JFrog(FROG) - 2022 Q1 - Quarterly Report

Note Regarding Forward-Looking Statements This section serves as a cautionary statement, indicating that the report contains forward-looking statements subject to substantial risks and uncertainties - This section serves as a cautionary statement, indicating that the report contains forward-looking statements subject to substantial risks and uncertainties. Investors should not rely on these statements as predictions of future events, and actual results may differ materially[11][12][13] - Forward-looking statements cover various aspects including future financial performance, market acceptance, growth rates, competition, product development, and the impact of global events[14] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents JFrog Ltd.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, along with accompanying notes detailing significant accounting policies and financial instrument disclosures Condensed Consolidated Balance Sheets - Total assets increased slightly from $852.5 million at December 31, 2021, to $856.4 million at March 31, 2022, primarily driven by an increase in short-term investments[17] - Total liabilities also saw an increase, mainly due to higher deferred revenue, reflecting ongoing sales and customer commitments[17] Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :------------------ | | Assets | | | | Cash and cash equivalents | $59,577 | $68,284 | | Short-term investments | $368,073 | $352,844 | | Total current assets | $507,351 | $499,022 | | Total assets | $856,396 | $852,528 | | Liabilities | | | | Deferred revenue (current) | $134,611 | $129,149 | | Total current liabilities | $182,757 | $175,264 | | Total liabilities | $219,878 | $213,947 | | Shareholders' Equity | | | | Total shareholders' equity | $636,518 | $638,581 | Condensed Consolidated Statements of Operations - Total subscription revenue grew by 41% year-over-year, from $45.1 million in Q1 2021 to $63.7 million in Q1 2022[20] - Net loss increased significantly from $(7.9) million in Q1 2021 to $(19.7) million in Q1 2022, primarily due to higher operating expenses, particularly in research and development and sales and marketing[20] Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total subscription revenue | $63,696 | $45,087 | | Total cost of revenue—subscription | $13,863 | $8,427 | | Gross profit | $49,833 | $36,660 | | Total operating expenses | $68,972 | $47,272 | | Operating loss | $(19,139) | $(10,612) | | Net loss | $(19,704) | $(7,895) | | Net loss per share, basic and diluted | $(0.20) | $(0.09) | Condensed Consolidated Statements of Comprehensive Loss - Comprehensive loss widened to $(21.2) million in Q1 2022 from $(8.5) million in Q1 2021, driven by both increased net loss and higher unrealized losses on available-for-sale marketable securities and derivative instruments[21] Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(19,704) | $(7,895) | | Other comprehensive loss | $(1,481) | $(641) | | Comprehensive loss | $(21,185) | $(8,536) | Condensed Consolidated Statements of Shareholders' Equity - Total shareholders' equity slightly decreased from $638.6 million at December 31, 2021, to $636.5 million at March 31, 2022, primarily due to the net loss and other comprehensive loss, partially offset by share issuances[23] - Share-based compensation expense contributed $14.1 million to additional paid-in capital during Q1 2022, reflecting ongoing equity incentive programs[23] Condensed Consolidated Statements of Shareholders' Equity (in thousands, except share data) | Metric | Balance as of Dec 31, 2021 | Balance as of Mar 31, 2022 | | :-------------------------------- | :------------------------- | :------------------------- | | Ordinary Shares (Shares) | 97,312,040 | 98,641,858 | | Ordinary Shares (Amount) | $272 | $276 | | Additional paid-in capital | $776,690 | $795,808 | | Accumulated other comprehensive income (loss) | $611 | $(870) | | Accumulated deficit | $(138,992) | $(158,696) | | Total shareholders' equity | $638,581 | $636,518 | Condensed Consolidated Statements of Cash Flows - Net cash provided by operating activities decreased to $5.0 million in Q1 2022 from $8.8 million in Q1 2021, despite an increase in deferred revenue, due to a higher net loss[26][128][129] - Net cash used in investing activities decreased to $(18.9) million in Q1 2022 from $(27.9) million in Q1 2021, primarily due to lower net purchases of short-term investments[26][130] - Net cash provided by financing activities increased significantly to $5.2 million in Q1 2022 from $1.3 million in Q1 2021, driven by proceeds from employee share purchases and option