Earnings Call Transcript - FROG Q2 2022

Operator, Operator

Thank you for standing by, and welcome to the JFrog Q2 Fiscal 2022 Financial Results Conference Call. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Schreiner, Vice President of Investor Relations. Please go ahead.

Jeff Schreiner, Vice President of Investor Relations

Good afternoon, and thank you for joining us as we review JFrog's second quarter financial results, which were announced following market close today via 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 the third quarter and full year of 2022. 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 Form 10-K for the year ended December 31, 2021, filed with the SEC on February 11, 2022, 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-Q for the quarter ended June 30, 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 a 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's CEO, Shlomi Ben Haim. Shlomi?

Shlomi Ben Haim, CEO

Thank you, Jeff. Welcome, everyone, to our Q2 earnings call, and greetings from the swamp. I'm happy to report yet another strong quarter for JFrog as the adoption and demand momentum for our DevOps and security products continues. As we will share today, I'm pleased to see our strategic investments bear fruit. In Q2, JFrog revenues exceeded the midpoint of our guidance by more than 3% for the second straight quarter. We are excited to report that our strategic sales team again broke all-time records with multi-year hybrid, full platform deals signed with some of the world's leading enterprises. Our second quarter revenue was $67.8 million, reflecting 39% growth year-over-year compared to 41% reported in the previous quarter. Our cloud revenue grew by 68% year-over-year compared to 63% reported in the previous quarter, demonstrating our cloud-first strategy and driven partly by continued growth in our cloud marketplace channels and customers' cloud migrations. As for larger company deals in the quarter, the number of customers with ARR over $100,000 grew to 647 compared to 599 in the previous quarter, which is a 56% increase year-over-year, and our trailing four quarters' net dollar retention grew to 132% compared to 131% reported in the previous quarter. Our customers tell us that JFrog is a mission-critical piece in how they pull software from public hubs, build, manage, secure and distribute it to production. JFrog Artifactory serves their software organization as the single system of record and we continue to see that JFrog is an infrastructure backbone and remains a cornerstone of our customer software delivery processes at scale. Now allow me to elaborate more about the teams that drove JFrog's success this quarter. First, the scaling gap of the cloud, cloud migration and cloud marketplace expansion. Second, the maturation and adoption of security solutions in the DevSecOps domain that covers the organization's software supply chain. Third, the strong validation of the binary-centric platform. And fourth, our emerging success in DevOps for IoT and connected devices. Let's begin with the DevOps in the cloud. In Q2, JFrog twice broke internal records for the largest deals in the history of our cloud and hybrid solutions. The enablers for these deals continue to be the growing demand for hybrid multi-cloud DevOps solutions and the work of our teams to drive migrations while deepening the partnership with cloud marketplace vendors that enable simplified purchases and processes. For example, the now largest deal ever for JFrog Cloud came in Q2 via one of the world's largest travel and hospitality booking companies. In this strategic deal, the customer required a holistic DevOps and SecOps SaaS solution to expand their global binary distribution and reduce their infrastructure costs while simplifying the security policies of the software supply chain. The JFrog Platform will support the customer's global scale, provide DevOps as a service to the thousands of developers and protect their millions of customers. In addition, we see robust cloud growth among our platform users. For example, the second major deal this quarter came from one of the world's largest financial institutions that migrated part of its IT assets to JFrog's Cloud, grew their adoption and increased their annual spend by 67%. As these financial institutions transition towards a multi-cloud environment in the upcoming years, the hybrid deployment model will provide standardization across both cloud and self-managed solutions, allowing for integration and collaboration across development and release teams. As a long-standing customer, this company has grown from an initial deployment of Artifactory and expanded to security and distribution through the use of the JFrog Platform. Now onto our security pillar. Our investment in security continues to bear fruit as we see an accelerating trend of companies turning to JFrog looking for a robust way to secure the software supply chain. In today's world, more and more hackers are targeting developers to gain access to organizations. Companies are realizing that securing binaries is critical, acknowledging that using point solutions without a holistic security approach continues to expose them to external vulnerabilities. For example, a large global technology hardware manufacturer turned to JFrog in Q2 to modernize its software supply chain security processes. In a competitive replacement, JFrog uniquely provides these new customers with highly available solutions, software distribution and more. Understanding they also needed to scale security continuously with over 1,000 developers, they lacked a fully integrated solution to provide