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

Good morning. Thank you for joining us here. I had an insightful little keynote there with the CIO panel. Good news is a lot of investment in data. So this is very topical here. Very pleased to have MongoDB. Today, we have Michael Gordon, the Chief Operating Officer and CFO; and Serge, the SVP of Finance. Welcome to Nashville.

Thank you for having us.

Thank you for having us.

Absolutely.

Great to be back here.

Listen, let's start maybe with this idea of, we've seen a slowdown in the overall spend environment. It's been challenging. But as I take a step back and think about the role of a database, I like this idea that behind every good application lies a database. And so let's talk a little bit about the business, the drivers of the business, what portion of ARR is driven by new apps versus migrations off older apps? And how would you compare that to kind of maybe what you saw in the 2021 IPO?

Yes. So taking a step back, first of all great to be here. Thanks for having us. Unfortunately, there's been a database behind the bad applications, not just the good ones. But -- so it's a huge market, and IDC's numbers are north of $80 billion. And just to try to kind of frame it up, it's a market that's actually also growing in double digits, which normally you'd say like database has been around for decades, how is a market that's been around that long growing at -- well in excess of kind of GDP clips and the more mature business growing in line with GDP. And fundamentally, it's really because databases are at the heart of every application, and new companies today are using software, specifically software that they build to try and drive competitive advantage, right, to improve their end user experience and things like that. And each of those applications need a database. That's what creates the opportunity for us. And so that's really kind of the core of the opportunity. We're closing in now on $2 billion of revenue, but still tiny, kind of low single-digit share of this huge market. And if you think about the market overall, to kind of your question, you can think about it in terms of new builds and you can think about it existing. And I think the simplest way for me to think about it is if you look at the IDC projections, there's anywhere being kind of $10 billion to $12 billion new being created every year, right, new spend every year, right, which, again, just sort of highlights how big the opportunity is. And then there's, let's just for simplicity sake, we'll call it kind of $80 billion in the installed base. Not every dollar of that $80 billion issues in RFP every year, right? If you have an application that's working perfectly fine, you're not going to bother to change out the database. Databases are extremely sticky. And so when you think about it, if we just roughly assume that there's an average 10-year application life, which probably on balance is coming down, just given the rate and pace of technology innovation, but just for simplicity's sake, we'll call it 10 years, so that's about $8 billion of existing that's going to replatform every year. So you add that to the sort of $10 billion to $12 billion of new and you wind up with sort of $18-to-plus billion new kind of transactable in any period. And if you look at sort of our incremental market share, it's been increasing over time, but it's still kind of mid-single digits, and part of that is just because of the footprint coverage. We can talk more about that. In terms of the relational migration piece, at the time of the IPO back in 2017, we said about 30% of the new business that we are winning were relational migrations. That has continued to go up in dollars, but down in percentage. So I think our last disclosure on that was about 20%. It varies between 20% and 30% over our time as a public company. And part of that is because Atlas, which is now 71% of our business, which is our Database as a Service offering, tends to be new builds, new applications. Also if you went to a big bank or a big telco or someone like that, by the time they're taking an existing application, re-platforming it, moving it to the cloud from on-prem, everything else, at some point, you could probably get at least half the people in the bank to call that a new applications. So the decision gets a little bit fuzzy at some point. So like -- I wouldn't overly push it, but that's kind of the set up. So I wanted to stop there, and we can go anywhere you want to go.

So the way I look at it, $18 billion to $20 billion jump off every year across new and migrations that you can drive net new ARR every year. How do you increase the attach rate to the new part? Obviously, the mix has gone up since the IPO, but what are the things that you can drive a higher attach rate to net new application builds?

Yes. So I think there are 2 kind of key things. First and foremost is sort of the product, right, and we have an amazing product and relational databases, which are the vast majority of the spend today. So we're built and pioneered in the '70s for a completely different era. And so we've come along with -- not just what we think, but developers generally view as kind of a better mousetrap, right? And so having a great product is the first place to start. Obviously, that's not a stagnant effort. We have to continue to invest in the product and have had a lot of success there. Second is really developer mind share. And so developers love working with MongoDB, but -- and then the third thing is footprint coverage for sales. And so I think this is an important distinction, especially for investors who are newer to the category. There are a ton of database companies to invest in. And so when we went public, we were the first database company to go public in over a quarter of a century. So there are a ton of comps, right? It's not like cyber or something. We're like there -- security were 1 million companies out there. And so one of the key distinctions of our market is companies tend to adopt or pick databases application by application, right, kind of going back to your opening comment. And so when Piper decides to run an application of MongoDB, they don't kick out every other instance of Oracle and everyone else. It's sort of an application by application process. And so that changes the dynamic a little bit. Unlike ERP or CRM, right, like you -- the sales and trading teams on the same HR system as the research team or the banking team or the private wealth team or whatever, right? And so that's just sort of different than what you see in a lot of software. And so the biggest challenge is the awareness, right? What we're offering is a paradigm shift, and some people are still steeped and relational, and so is the awareness, the education and then the selling. As popular as we are, our salespeople don't get to kick back, put their feet up on the couch. Once we sell a workload into account, we need to continue to sell additional workloads as you go development team by development team and division by division.

