Earnings Call
JFrog Ltd (FROG)
Earnings Call Transcript - FROG Q1 2022
Operator, Operator
Ladies and gentlemen, thank you for joining us and welcome to JFrog's First Quarter 2022 Earnings Conference Call. I'll hand the conference over today to JoAnn Horne of JFrog Investor's Relations team. JoAnn, please go ahead.
JoAnn Horne, Investor Relations
Good afternoon and thank you for joining us as we review JFrog's first quarter 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. Before we get started, let me review the safe harbor statement. 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 second 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 obligated 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 March 31, 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 measures of JFrog's performance, should be considered in addition to, not as a substitute for, or in isolation from, GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. And with that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi?
Shlomi Ben Haim, CEO
Thank you, JoAnn, and greetings from the swamp. Before we begin today's conference call, I want to say that our thoughts and well wishes continue to be with the millions of victims due to the humanitarian crises in Ukraine. We hope and pray for more peaceful days ahead. Welcome again everyone to JFrog's first quarter earnings call. 2022 got off to a strong start for JFrog, with the highest revenue growth in the past six quarters. These results are a clear reflection of several key strategies we implemented, combined with our cloud-first security focus, end-to-end platform approach, and impressive sales execution. As we will share today, Q1's numbers across all key metrics show how our product-led mindset, market demand, and strategic investments are all aligned with our goals, leading to a sustainable fast-growing company consistently generating positive free cash flow. Our first quarter revenue was $63.7 million, reflecting 41% growth year-over-year compared to 39% reported in the previous quarter. This growth exceeded the midpoint of our guidance by 4%. Our cloud revenue in the first quarter grew by 63% year-over-year, compared to 52% reported in the previous quarter, driven primarily by increased usage of our security capabilities and growing adoption of our platform subscription through our cloud marketplace channels. As a result of this demand, the number of customers with ARR over $100,000 also grew significantly to 599 compared to 537 in the previous quarter and our trailing four-quarter net dollar retention expanded to 131% compared to 130% in the previous quarter. During the first quarter we saw a trend of more companies moving forward adopting one-stop solutions, shifting from binary storage to security, distribution capabilities, all provided in our integrated platform. This end-to-end adoption is driving higher consumption by our customers. Now, allow me to elaborate more about the following strategies and changes we applied that drove the company's goals in this quarter. First, investment in our cloud hybrid and multi-cloud offerings. JFrog's strategy of enabling a hybrid environment is being validated daily by our customers, who are considering or already moving between cloud and on-prem with their DevOps and security toolset. Second, our security solution is setting a new standard in the market. Modern organizations already understand that security scanning isn't enough and need a holistic solution to secure the software supply chain. Third, our end-to-end platform approach delivers full binary life cycle control, allowing companies to build quickly, securely, easily, and distribute in a fully automated flow. Our investments in a unified enterprise-grade platform are key to the growth we see. Fourth, our 360 funnel management and investments; JFrog is not only bottom-up, but also selling top-down. Sales are not only direct and through our inside and strategic sales teams, but now we will also be expanded through partners and channels. Today I will share with you how these focus areas are fulfilling our goal strategy. In Q1, we continued to see that binaries or software packages are at the cross-section of the modern software supply chain. As our customers have noted, binaries are brought into the organization from third-party hubs and binaries are what you build, secure, automate, and deploy. There is no way to manage and automate your software all the way to runtime without managing your binaries. Increasingly, as our customers demonstrated, the runtime of choice is trending toward cloud. I'm pleased to announce that during the first quarter, we recorded the largest ever single company cloud contract in JFrog's history. A manufacturer of semiconductor and industrial software is undergoing a massive digital transformation, promoting a strategic transition to the cloud. They started with JFrog Artifactory, grew into adoption of the entire JFrog platform, and are now completing their end-to-end cloud standardization across all business units. While this deal is an amazing achievement, it also validates our long-held strategy to provide customers with hybrid and multi-cloud solutions that will serve them across deployment environments as they migrate to the cloud. As another example within this quarter, a full platform subscription in the cloud, one of the largest American-based manufacturers of automotive software saw a need to standardize its DevOps processes and incorporate security. After already utilizing JFrog Artifactory as a single source of tools for DevOps, the customer reached out to us to normalize software distribution across its global team. In partnership with our strategic sales team, this manufacturing customer moved to JFrog platform enterprise cloud subscription, which led to a net new ARR of $500,000. Moving to security. We were all reminded in