JFrog Ltd. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with the third quarter and first nine months of 2020. JFrog provides a hybrid DevOps platform through self-managed and SaaS subscriptions. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $53.7 million | $38.9 million | $147.4 million | $108.1 million |
| Gross profit | $42.2 million | $31.6 million | $118.5 million | $87.8 million |
| Gross margin | 79% | 81% | 80% | 81% |
| Operating loss | $(20.9) million | $(5.4) million | $(45.8) million | $(6.2) million |
| Net loss | $(20.5) million | $(5.3) million | $(41.5) million | $(5.7) million |
| Net loss per share, diluted | $(0.21) | $(0.14) | $(0.44) | $(0.18) |
- Q3 revenue increased 38%; nine-month revenue increased 36%. Subscription revenue was $53.7 million in Q3 and $147.4 million year to date. Self-managed subscription and SaaS revenue accounted for 92% of revenue; SaaS represented 24%, up from 22% in Q3 2020.
- Q3 gross margin fell two percentage points, primarily reflecting higher acquired-intangible amortization, including Vdoo-related costs. Operating expenses rose substantially: Q3 R&D increased 123%, sales and marketing 64%, and general and administrative 33% year over year.
- Share-based compensation was $16.9 million in Q3 and $42.7 million for nine months, versus $9.7 million and $14.4 million, respectively, in 2020. Nine-month results also included $4.2 million of acquisition-related costs and increased compensation tied to acquisition holdbacks and retention arrangements.
- Cash and cash equivalents were $84.6 million and short-term investments were $317.8 million at September 30, 2021, totaling $402.4 million. Cash from operations was $10.2 million for nine months, versus $16.6 million; free cash flow, a company-defined non-GAAP measure, was $7.1 million versus $14.0 million.
- Investing cash outflow was $88.2 million, including $195.8 million of acquisition payments net of acquired cash, partly offset by investment maturities and sales. Financing cash outflow was $1.1 million. The filing reports no borrowings or debt balance; operating lease liabilities were $28.0 million.
- Current assets were $469.8 million and current liabilities $147.2 million. Deferred revenue totaled $126.9 million. Remaining performance obligations were $139.7 million, of which 82% was expected to be recognized within 12 months.
Material changes and business developments
- Growth came from both existing and new customers: management attributed about $12.0 million of Q3 revenue growth and $33.5 million of nine-month growth to existing customers. Net dollar retention was 129%, down from 136% a year earlier.
- Customers with at least $100,000 in ARR increased to 466 from 352 at December 31, 2020; customers with at least $1 million in ARR increased to 14 from 10.
- In July, JFrog acquired Vdoo, a product-security platform company, for preliminary consideration of $299.3 million, comprising $217.5 million cash and $81.8 million in shares. The acquisition added $224.7 million of goodwill and $45.5 million of identified intangible assets. JFrog also acquired Upswift in August for $9.5 million net of cash acquired.
- Total assets rose to $829.7 million from $689.2 million at year-end, substantially reflecting acquisitions; goodwill increased to $247.8 million from $17.3 million.
Outlook, commentary, risks and contingencies
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management expects to continue increasing investment in research and development, sales and marketing, and general and administrative functions. It believes available cash, investments and operating cash flows will fund needs for at least 12 months.
- Management says COVID-19 has slowed growth, extended sales cycles and delayed projects, and could continue to weigh on upgrades and customer orders. All offices had reopened as of October 1, 2021; future pandemic effects remain uncertain.
- Integration and execution risks relate to the Vdoo and Upswift acquisitions, including the ability to integrate people, operations and technology and realize expected product benefits. Acquisition-related employee holdbacks, retention payments and RSUs create future compensation expense.
- Other highlighted risks include cybersecurity and software supply-chain incidents, evolving privacy and data-protection rules, foreign-exchange exposure to the Israeli shekel, and competition. The company uses currency hedges and reported that a hypothetical 10% exchange-rate change would not have materially affected period results after hedging.
- Non-cancelable purchase obligations with terms of at least 12 months totaled $87.6 million, mainly for hosting and software. The company disclosed a potential additional payment of up to approximately $6.0 million associated with Israeli Innovation Authority intellectual-property transfer restrictions. It reported no legal matters expected to have a material adverse effect.
- Management assessed disclosure controls as effective at a reasonable-assurance level and reported no material change in internal control over financial reporting. JFrog expected to lose emerging-growth-company status at the end of 2021 and become subject to auditor attestation requirements for internal controls.
Important facts for investors to verify
- Whether revenue growth and customer expansion continue, particularly given net dollar retention’s decline to 129%.
- How margins, operating losses and cash generation develop as spending, share-based compensation and acquisition-related amortization rise.
- Whether Vdoo and Upswift integrate successfully and deliver the expected security and device-management product benefits.
- Whether the $402.4 million liquidity position remains sufficient after acquisition payments, purchase commitments and ongoing investment needs.
- How pandemic-related sales-cycle delays, cybersecurity exposure and privacy-regulatory requirements affect customer demand, costs and execution.