exercises[26][131][132] Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $5,031 | $8,811 | | Net cash used in investing activities | $(18,896) | $(27,890) | | Net cash provided by financing activities | $5,155 | $1,282 | | Net decrease in cash, cash equivalents, and restricted cash | $(8,710) | $(17,797) | | Cash, cash equivalents, and restricted cash—end of period | $59,830 | $146,942 | Notes to Condensed Consolidated Financial Statements - JFrog provides an end-to-end, hybrid, universal DevOps Platform, enabling continuous software delivery and enhancing security and developer efficiency[29] - Revenue from SaaS subscriptions increased its contribution to total revenue from 23% in Q1 2021 to 26% in Q1 2022, indicating a shift towards cloud-managed offerings[36][81] - The company's long-lived assets are primarily located in Israel ($17.6 million) and the United States ($10.5 million) as of March 31, 2022[35] - Remaining performance obligations totaled $172.1 million as of March 31, 2022, with 83% expected to be recognized as revenue over the next 12 months[38] - Goodwill increased slightly to $247.9 million as of March 31, 2022, due to a purchase accounting adjustment[52] - Intangible assets, net, decreased to $45.1 million as of March 31, 2022, from $48.0 million at December 31, 2021, with amortization expenses significantly increasing to $2.8 million in Q1 2022 from $0.4 million in Q1 2021[53] - Share-based compensation expense increased by 20% year-over-year to $14.1 million in Q1 2022, primarily due to grants to new and existing employees and acquisition-related equity awards[68][120] - The company recorded an income tax expense of $0.8 million in Q1 2022, compared to an income tax benefit of $2.4 million in Q1 2021, mainly due to the mix of pre-tax income/loss across different tax jurisdictions[71][122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on JFrog's financial condition and results of operations for the three months ended March 31, 2022, highlighting revenue growth, increased net loss, and strategic investments Overview - JFrog aims to enable 'Liquid Software' through its end-to-end, hybrid, universal DevOps Platform, bridging software development and deployment for faster, more secure releases[78][79] - Revenue is primarily generated from self-managed and SaaS subscriptions, with SaaS contributing 26% of total revenue in Q1 2022, up from 23% in Q1 2021[81] - Enterprise Plus subscriptions, offering access to multiple products, accounted for approximately 35% of total revenue in Q1 2022, up from 29% in Q1 2021, indicating strong demand for comprehensive solutions[82] Key Financial Highlights (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $63,696 | $45,087 | | Net loss | $(19,704) | $(7,895) | | Operating cash flow | $5,031 | $8,811 | | Cash, cash equivalents, and short-term investments (as of period end) | $427,700 | N/A | COVID-19 Update - JFrog has fully reopened its offices and is conducting business as usual, following increased vaccination rates and less virulent COVID-19 strains[85] - The company continues to monitor the pandemic's impact, acknowledging ongoing uncertainty and potential future effects on operations, sales cycles, and financial condition[86][185] Factors Affecting Our Performance - JFrog plans to extend its technology leadership by continuously enhancing its platform with new products and expanded functionality, investing in integrations with major package technologies[87][88] - The company aims to expand usage by existing customers, leveraging its net dollar retention rate (131% as of March 31, 2022, up from 130% in Q1 2021) and growing its base of large customers (599 with ARR ≥ $100K, 16 with ARR ≥ $1M)[89][90][91] - Acquiring new customers is a key growth driver, supported by self-service, freemium offerings, free trials, and open-source software, alongside international expansion efforts[92][93] Non-GAAP Financial Measures - Free cash flow is presented as a non-GAAP measure, calculated as net cash provided by operating activities less purchases of property and equipment, to indicate liquidity for strategic initiatives[94][95] - Free cash flow decreased to $3.9 million in Q1 2022 from $7.7 million in Q1 2021, reflecting lower operating cash flow[96] Free Cash Flow (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $5,031 | $8,811 | | Less: purchases of property and equipment | $(1,143) | $(1,135) | | Free cash flow | $3,888 | $7,676 | Components of Results of Operations - Revenue is disaggregated into self-managed and SaaS subscriptions, with self-managed including license, support, and upgrades, and SaaS providing access to managed cloud products[97][98][99][100] - Cost