JFrog Ltd Q4 FY2022 Earnings Call

Good afternoon and thank you for joining us as we review JFrog's fourth quarter and full year fiscal 2022 financial results, which were announced following market close today via a press release. Leading the call today 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 Q1 and full year of 2023. 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 our public 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 Form 10-K for the year ended December 31st, 2021, filed with the SEC on February 11th, 2022, and our most recent report on Form 10-Q, which is 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 Form 10-K for the year ended December 31st, 2022, 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 measure 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. With that, I'd like to turn the call over to JFrog CEO, Shlomi Ben Haim, Shlomi?

Thank you, Jeff. Good afternoon to you all and thank you for joining the call. I'm happy to report that we ended fiscal year 2022 with annual results in line with our guidance range despite the challenging year from a macroeconomic and geopolitical perspective with moderated growth in the IT market. Nevertheless, DevOps, security software, and cloud computing remained among the most resilient IT projects. I'm happy to see that JFrog not only performed well with revenue growth of 35% year-over-year in line with our guidance range, but also exceeded our commitment to breakeven wrapping up Q4 with non-GAAP EPS of $0.04, more than double the range we communicated in Q3. 2022 included hyper growth in our cloud business, significant growth in the number of customers that subscribe to our full software supply chain platform, powered by advanced DevOps and DevSecOps end-to-end solutions, and the higher landing ASP with customers who invested more in digital transformation. For the fiscal year 2022, revenue was $280 million, up 35% year-over-year. JFrog finished the year with over 7,200 customers compared to 6,650 in the prior year, choosing us as the DevOps and DevSecOps partner of choice. Allow me now to elaborate more on our fourth quarter results. Our 2022 fourth quarter revenue was $76.5 million, reflecting 29% year-over-year growth. Our cloud revenues delivered continued momentum equaling $22.6 million and increasing 53% year-over-year. Our growth in the quarter was driven by continued increases in end-to-end JFrog platform subscriptions as well as ongoing customers migration to multi-cloud and hybrid environments. Customers with ARR over $100,000 grew to 736 compared to 696 in the previous quarter, increasing 37% year-over-year. Customers with ARR over $1 million increased to 19, up from 18 in the previous quarter and up 27% year-over-year. We are pleased with this result, especially in light of the market dynamics we witnessed in the last few weeks of the quarter. On today's calls, we'll share an update on how the latest macroeconomic changes are impacting our business, how we are adjusting for it, and how we continue to drive growth alongside cost efficiency to capture the massive DevOps and security market opportunities ahead. Let me start by expanding on the top three teams that drove customer acquisition and expansion throughout the year and specifically in Q4. First, overall adoption of our end-to-end software supply chain platform, showing increasing maturity and tooling consolidation by the enterprise. Second, growing demand for security solutions that are fully integrated into the DevOps workflow and available as part of a full platform. Third, cloud and multi-cloud migration and adoption. Let's begin with the end-to-end JFrog platform scope. The growing adoption of our complete platform by new and existing customers showcases the broad need for scalable end-to-end fully integrated hybrid solutions. Our holistic platform approach does continue to serve momentum in Q4. For example, one of the world's most recognizable payment processing companies completed a standardization on the JFrog platform as their system of records. They chose JFrog over the prior solution Sonatype Nexus, as they needed a highly available solution that scales efficiently and supports hybrid environments to meet the needs of thousands of developers. In another example, a leading commercial bank in EMEA chose JFrog as their enterprise DevOps system of records. Due to the high level of complexity, they presented requirements for universality, full binary lifecycle management, integrated security, large scale, and efficient replication and distribution between development sites. Already utilizing GitLab for source code management, this bank turned to JFrog to complete their software supply chain coverage within advanced solutions for binary management and software supply chain security. We saw this trend throughout 2022 as customers are telling us that both from a technology and business perspective, platform consolidation and standardization will be a key theme in 2023 not only for DevOps or DevSecOps, but for complete software supply chain management. Second, to our security pillar. In mid-October, we launched an industry disruptive set of advanced tools introducing JFrog Advanced Security as the first DevOps-centric security solution. While we continue to build and expand this offering, we were excited to see initial customers who purchased JFrog Advanced Security subscriptions, quickly taking advantage of these capabilities. JFrog's meaningful investment in security over the past few years is beginning to bear fruit. We strongly believe that the holistic JFrog platform powered by JFrog Artifactory, the database of DevOps, and the de facto standard in the software package management, combined with our best-of-breed security solution into a single platform will drive adoption among our install base and attract new users. This is reflective of the sea change we saw in 2022 of security being embedded across the software supply chain, and companies discovering that if they don't control and secure the binaries in their organization, they are finding it nearly impossible to secure the software assets and remediate security issues. Modern security technology is automated, requires less human intervention, manages software package dependencies, and sets policies that protect and