scanning and remediation paths across the DevOps pipeline. Now as a full platform customer that enjoys the integrated power of Artifactory and Xray, this company will be able to more securely automate its software delivery all the way to production in the cloud and on-premises. The continued pattern of full platform adoption also aligns with market demand. In Q2, one of the world's largest integration API platforms migrated from Symantec Nexus to JFrog's Platform. As these customers attempted to scale with their existing setup, they required a cloud-based DevOps platform that offers an extensive variety of cloud-native support to speed up their internal development while protecting them against vulnerabilities. They chose JFrog's Platform to support their need for a highly available, robust universal software package storage and distribution mechanism to ensure trust in releases all the way to the edge. Finally, on to the next-gen DevOps announcement we have made in the IoT and connected devices business. JFrog continues to innovate and address DevOps' big challenges. We introduced the world to the first binary repository that became the single source of record in the industry. We expanded our solution by building a SecOps composition analysis tool that became the standard in how the software supply chain is being protected. And now we are addressing the next challenge for development teams, which is updating software on the edge. Last May, at our user conference ramp-up, we announced and demonstrated JFrog Connect, a product combining JFrog DevOps platform capabilities with the technology of Upswift, a company we acquired in Q3 of last year. We are already seeing early demand for the product in the enterprise and how it will drive broad platform expansion. No other company provides a complete end-to-end DevOps and security flow all the way to connected devices. Today, over-the-air update solutions are made by companies forced to build their own technology that doesn't connect to the CI/CD flow, making them insecure and slow. The market for software updates on devices takes DevOps beyond not just the data centers and the cloud, but all the way to the edge. We believe JFrog Connect is the next logical step in fulfilling the Liquid Software vision and it is now offered in the latest version. At swampUP, we were proud to make additional announcements across our three core areas: DevOps, security and IoT. In our core DevOps area, we were honored to share the swampUP stage with the tech lead of the Swift project at Apple, which is the new standard for iOS developers. Swift package management is moving from a software-centric approach to a binary-centric approach, and the team has worked closely with JFrog to develop the first enterprise-grade software package support for Swift in JFrog Artifactory. Building on our solid foundation in JFrog Xray, we also announced new advanced capabilities for end-to-end software supply chain security. This includes detecting malicious software packages, scanning discovered secrets such as API keys and passwords, and infrastructure as code security scanning to detect cloud security misconfigurations before they're set up on the cloud. This was the most consequential set of security capabilities ever announced by JFrog. These new capabilities will be offered to customers as an additional package on top of our existing subscriptions beginning in late Q3. When we acquired Vdoo last year, we committed to delivering integration in 2022. The development and introduction of our Advanced Security Package demonstrate the execution of that promise. Finally, we announced integrations with ServiceNow and Microsoft Teams that enhance JFrog offerings across the marketplace and make JFrog solution too integrated to fail. Both Microsoft and ServiceNow products need access to JFrog Artifactory as the repository that stores all binaries and enables full automation of the DevOps pipeline and to Xray, which secures them at all stages. For JFrog customers, these integrations will create a DevOps environment from developers all the way to runtime with best-of-breed products that coexist and avoid vendor lock-in. Before we turn to our financial review, I would like to address the macroeconomic changes the world is now experiencing. A downturn in the global economy requires companies to look at their business efficiency, product diversity, cash management and path to profitability. Our renewal rates in both on-prem and cloud have remained robust and continue to perform very well. In addition, our cloud revenues continue to see positive usage trends. However, during the second quarter, we started seeing elongated sales cycles for large new business deals compared to trends we have seen in the past. We would also note that Asia-Pacific, which is currently our smallest geographic region in terms of revenues, has seen slower levels of DevOps adoption relative to our prior expectations. Given our customers' view of the JFrog DevOps platform as a critical component to modernize their software supply chain, we anticipate only a small potential impact on overall customer usage. We acknowledge and have accounted for the current macroeconomic headwinds emerging globally in our guidance. We are confident that JFrog is well positioned to succeed. We believe JFrog continues to grow long-term revenue at 30% or greater, even as overall global IT budgets may be pressured during the second half of the year. With that, I would like to turn the call over to our CFO, Jacob Shulman, who will provide an in-depth recap of our quarterly results and update you on our outlook for both Q3 and the full year 2022. Jacob?

