MongoDB, Inc. (MDB) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Brad Reback with the Stifel Equity Research team on the software side. Thanks very much for joining us. Just a quick housekeeping note. Online, in the chat, you can send questions if you have any for management. Or if you don't have access, please feel free to e-mail me at [email protected]. With us today from Mongo is Michael Gordon, COO and CFO. Michael, thanks very much for joining us.

Real happy to. Thank you. Thanks for hosting us virtually here.

Our pleasure. Maybe we could start at the top for those who may be newer to the story. If you could just sort of check the position Mongo's NoSQL solution versus, what I would call, legacy SQL databases from the likes of Microsoft and Oracle. Why do customers move in this direction?

Yes. Sure. So if we just take a step back, I think for investors who are newer to the space, and certainly, we recognize that there aren't 10 different companies you can invest in publicly traded database companies, you're probably not spending enormous amounts of time thinking about our area, our slice of the software ecosystem, but it's one of the largest in all of software, growing from $60-plus billion today to closing in on $100 billion over the next couple of years. And one of the reasons why the market is so large and so strategic is database is at the heart of every application. And so if you think about the phrases that you hear, like software is eating the world, or every company trying to become a technology company, those are catch phrases that get this idea that companies are increasingly competing with each other and for customers on the basis of their technology. And really what that means is the basis of their software applications. And so the database, which is the heart of every software application, is really quite strategic and quite central, which is why the market is extraordinarily large, but still growing quite rapidly. And so I think the key thing in terms of sort of us versus the incumbents of MongoDB as the leading modern and general purpose database, is really better equipped to handle the volume and was really built for sort of the scale of being digital-first, cloud-first, all those kinds of things. I mean think about the volume and variety of data today, that's not really what the relational database is built for, right? The relational database is built for the efficiency of storing data back in the '70s when data was incredibly expensive, and so you need to store it in the most optimally efficient fashion. Today, what's precious is a developer's time, right? Developers are the scarcest resource and extraordinarily competitive both to attract them, but also costly in terms of deploying them. And so developers love MongoDB because it's easy and intuitive to build with us. They don't have to spend all the time sort of translating to the relational format. And it's one of the reasons why, for the last 4 years in a row now, we've been voted the most popular database and database developers most want to work with in the stack overflow survey that they do. So hopefully, that's a little bit of backdrop and context that's helpful.

Yes, absolutely. And Michael, maybe you can dig in a little bit into the Atlas business. You guys were, I'd say, one of the earliest to understand this vision of, what I would call, consumption-based Infrastructure as a Service. So what motivated the company to move so quickly there? And where do you stand today?

Yes. No, thanks for that, Brad. So yes, so just from a product terminology standpoint and everything else, just so people are leveled, we sell 2 main packages: enterprise advance, which is MongoDB in an annual recurring subscription that customers are managing in their own environment until posting or deploying; as well as MongoDB Atlas, which is our Database as a Service offering, so a fully mannered offering. And to the comments that Brad is making, about 3 years ago, we launched MongoDB Atlas. And it's one of the first non -- first Database as a Service offering not provided by one of the cloud players. And what we saw, both from developers as well as the forward trends of where software development is going to go, was the increasing public adoption over the cloud. And we're still relatively early on in that adoption cycle, especially from large enterprises, but we deployed MongoDB Atlas first on AWS, and then, thereafter, on Google and Azure. And so it's available in any of the cloud platforms, any of the major cloud platforms that we've more recently signed a deal with Alibaba in China, whereby they are offering MongoDB as a service in China and paying us for that. And so I think it's really just because we're close to the developer because we understand how applications are getting built. We saw that opportunity, and we saw that need and that would emerge over time, and we've continued to invest in that. And I would say, over time, we've tended to introduce innovation first. So last year, at our user conference, our big end user conferences happening. Kicking off tomorrow, obviously, virtually. Normally, it's a physical presence, and we're looking forward to doing it in New York, but had to move and pivot to doing a global now virtual event, which starts tomorrow, and it goes for 2 days. And yes, last year, we introduced some new products into beta that we introduced first in an Atlas context, right? And so as we continue to go on, as we've continued to evolve, we continue to want to have the Atlas cloud, Database as a Service, Consumption as a Service model really leading, because we think that's where companies are going, that's where developers are going, that's where people are focused. And so we've increasingly said that will be sort of the innovation vanguard for us. And it's marked for all the obvious reasons, but I think it's also sort of intelligent for some reason that may be a little less obvious. When you think about the R&D dollar and the R&D investment that we're making, which is significant, we've had a good track record, but anything you can do to increase the intelligence or the likelihood of a high ROI and then investment dollar is valuable. And so the great thing about releasing cloud software is we can get realtime feedback, right? We can see right away which services, which features are driving engagement, we can focus and optimize on those, iterate. Whereas if you're doing an annual release cycle, you have to take a little bit more a little bit more of some guesswork, or a little less real-time feedback that you can react to. And so I think it's incrementally been smart, not just in terms of the trends and where the market is going, but in terms of making sure that we're getting the highest bang out of our R&D investment.

