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

Hey, welcome to our next session. Really happy to have the team from MongoDB here.

Same here. Thank you very much.

We were joking that it's like our offices are right across from each other in New York that we travel all the way [indiscernible]. That's what we do.

Great to be here.

Yes, I was missing one trip before [indiscernible]...

Thank you very much.

You had like -- maybe let's start with a kind of brief recap. So you had like a really good strong Q3 results. That was this week, yes.

This week.

A couple of days ago.

You've had a busy week. We have, too.

Yes. I've got a lot of questions, but maybe just to kind of level the playing field here, just kind of what were the highlights from year-end?

Yes. So overall, Q3 was a good quarter. Really pleased with the results. For those who don't know or need the quick recap, revenue growth of 47%. Atlas, which is 63% of the revenue, in the quarter grew 61%. The new business environment continued to be strong for us. We did not see any meaningful delays in sales cycles or deal slippage or some of the things I know others have commented on. We had 500 net new customers added in our direct sales channel, which is a strong and healthy number for us in terms of the -- so that's the new business environment, which is sort of the biggest factor in the medium and long term. In the short term, the near-term results are much more dictated by how does the existing set of Atlas workloads grow, and we saw a recovery and a nice rebound in the growth rate in Q3. That was terrific to see. It was particularly more pronounced in some of the placing and dicing some of the regions and channels that had seen a little bit slower growth in Q2 and that were more macro affected. So it's nice to see that bounce back. It was a very strong quarter for EA. We can talk about that more, I'm sure, but really strong. So good to see the continued demand and incremental penetration into customers there. And then maybe the last thing just sort of the headline level that I'd touch on is that revenue -- strong revenue performance and really outperformance relative to our guide flowed through to the bottom line and saw roughly $20 million in non-GAAP operating income at a 6% operating margin. So really great to see the progress there. And so all in all, we're really quite pleased with the quarter.

Yes. Okay. And then the -- let's kind of unpack that a little bit. Like the #1 -- well, one of the kind of strong ones was EA. Can you talk a little bit about like the factors there?

Yes. So a few things. So EA, Enterprise Advanced, this is self-managed MongoDB. Customers are buying annual licenses. And there's -- so we don't tend to sell a bunch of new customers on EA. They tend to be people who've been using it or maybe a little bit slower to public cloud adoption, but are expanding the MongoDB footprint. We don't need to call any one in particular. But a little bit slower in their public cloud adoption, but expanding the MongoDB usage. And so they continue to buy EA. We continue to see a strong and healthy business there. This quarter was particularly strong, 26% year-over-year growth on Enterprise Advanced. And the dynamic there is customers -- the value prop continues to resonate. We're increasingly seeing people look at Enterprise Advanced as an on-ramp to the public cloud. So if you take someone in a company or an in an industry that isn't as cloud-forward, they know they will eventually get there, right? A number of their software developers, their engineering team like wants to start building towards that. And because you can run MongoDB in any environment, on-premises and in the cloud and private cloud and a hybrid environment, multi-cloud, it's a good on-ramp to the public cloud. And so they -- in some ways, they look at that as sort of future-proofing their business. So it's not quite the dichotomy that it might seem just based on the usage or the deployment model. The other thing that I'd call out that we benefited from in Q3 was, in addition to strong EA overall is -- we saw a little more contract activity on a multiyear basis than we typically see for EA. We always see some. Most of our contracts are 1 year in nature, but we saw some more multiyear EA contracts, which is particularly relevant, given just the rev rec under ASC 606 requires us to recognize the term license from that. And so that's why we try and call it out, and that drives this sort of increased variability and reduced comparability. And we try and help give everyone enough when it comes to sort of follow the bouncing ball.

Yes, yes. And it's funny. I'm asking the question because like, remember a couple of weeks ago, like everything that was said was seeing negative for Mongo and Mongo share price. Now we're kind of in -- thankfully, we're back out of that. The one question I still get is like, it was just multiyear, like how important was that multiyear for the EA performance?

