JFrog Ltd Q2 FY2021 earnings

JFrog reported second quarter revenue of $48.7 million, up 33.6% from the prior-year quarter. Gross profit was $39.6 million, up 33.1%, and gross margin came in at 81.4%, down 0.3 percentage points. The GAAP bottom line swung to a loss. Operating loss was $14.2 million, compared with operating income of $1.3 million a year earlier. Net loss was $13.1 million, against net income of $1.7 million in the prior-year quarter, and diluted loss per share was $0.14. For the six months ended June 30, 2021, revenue was $93.7 million and gross profit was $76.2 million. The six-month net loss was $21.0 million, and diluted loss per share was $0.23.

Cash generation was the strongest part of the release. Operating cash flow was $19.2 million for the quarter, up 169.5%, and $28.0 million for the first half, up 377.2%. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $18.0 million. Capital expenditures were $1.1 million in the quarter and $2.3 million year to date. Deferred revenue reached $119.2 million, up 43.8% from the prior-year quarter, and remaining performance obligations were $127 million. Cash, cash equivalents and short-term investments stood at $615.2 million as of June 30, 2021.

The headline GAAP loss needs context. Share-based compensation explains most of the gap between reported and adjusted results, with a large piece tied to RSUs granted to the CEO in August 2020. Non-GAAP operating income was $1.0 million, and non-GAAP net income per diluted share was $0.01. Those measures strip out share-based compensation, acquisition-related costs and amortization of acquired intangibles.

Operationally, 415 customers had ARR above $100,000 at quarter end, up from 352 at December 31, 2020, and 12 customers had ARR above $1 million, up from 10. Net dollar retention for the trailing four quarters was 129%, down from 139% a year earlier. Cloud revenue grew 47% to $11.5 million and accounted for 24% of total revenue, up from 21%. Customers on the full Enterprise+ subscription represented 32% of revenue, up from 17%. JFrog hosted swampUP 2021 and rolled out capabilities including Private Distribution Network, Federated Repositories, Signed Pipelines and Cold Artifact Storage. MD&A attributes about $9.9 million of the quarterly revenue increase to growth from existing customers, with the remainder from new customers.

On July 19, 2021, after the quarter closed, JFrog acquired Vdoo for roughly $287 million, paying $199.8 million in cash net of cash acquired. Management frames the deal as a step toward end-to-end security from development to device, and expects it to support growth in the second half. Third quarter guidance calls for revenue of $52 million to $53 million, a non-GAAP operating loss of $2.6 million to $3.6 million, and a non-GAAP loss per share of $0.03 to $0.04 on roughly 96 million weighted average shares. Full year 2021 guidance calls for revenue of $202 million to $205 million, a non-GAAP operating loss of $4 million to $5 million, and a non-GAAP loss per share of $0.04 to $0.05 on about 95 million weighted average shares.

MD&A flags several pressures. COVID-19 has slowed growth, and the company expects slower upgrade orders, longer sales cycles and delays in new projects. New coronavirus variants could tighten restrictions again. Other disclosed risks include a history of losses, a security breach, competition, strain from rapid growth, and dependence on retaining and upgrading existing customers. Vdoo adds integration and customer continuity risk on top of that list.