of revenue for subscriptions includes customer support, cloud hosting, personnel, share-based compensation, and amortization of acquired intangibles, expected to increase with revenue[101][102] - Operating expenses (R&D, Sales & Marketing, G&A) are expected to increase due to investments in headcount, product development, marketing programs, and administrative functions to support business growth[103][104][105][106] - Interest and other income, net, includes earnings on investments and foreign exchange gains/losses. Income tax expense/benefit is influenced by jurisdictional income mix and non-deductible expenses[107][108] Results of Operations Comparison (Three Months Ended March 31, 2022 vs. 2021) - Approximately $15.0 million of the revenue increase was from existing customers, with the remainder from new customers[113] Revenue Comparison (in thousands, except percentage) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------------- | :----- | :----- | :------- | :------- | | Subscription—self-managed and SaaS | $59,069 | $41,338 | $17,731 | 43% | | License—self-managed | $4,627 | $3,749 | $878 | 23% | | Total subscription revenue | $63,696 | $45,087 | $18,609 | 41% | Cost of Revenue and Gross Margin Comparison (in thousands, except percentage) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------------- | :----- | :----- | :------- | :------- | | Total cost of revenue—subscription | $13,863 | $8,427 | $5,436 | 65% | | Gross margin | 78% | 81% | -3% | - | | Primary drivers for cost increase | Amortization of intangibles ($2.4M), personnel-related expenses ($1.5M), share-based compensation ($0.5M) | | | | Operating Expenses Comparison (in thousands, except percentage) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------------- | :----- | :----- | :------- | :------- | | Research and development | $27,101 | $13,836 | $13,265 | 96% | | Sales and marketing | $29,180 | $19,765 | $9,415 | 48% | | General and administrative | $12,691 | $13,671 | $(980) | (7)% | | Total share-based compensation expense | $14,074 | $11,750 | $2,324 | 20% | - R&D expense surged due to increased headcount (including acquisitions), share-based compensation, and acquisition-related compensation[116] - Sales and marketing expense rose due to higher personnel costs, share-based compensation, and marketing program investments[118] - G&A expense decreased primarily due to a $3.6 million reduction in share-based compensation, partially offset by increased personnel-related expenses[119][120] Other Income/Expense Comparison (in thousands, except percentage) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------------- | :----- | :----- | :------- | :------- | | Interest and other income, net | $273 | $360 | $(87) | (24)% | | Income tax expense (benefit) | $838 | $(2,357) | $3,195 | (136)% | | Effective income tax rate | 23% | (4)% | | | - Interest and other income decreased due to lower investment balances. The shift from income tax benefit to expense was driven by the mix of pre-tax income/loss in different tax jurisdictions[121][122][123] Liquidity and Capital Resources - JFrog's primary liquidity sources are cash, cash equivalents, and short-term investments, totaling $427.7 million as of March 31, 2022[125] - The company believes its current liquidity, combined with operating cash flow, will be sufficient for at least the next 12 months, but future capital requirements depend on growth, investments, and potential acquisitions[125][126] - Operating cash flow decreased due to higher net loss, while investing cash outflow decreased due to lower short-term investment purchases. Financing cash inflow increased from employee equity transactions[128][129][130][131][132] Cash Flow Summary (in thousands) | Cash Flow Type | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating Activities | $5,031 | $8,811 | | Investing Activities | $(18,896) | $(27,890) | | Financing Activities | $5,155 | $1,282 | Non-Cancellable Contractual Obligations as of March 31, 2022 (in thousands) | Obligation Type | Total | 2022 (Remainder) | 2023 and Thereafter | | :---------------------- | :---- | :--------------- | :------------------ | | Operating lease obligations | $25,545 | $5,549 | $19,996 | | Purchase obligations | $74,622 | $6,825 | $67,797 | | Total | $100,167 | $12,374 | $87,793 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details JFrog's exposure to market risks, specifically foreign currency exchange risk and interest rate risk, and the strategies employed to mitigate these exposures - JFrog is exposed to foreign currency exchange risk, primarily from NIS-denominated operating costs in Israel against the U.S. dollar, despite