Welcome to the JFrog's Second Quarter Fiscal 2021 Financial Results Conference Call. My name Jennia, I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. I will now turn the call over to JoAnn Horne from Investor Relations team. You may begin.

Good afternoon and thank you for joining us as we review JFrog’s fiscal ’21 second quarter financial results which were announced following the market close via press release earlier today. Joining us will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Jacob Shulman, JFrog's CFO. Before we begin, let me review the Safe Harbor statement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for the third quarter and full year of 2021. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements which reflect our views only as of today, not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future results. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2020 filed with the SEC on February 12, 2021 and our Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 7, 2021 which are available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our quarterly report on Form 10-Q for the quarter ended June 30, 2021, and other filings and reports that we may file from time-to-time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as measures of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. And with that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi?

Thank you, JoAnn. Reading from the swamp and thanks for joining us for JFrog’s 2021 second quarter earnings. The first quarter was very productive for us. And before we start, I want to express my special thanks to JFrog’s employees for strong deliveries on all fronts. In today's calls, I would like to cover [indiscernible] the items that will help to set the future of JFrog and the world of DevOps. First, I want to address the overall performance of the business in Q2. Then, I want to highlight some recent customers wins, including some from our pending strategic servicing. I will also talk about our recent acquisition of Vdoo, a leading security platform creator. I want to inform you about innovative product releases, we announced at swampUp our annual user conference. I will also address the recent hiring of our new Executive Vice President of Product and Engineering. These are all indicators of solid future for JFrog beginning with the second half of the year and investments we are making on all fronts in order to fulfill our vision of becoming the company behind all software updates, the company that makes software liquid. Let's start. We brought the world groundbreaking innovation in Q2, we delivered on unique product investment and we extended our partner ecosystem. Also a successful virtual annual DevOps community events for 1000s of attendees and held the sold out in person events in Tel Aviv at DevOps industry fairs since the pandemic began. This events and milestone as a single mission to make every software creator successful by providing the best solution to release fast and secure software continuously, the future is clear. There will be more software. Software needs to be updated. Updates can be only achieved with binary management, deployment and automation for fearless…

Thank you, Shlomi, and good afternoon, everyone. I will start with a brief overview of our second quarter financial results and provide our outlook for Q3 and the full year of 2021. As a reminder, please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP measures can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished to the SEC. Now let's turn to our financial results. We had expected Q2 to be the most difficult quarter of the year and we encouraged it came in line with our expectations. Total revenues for the three months ended June 30, 2021 were $48.7 million, up 34% year-over-year. Self-managed revenues also often called on-prem, were $37.2 million, up 30%. Cloud revenues again grew faster, up 47% to $11.5 million, or 24% of total revenues, compared to 21% of total revenues in Q2 of last year. Net dollar retention for the trailing four quarters was 129%. Note that this metric reflects the four quarters since the onset of the COVID pandemic, which saw pressure on customer expansions. We will continue to expect this metric to stabilize around 130% for the balance of the year. As a reminder, effective April 1, we implemented some subscription changes and price increases for certain subscriptions. Let me quickly review the terms again, the price increase was only for on-prem products, specifically for Pro and Pro X subscriptions. In addition, we made X-ray mandatory for our enterprise subscription. Overall, the changes are expected to impact approximately 40% of our revenue, customers had the option to renew early at older pricing. So we did see approximately 40% of our bookings in q1 associated with this early…

Thank you, Jacob. We invested a lot in the past few quarters and I'm happy to see the fruits of our labor coming in. We believe JFrog offers the pure DevOps and SecOps technology to the world. And our team stands ready to step into the second half stronger on all frontiers to meet our goals. I would like to stand a special welcome to the Vdoo team. We look forward to continued success together. Thanks for your attendance and may JFrog be with us all. Now, we are happy to take your question.

Thank you. [Operator Instructions] And our first question comes from Sterling Auty from JPMorgan.

First of all, happy birthday, Jacob. Thanks for sharing your special day with us all. And on to questions. I'd like to know a little bit more about you'd mentioned kind of the go-to-market with the cloud platforms, AWS, et cetera. What specifically are they doing on their side to get you in front of prospective customers? And how do you think that's going to contribute to the acceleration in the back half?

