Jfrog Ltd

NASDAQ:FROG

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for joining us, and welcome to the JFrog's Third Quarter 2020 Earnings Conference Call.

I'll hand the conference over today to JoAnn Horne of the JFrog Investor Relations team. JoAnn, please go ahead.

[JoAnn Horne]

Good afternoon, and thank you for joining us as we review JFrog's third 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.

During this call, we may 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 fourth quarter and for the full year of 2020. 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 and 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 events. 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 prospectus filed with the SEC dated September 15, 2020, which is available in 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 September 30, 2020, and other filings 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 there for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi?

[Shlomi Haim, executive]

Thank you, JoAnn. Good afternoon, and thanks for joining us for JFrog's 2020 Third Quarter Earnings Call, which is our very first as a publicly traded company. We're proud and excited to have become a public company listed on NASDAQ under the symbol FROG in mid-September.

Before we get started, I would like to wish you and your loved ones the best of health as we all face a new reality in how we learn, walk, communicate and more. We are all affected by the current environment, and we look forward to better days ahead. This is JFrog's first quarterly report. Therefore, I would like to take a moment and thank JFrog's employees for what we have built together. These employees, we call the Frogs, are the reason for the company's success and what makes us leap forward.

Let me begin by explaining both our business and vision to put JFrog's Q3 results into context. As a start, I'd like you to ask yourself a couple of simple questions. What version of video or audio conference software are you using right now to attend this call? On your LinkedIn or Facebook application, what is the current software version you're using? When you watch Netflix at home, what version do you use? Of course, you don't know. No one knows. I don't know. And frankly, as a user, you don't care. You just want up to date, reliable, secure software without any hassle.

Imagine there are no versions. This is JFrog's liquid software vision. A world without software versions where the world's software is updated seamlessly and securely without the hassle of update processes and downtime. My Co-Founders, Fred Simon, Yoav Landman and I launched JFrog in 2008 with a mission to make software development and delivery easier to manage through a process of what is known today as DevOps.

As developers ourselves, we predicted the change in the way software is being built, released and deployed, not only by developers but also by machines. Since that time, JFrog has pioneered a complete end-to-end platform for Continuous Software Release Management, also known as CSRM. We are honored that more than 75% of Fortune 100 companies use JFrog to build and deliver software rapidly and securely daily.

As a brief overview of the business and financials, I'm pleased to report that for the quarter ending September 30, 2020, JFrog revenue was $38.9 million, a growth of 40% year-over-year for the same period. Non-GAAP operating income was $5.1 million, more than double the prior year level. Also, in Q3, we achieved a record level of quarterly free cash flow of $9.7 million.

We continue to have a broad customer diversification, and no single customer represented more than 2% of the company's revenues. Our products continue to be mission-critical to our customers, regardless of COVID headwinds, and our growth retention remained in line with historical trends demonstrating this criticality.

In Q3, approximately 87% of revenue came from customers subscribed to our multiproduct offers. 19% of revenue came from our platform Enterprise+ subscription, which gives customers access to all JFrog's products as an end-to-end solution.

We are proud and humbled by this growth to date, and we believe these results demonstrate JFrog's increased adoption in the marketplace as organizations continue to embrace modern software infrastructures and transform into a digital world. But saying that every company has become a software company or software is eating the world almost sounds like a cliche. However, we realized that conversation in company's boardrooms are now focused on delivering digital experience and gaining competitive advantage through software, especially during today's challenges.

It is not a question of should we do it, but more when and how. How can we improve our user experiences and engagement with software? How can we be faster than our competitors, yet be secure? What change is required so rapid software releases will run on a smooth, yet resilient platform and increase go-to-market speed? JFrog is leading the charge in these areas. Since the only way to implement software fast, securely and efficiently with no downtime is through automation of the CSRM processes. And for that reason exactly, DevOps shines.

As the world experiences this exploding amount of software as a result of digital transformation, everyone is looking to be part of the software gold rush. And JFrog is the provider of the picks and shovels to millions of software developers around the world. We introduced the world with the first binary repository manager in 2008, and claimed that binaries, also known as software packages, will become the primary asset in the new software life cycle.

Today, JFrog offers an end-to-end hybrid multi-cloud universal DevOps platform to empower organizations, developers and DevOps engineers to meet increased delivery requirements. Of course, DevOps isn't a single process, but many connected tasks and tools across teams. And with the explosion of cloud-native technologies across open-source containers, Kubernetes and others, these teams face an even bigger challenge for organizations such as how to manage the different technology types that each have their own requirements.

This is why JFrog's strategy of universal package management is so important. Modern development organizations use more than 5 different software package types regularly. And our customers routinely utilize more than 20 of them. If you cannot centralize your packaged repository manager or you isolate management to a single technology, your development life cycle will be slow and messy. And no software automation, no integration process will meet the needs of the organization.

Our product philosophy is based on the user's freedom of choice. We will provide you with a universal solution that integrates with every developer's ecosystem and can be deployed in every environment. Our fellow developers call it the Switzerland of DevOps, while our enterprise customers call it an anti-vendor lock-in solution.

Starting with our flagship product and the heart of the JFrog platform is JFrog Artifactory. Not only is it the industry standout and the mother of all repositories, but also the only universal tool that supports over 25 technology types, comes in high availability version and scales to infinity. Then JFrog Xray, our security tool that natively integrates with Artifactory and provides a full vulnerability and license compliance solution that integrates with the developers' ecosystem. Xray helps the CISO of the world shift left and avoid security bottlenecks.