Q1 that the global software supply chain is under constant threat. As we mentioned in our Investor Day in February, there was undoubtedly a new Log4j incident coming around the corner. Regrettably, a new critical vulnerability, Spring Shell, came just weeks after Log4j and affected the entire industry. This only made it more apparent that we need a new approach to SecOps that couples automatic identification and rapid remediation across an entire company. The combined power of JFrog Artifactory and Xray continues to protect customers from these types of incidents, turning what could be days and weeks of finding, fixing, replacing, and testing, down to just a few hours. We see net new and existing customer upsell pipelines being generated for JFrog solutions based on both industry-leading tools and our outstanding and trained security research team. This dedicated team is already demonstrating industry-leading zero-day vulnerability detection capabilities with more discoveries than other security companies in the domain. The security research team is also working closely with our product groups to integrate an in-depth analysis of vulnerabilities directly into the JFrog Xray database to protect customers more quickly. We were also excited to continue to extend the security capabilities in Q1, announcing a contextual analysis feature. JFrog Xray now allows customers to more precisely determine the relevance of security vulnerabilities by looking at not just the binary itself, but also the environment it lives in and how it's configured. The unique functionality powered by JFrog Artifactory and Xray assists already overstretched DevSecOps teams in allowing them to quickly address the most critical security gaps and disregard irrelevant ones. To illustrate the value of our security offering, one of Europe's leading automobile manufacturers has turned to the JFrog platform to secure its software supply chain as the manufacturer develops self-driving car technologies. They have heavy dependencies on third-party software, and the holistic security coverage JFrog delivers, combining Artifactory, Xray, and distribution, led to an approximately $400,000 deal in Q1. The integrated team and technologies of JFrog and Vdoo are already making an impact on the market, and we look forward to further expanding our security solution in 2022. Let's move next to our end-to-end platform approach. One of JFrog's key differentiators is a focus not just on building better software, but getting it intelligently to where it is running and consumed across customers' distributed environments. Allow me to elaborate on the pain that organizations have with distributing software. Take a small globally distributed company that is developing one application. This single application must run in 20 different locations in the world. Each of those locations requires different versions of the software to address the various export controls and compliance regulations in each country. The organization has to manage this process across all 20 locations each time they release a new software version. Now take a large enterprise and multiply that exponentially as it manages hundreds and thousands of applications. JFrog continues to onboard customers and grow with more and more organizations choosing to meet these challenges with JFrog distribution as part of the Unified JFrog platform. For example, one of the world's most used collaboration and meeting tools, with nearly 300 million daily users, is driven by a large development team in China facing exactly these challenges. This company faces complications around the Chinese firewall and widely varied deployment environments and consumers around the globe, quickly recognizing that only JFrog distribution could meet its needs. This contract was a net new win for the entire JFrog platform. Going even further, software delivery doesn't end at the data center or the cloud anymore. Increasingly, companies are becoming connected device companies. This is why our strategic acquisition of Upswift, now JFrog Connect, is a key part of our Liquid Software vision. JFrog Connect aims to bring together the world of IoT devices and the world of DevOps to create a unified flow across entire organizations, from developers to devices. In addition to having many customers already using JFrog Connect, we are seeing additional demand for managing large fleets of devices remotely, including over-the-air updates, monitoring, controlling, and more. At the heart of our platform is our core flagship product, JFrog Artifactory, where we continue to innovate and support the developer and DevOps community with our universal approach. We recently expanded our offering by releasing support in Artifactory for the Dart programming language, an emerging technology driven by Google. This is a top 20 most popular technology of 2021, and support for its public depository pub was a key request from the community, which we were happy to deliver. We are committed to the developer community by continuing to support all software packages and welcome Dart developers to JFrog Artifactory. Finally, regarding our 360 funnel management and investment. Last year, we focused on building a top-down sales motion with our strategic sales team who are already showing results in growing the business across our top-tier accounts. This year, we are doubling down on partners and indirect sales. During Q1, we partnered with AWS for the support of their gaming initiatives, and we will choose them as a key DevOps partner. JFrog already supports some of the most respected and well-known gaming platforms across the globe, including companies like Ubisoft, who see the partnership between JFrog and AWS as strategic to their business. In their own words and I quote, "we rely on JFrog Artifactory to provide a quick and easy way for each team to access their build