Jacob Shulman, CFO

Thank you, Shlomi, and good afternoon, everyone. During the second quarter, total revenues were $67.8 million, up 39% year-over-year. Momentum in our cloud business continued with revenues of $19.2 million, up 68% year-over-year, driven by increased levels of customer usage and continued migration of customers from self-managed to SaaS. In the prior year's quarter, we had stated our cloud growth had bottomed. Since then, we have seen continued acceleration and customer adoption of our cloud solutions, and the JFrog DevOps platform delivered on our commitment to the market. While we are pleased to see this continued momentum, we would like to remind you that our cloud business is subject to variability. We continue to believe that the baseline growth rate for our cloud business is in the mid-50% range, with potential upside from increased customer usage as we saw in the first half of 2022. Self-managed revenues, often referred to as on-prem, were $48.6 million, up 31% year-over-year. Our on-prem business continues to provide consistent growth on a year-over-year basis, but the level of growth has recently slowed as the majority of new customers continue to land on the cloud, and the trend of migration to cloud from the on-prem and adding hybrid solutions has accelerated. Our success in Q2 demonstrates the value of large enterprises utilizing hybrid deployments. We continue to expect a portion of new customers will land with our on-prem solutions first, but we recognize that migration and new land have been transitioning towards the cloud in recent quarters. Net dollar retention for the four trailing quarters was 132%, in line with our prior commentary. As of the quarter end, we had 647 customers with ARR of over $100,000, up from 599 customers as of March 31, 2022, and up 56% from 415 customers at the end of the second quarter of 2021. In addition, we grew the number of over $1 million ARR customers again in the quarter, adding 1 in this quarter for a total of 17, up 42% year-over-year. As we discussed in the past, adoption of the full platform is a key factor in the increasing size of our customers. In Q2 of 2022, 36% of total revenue came from Enterprise Plus customers, up from 32% in Q2 of 2021. Now, let's review the income statement in more detail. Gross profit in the quarter was $56.8 million, representing a gross margin of 83.7% compared to 83.4% in the year-ago period. We expect gross margins to remain between 83% and 84% during the second half and to trend toward 80% over the long term as cloud revenues become a greater portion of total revenue. Operating expenses for the second quarter were $58.8 million, or 87% of revenues, up from $39.6 million, or 81% of revenues, in the year-ago period. As we noted, the second quarter will be the low point of operational costs as we enacted merit increases to employees, which caused a step-up in spend in this quarter. We continue to invest strategically within R&D and build out our strategic sales and channel relationships. Non-GAAP operating loss in Q2 was $2 million, or negative 3% operating margin compared to an operating income of $1 million, or a 2% operating margin in the year-ago period. Non-GAAP net loss in the quarter was $2.2 million, or a loss per share of $0.02 based on approximately 99 million weighted average shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $430.2 million in cash and short-term investments, up from $427.7 million as of March 31, 2022. Cash flow from operations was $4 million in the quarter. After taking into consideration CapEx, free cash flow was $3 million. We continue to remain free cash flow positive and have been so in every quarter since becoming a publicly traded company. We remain committed to accelerating our free cash flow margin toward our long-term target of 30%. Before we turn to guidance, I wanted to add to Shlomi's comments on our view about the potential impact of global macroeconomic headwinds. Despite the macroeconomic headwinds, we are confident that the business will grow 30% or greater this year and beyond. However, as Shlomi mentioned, we acknowledge the changes in some geographies and the slowdown in enterprise new deals approval cycles, and we feel it is financially prudent to take additional levels of conservatism as a precautionary measure to reflect the macro impact. We also continue to remain committed to our goal of breaking even for the fiscal year 2022. Therefore, in order to stay aligned with our guidance, we have accelerated initiatives to improve our operational efficiencies. For Q3, we expect revenue to be between $70.5 million to $71.5 million, with non-GAAP operating profit ranging between negative $0.5 million to positive $0.5 million, and non-GAAP earnings per diluted share of negative $0.01 to positive $0.01, assuming a share count of approximately 106 million shares. For the full year of 2022, we are slightly increasing our revenue guidance to a range between $278.5 million and $280.5 million. Non-GAAP operating income is expected to be break-even, ranging between negative $1 million to positive $1 million, and non-GAAP earnings per diluted share of negative $0.01 to positive $0.01, assuming a share count of approximately 107 million shares. Now let me turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi?