And on that latter point, I know last year at your Analyst Day, around the user conference, you started talking more about that, what I call the virtuous circle, or the cloud virtuous circle, continual feedback, improves the product, improves customer support and improves the sales process. As it relates to where you are as an organization today embracing all that and really being able to take advantage of that, how far along are you in that journey?

Yes. So we definitely saw the early opportunity and have continued to invest in that. I think we've seen some early signs, but still have work to do. So an example of early signs that I'd point to you is if you look at the first quarter results that we just released last week, you saw a meaningful uptick in customer count and in customer additions. I think some of that is reflective, not just of the general secular and other trends, of which we are beneficiary, but I think there's also a reflection of the fact that we're starting to get better at kind of what I'll call the self-serve DNA, right? The company, from a go-to-market perspective, had focused more on enterprise sales historically, and the self-serve DNA was sort of not -- was newer to us. And I think we're starting to see the fruits of our investments and the fruits of our labors there show up in numbers like that. But I think there's still more work that we can do, more work around harnessing that intelligence of that virtuous circle that you're describing, where you can actually see. Historically, when someone has downloaded a free version of MongoDB before becoming a paying customer, we didn't have much insight into who they were, how they were using the product, et cetera, right? They just downloaded the free version, whether it be from our website or somewhere else. And then when they needed their commercial features when they went into production, that's when we'd enter into a relationship. Today, with Atlas, you now sign up for the free tier, where you can have that free tier managed as a service for you, that free tier is relatively -- it's a finite amount of utility, obviously, you're not going to run large production applications with it. But you -- when we have customers in the free tier, we can see how they're using it, right? We can see the individual behaviors. We can see that they've just turned on back up or maybe they've just done something else, and that would be a good catalyst to either inform them more via tutorial or webinar or maybe what they've done as a high enough indicator of intent that it's worth spending the time and money to have someone go talk to them or reach out to them. And we now have their contact information because they've registered, et cetera, et cetera. And so I think we're -- we've made investments in there, we will continue to make investments in there. We've seen initial early successes, but I think we still have more to go in our path for sort of fully realizing the opportunity set there.

Got it. And you brought up last week's earnings report, which was, obviously, strong across the board. But you were fairly transparent that you did see a slow -- a very modest slowdown in Atlas growth during the latter part of the quarter. So the question is, what makes the cloud database market different than other cloud services? So if you think about Datadog and Twilio, those showed really strong sort of benefits from COVID. What makes that cloud database market a little different than those types of solution?