Yes. Hi, Sterling. Great to hear back from you. I'll start and Jacob feel free to chime in. Obviously, Sterling, we started to build the relationship with all the cloud providers in parallel as we provide a multi-cloud solution. Part of what we are doing is not just to make sure the JFrog solution is present on the marketplace but also collaborating on a co-selling and co-marketing level with the enterprise team of AWS, Google Cloud and Microsoft Azure. The way it addresses our customers, our joint customers or prospects is that with the cloud contractors, all of them have. The cloud providers in the cloud enterprise sales team can come with other benefits to the customers which makes the joint solution and the holistic solution more appealing not just from a cost point of view, but also different benefits point of view, including premium support and other benefits that they can offer as a cloud provider. Obviously, this is a win-win situation because they generate more traffic on the cloud. We provide more DevOps and SecOps value and the customers enjoy different terms and different conditions of the usage.

Shlomi, If I add to that, that obviously it also streamlines the purchasing process, they remove the administrative headache and hurdles from the process.

Got it. Make sense. And then one follow up, you had talked about customers looking to consolidate in terms of some of their cloud usage and that you were looking to negotiate new deals, can you help us understand, what part of the business, how big of an impact is that? And what is the pricing structure that they're looking to move towards?

Yes, well, that's a good question, because what we see now, as the end of the four quarters into the pandemic, is that customers are looking to optimize subscriptions. By the way, not only cloud, they are looking to optimize subscriptions and especially hosting costs. So what they are looking at is obviously usage into cloud, data transfer and data storage. And they are trying to understand what it means to scale with a full platform and not just a registry or just a security solution. So currently, we have in pipe some big opportunities, joint opportunity -- some of them are joint opportunities, together with the cloud providers, and some of them started the on the JFrog free deal solution. And what we expect to see is that these deals will come in, in the future quarter.

And our next question comes from Jack Andrews from Needham.

Good afternoon. Thanks for taking my question. Shlomi, appreciate your context by which you walked through all the innovations that you talked about it swampUp, could you maybe frame for us just how we should think about the monetization, the potential uplift to ARR from some of these features?

Yes, well, Jack, the idea of adding more and more innovation into the platform is very much aligned with our vision, what we are trying to fulfill? We are trying to make sure that the binary lifecycle, the full binary orchestration is covered by JFrog platform. Therefore, when you look at the thing that the market, kind of showing or the demand that we have for the market, is about global team, distributed team, remote walk, and how do I get binary fast and secure to the edge. Therefore, the first thing that we have released is the Federated repository. That's an enhancement of artifactory, which will help teams all over the world to look at the same repository, no matter whether you are in China, or Europe or North America, you will wake up on Monday morning and you will develop against the same repository. The second thing is once it's ready, how do you get it distributed? And that's beyond your just DevOps lifecycle? How do you get it distributed to the edge, and that means that JFrog distribution can cover these aspects, distributing release boundaries from one to many edges. Jacob pipeline with the Signed Pipeline is actually answering the holistic security that we are talking about across the platform, what comes into the pipeline gets out on the deployment side. Now, onto the ARR questions you mentioned. This all is part of our platform, some of the features are advancing artifactory solution, other security solutions and some CI/CD. When we look at the distribution obviously this will be by consumption. As you distribute more the ARR growth will be impacted. Federated repository is about the -- in large of the team, of the topology, multisite topology and then ARR will go by Team, by project and by location. And when you look at the security enhancements, this will upgrade to subscriptions that includes the JFrog security from the [indiscernible] and above in the self-hosted solution and obviously more usage when it comes to the cloud.

Really appreciate that color, thanks Shlomi. Just as a quick follow up. Can I ask about just any color you can share in terms of new leads and new logos coming from your free tier. Are there any characteristics in terms of just metrics that you're able to share with us in terms of the traction you're getting there?