Shlomi Ben Haim, CEO

Thank you, Jacob, and Happy Birthday, my friend. Thank you to my team, JFrog employees, for your steadfast dedication and high standards. Your passion leads to this success. Again, we saw that our strategic investment, platform expansion, and end-to-end DevOps coverage aligned with the growing market demand. Second-quarter numbers show that JFrog is positioned well to keep the growth momentum while remaining an efficient business financially. I want to thank you all for your attendance today. May the Frog be with you. And now we'll take your questions.

Operator, Operator

Our first question comes from Sanjit Singh of Morgan Stanley.

Sanjit Singh, Analyst

Congrats on Q2. I guess I want to start the conversation around the confidence for sustaining 30% growth. Really appreciated the sort of thinking on and the commentary on what you're seeing in the macro and some of the longer sales cycles. But if we break it down into the drivers for 30% growth, what gives you that confidence that in a potentially tougher budget environment, you'll continue to sustain that level of growth?

Shlomi Ben Haim, CEO

Thank you for your question. Thank you for joining us today. This is Shlomi. Regarding the macroeconomic changes that we are seeing as detailed in the script, we are actually seeing an increased demand for our cloud solutions, with more usage in the cloud coming from new and existing customers. So the trend of cloud growth has continued since the second quarter of 2021. What we are also observing is some kind of slowdown in the life cycles of big deal approvals, especially when it comes to major deals and a slowdown in some of the regions. So we wanted to take a conservative approach with our guidance, and these are the observations that we've seen so far.

Jacob Shulman, CFO

I would add to that, Sanjit. First of all, we believe there is a lot of room for penetration for us in existing customers. Our expansion rates continue to be very attractive. We see a lot of opportunities in our existing customers. For many of them, we continue to be mission-critical. So in our discussions with customers regarding their future deployment of DevOps, we've seen a lot of opportunities for us to expand and maintain this revenue growth.

Sanjit Singh, Analyst

That's very helpful. And Happy Birthday, Jacob, as well. Hopefully, you get the chance to do something else on earnings calls next time around. My follow-up question, Shlomi, for you, is, as the market is moving more and more towards cloud, if we call this the DevOps category, what patterns are you seeing from customers? How are they approaching the cloud decision, right? Because you guys own a couple of important pieces of the cycle. There are other parts of the software release cycle that may be using other vendors. When customers say, 'Okay, I'm moving to the cloud,' are they thinking about doing this in a different approach than they did on-prem, and meaning in terms of consolidating the number of vendors? Or are they going with the best-of-breed approach? In your conversation with customers, how are they approaching the cloud architecture decision for this category?