Yes. I'd say a couple of things. And I think it speaks generally to the market overall for databases. So they tend to be not as monolithic or enterprise-wide. So meaning that an organization kind of thousands, it's a large application, tens of thousands, if not more, applications that it's running, whereas if you have a particular cloud system, CRM, GL, whatever it might be, you tend to have one and you run it enterprise-wide. And so unlike a Zoom or a Slack, who's maybe seeing a strong enterprise pivot, they're benefiting from the enterprise-wide usage. And so that's what's driving up the engagement or adoption. I think the thing about database is there is a cycle time, right, between when you say I want to go build an application, then you deploy it and then you have the consumption. There's just a gestation period that happens or takes place. And so I think that we are a beneficiary of all these trends that we've described, and our confidence has only increased from a long-term perspective, I just don't think that there's quite the fast twitch reflex that drives database consumption. The other thing specifically, as it relates to our commentary around the second half impact of COVID on consumption is worth spending a few minutes on. And so maybe I'll just take a step back and say, if you look at the consumption model, in 3 different ways, you've got new customers who are coming on, you've got existing customers and what is their expansion and you have existing customers turning and going to 0. And so what we saw is we saw a fairly healthy increase actually in new customers and net additions, which again, you can see in the customer count numbers. We did not see any increase in customer churn, but what we saw was the existing customers expanding and growing, but not at as quick a rate as we have historically seen. And the reason for that is as the leading modern general-purpose database, when you've got a general-purpose database, you've got broad sector, broad application, broad use case adoption. And as the economy went through the global macro shock that it went through, and the shutdown took hold and started rippling through the economy, we saw a broad swath of the customer base see lower usage, and the database is like any other component of the software or whatever, and that has been the cloud model, when you have less usage, you'll have less consumption and therefore, less revenue. We haven't seen -- and I haven't heard either anecdotally or quantitatively in the numbers, any systemic changes, any reason why when things are recovered or on a more normalized basis, why this shouldn't be anything more than a onetime impact, but it is an impact. And as we look out on macroeconomic view is that things will be rougher still in the second half of the year. And so we've reflected that appropriately in the guidance.

Got it. And on that general purpose comment, it almost seems to me you could flip it around as a pretty nice positive insomuch as, historically, your competitors have said that NoSQL document solutions like yours are fairly lightweight and aren't really made for enterprise-class workloads. But the fact that you're being impacted a little bit would sort of seem to indicate just the opposite that you are in the most important workloads where there have been some slowdowns?

Yes. No, I think that's right. And we've tried and shed light each quarter with the customer stories and the vignettes that we share that give some insight into the mission criticality, and obviously, none of our customers come through of us, describing their name -- giving their name, describing their use case, or worse yet, describing the challenges they had perhaps with some of the legacy technology vendors, many of whom are still providing some work. It's not like someone's Oracle instance goes to 0, right? And so they're not looking to expose all of their challenges. But no, you're right. It's a broad customer base where you do very well with new workloads as the market continues to grow and as new applications continue to come online. That's part of what's driving the growth, but we're also seeing success in relation with migrations.

And Michael, if you look at your sales pipeline today and compare it to a few years ago, are the starting points different in some that does the types of apps that people are either looking to build or transition from legacy to Mongo? And are the customers, the sizes, the industries, et cetera, have there been changes there?

I don't think there have been any big changes. I mean, if I take us back 2.5-plus years ago, at the time of the IPO, we talked about just over half of the Fortune 100 being customers already. So obviously, the user base has been fairly advanced, fairly sophisticated and demanding customer base from early on. I think we've had success in continuing to penetrate the existing customer base as well as continuing to add new customers. And I do think, for people who aren't steeped in databases and who don't know about it, there is sort of an assumption or an attempt, or it is a temptation, to try and slice and look at the universe by workloads or use cases. What use case are you really good in? And I think that's partly where we're different in that we've built a general-purpose database, right? And so it's not just like we can train the sales force to go look for this one problem because this is what we solved, becomes like the hammer that looks for every nail it can find. But instead, it's a broad-based general-purpose database, and that's what drives a lot of the success and a lot of the adoption effect that we are used across a broad range of industries.

Got it. Got it. And on the sales front, I know, Dave, on the earnings call, talked about the deals that you don't get to see. And I know this may be difficult to answer, but any sense on what percent of opportunities are passing you by, not because people are uncomfortable with you, but just because they don't know about you?

Yes. So I guess what I'd say is with a sales force that's measured in the hundreds versus the tens of thousands that the opportunity would support, my guess is a pretty high percentage. We shared on, not this most recent earning call but I think the one before, about our limited coverage even in the U.S. relative to NFL cities, and the U.S. is our most built out market. And so I think our footprint coverage is early and is thin. We've tried to generally drive awareness and are continuing to make progress on that front. We've been able to accelerate and extend our reach through the use of strategic partners. And whether that be the global cloud players, global SIs or other folks, because there will be deals that they hear of or are involved in or relationships they have that we just don't have, given that we're just getting started out. But it's relatively early on, but we're continuing to make progress as we build out the go-to-market footprint.

