.
Material changes versus the prior comparable period
- Revenue rose 39% in Q2 and 40% in the first half. Management attributed most of the increase to existing customers: approximately $16.2 million of Q2 growth and $32.5 million of first-half growth.
- Gross margin declined three percentage points to 78% in both comparison periods. Management cited higher acquired-intangible amortization, mainly related to the 2021 Vdoo acquisition; first-half cost of revenue also increased with personnel, share-based compensation and hosting costs.
- Operating expenses increased 39% in Q2 and 42% in the first half. Research and development and sales and marketing rose substantially with headcount and investment; general and administrative expense decreased 7% in both periods, partly because prior-year expense included a CEO RSU award that fully vested in 2021.
- Net losses widened, and first-half operating cash flow and free cash flow fell materially year over year. Share-based compensation was $29.2 million for the first half, compared with $25.9 million.
- Cash and cash equivalents declined from $68.3 million at year-end 2021 to $55.2 million; short-term investments increased from $352.8 million to $375.0 million. Accumulated deficit widened to $182.5 million.
Outlook, commentary, risks and unusual items
- Guidance: The supplied filing text does not provide specific numerical revenue or earnings guidance. Management said existing cash, cash equivalents, short-term investments and operating cash flow should meet needs for at least the next 12 months. It expects continued investment in research and development, sales and marketing, and general and administrative functions, and says free cash flow may fluctuate.
- Operating indicators: Net dollar retention was 132%, compared with 129% a year earlier. Customers with ARR of at least $100,000 numbered 647, up from 537 at December 31, 2021; customers with ARR of at least $1 million numbered 17, up from 15. Remaining performance obligations were $184.7 million, of which the company expects to recognize 80% over the next 12 months.
- Commitments and settlement: Non-cancelable purchase obligations were $83.9 million. Contractual obligations totaled $120.3 million, including operating lease obligations of $36.4 million. The company had an additional $10.8 million in facility lease obligations for leases commencing in late 2022 and 2023. A wage-and-hour dispute with former sales employees was agreed to be settled for approximately $2.6 million, subject to arbitrator approval; the amount had been accrued in 2021.
- Risk factors: The filing highlights uncertainty from inflation, rising interest rates and weaker IT spending; privacy and data-protection regulation; cybersecurity and software supply-chain threats; international operations and foreign exchange exposure; and continuing COVID-19 effects, including longer sales cycles and project delays. Management said a hypothetical 10% foreign-exchange move, after hedging, and a 1% interest-rate increase would not have had a material impact in the periods or at the reporting date, respectively.
- Other items: Foreign-currency hedging produced losses recognized in earnings and other comprehensive income; net deferred hedge losses in accumulated other comprehensive income were expected to be recognized as operating expenses over the next 12 months. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and customer expansion can continue while operating losses widen and gross margin remains below the prior-year level.
- How much of the margin and expense changes reflect ongoing operating costs versus acquisition-related amortization, retention arrangements and share-based compensation.
- Whether operating cash flow and free cash flow recover, given the year-over-year decline and the company’s substantial contractual commitments.
- Whether the $184.7 million remaining performance obligation converts to revenue on the stated schedule, and whether retention and large-customer trends persist.
- The approval and final cost of the $2.6 million employee settlement, along with any developments in other contingencies and the potential IIA intellectual-property transfer payment of up to approximately $6.0 million.
- Exposure to cybersecurity, privacy, macroeconomic and geopolitical risks, and any change in management’s stated liquidity outlook.