Q3 2024 Earnings Summary
- JFrog closed several large deals in Q3, including three of the largest deals in the company's history, contributing to strong free cash flow and robust billings and RPO growth, indicating strong future revenue visibility. , ,
- Significant growth in high-value customers, with the number of customers having over $1 million in ARR increasing by 53% year-over-year to 46, reflecting strong enterprise adoption of JFrog's platform and services.
- Robust cloud revenue growth of 38% year-over-year in Q3, with the company anticipating around 40% cloud revenue growth for 2024, supported by large-scale wins and customer commitments, demonstrating resilience despite a challenging spending environment. ,
- Analysts questioned the company's ability to achieve its 40% cloud revenue growth guidance, noting that based on the provided numbers and guidance, the math does not support 40% growth for the year. One analyst stated, "You can't get to 40% for the year on cloud. That's the point. Just the math doesn't work." ,
- Declining gross margins due to a higher mix of lower-margin cloud revenue raise concerns about profitability. The CFO acknowledged that as cloud revenue becomes a larger portion of total revenue, gross margins are expected to decline over time, stating, "I would expect that gross margins would start to decline."
- The overperformance in Q3 was largely due to delayed large deals closing, which may not be indicative of sustainable ongoing strength. The CFO mentioned that the overperformance was "largely due to the fact that we saw many of those large deals being closed", including deals pushed from previous quarters. This could raise concerns about the predictability of future quarters. ,
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue (Quarterly) | Q4 2024 | no prior guidance | $113.5 million to $114.5 million | no prior guidance |
Non-GAAP Income from Operations (Quarterly) | Q4 2024 | no prior guidance | $14 million to $15 million | no prior guidance |
Non-GAAP Net Income per Share (Quarterly) | Q4 2024 | no prior guidance | $0.13 to $0.15 | no prior guidance |
Revenue (Annual) | FY 2024 | $422 million to $424 million | $425.9 million to $426.9 million | raised |
Non-GAAP Income from Operations (Annual) | FY 2024 | $52 million to $54 million | $56.4 million to $57.4 million | raised |
Non-GAAP Net Income per Share (Annual) | FY 2024 | $0.54 to $0.56 | $0.59 to $0.61 | raised |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Consistent focus on cloud revenue growth targets | Highlighted as ranging from 38% to 59% YOY in previous quarters, with increasing skepticism about achieving 40% in later quarters | Maintained 40% target but with rising doubts on feasibility; cloud grew 38% YOY | Continued skepticism escalating into Q3 |
Large enterprise deals (especially $1M+ ARR) | Key growth driver with deals delayed or pushed from prior quarters; seen as valuable yet volatile if macro headwinds persist | Still critical to growth (46 customers over $1M ARR), but some deals faced longer cycles and were pushed from Q2 | Recurring importance; emphasizes caution on timing |
Ongoing margin pressure from higher cloud mix | CFO guided margins to decline from mid-80% range over time, due to lower-margin cloud revenue | Gross margin fell to 82.8% as cloud revenue share grew (39% of total) | Steady downward margin trend continuing |
Shifts in net dollar retention and expansion rates | Slower expansion in existing accounts and NDR in mid-to-high teens (117%-119%) across earlier quarters | NDR at 117%, with cautious outlook due to macro conditions | Stabilizing around mid-teens; remains conservative |
Longer sales cycles and delayed strategic deals | Repeatedly cited as macro-driven headwinds, extending procurement times and postponing migrations or upgrades | Highlighted again as a core challenge; big deals require longer negotiation, though they ultimately closed in Q3 | Persistent delays still impacting near-term revenue |
Security offerings and platform consolidation | Touted as long-term growth drivers; adoption slowed by longer proof-of-concept stages, though seen as strategic | Remains significant for large deals and future revenue; less mentioned compared to prior calls but still cited for 2025 momentum | Still key, with slower near-term ramp but strong future potential |
Billings and RPO growth | Not specifically discussed in prior quarters | Emphasized for the first time as an indicator of long-term revenue trends, boosted by large multiyear deals | Newly introduced metric in Q3 to gauge revenue health |
Topics like “broad-based digestion” and gross retention (97%) | Broad-based digestion mentioned in earlier quarters (Q1), and 97% gross retention was reiterated in Q2 and Q4 as a sign of customer stability | Broad-based digestion not mentioned; 97% gross retention reaffirmed | Digestion theme dropped; retention rate remains consistent |
Expansion in sales capacity and partnerships | Highlighted as a future catalyst in Q1/Q2/Q4, with investments in enterprise sales teams and channel partners, though raising operating expenses | No specific mention in Q3 about expanding sales capacity or partner programs | Not addressed this quarter |
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Future Guidance & 2025 Outlook
Q: How should we think about 2025 models given current trends?