tools, while the AWS cloud enables cross-team collaboration, so we can create the best video games on the market." These types of partnerships are just the beginning of a broader set of possibilities that JFrog can tap into. With increasing emphasis on resellers, partners, and alliances relationships within the software development ecosystem, we see attractive growth opportunities for JFrog as the global DevOps and security market expands. Speaking of relationships, we were honored to hear about the impact of JFrog's platform from some of our most trusted customers during our recent event. Our customer Fidelity spoke about the transition to the cloud and how JFrog supported their massive scale at approximately 16,000 developers migrating thousands of applications in a hybrid and multi-cloud strategy, all while keeping their products and services running. Fidelity showcased how JFrog continues to be mission critical, not just for their development teams but for the entire business. We were also very excited to see the use case of Broadcom supporting 23-plus business units such as CA Technologies and Symantec, covering not only thousands of developers, but also extensive M&A activities and standardization, supporting about 6,800 deployments per day. They said, if you have ever looked at DevOps tools, it's like a periodic table of hundreds and hundreds of applications and integrations; Artifactory, Xray, and Vdoo, among many other JFrog products, are a part of our standard fit. We are proud to have customers who put their trust in us as they build out their DevOps and security journey. As we're now turning to financials, I want to reiterate our commitment to building solid growth alongside an efficient business with positive free cash flow in 2022, as we have in the past and continue to operate this year and beyond. 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 the second quarter and full year 2022. Jacob?
Jacob Shulman, CFO
Thank you, Shlomi, and good afternoon everyone. Let me add to Shlomi's comments that we are very pleased to have started the year with such a strong quarter, continuing the momentum we saw in the second half of 2021. As a reminder, all numbers referenced in my remarks are on a non-GAAP basis, unless otherwise stated. A reconciliation to comparable GAAP measures can be found in today's earnings release which is available on our website and as an exhibit to the Form 8-K furnished to the SEC. Now let's turn to our financial results. Total revenues for the three months ended March 31, 2022 were $63.7 million, up 41% year-over-year. This is our strongest growth rate in six quarters and our third consecutive quarterly increase. Self-managed revenues, also often called on-prem, were $46.9 million, up 35%. We had a particularly strong quarter in cloud revenue growth, up 63% to $16.8 million. As a reminder, we indicated in the second quarter of 2021 that we believe cloud growth has bottomed and we would see a reacceleration of growth. While we are pleased to see the continued momentum in our cloud business driven by increased adoption of security solutions and the full platform, we would like to remind you that our cloud business is subject to variability due to usage-based revenue recognition. We believe the baseline growth rate for our cloud business is in the mid-50% range with potential upside from increased customer usage. Net dollar retention for the four trailing quarters was 131%, in line with our prior commentary. As of the quarter end, we had 599 customers with ARR of over $100,000, up from 537 customers as of December 31, 2021, and up 52% from 395 customers at the end of Q1 of 2021. In addition, we grew the number of over $1 million ARR customers to 16, adding one from Q4 and increasing by 60% 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 Q1 2022, 35% of total revenue came from enterprise-plus customers, up from 29% in Q1 of 2021. Before moving to the income statement, I wanted to provide an update regarding the pricing changes we made to some of our on-prem offerings one year ago, which, as a reminder, excluded all cloud subscriptions and the on-prem Enterprise+ subscription. First, I'm happy to report that customer churn has remained minimal, consistent with historical trends. In the first quarter, we saw customers who previously took advantage of early renewals a year ago now renewing at the current pricing structure. When we announced the pricing increase last year, we noted it would equal roughly 10% of FY 2020 revenues or approximately $15 million. Since instituting the price change on April 1 of last year, we have recognized almost half of this contribution in reported revenues and would expect to see the remaining balance roll off over the next four quarters. We believe adoption of the price changes by our customers reflects the increasing importance that JFrog's platform solution delivers. We continue to explore additional opportunities to further monetize the value we provide to our customers. Our commitment to a 30% plus revenue growth for the foreseeable future remains intact, even excluding the benefit we have seen from our on-prem pricing increase. Now let's review the income statement in more detail. Gross profit in the quarter was $53.8 million, representing a gross margin of 84.4% compared to 83.4% in the year-ago period. We continue to see our SaaS gross margins expand as a result of the steps we took in 2021 to improve our cost structure. We expect gross margins to remain between 83% to 84% for the balance of the year while moderating towards the low 80s over the long term as cloud revenues become a greater portion of total revenue. Operating expenses for the first quarter were $53.2 million or 83% of revenues, up from $35.8 million or 79% of revenues in the year-ago period. We continue to invest in our product offerings and building out our strategic sales