JFrog Distribution is how you take a blessed software package release bundle and deploy it into the edge security. This tool chain creates the circle of trust in the CSRM workflow. JFrog Pipelines, our CI/CD solution and the result of an acquisition we made in 2019, integrates and automates the flow of binaries through the DevOps pipes.

We build JFrog Mission Control and JFrog Insight, the admin user dashboard, to provide a holistic view of the platform and simplify the configuration and resources management in a multi-zone, multi-server environment. These tools together form our complete end-to-end platform, and this is what sets us apart from the competition who are years behind in their approach.

JFrog's market is very large and growing at fast pace. Looking at the landscape, we see several additional tiers of opportunities for our business. Many potential customers still rely on home-grown solutions that were built only 5 or 10 years ago. These solutions are often incomplete and will be replaced with robust but simple solution like JFrog that support modern cloud-native technology and scale.

The market also attracts competitors who attempt to solve certain aspects of the software development cycle. These point solutions fall short by not focusing their solution around software packages, not being fanatically universal, not offering security tools as part of a platform, not being hybrid, no multi-cloud, focusing on legacy technologies their business has relied on for years instead of adopting DevOps innovation to solve this pain.

In Q3, we were proud to deliver updates requested by our customers and community. Our R&D core teams focused on solid road map execution that prioritize feature releases that specifically answered work from home challenges. This includes improvements in security tools, distribution and team collaboration around DevOps. For example, we released peer-to-peer download functionality for automated software package distribution. This capability not only accelerates the distribution flow but also eases the strain on network resources. We also greatly enhanced our customers' ability to operate in highly regulated airgap secured environment, helping users sign and validate release bundles with JFrog Distribution.

New security scanning, scan reporting and license compliance capabilities were added to JFrog Xray to serve companies with multiple security stakeholders. JFrog Pipelines extended its reach into the community by releasing the ability for users to define their own reusable pipeline steps to centralize and simplify automation.

Alongside a self-managed offerings, our hybrid platform continues to be a growth engine for JFrog and drive speed, security and efficiency for our customers. The adoption of the cloud was accelerated by COVID-19, which created the need for more data transfer and software delivery for our customers.

The remote working world driven by COVID makes customers appreciate the ease of setup while addressing the remote access required. Our cloud format and SaaS revenue growth has significantly exceeded self-managed solution growth for the past 2 quarters. In fact, JFrog was recently named #14 on the Forbes Cloud 100, listing the world's most influential and successful cloud companies. This is our third year in a row selected to this list.

To continue this cloud momentum, in the third quarter, we launched the JFrog free community offering in the cloud, responding to the demand of the community and giving developers easy access to our platform. This offering includes JFrog repository, Artifactory, as well as security scanning and software development pipelines orchestration tools, which are now available to the community on all major cloud providers, AWS, Microsoft Azure and Google Cloud in multiple regions. We already see this offering increasing the number of JFrog's cloud users by the thousands as well as increasing traffic to other digital and educational resources we provide.

From a cloud partnership perspective, in Q4, we are hosting a dedicated DevOps cloud-based conference alongside our partners, AWS, Microsoft and Google. This event is co-marketed, co-hosted, addressing the needs of each cloud communities developers in a dedicated day for each cloud.

JFrog always balances between the needs of the business and the needs of the developer since software packages are being produced and consumed by millions every day. These packages are the lifeblood of liquid software that starts in developers communities that create them for all organizations.

A key component of addressing developer community needs is providing tools that support their ecosystem tool chain with minimum sales and marketing intervention. For example, in Q3, our teams improved the JFrog command line interface to enable easier ecosystem integrations with JFrog products; released small open source plug-ins to serve the community better including CI/CD and observability tools integrations; released ChartCenter as a community hub for cloud-native developers assets; led the C and C++ community with JFrog's common package manager to further enhance these technologies and support the evolving IoT world. Over 70 companies have already shown interest in joining this effort.

JFrog held the first automotive DevOps summit with users from companies like Toyota, Volvo, Daimler and more. The demand from the market and our community involvement is at an all-time record. This is also a great opportunity for me to welcome Micheline Nijmeh, our new Chief Marketing Officer. Micheline is a veteran marketeer who brings vast experience in building high-growth organizations from leading companies where she served such as Zscaler, Xactly, Salesforce and Sun Microsystems.

Turning to sales. JFrog is driven by inbound inside sales motion only, allowing us to keep the mantra of delivering products both by developers and not sold. Our land and expand revenue growth is driven by upsell to current customers alongside initial entry point sales to new customers. In fact, as of September 30, we had 313 customers with ARR greater than $100,000, of which 9 customers were over $1 million.

We are focusing on our sales and marketing growth, and we'll keep invest while scaling. Alongside our inside sales team, we started to build JFrog's strategic sales team by region. This team is already expanding our footprint among our top 100 accounts and ensuring a smooth adoption of our platform. As such, our cohort growth is solid, and net dollar retention for the trailing fourth quarter was 136%. This is an important metric to judge our progress.

In terms of our overall sales performance and funnel conversion, we saw a trend of time to sell increasing slightly during COVID-19. These are increasingly getting escalated higher in the organizations due to budget cuts or defaults to executive approvals for expenses. And distributed workforce are making customers internal processes more complex.

