JFrog(FROG) - 2023 Q4 - Annual Report

Part I Business JFrog provides an end-to-end 'Liquid Software' platform, automating and securing the software supply chain with Artifactory at its core - JFrog's vision is to enable "Liquid Software" through its end-to-end, hybrid, universal Software Supply Chain Platform, which bridges software development and deployment[22][23] - The company's platform is built around JFrog Artifactory, the first universal package repository, which acts as the central "database of DevOps" for an organization's software packages[26][35][38] | Metric | Value (as of Dec 31, 2023) | | :--- | :--- | | Total Customers | ~7,400 organizations | | Fortune 100 Customers | ~83% | | Customers with ARR > $100,000 | 886 | | Customers with ARR > $1.0 million | 37 | | Revenue from outside the U.S. (FY 2023) | ~38% | - JFrog's business model combines a bottom-up, community-focused approach with a top-down enterprise sales strategy, offering multi-tiered subscriptions (Pro, Pro X, Enterprise X, Enterprise Plus)[46][47] Our Platform and Products The JFrog Platform, centered on Artifactory, offers integrated products for curation, security, distribution, and CI/CD - The platform offers a cohesive, end-to-end solution with JFrog Artifactory at its core, supplemented by products for curation, security, distribution, and CI/CD[37][40] - Key products include: - JFrog Artifactory: Universal package repository and single source of truth - JFrog Curation: Controls admission of open source packages - JFrog Xray & Advanced Security: Scans for vulnerabilities, license compliance, and provides advanced binary-focused security - JFrog Distribution & Artifactory Edge: Enables reliable and efficient software distribution to multiple locations and edge devices - JFrog Pipelines: Automates and orchestrates the CI/CD workflow[38][40][42] - The platform is expanding to include MLOps functionality, managing machine learning models and their dependencies to unite MLOps with DevSecOps practices[39] Business Model and Growth Strategies JFrog employs a hybrid go-to-market strategy with multi-tiered subscriptions, focusing on technology leadership and customer expansion - The company utilizes a dual bottom-up (community-focused) and top-down (enterprise-focused) sales approach[46] - Subscription tiers include JFrog Pro, Pro X, Enterprise X, and the full-platform Enterprise Plus. Optional add-ons like JFrog Advanced Security and JFrog Curation are available for higher tiers[47][50] - Key growth strategies include: - Extending technology leadership in DevSecOps, MLOps, and edge solutions - Expanding within the existing customer base, highlighted by a net dollar retention rate of 119% as of Dec 31, 2023 - Acquiring new customers through free trials, open source versions, and targeting new user personas like AI/ML Engineers - Expanding channel and alliance partnerships, especially with cloud providers[50][51] Competition JFrog faces fragmented competition from in-house solutions, DevOps vendors, cloud providers, and security point solutions - Competition is fragmented and comes from various sources: - Home-grown solutions: In-house tools built by companies for specific needs - DevOps vendors: Companies like Microsoft's GitHub, GitLab, Cloudsmith, and Sonatype - Cloud providers: AWS, Microsoft Azure, and Google Cloud, which offer competing functionalities - Security point solutions: Aqua Security, Snyk, Sonatype, and Synopsys - Diversified vendors: IBM (Red Hat) and Broadcom (VMware)[63][71] - Many competitors possess greater financial resources, brand recognition, and larger sales forces[64] Human Capital JFrog has approximately 1,400 global employees, guided by a 'CODEX' culture and committed to Diversity, Inclusion, and Equity - The company had approximately 1,400 employees globally as of December 31, 2023, with about 750 in Israel and 350 in the U.S[74] - The corporate culture is guided by the "CODEX," a set of values created by employees, emphasizing integrity, community, innovation, and teamwork[75][76] - JFrog highlights its commitment to DEI, noting that three of its nine board members and four of its twelve executive management team members are women[79] Risk Factors The company faces risks from rapid growth, net losses, competition, cybersecurity threats, and geopolitical instability in Israel - The business has experienced rapid growth, and failure to manage future growth, improve systems, and maintain corporate culture could adversely affect operations[89][91] - The company has a history of net losses ($61.3 million in 2023, $90.2 million in 2022) and may not achieve profitability on a consistent basis as it continues to invest in growth[94] - A breach of security measures or unauthorized data access could lead to loss of customer trust, litigation, and significant liabilities. The company is subject to complex and changing privacy laws like GDPR and CCPA[192][179] - A material part of R&D is conducted in Israel, and operations could be adversely affected by geopolitical conditions, such as the Israel-Hamas war, which has led to employee reservist call-ups[239][240][241] - The business is highly dependent on its core product, JFrog Artifactory. Any decline in its demand or performance would significantly impact the company's financial condition[117] Cybersecurity JFrog's cybersecurity program, led by the CSO, is certified against ISO and SOC 2 standards, with Board oversight - The cybersecurity program is led by the Chief Security Officer (CSO) in partnership with the Chief Information Officer (CIO), who leads the Governance Risk and Compliance (GRC) function[264] - The company's information security controls are certified against ISO 27001, ISO 27701, ISO 27017, and SOC 2 Type II