JFrog’s S-1 Analysis — Leaping Forward 🐸

Software developer tools company JFrog recently filed its S-1 with $100M as a placeholder for the offering. The first venture-backed developer-focused company to file in 2020, JFrog offers a DevOps/Continuous Software Release Management solution (CSRM) to enable organization to continuously deliver software updates across any system. Currently JFrog has 5.8K customers supporting millions of developers generating $128M in revenue over the last twelve months. Founded in 2008, JFrog has +590 employees and is co-headquartered in Sunnyvale, California and in Netanya, Israel.

JFrog’s S-1 emphasizes that “software is eating the world,” the frequency of software releases is increasing, and the end state of digital transformation is a non-stop, always-on, secure, continuous delivery of value to users. JFrog’s vision is to power a world of continuously updated, version-less software they call “Liquid Software.”

JFrog’s solutions support DevOps, the convergence of software “developers” and IT “operators.” The DevOps workflow spans the entire software lifecycle from the planning, coding, building, and testing of software by developers, to the releasing, deploying, operating, and monitoring of that software by operators. JFrog’s platform is designed to manage and deploy all types of software packages within an organization, making it the system of record for an organization’s software, what they like to call the “database of DevOps.” Like fellow recent IPO filer Sumo Logic, JFrog also notes it supports DevSecOps, the process of managing security earlier in the software release cycle.

The core of JFrog is its Artifactory, a universal package repository, where software packages can be edited, tracked, and managed. To complement Artifactory, JFrog offers a fully integrated suite of products include Pipelines, Xray, Distribution, Artifactory Edge, Mission Control, and Insight.

• JFrog Pipelines is a Continuous Integration/Continuous Delivery (CI/CD) tool, responsible for automating and orchestrating the movement of software packages through the platform.
• JFrog Xray continuously scans JFrog Artifactory to secure all packages stored in it.
• JFrog Distribution provides reliable, scalable, and secure software package distribution with enterprise-grade performance.
• JFrog Artifactory Edge is a specialized, read-only version of JFrog Artifactory, co-located close to the runtime environment.
• JFrog Mission Control is the platform control panel, providing a high-level view of all the moving pieces of an organization’s CSRM workflow.
• JFrog Insight is a universal DevOps intelligence tool.

Overall the fully integrated suite of products allows customers to compile software from source code repositories, manage the dependencies among components within software packages, move packages to a universal repository, ingest packages from third parties, including open source libraries, scan for vulnerabilities through various stages, distribute to endpoints, and deploy in production, all through a single user access point. The company claims benefits of their approach include being an end-to-end unified platform, a single, trusted repository, acceleration through automation, multi-cloud deployment, scalability, and security. The company bundles the software into different package offerings delineated below.

JFrog addresses the DevOps tools category which is expected to reach $18B by 2024, according to IDC. JFrog built their own Total Addressable Market (TAM) model that suggests a $22B market, which they calculated by multiplying the average ARR per customer type by the number of businesses that are between 500-1K employees, 1K-2.5K, and +2.5K.

There are numerous competitors. With respect to self-managed deployments, alternatives include IBM (Red Hat), Pivotal Software, VMware, GitLab, and Sonatype. With respect to SaaS deployments, competition includes GCP, AWS, and Azure DevOps including GitHub.

JFrog revenues are comprised of revenue from self-managed subscriptions and SaaS subscriptions. Within self-managed subscriptions there can be license revenue from proprietary features that is recognized upfront and is a separate line item in the consolidates statements of operations. JFrog achieved $105M in consolidate revenue in FY19 compared to $64M in FY19, 65% YoY growth. For the six months ended June 30, 2019 and 2020, JFrog’s consolidated revenue increased from $46M to $69M, expanding 50% YoY. For this time period, subscription revenue represented 92% of total revenue while license revenue was 8%. Interestingly, self-managed revenue is the more popular product delivery option representing 80% of revenue vs. SaaS subscriptions of 20% for the past six months. This suggests customers are security conscious and care about control, logical given code is a key business asset.

Revenue is derived from both U.S. and international customers. International customers represented 36–38% of revenue the last two years. Other than the United States, no other individual country accounted for 10% or more of total revenue for these years.

Customers continue to increase. As of June 30, 2020, JFrog had 5.8K customers, up from 5.6K as of December 31, 2019. Approximately 286 customers as of June 30, 2020 had annual run-rate revenue (ARR) of $100K or more, increasing from approximately 234 and 131, as of December 31, 2019 and 2018, respectively. There is some revenue concentration as these 286 larger customers (5% of total) account for ~48% of ARR. Further, as of June 30, 2020, they had eight customers with ARR of $1M+, up from seven and one customer as of December 31, 2019 and 2018, respectively. For the six months ended June 30, 2020, the 10 largest customers represented ~8% of total revenue and no single customer accounted for more than 2% of total revenue. As of June 30, 2020, approximately 27% of the Forbes Global 2000 were JFrog customers.

JFrog achieved a strong twelve month trailing net dollar retention rate of 139% as of June 30, 2020. The net dollar retention rate for FQ2’20 was 133%, resulting in the trailing four quarter net dollar retention rate declining from 142% to 139% from year end 2019 to the second quarter of 2020. Management expects trailing four quarter net dollar retention rate to decline further in the near term due to the impact of the COVID-19 pandemic. Our recent research found that public SaaS businesses achieving +124% net dollar retention are in the top quartile so JFrog remains in a good position.

Importantly, JFrog’s product bundling is working to drive strong retention. For the six months ended June 30, 2020, approximately 85% of revenue came from subscriptions that provide customers with access to multiple products, compared to approximately 83% for the six months ended June 30, 2019.

Moving on to gross margin, which equals revenue minus the cost of goods sold that includes things like hosting costs and customer support. For the last six-month ending June 30, 2020, JFrog achieved 81% gross margins. Gross margin for subscription revenue decreased to 81% for the year ended December 31, 2019 compared to 83% for the year ended December 31, 2018. The decrease in gross margin was primarily due to additional costs of access to vulnerability databases beginning in 2019. Our research suggests publicly traded SaaS companies that achieve a gross margin of +78% are in the top quartile so JFrog is doing well.

Of each operating expense item, JFrog spent the most on S&M at 42% in FY19. Its GTM motion is primarily self-service and inbound sales. They recently began building a small, high-touch strategic sales team to identify new use cases and drive expansion and standardization on JFrog within its largest customers. The company has an OK magic number of 1.0. A magic number of 1 suggests there is S&M efficiency. Our research suggests for publicly traded SaaS companies the median operating margin is -16% so JFrog is doing well at -7% in FY19.

In terms of net income margin, JFrog achieved -5% in FY19, significantly improving from -41% for the equivalent period a year earlier.

Jfrog raised +$228M in total funding from backers including Insight, Spark, Battery, Sapphire, and Scale. It last raised money a $165 million Series D round in October 2018 at a $1.2B valuation.

JFrog’s IPO registration touches on a few trends. First, every company is becoming a software business, so developers are now buyers and developer tooling has more reach than ever before. Second, winning the hearts and minds of developers with a game changing product like Artifactory earns the opportunity to build new solutions to broaden reach. Customers can be a key moat because you can upsell more products to them. Finally, the continuous and reliable release of new software is mission critical, where delay or failure can be disruptive and costly. In turn, development teams need to adopt tooling and standardize practices to prevent issues. The companies that provide this tooling can become huge. After being private for twelve years, it will be exciting to watch as JFrog goes public.