We saw a brief dip in demand at the beginning of the pandemic as well as a longer conversion time from trial to paying customers. Since then, we've seen demand growth improve, and we are confident that the ongoing free trials and new community cloud offerings will be converted in the future.

This momentum demonstrates the adoption of our multi-product offerings by the enterprise despite COVID and express budget concerns. Our expansion model in the self-hosted offering grows not only by adding additional servers but also through demand for other products on top of Artifactory, such as Xray and Distribution.

To illustrate this, in Q3, we landed one of the world's largest retail brands utilizing JFrog across both self-managed and SaaS services and hosted on Microsoft Azure. The deal drivers included the need to diversify their deployment across self-managed, SaaS and multi-region offerings in order to allow easy and smooth access for their team.

In addition, in Q3, our customer, a market-leading company in cloud software for customers' engagement and operational excellence, expanded its SaaS agreement to over $1.2 million in ARR, while upgrading to the complete JFrog Platform to support distributed development teams around the globe. This is a small sampling of successes, and we are excited about where we're going next in Q4.

As we wrap up 2020, we plan to invest our resources in supporting new package types and technology enhancements that helps our customers build and deliver even more rapidly and securely. These investments will support our growth in 2021, allowing us to scale even further when the market recovers.

With that, I'd like to turn it over to our CFO, Jacob Shulman, for more detailed financial results.

[Jacob Shulman, executive]

Thank you, Shlomi, and thanks for joining us for our first earnings call. It's been an exciting time, and I want to thank my team and everyone who helped get us to this point. We are very pleased to have started our public company life with such a strong quarter.

Before we look at the results, I wanted to quickly review our revenue model. JFrog generates revenue from subscriptions. We categorize our customers into 2 segments: self-managed and cloud SaaS, both of which pay subscription fees. Self-managed customers pay based upon the number of servers tied to a multi-tier subscription price. Self-managed customers can operate on-prem or in the private or public cloud.

Our cloud SaaS customers pay a subscription fee based upon consumption of storage and data transfer. We report 2 revenue lines. The license line is related to a small percentage of the revenue from the self-managed customers, which must be recorded as license and the remainder as a subscription revenues.

So let us turn to the third quarter results. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics 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.

Total revenues for the 3 months ended September 30, 2020, was $38.9 million, up 40% year-over-year. Self-managed revenues, also often called on-prem, were $30.1 million, up 32%. Cloud revenues grew faster, up 74% to $8.8 million or 22% of total revenues compared to 18% of total revenues last year. Our installed base continued to expand, driving 136% net dollar retention for the trailing 4 quarters.

During COVID, we saw lower upsells from some customers, which reduced our net dollar retention in Q2. Net dollar retention in Q3 was largely flat with the rate in Q2 on a stand-alone basis, and we are seeing the same trend quarter to date. As such, we expect our trailing 4-quarter net dollar retention will remain above 130% for the next several quarters.

As of the quarter end, we had 313 customers with ARR of over $100,000, up from 286 customers as of June 30. Of the 313 customers, 9 had ARR greater than $1 million as compared to 8 customers in the previous quarter.

Now let's review the income statement in more details. Gross profit in the quarter was $32.2 million, representing a gross margin of 82.7% compared to 82.5% in the year-ago period. We continued to improve the cost structure of our cloud infrastructure and gain better margins on our cloud deployments.

R&D expense was $8.9 million or 23% of revenue, in line with the same ratio in the year-ago quarter. We have continued to invest significantly in R&D, including the rollout of our free tier in Q3, along with expanding the capabilities of Xray and Distribution.

Sales and marketing expenses were $13.3 million or 34% of revenue compared to 36% in the year-ago period. We benefited from a number of cost-saving measures this quarter as a result of COVID, including reduced travel and converting marketing programs to an online mode. Note that approximately half of our sales and marketing costs are spent on community-related functions, which are key to our developer-driven model.

G&A expense was $4.8 million or 12% of revenue compared to 14% in the year-ago period. G&A reflects an increase in our public company costs, including our D&O insurance policy costs only for a portion of the quarter since the IPO.

Non-GAAP operating income was $5.1 million or a 13% operating margin, increasing from $2.5 million or a 9% margin in the year-ago period. Non-GAAP net income in the quarter was $5.3 million or $0.05 per diluted share, based on approximately 101.8 million weighted average diluted shares outstanding.

Turning to the balance sheet and cash flow. We ended the quarter with $578 million in cash and short-term investments, including $393 million in IPO proceeds. Cash flow from operations was $10.8 million in the quarter. After taking into consideration CapEx, free cash flow was a record $9.7 million. We are pleased to have been cash flow positive for more than 5 years, though we continue to review the balance between growth and cash generation every quarter.

I would now like to turn to our outlook for the fourth quarter and the full year 2020. Revenue for Q4 will be $40.9 million to $41.9 million with non-GAAP operating income of $1.2 million to $2.2 million and EPS of $0 to $0.02, assuming share count of approximately 104 million shares.

While we don't provide guidance on operating expenses, we do expect an increase as a percentage of revenue in Q4 due to a number of items, including increased R&D, public company costs, the bounce back from the -- some of the reduced spend due to the COVID shutdown, along with sales and marketing costs related to the new cloud community offering.

For the full year, we expect revenue of $149 million to $150 million, non-GAAP operating income of $12 million to $13 million, non-GAAP EPS of $0.11 to $0.13 based on a share count of approximately 101 million diluted shares.