and partner channels. Non-GAAP operating income for Q1 was $543,000, a 0.9% operating margin compared to an operating income of $1.9 million or 4.1% operating margin in the year-ago period. Non-GAAP net income in the quarter was $158,000, or $0.00 per diluted share, based on approximately 103.9 million weighted average diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $428 million in cash and short-term investments, up from $421 million as of December 31, 2021. Cash flow from operations was $5 million in the quarter. After taking into consideration CapEx, free cash flow was $3.9 million. Before we turn to the guidance, I want to remind you of the detail we provided last quarter around the cadence of the financial model for the year. There is no change to our expectation that the second quarter will be the low point for profitability, as beginning in the second quarter, we implemented merit increases to align with labor market benchmarks. Our profitability is expected to improve in the second half of the year. For Q2, we expect revenue to be between $65 million to $66 million, with a non-GAAP operating loss between $2.5 million to $3.5 million and non-GAAP loss per share of $0.03 to $0.04, assuming a share count of approximately 99 million shares. For the full year of 2022, we are increasing our revenue guidance to the range between $276.5 million and $278.5 million. Non-GAAP operating income is expected to be breakeven, ranging from negative $1 million to positive $1 million, and non-GAAP earnings per 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 Ben Haim, CEO
Thank you, Jacob. 2022 has seen a strong start for JFrog, and we are committed to building on this success across products, processes, and execution as we leap forward throughout the year. My team, JFrog employees, and your dedication to always listening to the community and addressing the real pains in the market continues to bear fruit. These strong quarterly results are a testament to and thanks to you. Looking forward to Q2, we are happy to finally meet our customers, partners, and the community in person again for the kickoff of our annual swampUP user conference. This year, we are taking swampUP on the road, visiting multiple cities, interacting with the global developer and security communities and customers. We invite you all to attend. Finally, we believe JFrog is well positioned to drive further revenue growth in 2022 as we aim to deliver for JFrog users, customers, and shareholders. I'd like to thank you all for your attendance today, may JFrog be with you. And now, we'll take your questions.
Operator, Operator
Our first question comes from Mike Cikos with Needham and Company.
Mike Cikos, Analyst
Thank you for taking my question. It's great to see the strong revenue performance and the increase in revenue that was reported. I have a question regarding the revenue acceleration we discussed. Can you explain what factors contributed to your success this quarter? Were there any unexpected developments that led to these better-than-expected results?
Shlomi Ben Haim, CEO
Yes Mike, thank you for joining the call and thanks for the question. We actually look very well into the growth that we observed this quarter. And as we detailed, there were three main reasons for this growth: a) is the growing adoption of our SaaS services in the cloud, mainly due to security and probably after the Log4j episode when people understand that they need a holistic solution for security. The second thing is the adoption of our end-to-end platform. It's not merely covering your repository or your security demand anymore. You need an end-to-end DevOps platform to manage the full binary life cycle all the way to deployment. And third, our consistent investment in our strategic selling that drove not only more and more customers that are adopting the platform but also a higher entry point and lending within our customer portfolio, plus the improvements of the strategic team working with the partners mainly the cloud partners. Those are the main three reasons for the growth you saw in Q1.
Mike Cikos, Analyst
Thank you for outlining that. And if I could squeeze one more in. This would be more for Jacob, I think. Good to see the revenue raise for the full year in excess of the Q1 beat. I know that we're maintaining the full year operating profit outlook. And I know that we're talking about this cadence being the same as what you guys had spoken about last quarter where Q2 is going to be the low point before profitability improves. Just curious, can you provide an update on why not take up the full year profitability? I just wanted to get a better sense of, I guess, some of the assumptions that you guys have in that profit guide? And then, if you could also talk in any way to the potential FX movements that you guys are seeing in conjunction with that that would be terrific?
Jacob Shulman, CFO
Yeah. So let me first address the potential FX. As we noted in the previous quarter, the negative trend in FX input is about two points. Please note that for 2022, we hedged at a very sufficient level. So this volatility that we're seeing right now does not actually impact us. And the improvements in dollar rates versus Israeli shekel will result in a better environment towards the end of the year, more likely in 2023, just because we're very well hedged for this year. With regards to overall profitability as noted, previously, we continue to grow very efficiently and continue to generate free cash flow. There are a lot of opportunities in front of us, specifically in additional offerings and security and Connect products. We're also building our people-to-market channels and partnership alliances. So we have a lot of areas of investments with very attractive ROI. And that's why we continue to be – please understand that for the year we're going to be at breakeven levels.