most revenue being in USD[138] - The company uses foreign currency forward and option contracts as hedging instruments to reduce volatility, though these programs do not eliminate all risk[139] - Interest rate risk is minimal due to the short-term nature of its cash, cash equivalents, and short-term investments, with a hypothetical 1% interest rate change having no material impact on fair value[142] Item 4. Controls and Procedures This section confirms the effectiveness of JFrog's disclosure controls and procedures and notes no material changes in internal control over financial reporting during the quarter, while also acknowledging the inherent limitations of any control system - Management, including the CEO and CFO, concluded that JFrog's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022[143][144][145] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[146] - The effectiveness of internal controls is subject to inherent limitations, including judgment in design and implementation, and the inability to completely eliminate misconduct[147] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the legal proceedings detailed in Note 10 of the condensed consolidated financial statements, which includes a settlement for a wage and hour dispute with former sales employees - JFrog is not currently aware of any matters that would individually or collectively have a material adverse effect on its business, financial position, results of operations, or cash flows[60] - The company has agreed to amicably resolve a wage and hour dispute with former sales employees for approximately $2.6 million, which was accrued as part of sales and marketing expenses in Q4 2021[61] Item 1A. Risk Factors This section updates the risk factors previously disclosed, focusing on potential impacts from global economic conditions, stringent privacy and cybersecurity regulations, and challenges associated with international operations Risks Related to Our Business and Industry - Unfavorable conditions in the industry or global economy, including geopolitical unrest (e.g., Russia-Ukraine war), inflation, and interest rate hikes, could limit business growth and negatively affect results of operations by decreasing IT spending[152] Risks Related to Privacy, Data Protection and Cybersecurity - JFrog is subject to stringent and evolving global privacy, data protection, and data security laws (e.g., CCPA, CPRA, GDPR, DSL, PIPL), with non-compliance potentially leading to significant costs, liabilities, and reputational harm[153][157][159][166] - Security breaches or unauthorized access to proprietary and confidential data, including through cyberattacks or employee error, could damage reputation, lead to litigation, regulatory investigations, and significant financial liabilities[169][172][175] - The company faces heightened cybersecurity risks due to remote work and geopolitical tensions, with evolving attack techniques and regulatory requirements increasing compliance burdens and costs[174][177] Risks Related to Foreign Operations - International operations, with primary R&D in Israel and customers in over 90 countries, expose JFrog to risks such as changes in tariffs, labor regulations, privacy laws, political/economic conditions (e.g., Russia-Ukraine war), currency exchange rates, and intellectual property protection[179][180][182] General Risk Factors - The ongoing COVID-19 pandemic continues to pose risks, potentially leading to slowed growth for new customers, fewer upgrade orders, increased sales cycle lengths, and delays in new projects, with the full impact remaining uncertain[184][185][187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports the issuance of ordinary shares in February 2022 as consideration for a previous acquisition, exempt from registration under the Securities Act - In February 2022, JFrog issued 48,183 ordinary shares as consideration for a prior acquisition, exempt from registration under Section 4(a)(2) or Rule 701 of the Securities Act[188][189] - No proceeds were generated from these unregistered sales of equity securities[190] Item 3. Default Upon Senior Securities This item states that there are no defaults upon senior securities to report - Not applicable[191] Item 4. Mine Safety Disclosures This item indicates that there are no mine safety disclosures required - Not applicable[192] Item 5. Other Information This item states that there is no other information to report - Not applicable[193] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and other required filings - The exhibit index includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (Exhibits 101 INS, SCH, CAL, DEF, LAB, PRE, 104)[197]