Now let me turn the call back to Shlomi for some closing remarks before we take your questions.

[Shlomi Haim, executive]

Thank you, Jacob. We believe JFrog continues to be positioned well in the market to address the needs of business going through rapid digital transformation. As a core DevOps vendor, we see it as our responsibility to lead the market through the must happen changes in the software update landscape. It is our mission to make DevOps a bridge, not only between developers and IT operators but to an era of liquid software.

Thanks for your attention and may the frog be with us.

[Operator]

[Operator Instructions] Our first question comes from the line of Sterling Auty with JPMorgan.

[Sterling Auty, analyst]

In your prepared remarks, you talked about the health of the free trials and the community and expressed confidence in being able to convert that into new customers. I'm just curious, what is it that's giving you the confidence that you should see healthy customer conversion as you finish off 2020 and head into 2021?

[Shlomi Haim, executive]

Yes. Good afternoon. This is Shlomi. I'll take this question. Actually, a great one, and I'll start by saying that we are very excited to have our first earnings call.

With regard to the demand, what we are looking at is a world that food is being delivered by software. Our kids are learning from home enabled by software. Even COVID is being monitored by software. So the demand is there because software needs to be updated and organizations already get that. And the transformation that organizations are now facing is not just transformation of making your business digital but also making sure that you build, you secure and you deploy software faster.

Now COVID started with, I think, a market shock and then what we have seen is that more and more demand to solutions like JFrog came from cloud users and cloud-native technologies. Therefore, we saw a growth in the demand in our cloud, and therefore, we established these free tier, in the cloud, on the multi-cloud deployment environment to enable this demand fall on JFrog solution.

It is not just the demand of one tool, but the demand of an end-to-end solution that is expressed by all companies from all sectors. We are positive that as the markets continue to digitalize businesses, we are positive that the demand will be converted into a customer funnel.

[Sterling Auty, analyst]

Got it. And then 1 follow-up. You mentioned the strength of R&D and some of the investment areas, including support for additional package types that you're working on towards the end of this year. Can you give us a sense of maybe what some of those package types are that you don't currently support? And what the opportunities there might look like?

[Shlomi Haim, executive]

Yes, what a great question. And yes, we will continue the investment in R&D and innovation around DevOps. When you sell to developers, we have to remember that developers might be the community that enables this change. But all of us are enjoying this change by consuming better and more secure software. This is a result of millions of software packages that are being distributed and consumed daily.

These software packages come in different types, and developers today are overwhelmed with the amount of technology that they have to face. When you provide the community with a fanatic universal solution that support all package type, and you can actually consolidate it all under 1 platform, that makes their life easier and smoother as they build secure and release software. Just recently, we released another support in a new package type called Alpine, which supports containers and cloud-native technologies.

We are looking at the new package types that the community is asking for. And the community communicates with us on a daily basis through different systems in order to let us know what is the next challenge that they see and what is the most popular software package that they will have to support.

On a daily basis, every enterprise that uses JFrog, uses more than 20 different package types. And when you give them a universal support or what they call the Switzerland of DevOps, that will obviously ease their pain and lowers all kind of management resources.

[Operator]

Our next question comes from Sanjit Singh with Morgan Stanley.

[Sanjit Singh, analyst]

Congrats on the -- on your first call as a public company, and congrats on the IPO, and really solid results coming out of the gate.

And so my question, maybe to start with you, Shlomi, is just to get -- talk about the CSRM vision and what we can sort of -- how sort of track progress? I think you sort of mentioned in your script that Enterprise+ was 19% of revenue, which is -- it seems like there's an improvement over last quarter.

Can you give us sort of, Shlomi, like what are some of the trigger points or the inflection points in terms of as customers go from, let's say, a Pro X subscription to an Enterprise to Enterprise+? Is it getting to a certain number of service for Artifactory? Is it bringing on Xray? What are sort of the like patterns that sort of give you guys the signal that this is going to be more of an end-to-end platform customer?

[Shlomi Haim, executive]

Yes. Absolutely, and thank you for joining this call. Great to hear from you again, Sanjit. And this question is something that we look at when we put together the strategy of the company moving forward. First, coming from the community demand. What is it that you really need? What do you need? Do you just need the best-of-breed solution or you want to have a holistic end-to-end solution that kind of points each of your pain?

So one thing that we've seen is that every company now that builds software will identify software packages as the first level citizen, as the primary asset. And therefore, they will need the database of DevOps, they will need the repository. On top of that, if you build more benefit to the community and to the enterprise, such as security and distribution and CI/CD enablement and dashboard, and easy configuration on a multi-site, multi-server environment, you bring enterprise value to the developers' hands and help them adopt DevOps much faster.

So with our different subscription and the full alignment with our product portfolio, what we are seeing, to your question, is that more and more customers are looking for a secured repository. This is why Xray is being adopted quite rapidly. And something that happened just recently in the past 2 years is that every organization, especially under COVID, needs to distribute software packages securely and rapidly. And therefore, JFrog Distribution became a main trigger for companies to upgrade to the Enterprise+.

What we reported in Q3, which was a wonderful quarter for us, is not just a growth in ARR, not just the growth in revenues, but also more and more customers that are upgrading to a multiproduct solution and consolidating their DevOps practices around JFrog Platform.