Shlomi Ben Haim, CEO

That's a very good question. And I'm sure that all the DevOps providers are grappling with this question. What we see in the market is split between three different categories. First, most of the new customers are starting with the cloud; this is where the new industry is going, less on-prem for new customers. What we see in the enterprise, especially with the expansion of our customers, is two movements: a, migrating to a hybrid environment. Nobody is just switching on and switching off the on-prem solution. So a hybrid environment gives them the time to migrate IT assets one by one, by region or by team. The third category is those that are looking for multi-cloud solutions, and then they will start with one cloud migration and then duplicate to a multi-cloud environment and a multi-region environment. This will be a fulfillment of their strategy of moving to the cloud. In all three categories, Sanjit, migration to the cloud is not an easy move, especially retail infrastructure. It's heavy lifting, and I'm very happy to see that JFrog can provide them with this long runway to take it step by step.

Operator, Operator

Our next question comes from Brad Reback of Stifel.

Brad Reback, Analyst

Great. Can you hear me?

Shlomi Ben Haim, CEO

Yes, we can hear you.

Brad Reback, Analyst

Great. So a couple of quick questions. Shlomi, as a customer migrates from on-prem to the cloud, can you give us a sense of the economic uplift you get from that?

Shlomi Ben Haim, CEO

Yes. So migration to the cloud usually comes with an ARR growth. What we see in the market is that it mainly comes from data transfer. This is one of the consumption units that we measure. So more data transfer in the cloud means more binary movements between regions and different deployments. The second thing we've seen is that when you move your assets to the cloud and save on headcount that you used to employ, you now get JFrog as a service, DevOps as a service. You invest more in the asset and ensure its proximity to your developers. Therefore, as also reported in the script, the ARR growth is largely due to migrating from a lower subscription to the full platform in the cloud.

Jacob Shulman, CFO

I would add to that, Brad, when customers transition to cloud, they also tend to add additional capabilities because they perhaps didn't have sufficient in-house resources to use the full DevOps platform. So when we compare these migrations, we see a range of upsells somewhere between 20% to 80%. It really depends on the customer use case. For example, one of the largest deals that we closed this quarter saw an upsell of 67%. That's one example.

Brad Reback, Analyst

That's great. And then, Jacob, for you, your comment on efficiencies. Is that reflected in the existing spend? Or does it also encompass slowing down hiring in the back half of the year?

Shlomi Ben Haim, CEO

Brad, you broke up a bit. So can you please repeat the question?

Brad Reback, Analyst

Sure. I hope you can hear. Sorry, I'm in a tough spot. The comment on efficiencies. Is that just slowing existing spend already? Or is it also a function of slowing hiring in the back half of the year?

Jacob Shulman, CFO

Yes. We will carefully review our hiring in strategic areas. So we will obviously continue to implement our efficiencies in other areas such as cloud efficiency and other projects. But the growth regarding headcount is also under review.

Operator, Operator

Our next question comes from Mike Cikos of Needham & Company.

Mike Cikos, Analyst

I did want to just expand on that last point regarding those efficiencies you guys have previously discussed. Can you help us understand where those efficiencies are coming from? And have those been put in place at this point, or is that still to come?

Shlomi Ben Haim, CEO

Yes. So in addition to reviewing headcounts carefully, the additional efficiencies would be our focus on cloud efficiencies. Many of our initiatives to improve our cloud efficiency have already been implemented, and we are seeing our gross margins on our cloud business improving quarter to quarter. There is still a lot of room for us to continue this, and this is what we intend to do. We're also exploring various projects and will continue with the highest ROI projects. Additionally, we'll review which projects may need to be postponed or even stopped.

Mike Cikos, Analyst

Sorry, just to further elaborate on that: if we're talking about the initiatives to improve cloud efficiency, is that just you securing better rates as you guys continue to build scale and volume? Or are you optimizing your own internal infrastructure? Can you provide more color?

Shlomi Ben Haim, CEO

Some of it involves optimizing existing infrastructure. Some of it may require re-architecting some of the infrastructure that will generate significant efficiencies. So it's a combination of both.

Jacob Shulman, CFO

I would add, Mike, that when we build efficiencies, we are obviously focused on two elements: one, the company's growth; and two, our commitment to breaking even. The headcount goals are something that we review regularly. Additionally, our investment in our strategic features and the differentiators we create in the market is another priority; however, we are also engaging with our vendors just like any other company, and we are reviewing every contract to see if we can optimize.

