JFrog Ltd

JFrog Ltd (NASDAQ: FROG) provides an end-to-end, hybrid, universal DevOps Platform to achieve Continuous Software Release Management (CSRM). The CSRM platform enables organizations to continuously deliver software updates across any system.

Key highlights

• Q1 2021 and full year 2021 outlook: The management pours their complete confidence in maintaining a revenue growth profile. For Q1 2021, they expect to clock a revenue between USD 44 - 45 million with operating income between USD 0.5 - 1.5 million, while for FY 2021, they expect revenue between USD 196 - 204 million, along with operating income between USD 5-7 million.

• Sequential growth in a challenging environment: The company is continuously working closely with customers in the respected market segment to develop innovative product offerings adapted to new consumer trends. As a result, it is improving its revenue matrix on a sequential basis in a challenging environment, which is admirable.

Source: Company

• Strong free cash flow generation: The on-going steady performance of the operations helped the group in achieving record financial performance, where it recorded a free cash flow of USD 25.9 million in 2020 against USD 8.2 million in the previous corresponding period.

Source: Company

• Long-term target model:The company aims to achieve higher numbers with more improved operating margins. The group emphasizes on improving operating margins to 23% from 9% by bringing down the R&D cost to 21% from 24%, Sales & Marketing cost to 27% from 36% and G&A cost to 9% from the current 14%. The company also aims to increase its free cash flow margin to 30% by achieving these numbers, which would be a commendable job.

Source: Company

Financial overview of FY2020 (In thousands of USD)

Source: Company 

• For FY 2020, the company posted revenue of USD 150.82 million, an increase of 44% from USD 104.71 million in the previous corresponding period. The higher revenues were driven by increased demand for the hybrid, universal DevOps platform, expansion by current customers, along with accelerating growth in the multi-cloud business.
• Gross profit increased to USD 122.37 million, against USD 84.68 million in pcp. The gross profit was partially offset by increase in cost of revenue.
• On the back of higher operating expenses, which increased to USD 136.56 million, against USD 91.62 million, the company reported higher operating loss to USD 14.19 million in FY2020, against USD 6.94 million in 2019.
• Net loss stood at USD 9.41 million, against USD 5.39 million in pcp, partially offset by income tax benefit of USD 2.74 million.

Risks associated with investment

The Company is exposed to risks of varying degrees of significance, affecting its ability to achieve the strategic objectives for growth. As the Company is in the technology sector hence, the significant risk of technological change arises. Other risks include evolving industry standards, intense competition, Currency fluctuations etc. are also present. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company would be investing in building new capabilities and extending its platform to bring the power of CSRM to a broader range of use cases, including increased security solutions for DevSecOps and enabling DevOps solutions for devices on edge. Additionally, the management believes that acquiring new technologies to complement their organic innovation efforts would help them rapidly adapt to address the market's evolving needs and drive increased value for their customers. Furthermore, its long-term model of achieving higher operating margins would help the company in posting a strong bottom line. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of USD 47.55 as on March 17, 2021. We have considered Datadog Inc, MongoDB Inc, Varonis Systems Inc. as the peer group for the comparison.

1-Year Price Chart (as on March 17, 2021). Source: Refinitiv (Thomson Reuters)

ON24, Inc.

ON24, Inc. (NYSE: ONTF) provides a leading cloud-based digital experience platform that enables businesses to convert customer engagement into revenue through interactive webinar experiences, virtual event experiences and multimedia content experiences. 

Key Updates:

• Recent Growth supported by strong customers addition: The group has a wide range of offerings and caters to several organizations, ranging from small businesses to global Fortune 100 organizations across several industries, including technology, financial services, healthcare, industrial etc. The group derives its revenues through subscription-based model by offering digital platform to the clients, which includes a number of workspaces, logins, modules, licenses and other platform capacity factors. In the recent past, the group has managed to increase its customer base from 760 customers as of FY15 to nearly 2000 customers as of FY20, which is encouraging.
• Improved Cash from Operations: For FY20, the company reported a tremendous surge in cash from operations to USD 542 million, as compared to a cash outflow of USD 11.350 million a year ago. The improvement was driven by higher net income, which is a key positive.     

FY20 Financial Highlights:

• ONTF announced its full-year result, wherein the company posted total revenue of USD 156.941 million, significantly higher than USD 89.133 million in the previous year. The company reported strong momentum from the Subscription and other platform segments (USD 122.630 million v/s USD 72.589 million in FY19), while professional services grew to USD 34.311 million, from USD 34.311 million in FY19.
• Gross profit surged to USD 123.606 million, from USD 61.992 million in FY19, thanks to the elevated revenue, partially offset by higher costs of sales (USD 33.335 million versus USD 27.141 million in pcp).
• Total operating expenses stood higher at USD 101.763 million, as compared to USD 78.093 million in pcp. The group reported income from operations of USD 21.843 million, as compared to a loss from operations of USD 16.101 million in FY19.
• The company posted its net income of USD 20.753 million, as compared to a net loss of USD 17.527 million in FY19.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations require constant innovations, which might lead to higher R&D expenses and might take a toll on the company’s margin. Moreover, the arrival of new players in the industry with better offerings might lead to price competition.

Valuation Methodology (Illustrative): EV to Sales based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company derives its major income from the subscriptions and other platform segment, which remain elevated in the recent quarters due to higher subscriptions revenue from the existing and new customers. Moreover, Average Recurring Revenue has increased in Q4FY20 by more than 100% on y-o-y basis, which is noteworthy.  For FY21, the group expects its total revenue in between USD 205.5 million to USD 208.5 million, higher than USD 156.94 million in FY20. We have valued the stock using EV to Sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Avalara Inc, Veeva Systems Inc etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of USD 53.22 on March 17, 2021.

Price Chart (as on March 17, 2021). Source: Refinitiv (Thomson Reuters)

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