Got it. And on the cloud side, I know Google is sort of the main cloud player that doesn't have a competitive offering. Does that lead to a unique relationship there and a deeper opportunity going forward?

Yes. So I think we've got great opportunities with all 3 of the major cloud players outside of China, and then specifically in China, with Alibaba, our partnership with them. I do think that Google is probably -- they're the least conflicted in the sense that they don't have a competing offering, and they've more explicitly said that they want to partner on that basis, and they want to lead with best-in-breed solutions. And that said, I'm sure, Amazon and Microsoft would prefer to get every dollar if they could, but I think they're also quite conscious of the fact of that popularity and success and relevance of MongoDB to their customer base. And so they've actively worked to partner with us as well because it helps both of our businesses.

And can you remind us the different type of economic relationship you have with Alibaba and sort of the usage-based relationship there versus the other hyperscale players?

Yes, sure. So it's slightly different given the regulations in China, and the fact that they make it not as easy as straightforward for the Big 3 here to just go offer software there. So we can't offer MongoDB as a service directly. What we've done is we've partnered with Alibaba to build a MongoDB as a service offering. They had one previously, and we had to sort of educate them about our intellectual property rights. And make it clear that the intellectual property rights didn't allow them to do that. And so they had a starting business, which we then partnered with them last year, whereby they licensed our software effectively to bring their offering into compliance. So they now have a fully licensed managed offering that they're selling to their customer base. And as they grow, their customer base and as they grow their usage, we benefit from that as well. So we've signed a multi-year deal with them. We're in the first year of the deal. It's proceeding well so far, and both parties are pleased. And year 1, we're tracking above the minimum. So we've been very clear that from an overall perspective, it's not -- year 1 is not what this is about, and that's not material in terms of the impact, but it's a multiyear relationship. And collectively, I feel very excited about what we're able to build and where we're going forward. And I think -- to me, the thing that's key is here's someone who previously had been using the software upon getting educated and spending some time with about the difference in our licensing model, understood the -- not just the value, but the ownership of our intellectual property and understood the value and popularity of MongoDB and placed enough value in that, that they went ahead and effectively added a COGS line item to their own P&L from a business that they're running because they realized that together, partnering, we could -- and by offering a certified authorized offering, that they thought that they could incrementally go pick up additional market share versus their in-market competitors. So far, again, early on, but we've been pleased what we've seen, and they've been great partners.

Got it. And you alluded to the sort of the IP licensing, and I know you made some changes there, probably about 1.5 years ago, maybe longer at this point. Am I correct to assume that, that's pretty much noise -- all that noise is behind you, not a big point of discussion for customers anymore?

Yes. It doesn't really come up. I think from the beginning, we were licensed under AGPL, and then we moved that to SSPL. It was really very little difference between the 2, except making some of the compliance responsibilities a little bit more explicit. There -- it doesn't really come up in customer conversations. Obviously, we've seen strong download activity, and actually probably an acceleration download activities. You can see in the reported numbers, so it certainly hasn't impeded any adoption or usage or things like that, that we've been able to discern.

Great. Switching gears. If you think about the Atlas gross margin profile over time, should we think about that in line with other cloud-based infrastructure services?

I think it's a little bit different in that there's sort of a more one-for-one relationship in the sense of we haven't built our own data centers we're not going out and buying or overprovisioning capacity on spec. And at the low end of the market, a customer has the option of downloading the community server version themselves and hosting it, and so they have a fairly transparent understanding of what their storage and compute costs might be. And so I think that -- I wouldn't categorically just look at other players. That said, I think you can see in our own numbers, with Atlas now 42% of revenue and us being able to maintain healthy gross margins, I've been incredibly pleased, as we've commented, over the last 2 years with our progress and execution on the gross margin plan for Atlas. We've tracked in excess of where we expected to be. If you told me at the time of the IPO that we'd have the margin profile we do today with, I'll say, 42% of revenue, I would not have believed that. And so I think we've performed well. I think there's more that we want to do, and we have not bottomed. So I wouldn't call a trough yet, as we expect Atlas to continue to increase as a percentage of overall revenue in general, but we've been really, really pleased with it.

Got it. Over the last few years, you've done some opportunistic small M&A. You're able to take advantage of the current markets, even earlier than most in January and do a fairly sizable convert to augment the balance sheet. How should we think about your desire or philosophy of putting that money to work for inorganic purposes?