standards, and are aligned with NIST cybersecurity practices[267] - The Board of Directors, through its Audit Committee, provides oversight of the information security program, receiving updates at least twice a year[272] - As of the report date, JFrog is not aware of any cybersecurity threats that have materially affected or are reasonably likely to materially affect the company[271] Properties JFrog leases all its facilities, with co-headquarters in Sunnyvale, California, and Netanya, Israel - The company is co-headquartered in Sunnyvale, California, and Netanya, Israel[275] - JFrog leases approximately 49,000 sq. ft. in Sunnyvale, CA (leases expiring through 2026) and 52,000 sq. ft. in Netanya, Israel (lease expiring in 2026)[275] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities JFrog's ordinary shares trade on Nasdaq under 'FROG', with no cash dividends paid or anticipated in the foreseeable future - The company's ordinary shares are listed on the Nasdaq Global Select Market under the ticker symbol "FROG"[280] - JFrog has never declared or paid cash dividends and does not intend to in the foreseeable future[282] Management's Discussion and Analysis of Financial Condition and Results of Operations JFrog's 2023 revenue grew 25% to $349.9 million, with improved net loss and strong liquidity, driven by customer expansion | Financial Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $349.9M | $280.0M | 25% | | Net Loss | ($61.3M) | ($90.2M) | (32%) | | SaaS Revenue % of Total | 34% | 28% | N/A | | Enterprise Plus Revenue % of Total | 46% | 38% | N/A | - The net dollar retention rate was 119% as of December 31, 2023, down from 128% as of December 31, 2022. The company expects this rate to stabilize around current levels[304] - The number of customers with ARR of $100,000 or more grew from 736 in 2022 to 886 in 2023. Customers with ARR of $1.0 million or more increased from 19 to 37 in the same period[305] - The company generated positive free cash flow of $72.2 million in 2023, a significant increase from $17.1 million in 2022[310] Results of Operations (2023 vs. 2022) Total revenue increased 25% to $349.9 million, with stable gross margin and reduced operating loss, improving net loss to $61.3 million | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $349,886 | $280,040 | 25% | | Gross Profit | $272,843 | $217,753 | 25% | | Gross Margin | 78% | 78% | 0% | | Operating Loss | ($75,548) | ($89,840) | (16%) | | Net Loss | ($61,256) | ($90,184) | (32%) | - The increase in total revenue was driven by approximately $64.5 million in growth from existing customers[327] - Total share-based compensation expense increased by 39% to $95.2 million in 2023 from $68.7 million in 2022, primarily due to grants to new and existing employees[333] Liquidity and Capital Resources JFrog maintains strong liquidity with $545.0 million in cash and investments, generating $74.2 million in operating cash flow in 2023 - The company's principal sources of liquidity as of December 31, 2023, were cash, cash equivalents, and short-term investments totaling $545.0 million[337] | Cash Flow Activity (in thousands) | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $74,155 | $21,425 | | Net cash used in investing activities | ($53,476) | ($53,338) | | Net cash provided by financing activities | $18,371 | $11,027 | - As of December 31, 2023, the company had non-cancelable contractual obligations totaling $56.1 million, primarily for hosting services and operating leases[346] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021-2023, with an unqualified auditor's opinion - The independent auditor's report, issued by Kost Forer Gabbay & Kasierer, expressed an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[363][373] - The auditor identified the evaluation of Standalone Selling Prices (SSPs) for self-managed subscription and license performance obligations as a critical audit matter due to the subjective judgment required[368][369] | Balance Sheet Item (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $972,556 | $871,221 | | Total Liabilities | $293,433 | $246,448 | | Total Shareholders' Equity | $679,123 | $624,773 | | Statement of Operations (in thousands) | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $349,886 | $280,040 | $206,683 | | Gross Profit | $272,843 | $217,753 | $164,860 | | Operating Loss | ($75,548) | ($89,840) | ($68,369) | | Net Loss | ($61,256) | ($90,184) | ($64,203) | Controls and Procedures Management confirmed effective disclosure controls and internal control over financial reporting as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[516] - Management concluded that the internal control over financial reporting was effective as of December 31, 2023, a conclusion audited and confirmed by the company's independent registered public accounting firm[518] - No changes in internal control over financial reporting occurred during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the internal controls[519] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information on governance, compensation, and related matters is incorporated by reference from the forthcoming 2024 proxy statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and accountant fees is incorporated by reference from the forthcoming Proxy Statement[526][528][529][530][531] - The company has adopted a Code of Business Conduct and Ethics, which is available on its investor relations website[527] Part IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents and executive certifications - This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and executive certifications[534][535] Form 10-K Summary No Form 10-K summary is provided in this report - No summary is provided for Item 16[539]