JFrog Ltd. (Nasdaq: FROG) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars. JFrog provides a hybrid DevOps platform for managing software supply chains.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $72.0m | $53.7m | $203.5m | $147.4m |
| Gross profit | $56.1m | $42.2m | $158.5m | $118.5m |
| Gross margin | 78% | 79% | 78% | 80% |
| Operating loss | $(23.4)m | $(20.9)m | $(65.0)m | $(45.8)m |
| Net loss | $(23.6)m | $(20.5)m | $(67.0)m | $(41.5)m |
| Basic and diluted loss per share | $(0.24) | $(0.21) | $(0.68) | $(0.44) |
- Q3 revenue grew 34% year over year; nine-month revenue rose 38%. Subscription revenue growth was driven mainly by existing customers: $15.4m of Q3 growth and $50.1m of nine-month growth.
- SaaS accounted for 29% of Q3 revenue, up from 24% a year earlier. Multi-product subscriptions represented approximately 95% of Q3 revenue. Enterprise Plus represented approximately 39%, versus 34% in Q3 2021.
- Gross margin declined as costs rose, including higher personnel and hosting costs; the nine-month comparison also reflected increased amortization of acquired intangibles. Operating expenses grew 26% in Q3, to $79.5m, led by research and development and sales and marketing spending.
- Q3 interest and other income was $1.4m, primarily reflecting higher interest income. Income tax expense was $1.5m.
Cash flow, liquidity and balance sheet
- For the first nine months, operating cash flow was $14.1m, compared with $10.2m in 2021. Capital expenditures were $3.4m; company-defined free cash flow was $10.7m, versus $7.1m.
- Investing cash outflow was $35.9m, mainly reflecting net purchases of short-term investments; financing provided $9.7m, primarily from employee share purchases and option exercises. Cash, cash equivalents and restricted cash decreased $14.3m.
- At September 30, cash and cash equivalents were $54.0m and short-term investments were $380.0m, totaling $434.0m. Total current assets were $509.0m and current liabilities $192.2m. Total assets were $852.6m; total liabilities were $227.7m. The balance sheet reports no borrowings.
- Deferred revenue totaled $159.7m. Remaining performance obligations were $189.8m, of which the company expected to recognize 82% within 12 months.
- Share-based compensation was $19.2m in Q3 and $48.4m for the nine months. Unrecognized compensation cost was $224.6m, expected to be recognized over a weighted-average 3.2 years. The company had 100.2m ordinary shares outstanding at quarter-end.
Changes, outlook and risks
- Net losses widened year over year, despite strong revenue growth; operating expenses and cost of revenue increased, and gross margin contracted. Nine-month operating cash flow and free cash flow improved.
- Net dollar retention was 130%, compared with 129% a year earlier. Customers with ARR of at least $100,000 increased to 696 from 537 at December 31, 2021; customers with ARR of at least $1m rose to 18 from 15.
- Management said existing cash, investments and operating cash flow should cover needs for at least 12 months. It expects continued investment in research and development, sales and marketing, and general and administrative functions; no specific financial guidance was provided in the supplied filing text.
- JFrog launched JFrog Advanced Security in October 2022, after quarter-end. Management cited economic uncertainty, inflation and reduced customer IT spending as potential headwinds, alongside privacy and cybersecurity regulation, security incidents, foreign exchange exposure to the Israeli shekel, and geopolitical risks.
- A California wage-and-hour dispute was settled through arbitration for approximately $2.6m in September 2022; the company said it had accrued a sufficient estimated settlement in Q4 2021. The company also disclosed a potential IIA-related payment of up to approximately $6.0m if certain intellectual property is transferred outside Israel, subject to approval and applicable terms.
- Management reported disclosure controls were effective at a reasonable assurance level and no material changes to internal control over financial reporting during the quarter. It reported no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and 130% net dollar retention persist, particularly amid economic uncertainty and potential IT-spending reductions.
- Whether elevated operating expenses, hosting and personnel costs, and acquisition-related amortization continue to pressure margins and losses.
- The composition, liquidity and valuation sensitivity of the $380.0m short-term investment portfolio, including unrealized losses, and the sustainability of operating cash flow and free cash flow.
- Potential dilution from equity compensation: 7.9m unvested RSUs, 7.7m outstanding options, and 32.7m total shares reserved for future issuance.
- Developments in cybersecurity and privacy compliance, Israeli shekel exposure and hedging, the IIA intellectual-property restrictions, and contractual commitments of $107.7m for leases and purchase obligations.