remediate an organization's software supply chain. We built JFrog Advanced Security with this understanding, and we believe it will displace legacy security solutions, attracting new customers to JFrog as this market continues to mature. In just over a year since our acquisition of Vdoo, JFrog has really developed a half dozen capabilities that can consolidate security point solutions currently in the market. As some competitors cobbled together open source tooling to appeal to the market demands, JFrog delivers a comprehensive DevOps and DevSecOps solutions for enterprises who are looking to consolidate the tool stack into a single platform. Let me share with you how we differentiate in security. Development teams are using security point solutions that generate too many results, requiring them to inefficiently fix all vulnerabilities, not allowing them to prioritize remediation based on context. This is why our contextual analysis capability was released. With JFrog Advanced Security, we allow teams to prioritize safe development hours and focus on what matters. Also, companies want to ensure that no software is shipped with accidentally included secrets or access keys. This is why secrets detection in our Advanced Security solution is so important, as it discovers inadvertent revealing of secrets and where they live in both code and hard coded into binaries. JFrog is helping companies and development teams focus these holistic security efforts with our solutions, alleviating teams' workloads, decreasing risk, and covering the entire software supply chain, which is impossible by scanning source code alone. We believe this approach will help drive growth in existing customers in 2023, upgrading many into higher JFrog subscription types that incorporate security solutions alongside core architect management. Security budgets remain one of the most defensible areas of technology spend, as enterprises prioritize investing in end-to-end solutions to secure their growing digital attack surface. For example, in Q4, one of the Nordic region's most prominent banks turned to JFrog to incorporate security across the software supply chain. Looking for a multi-cloud-based solution to streamline their operation, they partnered with JFrog and Google Cloud via their marketplace to enhance the bank's security posture and displaced legacy on-premise solutions. In another Q4 example, one of France's most recognizable luxury brands turned to JFrog for complete visibility and security across the software supply chain, saying they could now build once and run everywhere securely across multiple cloud providers. Looking to consolidate and standardize their DevSecOps tools long-term, this company is illustrative of what we are hearing from thousands of JFrog customers. They want to get control of their security tools fallout and the associated costs. We'll keep investing in JFrog security solutions as one of our R&D cores and look forward to more advancement and innovation in software supply chain security in 2023. We believe a proven powerful holistic security solution, coupled with end-to-end binary management is the antidote to modern software supply chain's security threats. Now, I want to address our cloud business. Cloud, multi-cloud, and hybrid infrastructures continue to be the desired end state of many companies. Our enterprise customers tell us that cloud migrations are often a multi-year effort and that the hybrid capabilities of JFrog allow them to move over time at their own pace with limited disruption to the business. As such, we've been pleased throughout the year to see growth in the cloud business across all subscription types. In Q4, a Fortune 100 pharmacy brand chose JFrog's software supply chain platform due to the immediate need to consolidate DevOps and DevSecOps solutions. JFrog replaced multiple existing on-premise and cloud offerings, including container registry tools from AWS and Google Cloud to manage their full software supply chain on one platform. This $500,000 enterprise-class deal was driven by the need for universality, scalability, consolidation of tools and JFrog's out-of-the-box integrations across the ecosystem. Recent CIO surveys validated by analysts and our customers tell us that while some short-term budgets may be tightening, annual investment in DevOps and security platforms in 2023, specifically in multi-cloud form are expected to go over 2022. Next, I want to address the ongoing macroeconomic challenges. JFrog's overall win rate and customer preservation remain robust, consistent with the historical trends, and we have been able to close a substantial amount of Enterprise Plus deals, that show us the enterprise demand for JFrog solutions. However, the macroeconomic headwinds, such as elongated sales cycles and customer pushouts increased significantly in the fourth quarter, impacting the overall growth of our business. During the month of December, we witnessed a further slowdown in deal closing and increased customer optimization efforts in cloud usage. As we closed the quarter, we saw our customers exercise caution in this uncertain environment. This is evident in the number of deals that pushed from Q4 into 2023 and that now require C-level budget sign-offs. This impacted our growth and net retention rate in the fourth quarter. It is further evident that self-hosted customers who are considering migration to the cloud are expanding their on-prem systems at a slower pace in favor of their cloud migration strategies that are pending further budget approvals. We would expect this pattern to continue in 2023 and have included them in our forward outlook. Despite these challenges, we see a growing need for DevOps security and edge solutions across the software supply chain in 2023 and beyond, continuing to believe JFrog's software supply chain platform sets industry standards and delivers unmatched value to the market. As we step into 2023, we see opportunities to leverage investments we have made within our solutions in prior years, allowing us to expand our profitability while still delivering topline growth as we will share in our guidance. JFrog was founded in a recession, has built a solid business across a decade, and we believe remains well-positioned and well equipped to deliver in uncertain times.