Yes. Inorganically, I think we have done a couple of opportunistic things. I expect we will continue to remain opportunistic, but I would match with the optimism -- with the opportunism a discipline and maybe that's like included in our definition of opportunistic. And so I think that's just kind of how we think about it. We have a fairly ambitious product road map. We know what we want to go do. Much of that is not easily done or accelerated or modular, such that there's some sort of plug-in acquisition that makes sense. Realm is a good example of one that did that, right? That it was able to accelerate a road map. We had mobile on the road map and be able to take the leading mobile database and incorporated and integrated into our efforts, I think has been really additive. I think in terms of the investment outlook more broadly, we've been quite long-term oriented in the way that we've approached everything. And I think that that's reflected in the fact that we called this out in the earnings call. But clearly, we have some COVID-19-related savings as a result of dramatically reduced travel and things like that. Rather than just sort of pocket all of those, we decided that we have an investors' road map. We're seeing opportunistic situations present themselves in terms of the go-to-market side. And so we said, let's redeploy these in 2 areas. First, digital marketing, capitalizing, like I said, on the opportunity that we have, the fact that ad rates are down meaningfully. And the fact that we have started to build these self-served muscles, which again show up already in the numbers and the customer counts and things like that. So we said we're going to incrementally invest there. And we, secondly, have identified a lot of unusual talent from an engineering -- software engineering perspective that's sort of interested or available on the market as firms go through displacement, and start-ups and other places are more disrupted. We have an opportunity to pick up a little bit of talent. And so if we can incrementally do that and get a jump-start on our fiscal '22 R&D hiring without, in a way, we're sort of redeploying the savings, that makes sense to us and helps us accelerate our long-term product road map and better position us for our fiscal '22 and beyond. And so we're looking to do things like that as well.

Got it. Michael, about a year ago, you -- I think it was also at the user conference, introduced your search product. Any update on where that stands from an adoption standpoint?

Yes. So Search and Data Lake are both in beta. We have our user conference, that I mentioned, is now a virtual event kicking off tomorrow where we're going to talk more about those. So I don't want to steal too much of secure and the rest of the team's thunder. But I think that they've been really good additions in terms of sort of extending the moment that we value, promise to a developer about making data easier to work with. And I think Data Lake and Search and for the other things you're going to hear about are all oriented in that vein.

Got it. From a market penetration standpoint, if you look at some of your most sophisticated largest enterprise customers, do you even account for 5% of their spend on the database side?

Yes. So directionally, what I'll say, and it's been a little bit of a while since I looked at this, but in general, if you look at sort of the top, pick some number, 20, 25 customers, whatever we want to, it would be the outlier customer where we are north of 5%. Most -- and we have perfect visibility there also. So obviously, some of it is directional because we don't know exactly how much customer XYZ spends on database software. But most of those, we have a very small footprint of their overall applications. There may be a small number where we have everything, right? So a customer that is using us for everything, or almost everything. That wouldn't fit that, but most would look more like the sub 5% bucket.

Got it. And maybe wrapping up, obviously, your relationships with the hyperscale guys are interesting in so much as that AWS and Azure have somewhat competing products. What do you hear most from customers why they choose Mongo over those solutions?

Yes. So I think specifically, directive is, I think it's the product superiority. If we're talking about the direct sort of imitation competitor products that they've tried to come up with, by definition, and almost structurally, like they are inferior, right? They can't use our code against us, so they have to sort of imitate or mimic the look and feel, and that leads to both a definitionally lagged product capability set as well as an inferior experience and poor compatibility. But even over above that, I think the other thing that's quite top of mind for folks, and I think we're going to talk fair amount about at the user conference, but it's broadening people's minds is multi-cloud, right? I think people are incredibly concerned about getting locked into a single cloud provider, and people understand how central and how sticky the database is. And so they're weary and leery of doing that.

Excellent. Any final thoughts you want to leave us with?

No. I think we have the highlights. Thanks for the time and questions, and we look forward to hopefully seeing all of you in person at some point.

Excellent. Thanks so much, Michael, and everyone, for joining us. All have a good afternoon.

Take care, you all. Thanks.

Bye-bye.