Yes. We call it out to help people understand, in particular, to understand the Q4 guide. So EA outperformed, period, even without regard to the multiyear. Atlas outperformed. And I sort of have been describing the multi-year as kind of like the cherry on the top or whatever. But -- and the reason why it's important, though, is historically, people are used to seeing Enterprise Advanced grow seasonally sequentially -- sorry, not seasonally -- grow sequentially from Q3 to Q4. And given how strong and how robust Q3 was, we don't expect that to happen. And so we just wanted to explain to people why and sort of put that in context, lest they sort of misunderstand or just think that we're being conservative or something. But we wanted really people to understand the [ counter ] of the business.

And so on that seasonality point on EA, if you think about it, like in the olden days, it's like you had a pipeline of new customers and, then Q4, it all came together and you had these big quarters. But then EA is not about new customers necessarily anymore. So do we have to rethink that's kind of Q4 seasonality? And then how much of a kind of this renewal pull of accounts play into that as well?

Yes. Do you want to comment on that?

Yes. So first, I would say, there was no renewal pull-forwards in Q3. So the performance was genuinely executing on the existing pipeline and the existing renewal base, and excellent performance there, plus the multiyear cherry on top. The seasonal dynamic in EA is that renewal base tends to be seasonally highest in Q4, and that hasn't changed. And renewal base, because there's not much new customer activity, is sort of the best indicator of our ability to upsell. So all of that kind of still remains. The only thing that we're calling out is different, because it was so exceptionally strong in Q3, we will not see that sort of sequential growth in revenue, but the overall dynamics are unchanged.

Okay. Perfect. And then last question, and then I'll move on from EA. A customer in this environment committing to multiyear seems to me like a very strong signal in terms of commitment? Like why is that happening? And how do you see that?

Yes. So I take it a couple of different ways. Generally, yes, I agree with that. And to your point, it is customer-driven, right? Like we're reacting to sort of customer desires or whatever. And so it's customer-driven. I think it speaks to the value proposition. It speaks to their confidence in MongoDB as a core platform, a platform to expand on. I mentioned the sort of future-proofing aspect and increasingly looking at EA as an on-ramp to the cloud. I think the last thing I'd say, and this is a little bit of a hypothesis, but I think it sort of helps like if you're trying to connect the dots, how do you put it all together, especially when other people are talking about getting challenges in getting people to sign commitments and everything else. I think there's a scenario in which the current environment, yes, maybe I'm reluctant to make commitments. But also for core technology, and core technology that's very sticky and hard to replace, I probably want some price certainty, right? I kind of probably want to know, so I can lock in my budgets and kind of know what I'm looking forward in the future. And obviously, in our industry, there's a past practice of people taking significant price increases and everything else.

Who would do that? Okay.

Okay. Exactly. And so I think for some, if you're a procurement team or a finance team and you say, hey, this is a core technology, we know we're going to use it. Like, "Hey, let's go get that price certainty. We're in an inflationary environment, budgets are going to be tight. Let's try and lock that in."

Yes, yes, yes. Okay. Perfect. Makes sense. And then as you mentioned some of the other players, the question I get a lot like, so what are you -- there -- you could think about EA as like a potential kind of upgrade to Atlas [ TAM ]. Are we on that journey already? Or is that -- for you at the moment, you just kind of some -- want some of the move, but like you're not going to kind of do anything?

Yes. We don't see a ton of people currently moving. What we more likely would see is let's imagine you're a historic EA customer, right? You don't -- you probably have many thousands -- depending on how large you are, tens of thousands of applications internally, but you're running most of them on-prem, very few of them are in the cloud. And so you're running MongoDB, you're using Enterprise Advanced. What would be most common as you start to move into the cloud is you'd be putting new applications on there. And so you'd have existing EA as part of your estate, but then you'd have some of your newer applications running on Atlas, and you'd be sort of buying both. We see very limited movement today of people running EA into the public cloud. I think, over time, we'll see more of that. From our perspective, to your point, it's very much customer-driven, right? If I just think about the time that, that takes, we've already won that workload, right? I'd much rather have the salesperson spend their time getting new workloads within that account rather than moving it over. Again, if we're using Barclays as an example, that we're really important to Barclays, obviously, we'd work with them, we'd do it. We'd spend the time, but I much rather have the salesperson spend time getting more workloads within Barclays, even though in the long run, we'll clearly...