Thank you, Shlomi and good afternoon everyone. During the fourth quarter, total revenues were $76.5 million, up 29% year-over-year. For the full fiscal year 2022, revenues were $280 million, up 35% year-over-year. We ended the year with 7,200 customers, an increase of 8% over the 6,650 customers at the end of 2021. Expansion in our cloud business continued during the fourth quarter with revenues of $22.6 million, up 53% year-over-year, representing 30% of total revenues. For fiscal year 2022, our cloud revenues equaled $80 million, up 60% year-over-year and equaled 28% of total revenue. We are pleased with the growth in our cloud business during the quarter and fiscal year 2022. However, we have seen an expansion of headwinds from both customer optimization and macroeconomic impact relative to our expectations, which impacted fourth quarter results. In the fourth quarter, our cloud usage was impacted by a higher than expected transition of our pay-as-you-go customers to minimum annual commitments. The transition to annual commitments is beneficial to our business, as it reduces volatility and provides more visibility over the long-term. However, in the short-term, it negatively impacted our revenue growth in the quarter due to volume discounts based on commitment size. Self-managed revenues on-prem were $54 million, up 21% year-over-year during the fourth quarter. For the full year 2022, self-managed revenues increased 28% compared to the prior year. Net dollar retention for the four trailing quarters was 128%, a decline of two points due to macro headwinds. Our gross retention continued to be at 97%. In Q4 of 2022, 43% of total revenue came from Enterprise Plus subscriptions, up from 35% in Q4 of 2021. Now, let me discuss the income statement in more detail. Gross profit in the quarter was $64 million, representing a gross margin of 83.7%, compared to 84.8% in the year-ago period. The decrease in gross margin relative to the year-ago period is related to a high portion of cloud revenues as a percentage of total. We expect gross margins will remain between 83% and 84% in the near future and then trend towards the low-80s over the long-term as cloud revenues become a greater portion of our total revenue. Operating expenses for the fourth quarter were $62.5 million or 82% of revenues, up from $50.2 million or 85% of revenues in the year-ago period. Our operating expenses grew sequentially by around $3 million, as we continue to build out our enterprise sales and channel relationships for the long-term. Non-GAAP operating profit in Q4 was $1.6 million or 2.1% operating margin compared to an operating profit of $50,000 or 0.1% operating margin in the year-ago period. We turned back to profitability this quarter, as non-GAAP net income in the quarter was $4 million with earnings per share of $0.04 based on approximately 106 million weighted average diluted shares outstanding compared to a loss of $0.01 per share in the prior year quarter. Turning to the balance sheet and cash flow. We ended the year with $443 million in cash and short-term investments, up from $434 million as of September 30, 2022. Cash flow from operations was $7.3 million in the quarter. After taking into consideration CapEx, free cash flow was $6.4 million or 8% free cash flow margin. We remain committed to accelerating our free cash flow margin towards our long-term target of 30% over the coming years. As of December 31st, 2022, our remaining performance obligations totaled $204.7 million. I'd now like to speak about our outlook for 2023 and guidance for the first quarter and full year. Our expectations for 2023 imply strong growth in our cloud business. But due to continued headwinds related to customer optimization efforts and ongoing macroeconomic impact, we see baseline growth levels moving toward the mid-40s, down from prior levels of mid-50s. We expect the trend of slow expansion within our self-hosted business to continue through 2023, as more new customers land and expand with our cloud solutions. We continue to see an increase in usage of our solutions by self-hosted customers. Therefore, during the upcoming fiscal year, we will implement the pricing change to better align the value we deliver. This pricing increase will contribute roughly $6 million to our forecasted 2023 revenue growth. In addition, we will soon be releasing a version of JFrog Advanced Security, supporting our self-hosted customers. We are happy to see strong customer engagement since launch with our cloud-based offering, and see this introduction as an opportunity to be an additional driver of expansion within our self-hosted customers. Our outlook does not anticipate any increase in customer churn, as we have not seen a loss of business. We have seen an elongation of customers' migration process to the cloud, which will impact our net retention levels in the short term. Our expansion in our cloud business continues to be a catalyst for longer-term growth. Given the dynamics of our self-hosted and cloud businesses in 2023, we now expect our net dollar retention ratio to be in the low 120s for fiscal year 2023. As committed, we returned to profitability in 2022 and now see opportunities to expand further in 2023 and beyond, as we begin to leverage investments we have made within R&D and sales and marketing over the past few years. Following prior cost optimization efforts, we referenced in the second half of 2022, we will continue with our cost management efforts, shifting resources to high-growth opportunities and being disciplined about headcount growth. For Q1, we expect revenue to be between $78 million and $79 million, with non-GAAP operating profit between $1.5 million and $2.5 million, and non-GAAP earnings per diluted share of $0.03 to $0.05, assuming a share count of approximately 107 million shares. For the full year of 2023, we anticipate a range between $340 million to $344 million. Non-GAAP operating income is expected to be between $17 million and $19 million, and non-GAAP earnings per diluted share of $0.18 to $0.20, assuming the share count of approximately 110 million shares.