Absolutely. The free tier is an amazing journey for JFrog because aside from the fact that it's top of funnel tool, it's also an amazing tool to communicate with the community, we will build by the community and for the community, and therefore, all the feedback that we are getting are immediately injected into what we call the optimization of the free tier. Now, when you look at the free tier, and not just JFrog, any kind of free tier in the cloud, you will divide into three different blocks, block number one, how many new users are coming visiting this offer; block number two, how many of them will activate, not just visit and learn about it, but also really activate and use it for free for now. And then, block number three is how many of them will use more above their quota and will be converted to paying users. What we see now as we conclude the three quarters with the free tier out is that the top of funnel we see more and more traction coming to the free tier. By the way, on all clouds on Google Cloud, AWS and Microsoft Azure, we see more activation as we optimize the onboarding process. And activation means not just artifactory, we start to see users using more than just one single product. And we also see an improvements in the number of conversions. Obviously, we will walk in the next future and this is an ongoing never ended investment that we will do to have a joyful experience to all of the community. If I may add to it one story. last sentence. The idea of free tier is also super powerful, because even if a prospect is not yet paying, but using your DevOps platform, it means that they are not using the competitors one. And for that we are also grateful and looking forward to convert them to become paying enterprise users.

And our next question comes from Kingsley Crane from Berenberg.

So, first, it seems like cloud revenue, despite the headwinds, we're talking about, did pretty well growing at 47%. But just want to kind of dig into it more. So when you talk about the dynamics customers consolidating, is that the case for their paring back their underlying usage of a public cloud or is it directly reducing the usage of JFrog itself?

Yes. So what we see in the market is that the cloud adoption at the beginning of the pandemic was impressive, let's call it impressive, we sell numbers that we were very happy about, people started to demand more, and to add more regions and not just usage but more regions and more deployments, environmental vision, JFrog solution in different places on different clouds. Currently, what we see is that the majority of the enterprise is looking on a multisite topology – multi-cloud topology. And they would like to optimize their subscription, not just with JFrog, but also with the AWS, Microsoft, and Google Cloud. Currently, as we are thinking about other clouds to expand, maybe even more in APAC. The second thing that we see is that usage is being reviewed, hosting expenses, especially if you offer a hybrid solution are being observed and reviewed. And agreements are being renewed, we see a very high retention rate. On the other hand, every time that we have a renewal point, it comes with an upgrade in terms of usage. And the organizations that are renewing the subscriptions are looking for more value coming from JFrog. We didn't see a lot of churn from JFrog into the public cloud, mainly because of the fact that we are also collaborating with them, as I mentioned before, on a co-selling and co-marketing level. But sometimes if you just need a simple repository and you don't need the full platform, or if you just need one theme to easily onboard on a registry, it might be a good solution for you. That's not what JFrog is aiming to.

Okay, that makes perfect sense. And then, to the follow up there would be -- sometimes we see tier back and consumption on a quarter-by-quarter basis. And, so do you think this is a recurring structural trend that you're seeing, or is this sort of just something in q2?

Well, Q2, as expected, and as we reported was a different quarter prod. So if you remember, in Q1, we reported the change that we've done on the on-prem self-hosted pricing, we changed the subscription. We invested a lot in Q2, we also invested a lot in R&D and released all types of innovations that we discussed in the past. So Q2 is not surprising for us. But we know that in order to set the stage for the second half of the year, we had to do these changes. And we had to do those modifications not only in the product, but also in the subscription. So we believe that thing in the next two quarters -- in the second half of the year, we will see it climb back again.

Okay, perfect. And yes, I mean, I thought that the number was good, first of all, anyway, so, 47%. So, thanks again.

Our next question comes from Sanjit Singh from Morgan Stanley.

Hi, everyone. This is Calvin on for Sanjit. Thank you for taking my questions. So it sounds like Vdoo won't be contributing to 3Q and FY '21 revenue guides. How should we start thinking about kind of the timeline for sales integration, joint selling between the sales arcs and some sort of kind of revenue contribution on ramp, either later this year, or next year? And then, when should we kind of see those revenues start turning on?

