(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 12, 2020, or our Annual Report. As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and under Part I, Item IA in our Annual Report.
JFrog's vision is to power a world of continuously updated, version-less software-we call this Liquid Software.
We provide an end-to-end, hybrid, universal DevOps Platform to achieve Continuous Software Release Management, or CSRM. Our leading CSRM platform enables organizations to continuously deliver software updates across any system. Our platform is the critical bridge between software development and deployment of that software, paving the way for the modern DevOps paradigm. We enable organizations to build and release software faster and more securely while empowering developers to be more efficient.
We have designed our subscription structure and go-to-market strategy to align our growth with the success of our customers. Our business model benefits from our ability to serve the needs of all customers, from individual software developers and IT operators to the largest organizations, in a value-oriented manner. All references to our customers included in this Quarterly Report on Form 10-Q refer to paying customers.
We generate revenue from the sale of subscriptions to customers. All of our subscription tiers are available for self-managed deployments, where our customers deploy and manage our products across their public cloud, on-premise, private cloud, or hybrid environments, as well as JFrog-managed public cloud deployments, which we refer to as our SaaS subscriptions. Due to ease of use, none of our subscriptions require the use of professional services. Revenue from SaaS subscription contributed 24% and 23% of our total revenue for the three and six months ended June 30, 2021, respectively, compared to 21% and 20%, respectively, for the corresponding periods in 2020.
Our self-managed subscriptions are offered on an annual and multi-year basis, and our SaaS subscriptions are offered on an annual and monthly basis. Revenue from subscriptions that provide our customers with access to multiple products represented approximately 92% of our total revenue for the three and six months ended June 30, 2021, compared to 86% and 85%, respectively, for the corresponding periods in 2020. Revenue from Enterprise Plus subscription represented approximately 32% and 30% of our total revenue for the three and six months ended June 30, 2021, respectively, compared to approximately 17% and 16%, respectively, for the corresponding periods in 2020. The growth in revenue from our Enterprise Plus subscription, which was first launched in 2018 for self-managed deployments and during 2020 for SaaS deployment, demonstrates the increased demand for our end-to-end solutions for customers' entire CSRM workflows.
We have an unwavering commitment to the software developer and IT operator communities, and show this commitment by offering varying forms of free access to our products in addition to the paid subscriptions described above. This free access takes the form of free trials, freemium offerings, and open source software, and helps generate demand for our paid offerings within the software developer and IT operator communities.
We had $615.2 million of cash, cash equivalents, and short-term investments as of June 30, 2021. We generated revenue of $48.7 million and $36.4 million for the three months ended June 30, 2021 and 2020, respectively, representing 34% growth. We generated revenue of $93.7 million and $69.3 million for the six months ended June 30, 2021 and 2020, respectively, representing 35% growth. Net loss was $13.1 million for the three months ended June 30, 2021 compared to net income of $1.7 million for the three months ended June 30, 2020. We incurred net loss of $21.0 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively. We generated operating cash flow of $28.0 million and $5.9 million during the six months ended June 30, 2021 and 2020, respectively.
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Acquisition of Vdoo Connected Trust Ltd.
On July 19, 2021, we acquired 100% of equity interest in Vdoo, a privately-held company in Israel, which provides a product security platform for automating all software security tasks throughout the entire product lifecycle. The acquisition accelerates our security technology expansion, aiming to deliver a holistic security solution as part of our Platform.
The COVID-19 pandemic has resulted in travel restrictions, prohibitions of non-essential activities, disruption and shutdown of certain businesses, and greater uncertainty in global financial markets. Such conditions have created disruption in global supply chains, increasing rates of unemployment, and adversely impacting many industries. While COVID-19 related restrictions have eased in many locations pursuant to Centers for Disease Control and Prevention guidelines and other governmental and local regulations, new variants of the coronavirus may result in increased restrictions in the future, which is likely to have an adverse impact on global economic and market conditions.
As of the date of this Quarterly Report on Form 10-Q, the full impact of the COVID-19 pandemic on the global economy and the extent to which the COVID-19 pandemic may impact our financial condition or results of operations remain uncertain. Furthermore, because of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods, if at all.
We have experienced slowed growth during the COVID-19 pandemic. We expect to experience slowed growth and lower orders from our existing customers for upgrades within our platform. We have experienced and expect to continue to experience an increase in the average length of sales cycles and delays in new projects, both of which have adversely affected and could materially adversely impact our business, results of operations, and overall financial condition in future periods. The extent and continued impact of the COVID-19 pandemic on our operational and financial condition will depend on certain developments, including: the duration and spread of the outbreak; government responses to the pandemic; the efficacy of COVID-19 vaccines; its impact on the health and welfare of our employees and their families; its impact on our customers and our sales cycles; its impact on customer, industry, or technology-based community events; delays in onboarding new employees; and effects on our partners, some of which are uncertain, difficult to predict, and not within our control. General economic conditions and disruptions in global markets due to the COVID-19 pandemic and other global events may also affect our future performance.