Mike Cikos, Analyst

That's very helpful. I really appreciate the color there. And if I could just squeeze one more in: when you're talking about the elongated sales cycles in the current macro environment, is there a difference in those cycles when you look at North America versus other international markets or even between the expansions you're seeing with existing customers versus landing new customers? Can you help parse that out for us?

Shlomi Ben Haim, CEO

Yes, Mike, great question. First of all, I have to admit that I'm excited to see those very big deals coming our way. Our strategic team is successfully closing records quarter after quarter. To be honest with you, those very large deals we break each quarter often teach us about the approval cycles of these seven-digit deals. However, for mass usage, and the expansion of new customer deals, we see that if you land with major builds and platform adoption, it requires three levels of approval. This is new to this domain. On the expansion, with customers, it splits between two categories: a, if you're moving to a new strategy, let's say you're implementing a hybrid environment, and you're not just renewing but are also expanding into the cloud; then it requires technology C-level approval and more. Overall, on big deals, we see longer cycles, both on the expansion and the new business. We don't see that impact on smaller deals. Regarding the geopolitical question you had, what we see in EMEA is very similar to what we see in North America. We don't see any headwinds coming from the geopolitical situation in Ukraine. In fact, EMEA responds to economic changes like North America does, as I mentioned before. In APAC, we see that the adoption of DevOps, especially in the enterprise and especially migration to the cloud, is taking longer than we expected earlier this year or late last year, but it's still happening, just with a different cycle related to DevOps adoption and migration.

Mike Cikos, Analyst

That was all very helpful. I really appreciate the color, Shlomi. I'll pass on my Happy Birthday wish to you, Jacob, as well.

Jacob Shulman, CFO

Thank you, Mike.

Operator, Operator

Our next question comes from Jason Ader of William Blair.

Jason Ader, Analyst

Jacob, my daughter's birthday is today too, so you're in good company. She's 21, so she can drink legally. I wanted to ask you about the security package, the Advanced Security Package that you announced. Can you elaborate a little bit on that and how it's going to be priced, which subscriptions it will be included in, and what kind of uplift do you think you could get from the Advanced Security Packages?

Shlomi Ben Haim, CEO

Jason, this is Shlomi. I'll take this question. The Advanced Security Package will come, as mentioned, on top of the existing subscriptions that we offer. This is part of the results of the integration of Vdoo technology, the Vdoo team with the Xray team created in the past years. If you remember, we talked about our strategic investment in security and what value we can bring to the world of software supply chain protection as the binary provider. This is unique to the market, and we see a growing trend of hackers targeting developers. When hackers target developers, you need different capabilities, and this new package we're launching provides just that. We shared this at swampUP. Our customers and prospects were really impressed. We see increasing interest in the market because we currently have one of the largest research teams collecting data on what has been hacked, which we can use to inform our customers about protecting their binaries. This will strengthen our holistic solution. There are many companies in the security market—many of them also from Israel—but we can uniquely offer security combined with repository and distribution capabilities.

Jacob Shulman, CFO

To sum up, I will add that this package will be available to customers in late Q3. So we will know more about the contribution in our Q4 updates in Q4 and we will have more information once the package is on the market.

Shlomi Ben Haim, CEO

The Advanced Security Package will be available as a beta program and commercially in Q3.

Jason Ader, Analyst

Okay. So it will be included in, obviously, in Enterprise Plus. Is it going to be available in Pro and Enterprise as an option, or how is that going to work from a tier standpoint?

Shlomi Ben Haim, CEO

It will be included in our Enterprise X and Enterprise Plus offerings on the on-prem side. Before that, it will be available for cloud, Enterprise X and Enterprise Plus customers.

Operator, Operator

Next question comes from an analyst at Bank of America.

Unidentified Analyst, Analyst

This is Laurie on behalf of Koji. Just a quick question on NDR. You expanded one point in the quarter. Can you comment on the main driver for that? And are there any changes that you could observe regarding usage from existing products for the same tier versus customers moving to a different tier?