Mike Cikos, Analyst
Understood. Understood. Thank you very much for both of you. I appreciate it. I’ll jump in the queue now.
Operator, Operator
Our next question comes from Brad Reback with Stifel.
Brad Reback, Analyst
Great. Thanks very much. Shlomi, you talked a bunch about various initiatives on the sales and marketing side top-down sales partners AWS, especially on the cloud. Is there an opportunity for these efforts to lead to an acceleration of customer growth? Last year was up 10%, could we see that accelerate here this year?
Shlomi Ben Haim, CEO
Yes, absolutely, and thank you for emphasizing this subject. As you know, and as we guided the market, we are building our sales force from a completely bottom-up inside sales machine. Over the past 18 months, we have built a very strong strategic team that is also covering from the top-down. And now it's time, as we shared in our Investor Day last February in New York, to double down on partnerships and strategic alliances, working with the ecosystem not just to accelerate growth but also to expose JFrog to new solutions and prospects – to prospects and new customers. So my answer is yes. It will happen in three different directions. Obviously, the immediate suspects are the major cloud players, and these guys are already working closely with us. The second thing that we are developing is all the system integrators relationships, and last, all the professional service companies that are in the DevOps and security domain. So yes, we should see growth not just in ARR but also in new customers coming from partners.
Brad Reback, Analyst
Excellent. Thanks very much.
Operator, Operator
Our next question comes from Ittai Kidron with Oppenheimer.
Ittai Kidron, Analyst
Thanks guys for the numbers. Shlomi, I want to start with you first on the growth or the cloud growth, the acceleration. They're great to see that. Can you talk about the maturity of your cloud platform? And more specifically, when you look at customers and how they're using that cloud platform here and now, how is it different? Do you think then how they used it a year ago? Would it be types of applications and use cases or how broadly or pervasively they're using it in their own organizations?
Shlomi Ben Haim, CEO
Yes. Hi, Ittai and thank you for the question. The answer is actually split into two. The things that we did and invested in the cloud that drove the consistent growth we see this quarter were amazing, but we grew in the previous quarter and the quarter before as well. The second thing is what happened in the market and we got our solution ready for it. So I'll start with the first one. In order to be a sustainably growing business in the cloud, you have to understand the dynamics in the market. There is no enterprise customer that we know in our portfolio that will move now to just a single cloud. The fact that we are providing not just the multi-cloud solution but also a hybrid environment, that allows you to migrate to the cloud according to your organizational needs, is the platform JFrog provides. It's not only cloud versus self-hosted, but the fact that you can actually run both of them in parallel. Alongside the holistic end-to-end solution, the so-called enterprise-class subscription gives you capabilities not just as a repository in the cloud in a universal way, but also a security solution that runs on the repository scale and ensures that you have no vulnerabilities in your single source of cloud, which is the repository. And then obviously, the distribution to different clouds, distribution to different destinations and everything that we now see aligns with what the market expects. The second thing is how JFrog prepared its sales for more than 18 months to what is now exploding. We keep saying organizations are becoming vulnerable because of the binaries. There is no hacker in the world that will attack any other assets in your binaries. Log4j is one reminder. After Log4j and Spring Shell, among many others, when you have a strong security solution that is well natively scanning your repository of binaries, I think that this has grown more attention to the JFrog cloud solution. This increased attention from not only the developers but also the security executives due to incidents like Log4j and Spring Shell has led to more inquiries.
Ittai Kidron, Analyst
Got it. Excellent. Jacob, I want to follow up on Brad's earlier question. It's clear that you're successfully upselling to customers, as seen in your $100,000 and $1 million customer segments, as well as in your dollar expansion. This indicates that your end-to-end strategy is resonating well and customers are upgrading. Can you provide insight into how much of your growth is attributed to volume versus price increases? I'm interested in understanding how much of your growth is due to this upward shift and the price adjustments you've implemented compared to an increase in new customer acquisition. If you could break that down for us, it would be helpful. I've been hearing concerns from investors that your customer base isn't growing sufficiently, and it seems like you're maximizing value from your existing customers. The question is, how much more new business are you capturing right now that you could leverage in the future?