In response to the COVID-19 pandemic, in the first quarter of 2020, we temporarily closed all of our offices, enabled our entire work force to work remotely and implemented travel restrictions for non-essential business. Since the second quarter of 2020, we intermittently and partially reopened our offices to the extent permitted by local government restrictions. In April 2021, we fully reopened our offices in Israel and in June 2021, we partially reopened our offices in the U.S. The impact, if any, of these and any additional operational changes we may implement are uncertain. The changes we have implemented to date have not affected and are not expected to materially affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Extending Our Technology Leadership
We intend to continue to enhance our platform by developing new products and expanding the functionality of existing products to maintain our technology leadership. Since our initial launch of JFrog Artifactory, we have released several additional products that together create a unified platform for CSRM.
We invest heavily in integrating our products with the major package technologies so that our products can be easily adopted in any development environment. We believe that these integrations increase the value of our platform to our customers, as they provide freedom of choice for software developers and IT operators and help avoid vendor lock-in. We intend to expend additional resources in the future to continue introducing new products, features, and functionality.
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Expanding Usage by Existing Customers
We believe that there is a significant opportunity for growth with many of our existing customers. Many customers purchase our products through self-service channels and often materially expand their usage over time. Increased engagement with our products provides our support and customer success teams opportunities to work directly with customers and introduce them to additional products and features, as well as drive usage of our products across large teams and more broadly across organizations. In order for us to continue to expand usage within our existing customers we will need to maintain engineering-level customer support, and continue to introduce new products and features that are responsive to our customers' needs.
We quantify our expansion across existing customers through our net dollar retention rate. Our net dollar retention rate compares our annual recurring revenue ("ARR") from the same set of customers across comparable periods. We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last month of the quarter. The ARR includes monthly subscription customers so long as we generate revenue from these customers. We annualize our monthly subscriptions by taking the revenue we would contractually expect to receive from such customers in a given month and multiplying it by 12. We calculate net dollar retention rate by first identifying customers (the "Base Customers"), which were customers in the last month of a particular quarter (the "Base Quarter"). We then calculate the contracted ARR from these Base Customers in the last month of the same quarter of the subsequent year (the "Comparison Quarter"). This calculation captures upsells, contraction, and attrition since the Base Quarter. We then divide total Comparison Quarter ARR by total Base Quarter ARR for Base Customers. Our net dollar retention rate in a particular quarter is obtained by averaging the result from that particular quarter with the corresponding results from each of the prior three quarters. Our net dollar retention rate may fluctuate as a result of a number of factors, including the level of penetration within our customer base, expansion of products and features, and our ability to retain our customers. As of June 30, 2021 and 2020, our net dollar retention rate was 129% and 139%, respectively.
We focus on growing the number of large customers as a measure of our ability to scale with our customers and attract larger organizations to adopt our products. As of June 30, 2021, 415 of our customers had ARR of $100,000 or more, increasing from 352 customers as of December 31, 2020. We had 12 customers with ARR of at least $1.0 million as of June 30, 2021, increasing from 10 customers as of December 31, 2020.
Acquiring New Customers
We believe there is a significant opportunity to grow the number of customers that use our platform. Our results of operations and growth prospects will depend in part on our ability to attract new customers. To date, we have relied on our self-service and inbound sales model to attract new customers. Prospective customers can evaluate and adopt our products through our free trials, freemium offerings, and open source software options. The costs associated with providing these free trials, freemium offerings, and open source software options are included in sales and marketing. While we believe we have a significant market opportunity that our platform addresses, we will need to continue to invest in customer support, sales and marketing, and research and development in order to address this opportunity.
Additionally, we believe our products address the software release needs of customers worldwide, and we see international expansion as a major opportunity. We have been operating and selling our products in international markets since our inception. While we believe global demand for our products will continue to increase as international market awareness of our brand grows, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that free cash flow, a non-GAAP financial measure, is useful in evaluating the performance of our business.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property and equipment. We believe this is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance
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sheet. Free cash flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of free cash flow are that this metric does not reflect our future contractual commitments and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our free cash flow to fluctuate in future periods as we invest in our business to support our plans for growth.
The following table summarizes our cash flows for the periods presented and provides a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, a non-GAAP financial measure, for each of the periods presented:
Six Months Ended June 30, 2021 2020 (in thousands) Net cash provided by operating activities $ 27,984 $ 5,864 Less: purchases of property and equipment (2,274 ) (1,506 ) Free cash flow $ 25,710 $ 4,358 Net cash provided by (used) in investing activities $ 71,866 $ (18,486 ) Net cash used in financing activities $ (5,101 ) $ (1,568 ) Components of Results of Operations
Our revenues are comprised of revenue from self-managed subscriptions and SaaS subscriptions. Subscriptions to our self-managed software include license, support, and upgrades and updates on a when-and-if-available basis. Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public cloud.