[Sanjit Singh, analyst]

Understood. That was great detail, Shlomi. My follow-up question is sort of around the cloud. It looks like the SaaS mix of the business improved again this quarter, looks like it was about 22% of revenue. You see other companies in the DevOps space, like an Atlassian, sort of aggressively pushing their customers to cloud. I guess my question, Shlomi, is, where are -- where is the sort of DevOps market and the overall cloud transition? And then where is sort of the JFrog customer base? Is that something that you guys are trying to incent them towards? Or are they sort of pushing you guys along that, "Hey, we want to go to cloud faster?"

[Shlomi Haim, executive]

Yes. Well, you look at DevOps as one part of the software life cycle, but let's look at the overall world. Everyone now looking at a distributed team and distributed deployment environment and trying to avoid any kind of vendor lock-in. So what is the solution? The solution is the freedom to choose what you want to use inside your organization, to not only support your software life cycle or CSRM, Continuous Software Release Management, but also to make sure that you bet right in the next year.

Now it's not enough to say that there is a cloud momentum. Of course, there is a cloud momentum. JFrog started 9 years ago to support both the cloud and the on-prem request. But the freedom of choice and the hybrid world is what the world is really demanding. What we are seeing is that none of our top 100 customers will bet only on cloud or only on-prem. And you can call it private cloud, public cloud, whatever. This is number one. They want to have a hybrid solution that plays the same, whether it's cloud or on-prem.

The second thing that we see is that we live in a transition period. Nobody just moved from 20, 30 years of building and releasing software to a different development and deployment environment in 1 day or 1 year. So we will continue to see the growth of the cloud alongside establishment of private cloud and self-hosted solution.

And the third thing that we see is the request for multi-cloud environment. We are collaborating and partnering with all the major cloud providers, but what we see coming from the enterprise is the solution of a multi-cloud environment. I just don't want to have AWS as my only deployment environment. I want to have other clouds and avoid any kind of vendor lock-in or region lock-in as -- in my solution moving forward.

Now more and more assets are moving to the cloud and being duplicated in both environments from different reasons, like security and disaster recovery and deployment in different geographies. And I think the JFrog solution having this hybrid philosophy and multi-cloud philosophy and identical software, both self-hosted and on-prem, kind of serves the community very well. And therefore, we see the acceleration in our cloud adoption alongside the other solutions.

[Operator]

Our next question comes from the line of Alex Kurtz with KeyBanc Capital Markets.

[Alexander Kurtz, analyst]

Congrats everyone on your first quarter as a public company. Maybe you could just touch on customer growth. I know we're not going to see it maybe until the end of the year. But what trends you saw as far as new logo, new customer growth this quarter versus last quarter?

And then Shlomi, one axis of growth is additional servers going into large enterprises. And I don't know if there was an update in the quarter to come to a conclusion about how that tracked, but just wanted to see if there was an update on sort of the densification of server licenses in your larger accounts?

[Shlomi Haim, executive]

Yes. So it's a great question, Alex. And thank you. In terms of the customer growth, obviously, we will look at it on an annual basis. And then we see the growth and we see more and more customers adopting. What we are really excited about is that demand is at all-time record. We see more and more custom prospects and community member joining our free tier in the cloud -- on all cloud and also more and more trials that are being downloaded for all products.

With regard to the growth, as we reported this year, we -- this quarter, we saw 300 -- and we reported 313 customers with over $100,000 in ARR, which also grows from the last time we spoke. We saw growth in companies that are in the $1 million club now and joining while adopting our platform. We see this growth. We monitor it very, very closely.

And the other thing that's worth mentioning is that it's across industries, it's across sizes. People and companies are adopting DevOps rapidly. We're also happy to report that the overall number of customers is growing and not just by logo but also more accounts and more regions of the same customer. And more and more adoption of our tools, not just Artifactory as the flagship product and the base of all subscription but also Xray and other services like Distribution and hybrid solutions that are being adopted by our customers.

So overall, we see this growth in logos and account numbers. We also see the growth of the multiproduct adoption. And on an annual basis, we will share these details with you. We will obviously keep on tracking this.

[Alexander Kurtz, analyst]

Great. And just on server growth per customer, maybe that's embedded in the net retention rate. But is there anything worth noting or revisit at another time?

[Shlomi Haim, executive]

No. It's worth noting because as you all know, the -- our subscription model is in full alignment with our offering. So if you start with the lowest entry point on JFrog subscription model, you get 1 server. If you go all the way up to the platform and do end-to-end solution, then you start with 6 servers. So obviously, the growth in customers over $100,000 or $1 million also points the growth in the number of servers. So you will see more and more servers of JFrog being adopted, not just by 1 product by -- but also by the adoption of the end-to-end solution.

The second thing is that in the cloud, unlike the self-hosted solution, we are seeing growth in terms of usage because in the cloud, our model is not by server but by consumption. And the amount -- the overwhelming data transfer that we see, especially during COVID, accelerates our growth in the cloud, not just by server but by usage per customer.

[Operator]

Our next question comes from Rob Owens with Piper Sandler.

[Robbie Owens, analyst]

You mentioned during the third quarter that there was a large win and my phone broke up, but I think it was within the retail vertical. Curious, when you go into an account that is a new customer for you, who are you displacing typically? And if there's any bake-off where you're typically going up against at this point?