And so [ it'd be even ] my fault. Like I remember we had like search. And I have that kind of running joke, it's like our big workloads is the customer data, and my regulator says like you can't go into the cloud. I'm like why not?

Right. Yes, yes, yes. And we that [indiscernible].

Like let's move forward to Atlas a little bit. The Atlas saw better numbers as well, and kind of you talked a little bit. And you called out the quarter before, like consumption maybe wasn't quite coming in and it's not people stepping down, it's more people not upgrading through the system. Like what changed?

Do you want to...

Yes. So let me just repeat what you said because I think it's important to make sure that we're sort of level-setting our understanding. So Atlas revenue is recognized as consumption, so it's recognized in real time. And in any given short period of time, it's primarily driven by growth of the existing applications that are already on our platform. Because the new ones that come, come -- they're almost always new workloads, and they come in relatively small. So in any given quarter, the vast majority of the performance is influenced by applications you already had at the start of the quarter. And so in Q2, we saw a macro-driven slowdown. We expected to see it, and we saw it. And it was driven by slower growth in the underlying -- in the usage of underlying applications. And therefore, consumption of our platform slowed down, still growing but slowed down. We've seen that get better in Q3. We did not expect that. And in particular, we had 2 flavors of outperformance versus our expectations. The first one is that areas that were particularly slow growing in Q2, namely mid-market globally and European enterprise, saw a bit of a bounce back. But then the second thing that we saw was a more broad-based improvement that we believe is seasonal. And so as we compare trends -- Atlas is a young business. So seasonality is hard to call. But if we look at the Q3s after COVID, meaning this one and the last one, we noticed similarities and patterns in terms of intra-quarter performance. And we believe there's an element of usage growth across our application portfolio as vacation season is over and people go back to work, but not just work, but just interacting with apps in their lives. And we saw better September and October than what we saw in August, and it was similar last year. It's early, it's 2 data points, but our hypothesis is that it's seasonality. It played to our advantage, but we take it for what it is. And obviously, we're happy with the outperformance. But as we think about forecasting the business in Q4 and beyond, we just keep in mind that we think this was a seasonal benefit.

Okay. And then the other thing that came up in conversations this quarter a lot was like it's Coinbase. It's like Instacart-like and that sort of stuff like -- how much of it factors that for you guys, like those kind of technology, technology assets?

Yes. So we're very well diversified across the board. Some of those customers, although [ no ] exact customers, we get a lot of questions around. And in Q2, we called out what we call digital natives as a part of our mid-market segment. And just to give you a sense, mid-market is mid-teens of our revenue. And those digital native companies are a minority, but a significant minority of that segment. So that gives you sort of the size of the exposure. We did see that segment slow down more than others in Q2, and we have seen a rebound more than others in Q3. And so our hypothesis is that those customers took a bit of a positive, the macro environment adjusted to figure out how they're going to invest to drive their own growth. But there's been a bit more investment there, and that shows up in the consumption of our platform.

Okay. Because like the one question that kind of comes with and is like its macro didn't necessarily get better in Q3 versus Q2, in fact got a little bit worse, but your consumption trends got better. And, okay, I get seasonality, but it also looks like people were investing more.

I think in certain pockets, we've seen incremental investments, yes.

Yes, yes, yes.

Yes, yes. I think the other way, and I know this is sort of hard to get at, but I'll give it a shot. I'll make it a little bit interesting. People sort of expect when we say macroeconomic that somehow there's this sort of one-to-one coefficient between our underlying consumption and GDP or something -- yes, and it's a sort of multivariable equation, right? What we can see is we can see the underlying activity, right, the reads and writes in the database, right, that drives the consumption and the usage. And that's a reflection of the end user activity, and therefore, that's the value that our customers are getting. But we don't have some 10-factor model where I can piece out all the different components of what the coefficients are for each of the variables. It's sort of like directly map it. He's working on it.