Thank you, Jacob. We believe we are well-positioned to face macroeconomic headwinds, as we have built a diversified customer base across multiple geographies and industry verticals. We believe our software supply chain platform is mission-critical in the digital transformation of enterprise customers and our security capabilities complement our leading position in DevOps. As we are turning the page on 2022 and leaping into 2023, I'd like to take this opportunity to thank my team. Over 1,300 frogs are working days and nights to make sure we are not only innovating but also turning our customers into digital transformation catalysts. We reimagine the future and navigate through the macro challenges in 2023. We are committed to working with the community, our customers, partners, and industry innovators to transform the software supply chain across our three cores DevOps, Security, and IoT. Thank you all for your attendance today and may the Frog be with you. And now, we'll be happy to take your questions.

Hey, thank you so much for taking the questions. Shlomi, maybe you can start with the Advanced Security side. It seems like you're seeing some initial traction there. Maybe help us understand kind of the attach rates to existing customers at this point. Is it fair to assume kind of it's more of an expansion motion than a land motion? And in general, what you're seeing?

Pinjalim, this is Jacob. If you could improve the quality of your line, please. It was really hard to hear the question.

Sorry, is this better?

Yes, much better.

Yes, I wanted to ask about Advanced Security and the attach rates that you're seeing with existing customers and if you're seeing any labs or maybe it is not a land motion?

Yes, Pinjalim. Hi, this is Shlomi, I'll start and Jacob, feel free to chime in. So, Advanced Security, as you know, was launched in October of last year. From the very beginning, we saw demand from our existing customers that require a platform solution that comes not only with Artifactory and Xray, but the full comprehensive Advanced Security capabilities. So, we added some features that are aligned with software supply chain security and make sense to the enterprise. Some of what we have heard from our customers and as we reported, some already purchased, is that they need to consolidate solutions that are now spread between different point solutions. They need a solution that can run in the cloud and on-prem, and this is our plan. They need a solution that protects the software supply chain, left to Artifactory and right to Artifactory. And this is where JFrog Advanced Security comes in.