Yes, well, obviously, I'm super excited to take this question. All folks are excited about the Vdooers joining the swamp. As we reported, Vdoo comes with an amazing, amazing technology and a great team of security experts that joins the swamp and that globally, not just on the R&D team or just in Israel. But they didn't bring a material ARR numbers, as they just started to ramp up their sales and marketing processes. But what happened since we joined them, we just announced the deal close on July 19. What happened since then is, is the ground shaking news in the world of security. This guy's already started to scan as I reported, the public repositories of all binaries, for example, in the Python public repositories, they found vulnerabilities that can expose your credit card numbers, it's not just any more about developers, it is for all software consumers, for all people in the world that are impacted by it. So if you ask me, if we will have an immediate impact? The answer is yes. Because our security tools are now enhanced and enforced by a very professional team with a very strong technology that slowly will start to be embedded into our solution in the JFrog platform. And the second thing is, that we are now addressing not just Dev, SecOps market, but also product security, security engineers, Cecil's of the world, people that are speaking security for breakfast. And this is something that kind of developed another muscle in JFrog. So in terms of technology, milestone one will probably be somewhere at the end of the year and will be added to our capabilities in the platform. And we are expecting to see a full integration with the Vdoo technologies into the JFrog platform during 2022. The pipeline is already fueled by the knowledge and by their expertise and their strategic team, which is a different aspect joined our strategic team and enlarged significantly worldwide. So we expect to see an impact there as well.

Got it. Thank you for all the added color. Can you also tell us a little bit more about the accounts sales team. I know you guys paused it previously and have you guys started to build that back out? And if so, how is hiring then?

You mean the strategic team?

Yes.

Yes. So we started to build this team, I think somewhere a quarter prior to the pandemic and we invested in building a hybrid fund and not just a bottom up insight in bounces as we used to do as we beat JFrog from. But also to have a top down model coming from the CIO, CSO, CTO, VP R&D down in order to adopt the platform. Now this goes hand-in-hand with the technology we offer. You cannot come to a CSO, and also a repository, you offer a full solution. And we needed to make sure that what we have is big enough in order to go from the top down. So we've been that the team alongside the technology, and the team grew up to be a very efficient team. As you can see in the Q2 numbers, and some of the deals that were reported over a million dollar were generated by the strategic team. With the acquisition of Vdoo, we more than doubled this team. And when I'm saying double is not just sales reps, it's also about the solution engineers. It's also about the field marketing. It's also including the premium support, and obviously expertise in the domain security. So this team is growing significantly, the model of top down with the bottom up a hybrid funnel also works great. And we see it's already in the pipeline numbers for the for the Q3 and Q4.

And our next question comes from Koji Ikeda from Bank of America.

Just another question here on the cloud, the cloud contracts during the quarter, I was wondering, if you could revisit that for a second here. What was the effect quantitatively to Q2, if there was any? And how much of a consideration were those revised cloud contracts playing into the full year guide?

Yes, I'll take that. Koji, the impact of this on Q2 revenue cloud revenue was slightly below million dollar. So, in high 100,000. In terms of outlook for -- that we provided for the rest of the year. Really, we believe that even with guidance, current growth rates will achieve those numbers. The reacceleration in the cloud will be a bonus for that.

Got it. And then, just one follow up here. Another question on Vdoo. I know you've mentioned multiple times, it's not supposed to have a material impact to growth for 2021. I just want to be absolutely clear here. Is there any contribution at all from Vdoo in the 2021 guidance? And it just want to be really, really clear on that?

The model is probably just the low hundreds of $1,000,very small.

Got it. Okay. And then just last one for me. So NRR down a point, but in the prepared remarks, you said, you're feeling pretty good about it from reaching a stabilization point? I mean, is there anything or what would be a potential driver here is thinking about the next few quarters, that could actually cause the NRR trend to go lower from here, just thinking about the cloud contracts or anything like that, what could cause that NRR to go down further from here.

So to remind you we are reporting our [indiscernible] and what we've seen is that on a standalone basis, Q2 was actually better than Q1 and better than Q4. So we see positive trends. Obviously, we still gain some numbers from pandemic which will lower, what could go wrong there, will believe, will continue to improve our standalone, net lower retention rates on a quarterly basis. And that's why we believe that we'll get back to 1k.

And our next question comes from Jason Ader from William Blair.

One quick one for Jacob. Jacob, what is the headcount now after Vdoo and how many head do add with Vdoo?

We added around 80 people with Vdoo and our overall head count with Vdoo is around 900 employees.

900. Okay, great. And Shlomi, my question for you is, what do you see as the biggest challenges over the next 12 months or so, for the company at this point, you've made some big investments, you made your first, let's call it pretty sizable acquisition. You're building out your strategic sales teams and your partnerships. What do you see kind of as you look at the landscape, what are the biggest challenges for the companies -- for the company?