Have's figured it out yet.

But I just -- so people understand, it's not quite that 1-for-1 that people might ideally like or would be more easily to -- easy to [ intuit ].

Okay. Then, Michael, I need to thank you on the earnings night. Of course, you kind of kept me busy all night with people asking like, okay, so you talked about consumptions in Q3 improving over Q2.

Yes.

And then we're all kind of doing our own math in terms of like, well, how much dollar was added and actually [ tended ] and correlate, so now I kind of like I had to try to answer that all night long.

Exactly.

So maybe just clarify for everyone.

Yes. Let me give it to go. Have done some practice over the last couple of days.

Apologies [indiscernible].

So if you don't mind our phrasing in percentages, because that's how we think about it, but dollars or percentage is the same thing. So the question that we got back from analysts and investors was, "Well, hold on, you're telling us the consumption got better in Q3 versus Q2. And what I see is Atlas sequentially grew 14% in Q2 over Q1, but only 9% Q3 over Q2, so it slowed down. So what gives? " Here is the explanation. Most of that has to do with the 14%, the sequential growth in Q2. And we talked about that in the context of our Q2 numbers, but I think it's a helpful refresher. So first to remember, it happens to be basic math, but it happens to be true. Q2 has 3 days more in Q1. And because we recognize revenue in real time, regardless of macro or any other environment, like we get 3 days extra, that's like 300-plus basis points of growth. So that 14% goes down to 10%-and-change, okay? And so that's the first part of your bridge.

And we've called that out before [indiscernible].

Yes, yes, yes. We got about that, yes.

Exactly. That was 6 months ago, and that feels like 6 years ago.

Yes, yes, yes.

So the second piece is revenue in any -- sequential revenue in any given quarter is a function of consumption growth in the prior quarter as well as in the existing quarter. So Q2 revenue in that was benefited from strong Q1 consumption. Because we said in Q1, we were still seeing expansion along the lines of historical terms. So that means the starting ARR was quite strong, and much of the revenue benefit of ARR growth in the prior quarter actually materializes revenue in the next quarter. So when you go from 14% to 10%-and-change after 3 days, then you have to take a meaningful chunk out of that because of the historically strong -- in line with history expansion that we saw in Q1. And so that's how like -- we haven't quantified that, but that's like how you actually get to closer to the real number of consumption expansion in Q2, whereas Q3 did not have that dividend, because Q2 consumption growth. So there was no benefit overflow, at least not to the same extent. But the consumption in Q3 did rebound, and that's what sets up the 9%. But also just tying back to your question on the guide, most of our raise for Q4 is actually Atlas-driven. Because that better-than-expected starting ARR point actually helps our Q4 numbers, and that's part of the reason why -- although the beat was mostly EA, the raise is mostly Atlas.

Okay.

One of the ways that I think about it, and maybe this is too simplistic, but it's when we're talking about the growth trends, we're talking about the trends in ARR, right? And what you're measuring is sort of the lagging -- what's happening in revenue, right, which is affected by the seasonality and all these other things. Fewer days...

In less volatile environment, the distinguishing is less important. But in this environment, it is important, and obviously, there's hypervigilance in relatively short term. So we just want to be as explicit and as transparent as we can.

And then the last question on that subject -- again, it's more a fundamental question. It's like, so consumption models are different than seat-based models, and I just had Mike Scarpelli from Snow on here. His consumption was slightly different. And -- but we just -- we talked about that, and I wanted to ask the question to you, like how do you even forecast this? Like what's -- kind of what are you using?

We're coming at it multiple different ways. We're looking at cohort behavior. We're extrapolating near-term trends. We are looking for leading indicators, although we're struggling to find many. And we're still sort of looking at it kind of the traditional way through the sales productivity and sort of the growth of capacity and ability. And we end up triangulating. And the beauty of sort of Atlas is that it really reduces the friction of acquiring new workloads. And that is additive to our growth rate in the long run. But it does increase this incremental sort of variability in the near term. And we're getting better at it because the base of existing applications growing. So sort of our portfolio is more diversified. But macro is a factor, and it's been particularly a factor over the last couple of quarters.