So, Pinjalim, the Advanced Security would be an add-on and requires Xray capability, that's why in terms of attach rates to the customers, about half of our customers have access to Xray. So, those would be the group of customers that can today purchase Advanced Security. Again, this is just the first weeks of this product. We're happy to see first customers find it and we have great expectations from this product. But it's just been a few weeks since this product was in the market.

Yes. Understood. On the macro side, maybe help us understand the pipeline that you're entering this year with at this point in time? And what have you seen so far in January? Is that more so what you'd seen in December, or is it taking a step down? Just trying to understand the guidance and how much room is there? Is it derisked or not?

Yes. So, we did see kind of macroeconomic headwinds accelerate a bit in the last few weeks of December. Specifically, we did see increased activity in cloud usage optimization. We do see that customers are trying to meet their budgets. They don't have any more room to exceed the initial budget allocations. We also saw some deals pushed out because they required additional approvals, which were not required previously. So, those dynamics, we believe we will continue to see in 2023, and that's what we took into account in our guidance for the full year and the first quarter.

Thank you for your questions. I would like to follow up on the outlook, Jacob. Regarding the dynamics you are observing, it's clear that sales cycles are elongating. However, I'm curious if you have managed to finalize any of the delayed deals by early January. Additionally, concerning customers transitioning from pay-as-you-go monthly plans to annual ones, you noted this trend earlier in the fiscal year. The extent of this shift appears to be more significant. As you consider your guidance for next year, could you clarify where you are incorporating a more cautious approach? This would help us understand how you have formulated your guidance for 2023.

Yes. Some of the deals that were delayed were closed in 2023, but many are still pending because they need further approvals. As customers assess their budgets towards the end of the year, they tend to postpone purchasing decisions until their budgets are finalized. Regarding the shift from pay-as-you-go to annual commitments, pay-as-you-go customers currently make up a smaller percentage of our overall cloud business. We started the year with about a third of our cloud business as pay-as-you-go and ended with that figure at around a quarter. Transitioning to annual commitments allows for better visibility, forecasting, and customer engagement, as it typically involves longer-term relationships with our clients. We anticipate that this transition will continue. We have observed that customer optimization is occurring in two main areas: storage and data transfer, with many customers having already implemented these optimizations. However, we remain cautious about the level of optimization, especially given the increases we've seen in recent weeks. Consequently, we have adopted a conservative approach to our guidance for the year.

Understood. And then, Shlomi I guess, a question for you, you have Microsoft announcing things like co-pilot for GitHub, which at least has the potential to rapidly accelerate the development and production of code. And I imagine like, the Microsoft, sort of competitors, Google, Amazon, maybe others will respond in some sort of fashion. And so when we think of this sort of AI movement on the left-hand side of the software release cycle, how do you think this impacts this trend were to continue and adoption of things like GitHub co-pilot, you know, accelerates meaningfully? What do you think the impact is on the software release cycle, sort of overall, how it impacts JFrog as a DevOps platform within that software lifecycle, and maybe even order Artifactory if you can sort of peel the onion for us in terms of how the market may be evolving with respect to some of these new AI-based technologies?

Thank you, Sanjit, for the question. AI integration into source code management is primarily driven by GitHub, which has made significant progress with their co-pilot. However, source code management leads to the automation of processes. This is where the strength of binaries lies. Automation requires AI to enhance the management, distribution, and security of binaries. Some of these features are already part of our next-generation distribution and security systems. The capabilities we introduced in JFrog Advanced Security are designed to replace traditional point security solutions with more automated tools. Artifactory makes it easy to automate binaries, whereas automating source code binaries, which are in machine language, presents more challenges. Therefore, you can expect to see increased AI integration within JFrog security, and it will align well with AI use in source code management.

Understood. Thank you, Shlomi.

