JFrog Ltd. (Nasdaq: FROG) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results are presented against the comparable 2020 periods. JFrog provides a hybrid DevOps platform for managing software releases, through self-managed subscriptions and SaaS.
Financial results
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $48.7 | $36.4 | $93.7 | $69.3 |
| Gross profit / margin | $39.6 / 81% | $29.7 / 82% | $76.2 / 81% | $56.2 / 81% |
| Operating income (loss) | $(14.2) | $1.3 | $(24.8) | $(0.8) |
| Net income (loss) | $(13.1) | $1.7 | $(21.0) | $(0.4) |
| Operating cash flow | Not separately stated | Not separately stated | $28.0 | $5.9 |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $25.7 | $4.4 |
- Q2 revenue rose 34% year over year; first-half revenue rose 35%. Subscription revenue was $48.7 million in Q2, including $11.5 million of SaaS revenue, or 24% of total revenue. About 92% of Q2 revenue came from subscriptions providing access to multiple products; Enterprise Plus represented about 32%.
- Operating expenses increased substantially: Q2 R&D was $16.7 million, sales and marketing $22.0 million, and general and administrative $15.1 million. First-half share-based compensation was $25.9 million, versus $4.7 million a year earlier; the increase included expense from RSUs granted to the CEO.
- At June 30, cash and cash equivalents were $259.2 million and short-term investments were $356.0 million, totaling $615.2 million. Current assets were $668.5 million and current liabilities $134.6 million. No financial debt is reported in the supplied filing text; lease liabilities totaled $19.5 million.
- First-half investing cash flow was positive $71.9 million, mainly reflecting net proceeds from short-term investment maturities and sales. Financing cash flow was negative $5.1 million, including $8.7 million of net payments to tax authorities on employee equity transactions.
Material changes versus prior periods
- Revenue growth reflected both customer expansion and new customers: existing customers contributed about $9.9 million of Q2 growth and $20.6 million of first-half growth. Net dollar retention was 129%, down from 139% a year earlier.
- Gross margin was 81% in Q2, compared with 82% in Q2 2020, and unchanged at 81% for the six-month comparison. Q2 operating performance moved from income to loss as operating expenses rose faster than revenue.
- Cash, cash equivalents, and short-term investments increased from $598.1 million at December 31, 2020 to $615.2 million at June 30, 2021. Deferred revenue was $119.2 million combined current and noncurrent, compared with $102.8 million at year-end.
- JFrog adopted lease accounting on January 1, 2021, recognizing operating lease right-of-use assets and liabilities; adoption did not materially affect results or cash flows.
Outlook, commentary, and risks
- No quantified financial guidance is provided in the supplied filing text. Management said it expects continued investment and higher expenses in R&D, sales and marketing, and G&A, and expects free cash flow to fluctuate as it invests for growth.
- Management believed liquidity, together with operating cash flow, would meet needs for at least 12 months, including acquisitions. After quarter-end, JFrog acquired Vdoo Connected Trust Ltd. on July 19, 2021 for approximately $286.5 million, including about $199.8 million cash, net of cash acquired, and 1,934,198 ordinary shares. The purchase-price allocation was not yet determined.
- The company reported that COVID-19 had slowed growth and could continue to lengthen sales cycles, delay projects, and reduce customer upgrade orders. The duration and financial impact remained uncertain.
- Other notable risks include cybersecurity and privacy compliance, acquisition integration, foreign-exchange exposure to the Israeli shekel, and operating in China. The company hedges foreign currency exposure and said a hypothetical 10% currency or interest-rate change would not have materially affected the reported periods.
- Outstanding non-cancelable purchase obligations with terms of 12 months or longer totaled $72.3 million. IIA-related restrictions on transferring certain intellectual property outside Israel could require additional payments of up to approximately $6.0 million. Management reported no known legal matters expected to have a material adverse effect.
- Management judged disclosure controls effective at a reasonable assurance level and reported no material change in internal control over financial reporting. The company expected to lose emerging growth company status at year-end 2021, bringing auditor attestation requirements for internal controls.
Important facts for investors to verify
- How much of revenue growth and customer expansion continues, particularly given net dollar retention’s decline to 129%.
- Whether expense growth, especially share-based compensation, moderates and how the company progresses toward profitability.
- Post-acquisition cash, share dilution, Vdoo integration progress, and the final allocation of its purchase price.
- The durability of operating cash flow and deferred-revenue growth, and the company’s ability to meet acquisition, lease, and purchase commitments.
- Developments in COVID-related sales delays, cybersecurity and privacy risks, and the transition to large accelerated filer and auditor-attestation requirements.