Shlomi Ben Haim, CEO

Yes, I can take that. First, I heard only the first part of your question. Please repeat the second part. The expansion of our net dollar retention rate comes primarily from the expansion of our cloud customers. We did see acceleration of our cloud customer growth driven by transition to the platform and also increased usage, and that was the main contributor to the expansion of our overall net dollar retention rate. Can you repeat the second portion of your question?

Unidentified Analyst, Analyst

Yes. Just wondering on the usage, how much is that from existing products for the same tier versus customer upgrades to a different tier?

Shlomi Ben Haim, CEO

Yes. We did see an increase in platform adoption in the cloud. It either comes from upselling to cloud customers or migration from Enterprise Plus customers on-prem to cloud. I don't have the exact numbers, but our overall Enterprise Plus revenue continues to grow significantly, and today it represents 36% of our quarterly revenue.

Unidentified Analyst, Analyst

Yes. And then just a follow-up on the previous question about longer sales cycles: has that impacted the landing ARR as well?

Shlomi Ben Haim, CEO

No, it doesn't. It's just a longer cycle for the big deals to come.

Operator, Operator

Our next question comes from Michael Turits.

Unidentified Analyst, Analyst

This is Billy on behalf of Michael Turits. I want to ask how you guys are thinking about R&D investment dollars for the year ahead. Are you more focused on the product roadmap and new products, or more focused on enhancing the current platform offerings with integrations and enhanced capabilities, etc.?

Shlomi Ben Haim, CEO

Yes. So there are several areas of focus for us. First, security is a real focus for us, and we know that there's significant effort in getting our Advanced Security Package into the market. Second, effort is in the IoT area. We launched JFrog Connect products and we see a lot of demand. This product still needs to be scaled to the level of the platform with digital features. So that's the second major area of investment. The third area is making our cloud a more efficient, robust business. So those are the three major areas of investments. Obviously, Artifactory is our main product today, and we also have a rich roadmap for improvements and additional features for Artifactory as well.

Operator, Operator

Our next question comes from Rob Owens.

Robbie Owens, Analyst

More on the security side of things with everyone talking about a broader shifting left. Just wondering if there's an opportunity to consolidate across a lot of these security capabilities and just what you're seeing in the market right now?

Shlomi Ben Haim, CEO

Yes. Well, shifting left is a trend, but what we are focusing on is not just protecting the developer, but protecting the software supply chain. It starts with the developer and ends in production and runtime. The one asset that is uniquely aligned at all stages is the binary. Since we are storing it and hosting it for you, we can provide you with a holistic solution for all stages in terms of security. Now, shifting left is important because the majority of our users are developers themselves. If we want to provide them with a holistic solution, we also have to shift left towards that direction. This includes all kinds of statistical analysis that the market already has solutions for, but will be included in our solution. All types of protecting the development environment, curating binaries outside the organization will be included, but we are focusing on the binary lifecycle and protecting all the way from development to production.

Robbie Owens, Analyst

Great. And there's been a lot of news about larger companies lowering the number of new developers they are going to hire in this environment. So just curious, given that dynamic, do you think you will start to see that play out in deal sizes? Or on the other hand, does this provide an opportunity given a more normalized pace of hiring moving forward for you to consolidate the opportunity across a wider set of fragmented categories?

Shlomi Ben Haim, CEO

Yes. It's a good question. We see that most of the value we provide to the market comes at the enterprise level, especially as the development environment scales, both in the cloud and on-prem. The reason for that is that when you start to have a bigger team that needs to collaborate, automate, and distribute across multiple locations, security also needs to be more efficient in this environment. This is where JFrog excels, especially because of the binary flows. While I know that it is appealing for developers in smaller shops, we start with the Enterprise Plus and Enterprise X customers and will continue from there and report back on the adoption trends.

Operator, Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Shlomi Ben Haim for any closing remarks.

Shlomi Ben Haim, CEO

I would like to thank you for joining us today. Thank you for your time, and may the Frog be with you.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.