Hi. Thanks for taking the question. So I believe you're guiding fiscal 2023 revenue growing around 22% and then Q1 growing around 23% and then exiting Q4, around 128%, NRR. So just kind of curious, I know you said a little bit lower, but what are the underlying the guidance for next year?

So, we ended the year with 128%. Natural retention and we expected gradually converge to 120 over the course of the year.

Okay. Thank you and then just want to touch also on the pricing changes. So sounds like it could provide a $6 million tailwind, just any more color on the set of customers this would affect and then the nature of this change?

So it's only impacting our self-hosted customers. As you know, our cloud monetization model is based on usage. Our self-hosted business monetization is based on the number of servers. We do see that our customers utilize our solutions more and more on a self-hosted site. But it does not necessarily relate to impact in the server purchases. Therefore, we decided to make this price change in order to better align the value that our customers are getting with the price that they pay. It's a small percent, 3% to 5% increase across all subscription types on self-hosted solutions.

Hey, Jacob. Hey, Shlomi. Hey, guys. Thanks for taking the questions. I wanted to follow up on that net revenue retention color there. And I wanted to kind of find out more on the upside in perspective, what needs to happen, maybe from a demand environment, or the customers out there, or the way that they're consuming the product that could drive net revenue retention higher from the low 120s, maybe back up to historical levels?

Yes, as you know, our growth in the cloud customer segment is outpacing our corporate net dollar retention. If we observe an acceleration in customer migration trends or a deceleration in cloud usage optimization, it could lead to increased cloud usage. Additionally, the uptake of our security solutions for on-premises customers also presents potential for growth. We are pleased with customer engagement on the cloud side regarding our Advanced Security capabilities, which we plan to launch for on-premises systems. The adoption of these features by on-premises customers may further enhance our expectations. However, since we have not launched Advanced Security for on-premises yet, it is premature to provide concrete insights, and this could indeed result in upside potential.

And Koji, and if I may add, I think that what we see is that the cloud growth is still performing very high you could see it in the results. What we've seen in the last few weeks of 2022 was that on-prem customers that were in the process of migrating to the cloud and improving, obviously, our net dollar retention are currently on hold pending for budget approvals. And this is part of the pipeline that was pushed. But on the same hand, they are not investing more in on-prem. So it's kind of an in-between period for on-prem customers that already express their motivation to move to the cloud, already completed a successful proof of concept of this workload migration, but still waiting to get the final approval for budget of moving to the cloud. And that's obviously on a bigger volume in our installed base, the on-prem current customers.

Yes. Hey, guys. So the profitability for fiscal 2023 much higher than expected. So that's nice to see. But given the headwinds, that you see the macro-related headwinds to topline? Are you sacrificing maybe too much on the growth side? I guess what I'm asking is what is your confidence in achieving topline growth just given the lower OpEx expand, and you're maybe something more that's occurring to the business beyond just macro? I don't know, if competition is changing, or the different approaches or maybe repository management or distribution it might be impacting the opportunity just seems like with the bullishness you articulated around expansion of Artifactory and the security distribution that number would be going as low as you talked about?

Yes. So we invested in the various areas over the course of the last few years, and we have started to see the first fruits from our investments in security capabilities. Artifactory is obviously the de facto standard in the industry and continues to be a very strong brand. We also build significant infrastructure around our go-to-market and R&D capabilities. So, we believe that the current level of investments is sufficient for us to achieve these revenue targets that we expect and that's why we can increase our bottom-line as well, because we feel comfortable in the level of investments that we've done.

Jon, and if I may add, well you know JFrog, you follow JFrog profitability was part of our plan before the recession. And we're very happy, I'm very pleased to see that we are not just committed to this KPI, but also exceeded in performing there. And we will keep on doing that. But your question is very important because you're asking if this is for profitability, are we sacrificing something? And the answer is no. We actually invested in three main domains, A, cloud; B, platform; and C, security. This is what we've done for the past year. And now, I think that the company is set to kind of go after the fruits of this investment that are also very much aligned with the market demand and what we hear from the market. So we will take the profitability challenge alongside going after the fruits of our investment in 2023.