The only other thing I would add, but importantly, when we are in the room, our win rates are very strong. And that's going to give us one of the key reasons why we have confidence to continue investing.

So let's talk a little bit about the growth profile of the business. Obviously, really big opportunity out there to drive a higher attach rate, high win rates. But if I look at the overall kind of market, we've seen industry growth rates across the cloud slow. We had kind of 2 decades of 30% growth, got spoiled. But now we're looking at an industry that's going to grow about 13% across the whole Cloud 100 if we look at the industry. My question for you is, how do you think about your growth profile here? It has slowed. What are the levers you're thinking about that could maybe sustain growth and/or maybe start to reaccelerate growth? Serge, we'll start with you.

I'll just -- I'll quickly hit it. Obviously, you can add any thing you want to. But I think about growth in 2 different ways, right? I think about it in terms of there's an existing set of applications or workloads that we've already won. And then there is a new business that we win, right? And we talked about this at our Investor Day, but that set of applications that we've already won, when a workload starts out, it tends to start slow, it tends to grow quickly for the first couple of years, will tend to grow but at a slower rate over time. And so if you won no new workloads, just the organic kind of growth rate of that installed base would slow over time, right? And so the first thing when you think about what does it mean in terms of driving higher growth rates as you need to keep adding new not because what you acquired isn't attractive or compelling, but just naturally, it's not going to keep growing at a faster pace as it does in the first couple of years of an application's life. And so the latter part, this kind of the new business piece, is really a function of the size of the sales force, our footprint coverage, sales productivity and all those kinds of things. And so that's sort of the combination. The last thing I'd say about the installed base is that growth in the installed base, while it's affected by the kind of tenure or whatever you want to call it, of the applications of the mix. It is also very closely tied to the end user activity of those applications. So if you think you have an application, it could be a customer-facing application, it could be a consumer-facing application, it could be an internal application, whatever it might be, the ways in which the end users interact with that database, right, the underlying reads and rights that you see, the transactions that they create in the database will drive the underlying consumption of that database. And so some of those things that we've called out at various points in time are affected by the macroeconomic environment. We kind of see that activity.

Yes. The only other thing I would add is we've been very happy with our ability to win new business sort of across the board. Q1 was a little bit of an outlier. We can talk about that. But generally speaking, new business, what's been the challenge and sort of the constraint in our growth over the last 2 years is that we've sort of seen 2 phases of the slow down in the growth of the underlying base. The first was roughly 2 years ago when the interest environment changed, the investment environment changed. We saw usage growth across the portfolio slowed down and with it, as Michael was saying, the consumption growth slowed down. And then again, in Q1 of this year, not quite to the same extent, but still we saw usage year-over-year growth slowed down. And again, it feels like a slightly softer macro environment again. And so the -- that's been the increased headwind that we've been fighting because there's nothing we can really do about the growth of the existing applications, where we spend most of our time is really all of our time around how do we win even more new workloads to offset that trend.

As you think about the levers on the sales force side, go-to-market, is it just a more challenging environment? Is sales productivity a little more challenging given this environment? Or are you seeing so good productivity numbers and...

Yes. We haven't seen the challenges, Serge referenced we had some internal operational issues in Q1. But beyond that, we've been able to successfully sell really in all environments, even in a more challenging macro environment. And part of the way that I've sort of think about it, they're sort of mentally visualize it, if you think about sort of an ocean, there can be all sorts of turbulence and [ shock ] and frost at the top. But when you're a small share player down at the bottom, some of those headwinds can exist, but you can still, as long as you're executing well, continue to win, despite that chapters because you're an insurgent, right, who's gaining share and you don't have that giant installed base that the legacy players do. And so I think that's been important. We also talked about, to your question about sales productivity, on our last earnings call a couple of weeks ago about how productivity was up year-over-year. And so I think the team has done a good job and has been able to execute well, despite generally a more challenging macro environment. But fundamentally, we think there's a big opportunity as a small share player. As long as we execute well, we should be able to continue win new business.

Serge, a question for you on Atlas. This is a growth engine for the company. It's been a fantastic growth engine. It's now a $1.3 billion business for you. Is it just usage that you kind of need to reverse here in consumption or reverse to drive some stabilization and/or reacceleration there? Are there other, I don't know, product factors that could help drive an acceleration on Atlas side? Walk us through the net levers as you think about that business. It's been a key growth engine. How does that growth engine sustain and/or improve?