[Shlomi Haim, executive]

Yes. Well, as I mentioned, Rob, the DevOps adoption happens across verticals. It's happening everywhere in the world. It's not a matter of size. It's not even a matter of where you are in the adoption of CSRM. And what we have noticed in the earlier years of DevOps is that it happened by sector because obviously, CIOs are speaking with CIOs and share best practices.

What we see today is a race to adopt modern technology. The industry -- the modern industry requires that because they all understand that everything is powered by software. So we see it coming from all industries. Specifically around the adoption that we currently see, it comes from organization that fall behind and COVID got them by surprise, so they have to accelerate the process, they have to move to cloud native, they have to change what they've built 5 or 10 years ago.

And what they -- what served them until now will not serve them, and they will be overwhelmed with the amount of software that need to be built, produced and distributed and, therefore, we see a huge demand, request for being educated, request for more material about what this means. And therefore, we're also positive that this will be converted to customers and paying customers that will use our platform.

[Robbie Owens, analyst]

Great. And then second, I know you guys embarked on a small number of direct sales folks right as COVID was effectively hitting. Any updates you can give on that front? And what kind of customer success metrics maybe they have -- had driven since you had them on board over the last 6 months?

[Shlomi Haim, executive]

Yes. So as I mentioned, our sales team is driven by enterprise inside sales and by a funnel that provides -- everything in JFrog so far was built on inbound inside sales. Obviously, we scale to the enterprise and to procurement process that generates more than $1 million POs in ARR. But what we are currently focusing on is building the strategic team that goes after the top 100 customers and accelerate the adoption of our end-to-end solution, not just by products but also by deployment environment.

So it's a hybrid strategic elite team that identifies the top customers and will be working on expanding our solution among these accounts. Every year, these customers will be identified, and it's part of our strategic moving forward in terms of go-to-market, and our sales and marketing teams are aligned in the house to build and enable that.

[Operator]

Our next question comes from the line of Brad Reback with Stifel.

[Brad Reback, analyst]

If you guys think about the 130% dollar expansion rate you mentioned earlier on a go-forward basis, how should we think about that breaking out between server unit growth versus pricing gains as customers move to higher SKUs?

[Shlomi Haim, executive]

Yes. Thank you for this question. Obviously, NDR is one of the key KPIs for JFrog to measure our success and to make sure that we are aligned with our goals. What we've seen in the market is that the net dollar retention, especially around subscription, is very important. And what we are looking at, what we are focusing on is the fourth quarter measurement of the net dollar retention.

I will start by saying that we are accelerating our upsell mechanism, not just by more servers or more consumption in the cloud but by providing the community with more benefit. We are very focusing on fanatical happiness for our customers and developers, and to see them get more benefit and to upgrade with more products and not just more of what they already have.

In terms of the numbers and the quarterly NDR, I will turn it over to Jacob Shulman, our CFO.

[Jacob Shulman, executive]

So Brad, our Q3 trailing fourth quarter net dollar retention rate was 136%. If I look forward and if the net dollar retention is over 130% in the next few quarters, typically, what we see is that in early stages of customers joining DevOps, they grow through adoption of new capabilities and kind of upgrade into subscriptions. And once they achieve Enterprise or Enterprise+ subscriptions, then they grow through a number of servers. That's for self-hosted on-prem customers.

In cloud, it's all based on transactions. So the more they adopt the different capabilities, not just repository manager but also Xray and Distribution, the more traffic they generate, and that's why -- that's how they grow. And that's why the net dollar retention rate expands as well.

[Operator]

Our next question comes from Jason Ader with William Blair.

[Jason Ader, analyst]

Hope everyone is well. On the new customer count, total -- actually, total customer count -- can you give us the total customer count or new customers so we can just track that?

[Jacob Shulman, executive]

Yes. So Jason, our customer count continues to grow from -- in Q3. However, the primary driver behind our revenue growth is expansion of existing customers. As of the end of the quarter, in Q2, we had more than 5,800 customers, and the revenue growth in Q3 is driven primarily by those customers. Contribution of new customers to our revenue growth typically very minimal at the beginning, and therefore, we will be reporting our customer -- total customer count on an annual basis.

[Shlomi Haim, executive]

I will jump in and add to it that what we are seeing now, Jason, is also a different adoption of JFrog tool. We were used to see customers -- new customers joining our portfolio due to the need of the repository. And with the JFrog Xray, our security tool, SecOps tool, and with JFrog Distribution that help you deploy software faster with the circle of trust mechanism, we see customers coming from different corners of organizations and join our portfolio.

The huge demand that we see in the free tier and the free trial represents the future, as I see it, in terms of number of customers that will join the JFrog family, not just because of the repository solution, but the holistic end-to-end solution. So you should expect to see that in the future as well.

[Jason Ader, analyst]

Understood. Okay. I forgot that you guys had said that about annual versus quarterly. I'm getting all confused with everything. What -- and Shlomi, what are your biggest priorities for 2021 as you sit here in November? What are the top 2 or 3 priorities as you move into 2021 for the company?

[Shlomi Haim, executive]

A wonderful question. Thank you. Well, first of all, as we all experienced, we are living in an unknown reality. I'm also tracking the news regarding the elections, trying to understand how our reality will look tomorrow. But we are stepping into a year that the pandemic is still around us and the demand is different, and developers are not just serving the organization but also serving the business.