Yes, Jason, thank you for this question. Well, obviously, we are after a very big market, what we see is more, it's beyond being the best DevOps company or being the best binary manager solution. We are looking at the software updates are possible. Now we all agree that there will be more software and software need to be updated. Updates can only happen with binaries. But in order to complete this full lifecycle of binaries management, we need to invest more in the deployment, in the distribution, in the device management and everything that has to do with DevOps for IoT. So you should expect to see more investment towards this direction as well. What it means is that we are replacing, again, home grown solution, in-house development, something that the company built 20, 25 years ago over a CDN, and that requires education and patient. And that would be probably a challenge that we will have to overcome. We invest also a lot in developers advocate with [indiscernible] in marketing, you see JFrog everywhere. We see the excitement around the innovation that we release but the market is still being educated with what we released. We saw it with artifactory, when we introduced the world with the binary repository concept. Then with X ray, when we introduced the world with the composition analysis security and now we distribution and the full binary management level that's very new to the market and mainly replaces something that you build your own over other tools that you integrate it into your solution. So I think that the education and the adoption would take time but once it will happen, it will look so.

Our next question comes from Brad Reback from Stifel.

I'm not sure if it's for Shlomi or Jacob. But as you think about the back half pipeline that you've talked about, is up meaningfully after this low on to 2Q. Is the composition of the pipeline difference, so is it heavily -- more heavily slanted towards SaaS? And if it is, does that have any impact to the P&L going forward?

Yes, I'll start and Jacob, obviously, can add more colors into it. What we see in the pipeline is, is a bit different than what we saw in the past. Obviously, if we compare it to past quarters, it's a bigger size of a pipeline. JFrog is growing, we just mentioned that we are about to cross the milestones of $50 million in revenues in the next quarter and we are very excited about it. But it's also supported in the pipeline numbers. Now the composition of the pipeline is also very interesting, because for the first time, we start to see the fruit of the strategic team label, we start to see accounts that have those taking longer, aiming to a much higher adoption of the JFrog solution. We start to see more and more co-selling with the enterprise cloud providers. And we are talking about six-digit contracts with these customers, sometimes prospects. We see adoption of new products. We just reported that this quarter, we won the biggest X-ray deal ever with the big financial institutes. This is something that we didn't see in the past, as you remember most of our foot in the door moves were through artifactory now actually became a significant player. We also see the excitement around the PDN that we announced in Q2, because it's a real thing. Everybody put aside JFrog, everybody will need distribution for binary and the market start to adopt it. So the composition is not just about technology and different tools, it's also about the structure that our CLO built with a strategic team that brings different types of appeals. I think that it took us longer to build this pipe because of the type of this deal but we are very excited and stand ready to -- to convert it into fulfilling.

And our next question comes from Rob Owens from Piper Sandler.

Hi, This is Ben Schmidt on for Rob, thanks for taking my questions. On the Vdoo acquisition, just wondering if you guys can shed some light on how much that we should expect the TAM to be expanded by this acquisition once the functionality is integrated?

Yes. So it really depends what you call the TAM because if you just look at the deps like ops market, obviously, it's included in the DevOps and DevSecOps. Some would say, above 20 billion and one of the analysts on this call said above 50 billion in the latest report. But this is part of the DevSecOps. This is exciting, but not exciting enough for us. When we are looking at securities for binary, we are looking about the market of devices, device management, how can I secure the binary that you actually deploy on your iPhone or in your Tesla, and this is a much larger market. We are looking at billions of devices that can be secured, while software is being updated over the years. We spoke about it at the very early beginning in the roadshow before we even went public. That's part of our vision. And this market is by order of magnitude bigger than just DevOps and DevSecOps. And Vdoo by the way, sorry, just to connect the dots, Vdoo developed one product that support the DevSecOps and the developers and another product that support the device and the security around the devices.

Okay, got it. That's helpful. And given the puts and takes on the SaaS growth this quarter. Has this changed your guy's outlook for SaaS growth in the medium to longer term?

No, it does not change our outlook for SaaS.

We have no further questions at this time. I will now turn it over to Shlomi Ben Haim.

Well, thank you everyone for joining the call today. We are very excited about Vdoo. We are excited about the inorganic growth, about the organic growth, about the innovation. And we are very determined to fulfill our vision and becoming the company behind all software updates. I thank you for this call and may JFrog be with you. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.