Jacob Shulman, CFO
I think there are a few aspects to consider regarding pricing increases and their contribution. As I mentioned earlier, about $50 million in revenue has been recognized over the past 12 months due to price increases. In terms of the contribution from existing versus new customers, we still see that the average lens value remains around $10,000. Historically, our revenue growth has mostly stemmed from expanding our existing customer base rather than acquiring new ones. We are successfully gaining new customers, having added approximately 10% to our new customer count last year, and we anticipate further expansion this year. Therefore, moving forward, our growth will mainly be driven by the expansion of existing customers, as that is central to our land-and-expand model.
Shlomi Ben Haim, CEO
And if I may add to this, Ittai, to remind the audience that the price changes we've instituted were only on the self-hosted solution and mainly enterprise and some on-prem offerings. So, the platform subscriptions you see growing, as well as the fast-growing cloud, were not subject to the price changes. Therefore, this growth is pure from our existing customers and new customers.
Ittai Kidron, Analyst
Yes, maybe just to wrap that guys. When you think about the lands, Jacob, you talked about your lending hasn't changed from a dollar standpoint. But do they start different plans? Is the landing from a product standpoint any different today than it was a year ago?
Jacob Shulman, CFO
We see, first of all, some of the customers landing in high-end plans and sometimes even in Enterprise or even Enterprise+. On the other hand, many more customers land on cloud, which is a smaller land. So, therefore on average ASPs for new customers remain relatively unchanged from prior periods.
Ittai Kidron, Analyst
Got it, excellent. Good stuff. Thank you.
Operator, Operator
Our next question comes from Sanjit Singh with Morgan Stanley.
Sanjit Singh, Analyst
Thank you for your questions. Shlomi, could you provide an update on the security progress regarding the integration with Upswift? I know that JFrog Connect has been introduced to your customers. In terms of generating new deals or expanding existing ones with your clients, what is the current status? I'm aware we are in the early stages, but could you share some of the progress observed with the Upswift integration in relation to the overall security strategy? What initial feedback have you received from customers?
Shlomi Ben Haim, CEO
Yes, hi Sanjit. Obviously, the fruits that we start to harvest are part of the investment in the inorganic additions to JFrog. Specifically, regarding security, there are two significant elements to mention. A) we have a very strong security well-trained team that is building a better Xray at Stage 1 to serve our customers. Especially with what we see now happening in the world of SecOps, that's a great addition for existing customers. We're beginning to see more and more demand coming to us not just from the Artifactory side but the Xray side. The second side of the security investment is the security research team. Now, this is a team that is well-trained to find vulnerabilities before anyone else in the world knows about it, and to find a zero-day vulnerability, and inject it into the Xray database as mentioned during the call. It’s a platform for JFrog customers because they are better protected and faster in remediation processes. The security that JFrog Xray now gives them covers not only the features and the scanning technology but also a very strong research team that reveals more and more zero-days—actually more than any other company in the domain. Regarding Upswift, very good question. A long time ago, we said that binaries and binary repositories will be at the heart of your software supply chain. Our Artifactory has become the standard. A few years after, we claimed that our composition analysis security and security relying on DevOps would be mainstream. This is happening now. What I'm forecasting now, and mark my words, developers will have to take responsibility all the way to the binary deployment of the device. This increased demand that we start to see just from announcing JFrog Connect, not even having it in production in our biggest customers, reflects a future pain point—the necessity of securing and rapidly deploying binaries to devices. JFrog Connect, as a result of the Upswift acquisition, has already made an impact on the market, and we are starting to see integrations with partners who also want to merge their solutions with JFrog Connect. So I believe that security is a low-hanging fruit and JFrog Connect will be significant for our growth.
Sanjit Singh, Analyst
Understood. Thank you for the insights, Shlomi. Jacob, I would like to revisit the frequently discussed macro guidance question we've been addressing throughout this earnings season. From your perspective on the current market conditions with your international customers in Europe, can you describe the environment you've experienced so far, not only for this quarter but also moving forward? Additionally, regarding your guidance assumptions, how have they changed or remained the same compared to last quarter in terms of deal closure rates, deal sizes, sales cycles, and so on?