A: Management is not commenting on 2025 yet, but they are being more conservative in building their outlook and guidance due to the uncertain macro environment. They remain cautious as big cloud migrations and security deals are not yet out of the woods, and they are committed to delivering a strong 2024 with a conservative approach. -
Q3 Results Drivers
Q: Was Q3 overperformance due to deals pushed from previous quarters?
A: Yes, the overperformance in Q3 was largely due to significant projects that were derisked from the forecast, including several large deals that closed in Q3, one of which was pushed from Q2. These sizable deals contributed to strong billings and RPO growth. -
Security Revenue Growth
Q: What gives confidence in security contributing materially in 2025?
A: Security was part of all big deals secured in Q3. Despite longer sales cycles, they are seeing more opportunities combining cloud growth and security, which gives confidence for continued momentum into 2025. Renewals of introductory-priced security deals are leading to adoption and expansion, consolidating customers around the platform play. -
Cloud Migrations & Macro Impact
Q: How is the macro environment affecting cloud usage and migrations?
A: The macro environment is causing delays in cloud migrations, as customers plan but are not ready to execute fully. Deals are taking longer, leading to a more conservative approach on cloud migration than before. Customers are not investing in self-hosted solutions while planning to move to the cloud, and the company is partnering with them to ensure successful migrations when ready. -
Gross Margin Decline
Q: How should we think about gross margin trends going forward?
A: Gross margins are expected to decline over time due to a shift in revenue mix toward cloud services, which have a lower margin profile. In Q3, cloud revenue made up 39% of total revenue versus 34% last year. As cloud becomes a bigger piece, gross margins will continue to decline despite optimization efforts. -
Net Dollar Retention Rate
Q: Any updates on net dollar retention rate guidance?
A: They expect net dollar retention to stabilize around the mid-teens, reflecting a conservative outlook. The current net dollar retention rate is 117%, but they are factoring in conservatism in their guidance going forward. -
Free Cash Flow Increase
Q: What is driving the increase in free cash flow guidance?
A: Closing several very large deals, including three of the largest in company history, has contributed to increased free cash flow. Strong collections from multiyear deals with upfront payments also played a role, though timing can shift between quarters. -
RPO Growth and Composition
Q: Can you provide details on the RPO increase?
A: The strong RPO growth is largely due to very large, multiyear deals closed in the quarter. Current RPO is $245 million, with a 24% year-over-year growth. These multiyear deals contribute to both billings and RPO strength. -
Buyer Caution & Strategic Commitment
Q: Is buyer hesitance affecting commitment to JFrog at a larger scale?
A: While some buyers are cautious due to the macro environment, JFrog secured three of the most sizable deals in its history. Customers are strategically committing to manage their software supply chain with one platform, choosing JFrog, and discussions are happening at higher executive levels. -
Transitioning Monthly Cloud Customers
Q: How are monthly cloud customers trending and being managed?
A: JFrog is incentivizing monthly cloud users to move to annual contracts to reduce volatility and drive growth. Retention is high, and progress in migrating customers to annual agreements is positive. Monthly customers are about 20% of cloud revenue and declining as they move to annual contracts. -
GitHub Partnership Impact
Q: How is the GitHub partnership impacting the business?
A: The co-engineered integration with GitHub, including capabilities with CoPilot, is a strong differentiator and creates momentum at the top of the funnel. It enhances offerings in DevOps, security, and AI but is considered a catalyst rather than the sole reason customers choose JFrog. Currently, they are not pursuing a co-sell mechanism with Microsoft but may consider it in the future. -
AI Potential Revenue
Q: When will AI contributions show up in revenue?
A: While AI models equate to binaries, and JFrog is planting seeds for future growth, customers are currently in an experimental mode. Due to considerations like compliance, regulation, and budget, significant AI-related revenue is expected to take longer than a few quarters to materialize. They will include it in guidance when there is more clarity. -
Deploying Advanced Functionalities
Q: How is JFrog helping customers overcome deployment bottlenecks for advanced features?
A: JFrog's strategy is to consolidate solutions around software supply chain management into one platform. Advanced features like end-to-end security and MLOps (following the acquisition of Qwak) are available as add-ons in Enterprise X and Enterprise Plus subscriptions, facilitating adoption and upgrades. -
Consolidation Opportunities
Q: Are customers consolidating vendors, and how does this affect JFrog?
A: Enterprises are expressing a desire to consolidate their software supply chain and security tools into one platform. While transitioning from multiple vendors takes time and often runs in parallel initially, JFrog is seeing this trend as customers seek to reduce complexity and improve security. -
Q4 Pipeline & Large Deals
Q: Is there visibility into more large deals in the Q4 pipeline?
A: Yes, there are sizable deals in future quarters' pipelines. However, the company is derisking the pipeline and sometimes strategically delays deals to include more offerings like security, aligning with customers for long-term platform adoption, which may extend sales cycles.
Research analysts covering JFrog.