Subscription-Self-Managed and SaaS
Subscription-self-managed and SaaS revenue is generated from the sale of subscriptions for our self-managed software products and revenue from our SaaS subscriptions. For subscriptions to our self-managed software products, revenue is recognized ratably over the subscription term. For our SaaS subscriptions, revenue is recognized based on usage as the usage occurs over the contract period.
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized upfront when the software license is made available to our customer.
Cost of Revenue
Subscription-Self-Managed and SaaS
Cost of subscription-self-managed and SaaS revenue primarily consists of expenses related to providing support to our customers and cloud-related costs, such as hosting and managing costs. These costs primarily consist of personnel-related expenses of our services and customer support personnel, share-based compensation expenses, public cloud infrastructure costs,
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depreciation of property and equipment, and allocated overhead. We expect our cost of subscription and SaaS revenue to increase in absolute dollars as our subscription and SaaS revenue increases.
Cost of license self-managed revenue consists of amortization associated with acquired intangible assets.
Research and Development
Research and development costs primarily consist of personnel-related expenses, share-based compensation expenses, associated with our engineering personnel responsible for the design, development, and testing of our products, cost of development environments and tools, and allocated overhead. We expect that our research and development expenses will continue to increase as we increase our research and development headcount to further strengthen and enhance our products and invest in the development of our software.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses, share-based compensation expenses, sales commissions directly associated with our sales and marketing organizations, public cloud infrastructure costs associated with our free trials, freemium offerings, and open source software options, and costs associated with marketing programs and user events. Marketing programs include advertising, promotional events, and brand-building activities. We plan to increase our investment in sales and marketing over the foreseeable future, as we continue to hire additional personnel and invest in sales and marketing programs.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses, share-based compensation expenses, associated primarily with our finance, legal, human resources and other operational and administrative functions, professional fees for external legal, accounting and other consulting services, directors and officer's insurance expenses, and allocated overhead. We expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect our general and administrative expenses to increase for the foreseeable future.
Interest and Other Income, Net
Interest and other income, net primarily consists of income earned on our cash equivalents and short-term investments. Interest and other income, net also includes foreign exchange gains and losses.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of income taxes related to the U.S. and other foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on certain deferred tax assets in Israel as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.
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Results of Operations The following tables set forth selected condensed consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Revenue: Subscription-self-managed and SaaS $ 45,312 $ 33,161 $ 86,650 $ 63,458 License-self-managed 3,345 3,270 7,094 5,794 Total subscription revenue 48,657 36,431 93,744 69,252 Cost of revenue: Subscription-self-managed and SaaS(1) 8,881 6,475 17,117 12,665 License-self-managed(2) 190 214 381 428 Total cost of revenue-subscription 9,071 6,689 17,498 13,093 Gross profit 39,586 29,742 76,246 56,159 Operating expenses: Research and development(1)(3) 16,688 9,776 30,524 19,071 Sales and marketing(1)(2)(3) 22,026 13,882 41,791 27,905 General and administrative(1)(3) 15,103 4,746 28,774 9,944 Total operating expenses 53,817 28,404 101,089 56,920 Operating income (loss) (14,231 ) 1,338 (24,843 ) (761 ) Interest and other income, net 346 574 706 1,138 Income (loss) before income taxes (13,885 ) 1,912 (24,137 ) 377 Income tax expense (benefit) (736 ) 213 (3,093 ) 803 Net income (loss) $ (13,149 ) $ 1,699 $ (21,044 ) $ (426 ) _________________________________________
(1) Includes share-based compensation expense as follows:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Cost of revenue: subscription-self-managed and SaaS $ 824 $ 199 $ 1,586 $ 339 Research and development 2,680 930 4,509 1,696 Sales and marketing 3,522 1,097 6,245 1,770 General and administrative 7,078 557 13,514 934 Total share-based compensation expense $ 14,104 $ 2,783 $ 25,854 $ 4,739
(2) Includes amortization expense of acquired intangible assets as follows:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Cost of revenue: license-self-managed $ 190 $ 214 $ 381 $ 428 Sales and marketing 182 182 364 364 Total amortization expense of acquired intangible assets $ 372 $ 396 $ 745 $ 792
(3) Includes acquisition-related costs as follows:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Research and development $ 351 $ 352 $ 702 $ 699 Sales and marketing - 114 - 228 General and administrative 361 - 361 - Total acquisition-related costs $ 712 $ 466 $ 1,063 $ 927
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Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: Subscription-self-managed and SaaS 93 % 91 % 92 % 92 % License-self-managed 7 9 8 8 Total subscription revenue 100 100 100 100 Cost of revenue: Subscription-self-managed and SaaS 18 17 18 18 License-self-managed 1 1 1 1 Total cost of revenue-subscription 19 18 19 19 Gross profit 81 82 81 81 Operating expenses: Research and development 34 27 32 28 . . .
Aug 06, 2021
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