Okay. That's, that's helpful. Thank you. And then the following question I have. And I would think that this would be a positive, but just the trends you might be seeing artifacts size, container usage, Infrastructure as Code, how do those trends potentially impact trends for Artifactory?

Yes, Artifactory, as Jacob mentioned, Artifactory is the standard maker in the binary and artifact management in the world. And we are very happy to see growing and especially when new customers and large enterprises adopt this methodology. It's kind of showing us that what we invested in is really the center of gravity for software supply chain management. When you build on top of the database of DevOps, Artifactory, and Artifactory became the single source of record for all companies, then the capabilities that you're adding as part of the platform are just completing the customers' ability to control the full software supply chain, left and right to Artifactory. So, we still think that the primary asset in software supply chain management is artifacts, and we're also seeing it from the customer demand, and we're also seeing it from other companies that are trying to develop the same capabilities.

Hey, guys. Yes, Mike Cikos here and thanks for taking the questions to get me on. I wanted to circle back to some of the earlier questions that are trying to get at what level of conservatism is baked into the guidance or how much has it been derisked? And really where I'm going with this is focused a lot, I think, Jacob in your prepared remarks and said that SaaS growth in calendar 2023 is expected to be mid-40s, as we look out over the course of the next year. And I'm trying to just get a better feel or a sense, but can you help us think about what went into your assumptions to arrive at that mid-40s, especially as we look at the comps that you guys are up against, given the strong growth rates you guys delivered in calendar 2022. But anything on that sales growth in 2023 would really be beneficial from my understanding?

Yes. So the following assumptions we'll look at when we came to this conclusion, A is that number of customers today and the overall business today on minimum annual commitments versus pay-as-you-go. Two, we'll look at the pipeline for migrations from on-prem to cloud. And we assumed some delays as we know that we did experience some delays in the conversions in the late part of Q4, and we assume that the delays will continue to be in 2023. So we applied some conservatism on the pipeline for conversion. And we also did not embed the significant upside usage on top of minimum commitment. So we do expect that customers will continue to optimize their cloud usage, and therefore the minimal potential upside above their annual commitments.

Thanks, guys. A couple of things for me, Shlomi on the macro front and the elongation of the sales cycles. Couple of things on there, first of all, was January worse than December, the same if you can talk about that? And then second related to that, is there any more color you can give us on regions North America, Europe, Asia, or type of customer enterprise commercial?

Yes. Thank you, Ittai. So it's too early for me to speak about January. But I can tell you that what we've seen in December, and specifically, in the last week of the previous quarter, is kind of a pattern that we keep on seeing. And this is why we took it into consideration when we actively set our outlook. We see that difference between geographies not just because of the geopolitical situation in Europe, but differences between geographies in how they adapt software supply chain and how they adopt cloud. So obviously, North America is leading with cloud migration with the big legacy industry sectors starting to move to the public cloud, we see EMEA following, but at a slower pace and APAC is really at the beginning of adopting platform solutions; they are still at the basics of DevOps. The second thing that we see is that security, especially in North America, and more specifically, software supply chain security, after the White House lounge should be saying that this is part of the regulation is part of every CIO agenda for 2023. And this is why we were very focused on having JFrog Advanced Security for 2023 and not later this year. So, I assume that we will keep seeing this trend, elongated processes with more C-level signups. We will see this. But alongside that, in North America, cloud growth will still happen. And security will still be at the top of the CIO and the CISOs list.

Thanks for taking my question. This is Ethan on for Rob. I just wanted to kind of ask a little bit more on the IoT opportunity. I know there's some mention of that in the prepared remarks and kind of where the market that we're at right now. Are you seeing customers coming to you actively seeking this out? Are you still kind of in an education part of the cycle right now where you're helping customers understand that you have this capability and that you're able to provide them with this type of automated release deployment with software? Thank you.

Yes. Thank you, Rob, for this question. As you remember, in Q3, we reported a big project that already adopted JFrog Connect. The IoT over-the-air update mechanism we now have in pipe, a few other projects coming from very big customers that want to extend the Artifactory and security usage all the way to the connected devices. We are excited about that. That part of the solution that we wanted to see an end to end all the way to the device, and it's still happening.