Jacob Shulman, CFO
Yeah. So first of all, to the first part of your question, Sanjit. We're very well represented in various industries. A very diversified portfolio does not depend on any industry or any particular customer. So the diversification is key. On the second side, yes, there are macro changes in the market. However, what we've presented today and guided us today, it's obvious we did not change our methodology; we continue to be prudent and cautious. So today, with potential upsides in the future, we remain consistent in our methodology and we haven't changed anything.
Sanjit Singh, Analyst
Got it. Understood. Thank you, Jacob.
Operator, Operator
Our next question comes from Koji Ikeda with Bank of America.
Koji Ikeda, Analyst
Hey, guys. Thanks for taking my question. Just one for me. So looking at the metrics of the business, it sure seems like everything is pretty good. Just a question here on the billings. I mean, based on our model, looks about 9%, definitely off a tough comp. I understand there's pricing in there. But maybe affected a little bit by the cloud adoption too. So just is there anything to call out in the billings other than the pricing or maybe the cloud adoption that we should be aware of? How should we be thinking about billings going forward, or I guess is this even really a metric that we should be looking at anymore? Is there something else that we should be looking at from here? Thanks, guys.
Jacob Shulman, CFO
I'll address that. Thanks, Koji, for the question. We've been saying for quite a long time that the billings are not a very representative metric here. To provide you more context, last year we had a huge pull-forward in the billings in anticipation of the price change that became effective on April 1. So that's why we saw the significant pull-ins of renewals into Q1, and we quantified it to be about $24 million. Those customers who renewed back then will continue to renew unless they terminate during the year. So, they will continue to renew in Q1. So that's why you saw perhaps the 9% growth in billings just because of the significant pull-ins last year and tough comparables. Adoption of the cloud also represents some headwinds to the billings because typically we have two types of arrangements for agile contracts: annual contracts and pay-as-you-go monthly contracts. So if a multi-year on-prem customer transitions to the cloud, that will have a headwind to billing due to the annual nature or shorter-term duration of contracts. Other than that, again, billings doesn't serve as a very representative metric for our business.
Koji Ikeda, Analyst
Thanks, Jacob. Thanks for taking my question, guys. Really, really appreciate it.
Operator, Operator
Our next question comes from Jason Ader with William Blair.
Jason Ader, Analyst
Yeah, thank you. Hey, guys. First question maybe for you, Shlomi. Can you give us an update on the competitive landscape? Any changes since the last time we talked, in particular, I guess how are customers thinking about end-to-end platforms and any kind of commentary on, in particular, GitLab and GitHub trying to move into your territory of Artifactory?
Shlomi Ben Haim, CEO
So, nothing in the landscape. As you remember, we categorized it in kind of a four-tier model. Still, the majority of the significant changes we have seen is coming from the replacement of homegrown solutions. Some of it is migrating to the cloud, while some is being self-hosted. But still, companies are adopting what we now call mature DevOps and SecOps solutions. Regarding source code or specifically, the two that you mentioned, GitHub and GitLab, our solution coexists with source code management. There is no development organization that will not start or use source code management, and there is no organization that will scale without managing the full binary life cycle. Regarding the roadmap, I keep hearing that they are planning to do what we are doing. However, in none of the pre-sales, we are hearing that people are migrating to these solutions. Artifactory is a solid rock scalable. I think it sets the standard in the market for managing binaries. Our security is far more advanced and mature and protects your binaries in a manner that neither can provide today. At the bottom line, if you look at the holistic solution, platform-based approaches are game-changers, especially when you think two to four years ahead, considering everything together including the hybrid solution, deployment, distribution, and remediation. So, it's not just putting a nice scanner over your repository. You have to think about the 360 degrees of your DevOps platform. The last point is, with the cloud, we are actually witnessing that our partnerships are stronger than our competition. We walk together side-by-side, and there are some overlaps, which we are aware of. We trust our customers to choose what makes sense to them at the enterprise level; the multi-cloud is a killer, and for smaller businesses, the product's maturity and the holistic solution and the number of features we provide are significant advantages.
Jason Ader, Analyst
Great. And then Jacob, did you disclose RPO? I might have missed it.
Shlomi Ben Haim, CEO
No. Deposit costs, we obviously disclosed on a quarterly basis in our Q filings, but as of the end of Q1 we have approximately $172 million in RPOs.
Jason Ader, Analyst
Yeah. The reason I'm asking is that while you're trying to steer us away from billings, some software companies use RPO as a proxy for bookings and as a leading indicator metric. Is that the case with JFrog? Should we be considering RPO growth as a leading indicator?