Yes.

Yes. I would just add, it definitely helps to have a larger portfolio, right, because some of the sort of stuff that might happen at an individual, it kind of balances out for sure. Two, it is more challenging in a more macro, uncertain and kind of fluid environment. And so I think we have to take that into account as well.

Okay. And then the -- shifting gear a little bit. Atlas as like a database platform, the one thing that I walked away with from your customer conference, I think it was in early June, was the conversation I have with SIs and customers about like what Atlas is used for, is like, oh, s***, that's much bigger than I thought or like proper, sorry. But is that sound like a fair observation? Like in terms of -- what do you see in terms of like Atlas adoption? Like what are people using it for?

Yes, I would -- it's 100% true. And I think that I would divide sort of the narrative in kind of 2 pieces. One was backward-looking. So we've got a tremendous amount of investment to take an interesting novel database idea and turn it into a mission-critical database, of which the last major step was sort of multi-document ACID, which we had introduced in 2018. And so -- and then from there on out, we've further expanded use cases and continue working on it and went from a database to a developer data platform with all these incremental use cases that have 2 things in common. They are focused on helping the developer, and they help solve data problems. But that's what search is. That's what sync or edge is. That's what analytics at least the way that we do analytics is. That's what time series is obviously. And what we're seeing is that we are not only mission-critical at the core, but sort of expanding in terms of what we can address, and that's where the incremental R&D dollars continue going. The thing that's happening and is lagging is customer awareness of that. Because we still find the customers have outdated understandings of what we can do. Developers are opinioned. If you tried this in 2012 or 2014, you're going to have a different view about what we are versus today when almost $1 billion of incremental cumulative R&D was put into the product. But that's an opportunity. It's an opportunity to updated understanding to bring people along for the ride, and that will ultimately result in winning more new workloads.

And I think that sort of hypothetical, like Barclays example that we were walking through, actually is playing out in real life, right, where you are seeing more enterprise adoption, people who have Enterprise Advanced, but are building new applications, new revenue-generating applications, customer-facing applications, mission-critical applications. But they're either modernizing existing infrastructure and legacy applications. Or they're entering into a new line of business or saying, oh, here's some new capability, mobile, whatever it is and sort of saying, let's start with that clean and fresh, right, without any of the baggage of the legacy systems and adopting Atlas as the best method to do that.

And as part of that, like talk a little bit about your hyperscaler relationships, like [indiscernible] or friends at AWS, well, in the early years, tried to hunt you down with kind of all sorts of new products. I think that's changed. Like -- so what are you seeing in terms of like the hyperscalers when you work with them?

Yes. So I think there will always be a competitive dynamic there across all the players. But I think what we've seen over time is sort of the increasing part of the partnering or cooperation piece rise to the top and sort of more outweigh. The individual relationships with the 3 are a little bit different because they're coming from sort of different positions. Google was pretty early on in part to sort of differentiate themselves before everyone else, sort of intentionally picked the best-of-breed approach. Amazon and Microsoft came up with more, let's see if we can try and kind of capture more, sell more proprietary products, create imitation products, recognizing the popularity of MongoDB. I think over time, as we've had incredible success, including against their imitation products, I mean, our win rates are exceptionally high, I think they've understood the value of partnering with us, understand that sort of if you're trying to solve for what solves the customers' needs best, embracing that best-of-breed solution does work out well. And then they've come to appreciate and now have some years of data around the incremental stickiness and sort of multiplier effect that MongoDB Atlas brings to their cloud environment, right? So they're competing -- we're obviously in a very big market, but the infrastructure storage and compute market is even bigger. And as they compete with each other, we want being a helpful partner and the kind of differentiator among them. So it's been effective. Like I said, there will always be components of competition, but we've been really pleased. I think getting to the point where we've got integrations with all 3 consoles, where their sellers are compensated on selling MongoDB, where their use of MongoDB Atlas burns down their enterprise discount agreements is all really valuable, and it reduces a lot of that friction and allows our kind of best-in-class product to stand out.