So obviously, we will be focused on different investments. The first and probably the most important driver for JFrog's success is our R&D and our ecosystem development, not just the core product that we will invest in, not just a better stable, scalable, reliable software that comes from JFrog, but also the ecosystem support, how can we provide more plug-ins and more community tools that will help you to adopt DevOps and will help you and support you to adopt our tools. This is what we call the 2 integrated to fill solutions.

So R&D investment is at my top priority for 2021. Alongside the R&D investment, we are also looking at the sales and marketing mechanism that scales with the business. We introduced the world with new software solution with new capabilities. And therefore, our top of the funnel, all the way to the conversion of the leads to paying customer, is focusing on enablement and focusing on reaching out to the enterprise in all different levels. You probably assume that a consultation with developers sounds A and a consultation with the SecOps or security experts sound B, and therefore, our capability is not just in the R&D level, but also sales and marketing, and especially with a focus on the strategic team will be my main priority.

And if I may, one last thing and maybe the most important, JFrog is in a transition as well as a company. We -- -- just a month ago, we were a private company. We are now a public company, active in 10 different countries. And our team is amazing. But this team needs to grow, and it needs to grow everywhere in the world, so we will be able to support you guys better as the company scales.

[Operator]

Our next question comes from Ittai Kidron with Oppenheimer.

[Ittai Kidron, analyst]

Congrats on your first call as a public company, good start. I have questions. I'll start with you, Shlomi, and this is -- I'm trying to kind of perhaps tie your Enterprise+ plus the Xray product. If you could talk about, first of all, Xray. How much of the focus over there is on proprietary code versus open source? And how do you feel about the maturity level of Xray? I'm just trying to think how much of a key factor is that in Enterprise+ adoption or some of the other pieces like Distribution inside the pipeline are the main drivers for upgrades?

[Shlomi Haim, executive]

Ittai, good evening to you in Israel. I think that this question is to the point because of what the community requires. And it's not about how can we scan and secure open source component. This is all technology -- organization adopted open source 10 years ago and 15 years ago, and different companies provide different scanners. I think that what Xray is really unique in is the fact that Xray is natively sitting on top of Artifactory and securing your #1 hub for all software packages from all types.

So when you look at Xray and you look at the database that Xray comes with, in order to compare and to reference open source license compliance and security vulnerability, Xray gives you a different solution, a different solution with a completely new vision of securing your software packages and not necessarily your source code repository.

Now why this is important? Because Artifactory is also your proxy. Artifactory is also your bridge to the outside world, bringing open source components, and you need Xray to support that. And the second thing, which is even more important, you want to power your organization with automation because you want to be fast, not just secure. And Xray integrates with your CI/CD environment, and Xray can automatically break your build if something was identified. So Xray is a 3-year product and becoming more and more mature, adopting -- adopted by the biggest organizations in the world, and we will keep on investing in Xray because the world of CSRM is incomplete if you just have a binary management without the security or distribution alongside it.

Now other security solutions, according to my understanding, will fall behind, not just because of the fact that they are not good enough of securing your package management -- your software package solution, but also because of the fact that more and more of our customers are looking for an end-to-end solution. They don't want to have a security solution for the containers from one company, a security solution for their Git repository from another and a security solution for Artifactory from a third company. Having Xray embedded into your DevOps platform is a big plus, and we see more and more customers upgrading to what we call the Enterprise+, which is the platform that includes Xray; and more and more customers upgrading to Pro X, which is the secured Artifactory.

[Ittai Kidron, analyst]

Got it. Excellent. Very good. And then for you, Jacob. You mentioned, if I got the comments right, 19% of revenue was from Enterprise+ in the quarter. Can you just refresh our minds what was it perhaps in the last couple of quarters so we can understand progress? And then I know you didn't guide anything on next year. And in this world, a couple of months is a long time. But is there a general framework you like us to keep in mind as we think about the potential range of outcomes for next year?

[Jacob Shulman, executive]

Yes. So first of all, in terms of some stats about Enterprise+ adoption, our revenues from Enterprise+ in the second quarter was 17%. And if I remember correctly, our revenues in 2019 from Enterprise+ was 19% -- 10%. So we've seen very nice growth in Enterprise+ adoption. And as customer expand there -- as we expand our capability with Enterprise+ and customers adopt this end-to-end solution, we will see these revenues contributing an even bigger portion in the future.

[Ittai Kidron, analyst]

Very good. And next year?

[Jacob Shulman, executive]

Can you repeat the question about the next year?

[Ittai Kidron, analyst]

Yes. Is there a general framework you like us to keep in mind as we think about how we model next year, either growth or profitability measures?

[Jacob Shulman, executive]

Yes. So as we see our net dollar retention rate staying above 130%, that should give you an idea about our expected revenue growth. To remind that our revenue is primarily contributed by expansion of existing customers rather than new customers.

In terms of profitability, we intend to invest back into the business. Shlomi talked about different areas of investments and the focus areas. In the near future, we expect our profitability to be low to mid-single digits in terms of percent of revenue.

[Operator]

Our next question comes from Nikolay Beliov with Bank of America.

[Nikolay Beliov, analyst]

As you guys try to push deeper into the Fortune 100 accounts, can you please talk about how you think your go-to-market strategy is going to evolve and we're in the process of building an overlay direct sales force?

[Shlomi Haim, executive]

Yes. Thank you, Nikolay. Going with JFrog is actually agnostic to the size of the company when it comes to technology. We build a pain solver for developers and DevOps companies. And therefore, the product portfolio, evolution, starting from 2008 all the way until 2020 is being improved based on what we hear. It's not just the product, but also the package types that we support and the integration with the ecosystem.