Jacob Shulman, CFO
Our view is that it's a better indicator than billings, but again, with the adoption of more cloud, we will see shorter durations for the agreements, so there will be headwinds as well.
Jason Ader, Analyst
Got you. And then, any thought on buybacks just given that you have a decent amount of cash and the stock is somewhat depressed? Have you guys given any thought to that?
Jacob Shulman, CFO
We see a lot of opportunities in front of us in the market and we'll obviously invest in what shares better to our shareholders.
Jason Ader, Analyst
All right. Good luck, guys. Thank you.
Jacob Shulman, CFO
Thank you.
Operator, Operator
Our next question comes from Michael Turits with KeyBanc.
Michael Turits, Analyst
Hi, I wanted to ask Jacob and everyone about the reaction of both small and medium-sized businesses as well as enterprises to the backlog situation regarding their development projects. Are you noticing any slowdowns or increased selectivity in their approach? Additionally, considering they have in-house alternatives or self-built options, is there any growing hesitancy in a challenging and inflationary environment to transition to a dedicated package?
Shlomi Ben Haim, CEO
Yes. If I heard the question correctly, regarding SMB versus enterprise, it is a very good way to distinguish the market. The enterprise all understands that adopting DevOps is not a question anymore. It's just a question of when it will happen and may I even add having some assets in the cloud and adopting Kubernetes. So, cloud-native, DevOps, and security go together in the enterprise. This is why we see that mature products like JFrog and the full end-to-end platform address enterprise demand. What we hear from the enterprise mainly is that they have to gain the confidence that they can rely on JFrog to scale with them because the number of containers, broker registries, and images they have to host, manage, extend, secure, and deploy is in the millions daily. In our Investor Day, two of the enterprises, Fidelity and Broadcom, mentioned the scale I just described. In the SMB segment, we start to see more small and medium businesses not just looking for a single-point solution for DevOps, but also wanting to combine it with security. What is happening there is that the developers of the world start to take responsibility for security engineering aspects. Therefore, when they need to remediate from an episode like Log4j, they need tools that are not just able to address Log4j but also secure and help them to remediate. Although the growth in the enterprise is more substantial, we also see increasing demand in the SMB for more than just a single integrated product.
Michael Turits, Analyst
Thank you, Shlomi.
Operator, Operator
Our next question comes from Rob Owens with Piper Sandler.
Rob Owens, Analyst
Good afternoon. Thanks for taking my question. You touched on it earlier in the call, but I was hoping you could elaborate a little bit more on your channel strategy, relative to how much of your revenue currently comes from the channel? And as you look at the appointment of Kelly Hartman, to the new Head of Channels role, what should we expect longer term? Is this to drive larger strategic opportunities, or is this to drive more of the velocity-related opportunities you're seeing now?
Jacob Shulman, CFO
So I'll address the first part and then Shlomi can elaborate more on the strategy. So, today our channel is very, very minimal relative to our overall business. Revenue coming from marketplaces is approximately 10% to 15% of overall gross business. Though, it is growing very fast, it remains a smaller portion of our total revenue. We also have some resellers who act more as procurement agents rather than value-added resellers or systems integrators, making it a greenfield opportunity for us to expand this program. Regarding the strategy, as I mentioned, the next logical step for us is to establish strong mechanisms that work with partners as we engage with the top five IaaS providers across different regions in areas where we didn't penetrate. This includes not only government or highly regulated environments but also larger projects. We have moved our partners and channels activity under our CRO organization and hired a senior partner leader to manage it. This will be split, as with everything else, between the cloud and the on-prem offerings. In the cloud, it's more mature since we have built partnerships with AWS, GCP, and Azure. We are now paving the way for more collaborations with system integrators and professional services companies, and not just filtering leads that we’re observing in the market. The major expectation we have is for those partners to also reach out to us proactively, as customers are directing them to work with JFrog, and we will be working together to explore markets that remain untapped in different geographies and industries.
Rob Owens, Analyst
All right. Thank you.
Operator, Operator
We're showing no further questions in queue at this time. I'd like to turn the call back to Shlomi Ben Haim for closing remarks.
Shlomi Ben Haim, CEO
Guys, I would like to thank you all for joining us today. In today's market, it's very important that the company will be focused on the strategy and allocate not only the resources but also the capital wisely. JFrog is paving its way to a very successful 2022, and may the Frog be with all of you. Thank you very much.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.