Okay. Perfect. And then the last couple of minutes, let's talk about the profit performance this quarter and in your comments for going forward a little bit like the -- so from the outside, I would say like you kind of planned for a slightly lower revenue run rate. You got surprised. The costs were kind of managed to the old guidance. And now you have like outperformance because top line came in better. It's like -- is that, that simple or...

I think that's an important driver. I wouldn't want to suggest that we haven't also applied incremental scrutiny on expenses and tried to update our frameworks for the current market realities. I think we talked about this in a bunch of different settings and formats, and I know this is not new to you. But like we've always been very rigorous and disciplined about how we look at our costs, how we assess channel investments, unit economics, ROI that we're getting on different investments, whether it's sales and marketing, R&D or whatever it might be. And so we've continued to do that. I think it would be foolish not to acknowledge that the cost of capital has gone up, right? And so definitionally, that means the bar gets higher and so fewer projects clear that bar right, as you're thinking about it. Now we take a long-term view. So that doesn't mean that you have to mark the cost of capital to today. But you -- I think you could recognize and look out and say like, over time, the cost of capital will be higher. So we continue to run the business for the long term. We continue to invest. We definitely had strong outperformance on the top line in Q3, Atlas, EA and then throw in the multiyear as well. More of that flowed to the bottom line, to your point, right? So I think that's sort of a reflection around some of the discipline that we're talking about. But also as we're looking out over the balance of Q4 and as we're starting and working through our fiscal '24 planning, the challenging and the scrutiny of, are we going to get the value out of this, we said we wanted to do these heads, are we still going to get the value of these heads? Are they more important heads? Do we reprioritize? And not just looking everything on an incremental basis, but trying to really assess things, which we've always done. I'd say the other thing in an environment like this, separate from the cost of capital, just to try and give people a more real-life sense of what does this mean right away from the spreadsheets and the models that you all build, we try -- and we're turning all sorts of different dials and levers all the time and testing and iterating on different things, which on ballots have not been highly accretive, but not every single thing works out, right? And so I think in a lower cost of capital environment, I think the inclination is to say, this project should work, it's not working, let's -- let it run another couple of quarters, right? And I think in a higher cost of capital environment, you sit here and say, you know what, I think we just have to accept it, like we didn't figure that one out, like that one isn't working the way that it should, right? And we need to stop it or deprioritize it, right? And so I think that just gives you maybe a little bit of flavor that's useful for some of the thought process.

And then the last question from me here, and then I need to let you go. Like -- so how do you think about the future. So now we are in positive territory. Like as you said, cost of capital is higher. Like how do you think about the path going forward now? And I don't want guidance, but like it's...

Yes, yes. No, totally. Yes, yes. And we do think about things for the long term. But if you take the long term in the rearview mirror for a second, right, since the IPO, we've delivered more than 35 percentage points of margin improvement. This past year, it was 100 basis points. We were pleased with that progress this year. And so, obviously, we'll give guidance in the fiscal '24 call, but that sort of puts things in context for how we feel about how we've been doing.

Yes, yes. Okay. Perfect. Last question, last 30 second. Usage of cash, what are we spending there?

From a...

Like the cash that you have.

So mostly think of it as opportunistic M&A and other things like that. But we've mostly -- we're not a big cash burner. We're not a capital-intensive business. And so I think it helps put us in a good position to sort of be opportunistic.

How do you think about the dilution effect from stock options, et cetera? Are you kind of working on that to kind of use cash for that?

Yes. We think about that. We talk about that. It's part of the annual planning process with the Board and the Comp Committee to think about targets for antidilution when you think about employee grants and things like that. So obviously, that's got heightened focus from everyone. And yes, so we're aware of that.

Good. okay. Perfect. Thank you. Thanks for joining...

Thanks for having us.

Next time, we do it in New York.

Yes, exactly.