However, when it comes to the enterprise, you hear all kinds of other requirements. Let me share some examples. In our package for data analyst, it's not something that you see in 100, 200, 500 people company. You see it in the enterprise. You see it in the financial sector. They need support for a certain package that gives thousands of developers a solution under JFrog repository.

And second thing that you will see in the enterprise is scalability. Scalability and where they can push because when we are looking at the biggest bank of the world, when we are looking at a huge retail company of the world, they have tens of thousands of developers, and they need to make sure that our products scales to infinity and not break when they start to consume all to distribute software.

The last thing that I would say is that in big organization and in the enterprise, it's basically a world with all technologies. They have all the products. They have a variety of technologies. They are adopting in one side of the world faster than the other side of the world. And they also want to make sure that they can consolidate it all under one platform. So we learn a lot from the enterprise, but the innovation starts from the community. Millions and tens of millions of developers that communicate with us on a daily basis and tell us what the pain is.

On the business side, enterprise sales and SMB sales obviously look different, and our sales team is based on those different tiers. Although the majority of our sales team is inside -- inbound and the strategic team is at the top of the pyramid, it's still built on these tiers of SMB, enterprise and strategic.

Moving forward, what we are seeing now is that the enterprise, while adopting the platform, requires someone that understands the organization and not just the technology solution. Let me give you an example. One organization can introduce us to the DevOps team and the day after to the security team and a day after to the product team because one will need security, the other will need distribution and the third will need to build software.

So our evolution happens alongside the enterprise adoption. Obviously, we are learning fast what are this needs. And our strategic team is being very aligned with the market change and the adoption of DevOps in the enterprise.

[Nikolay Beliov, analyst]

And my second question is around CI/CD. What is the state of the land? Everybody -- looks like everybody is using Jenkins at this point. What is the level of innovation at the Jenkins ecosystem? And how can you convince customers to begin to use your CI/CD? And what's your edge on that front of the platform?

[Shlomi Haim, executive]

That's a great question, Nikolay. And obviously, you see and I see the same reality. Jenkins is a great CI server supporting the largest community for the past 10 years. It's an open source solution that spreaded around the world and has been very successful. But what's happening now is that cloud-native stepped into our world and containers and micro services are exploding the market, and therefore, you need your developers to be faster. They need to be faster, not just in terms of how they build and how they automate but also by the fact that they need concurrent pipelines. And in terms of concurrent pipelines, JFrog Pipelines is the most advanced innovate technology that the market now has to offer.

The second thing that they will need is the freedom of choice, not just by building with a CI server but looking at the CI and the CD, the continuous integration and the continuous deployment. And when you look at that, you also want to allow them to get their source not just from 1 Git repository but for multiple vendors. And JFrog Pipelines is the only tool in the world that will get it from any source to any destination.

And the third thing, which is also very unique to JFrog, is the JFrog Pipelines is embedded into the platform; 1 UI, 1 unified solution that's not just build your software and deploy your software, but also integrate with Xray, integrate with Artifactory and pushes to the run time.

I think that Jenkins is a wonderful tool, but as companies are looking at cloud-native, they will have to look at solutions like JFrog Pipelines.

[Operator]

Our next question comes from Jack Andrews with Needham.

[Jon Andrews, analyst]

Congratulations on the results. I just want to ask one high-level question, if I could, for Shlomi. I was just wondering how much evangelizing do you think that you still need to do just regarding the overall importance of software binary management and moving towards your vision of continuous software delivery versus -- I mean how much has this become a true mainstream concept that's widely understood in the market these days?

[Shlomi Haim, executive]

Yes, Jack, thank you for this question. Actually, we get this question a lot because JFrog was the first company in the world that introduced the community and developers to the need of managing software on the software package or what we call the binaries level. And for the first 5 years, we were struggling to explain why this is the most important asset, why this is the primary piece of software that you have to be focused on. But now when you need to deliver software several times a day, you just have to look at your pipeline. And what you see is, yes, source code is very important for developers.

But what happens from the moment that you create the software package? What happens is that you secure software packages, you distribute software packages, you enable software packages on the edge, and you can also have incremental software updates with a cheap process of just updating the software package. So what we now see is that the rapid releases and the CSRM mechanism that organization are adopting is focusing on software packages as first level citizen and everybody understand that.

Now another fact is that if you look at their landscape and other solutions in the market, and if you look at the road map, just ask yourself, what is it that they invest in? They invest in package management solutions, package management security, package management distribution. So in a way, it's kind of being accepted by all vendors and all organizations.

And the last thing that, if I may add, in the world of containers and micro services and the world of fast shipping of software, that's the only thing that the world consume and produce, and this is what makes the organization fast, whether they are in the cloud or on-prem. And this is what also make them engage faster and more secure with their customers.

So I think that we will see more and more of this. I'm very honored to be the first call DevOps company in the public sector. And it also says something about our vision and what liquid software represent in the world of power users.

[Operator]

And that's all the time we have. I will now turn the call back to Shlomi.

[Shlomi Haim, executive]

Thank you. Well, thank you very much for your attention. The Frogs and I are very excited about what we see looking forward, the adoption of our tool, the adoption of DevOps. I appreciate your time. I wish us all better days and secure days and may the frog be with us all. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.