Yes. So there's 2 things, which the first one is usage. Usage has -- we've seen a slowdown that we think is largely macro driven. We don't control that. But certainly, there are states of the world in which you can assume that it can get better. But we can't plan for that, we can't bet on that. It just will be what it is. The one that we focus on is the acquisition of more new workloads. Product does play a role. So things like Search or Vector Search or some of the other things in our portfolio mean that we are winning more workloads than we otherwise would have because those incremental features might be the difference between us and somebody else. But there's many other things that sort of sit in the bucket of how do we acquire a new better, which is app modernization. We're getting increasingly excited about the opportunity to use AI to get more of those legacy relational workloads on top of our platform. AI apps themselves, we've launched a program called MAAP to sort of build an ecosystem that makes it easier for customers to build -- to start building applications. And then a number of what I would call more operational tactics in terms of how we configure our sales force, where we deploy our people, marketing tactics, all of which are there to kind of increase our ability to win new workloads to supplement whatever happens on the usage setting.

I tried to hold the AI questions. We have...

You did a stellar job.

I did, right?

Amazing.

I try to save to the 20-minute mark. We're not quite there yet. So -- but let's dive into AI. And one of the things that I think, and just intuitively, as you think about a database storing transaction records to going to now storing conversations, every question you ask the database you're going to be storing. Those early customers that are now kind of deploying basically AI, what do you see? Is the usage consumption pattern, is there anything you can kind of give us that there's a little bit of a tea leaf relative to what could happen as more of these AI apps are built and run on Mongo?

Yes. We see primarily 2 types of apps being built. One is what I would call the systems and automation, and those are kind of bots and/or conversational assistance, things that take us sort of human effort -- low-level human effort and relatively easily replace it with AI. And the second is what I will call analysis, more broadly, and that's intelligent document retrieval helps you find the answer faster. That's where some of the RAG architectures, in particular, become helpful. And that's what we're seeing both -- those are the 2 major flavors. And then there's a bunch of other interesting stuff that's in the margin. But if you think where the numbers are, those are the 2 first buckets of applications that we're seeing. We get this question a lot which is, what's the usage intensity of an AI app going to be? Can you tell me what's the multiplier of an AI app versus a regular app? And I'll maybe offer 2 thoughts on that. One, for sure, it's too early. So we -- most of the activity that we're seeing right now, frankly, is on the startup side. And there -- these are exciting new products, but they're still looking for their product market fit. And ultimately, we don't see a mature application that we can go benchmark against other applications. But then maybe in a more speculative bucket, they may not be the most important thing. The most important thing, ultimately, we always think is the popularity of the underlying application. And maybe to make a parallel, we have a number of video games being built on our platform, but they're not all equally popular. One of the most popular video games in the world is built on our platform, and the ARR that we win from that is multiples larger than the average video game ARR on a platform. And it's not a function of the fact that, that particular game uses the database differently. It's just the fact that everybody's kids, including my own, play. So some apps will be more popular than others, and that will ultimately be the bigger driver of ARR that we get from them than the usage intensity. But obviously, we're watching the usage intensity. And when we have something that we think is actually statistically significant, we'll definitely share.

And maybe it's helpful just given that we breached the AI topic just to take a step back and think about what are the kind of the key ways that affects us or how we think about it. And I think they're really 3 key buckets. I think the first is everyone talks about CodeAssist tools, right, and we can debate how much developer productivity that's going to drive, but it will make developers more productive. As a result, developers will create more applications to the -- opening comment at the beginning, every application needs a database. And so that just creates even more opportunity, right? So while we're not lacking for TAM, the overall market size should grow even bigger, right, as a result of CodeAssist tools. So that's kind of a market size comment. The other 2 piece is really more about market share. So the second thing I'd say is, in general, those modern applications, the AI-powered applications or whatever you want to call them, will desire, will benefit from, will need a more modern database, and MongoDB is a very good fit for that. And so the result of that is we should -- we have the opportunity for kind of more share as a result of our document model and our kind of better suited kind of technological differentiation for the modern world. And so that's helpful from a market share standpoint. And then the third piece is this large installed base of legacy relational applications or early on, but we're finding ways to leverage generative AI to help make migrations of that more efficient, faster, cost effective, et cetera. There's a fair amount of interest from customers around that. It's still quite early on. But incrementally, that also sort of creates another share opportunity for us when you kind of think about the overall market size. So I think those are kind of the 3 big picture kind of trends or ways that AI has the potential to benefit us.

One of the things that really distinguishes Mongo from others in this kind of space, really on, in the no SQL kind of space was the developer mindshare. You've built a great reputation with developers. Just intuitively, as we think about 10 years from now, when machines are writing the code, how do you create affinity with the machine? You've created infinity with the developer. How do you make sure that when machines create apps that Mongo is the preferred app? Is it exposing documentation to these training models? I'm just trying to think through the future set where machines create the apps and not humans. How do you drive affinity?

Yes. Let me maybe say 3 things. First one is we think that for a foreseeable future, including 10 years, a human will be involved. And the early evidence from the -- some of the Copilot seems to suggest not so much that the low productivity developer becomes more productive. It's more that the high productivity developer becomes even more productive. So those people are still going to be there, still going to be exceptionally important. Maybe there's a future -- super, super far enough in the future where you can imagine a world where that doesn't exist, but that will start to be the first thing that we would say. Second of all, it's absolutely important for the machines to know how to code with MongoDB. So we have partnerships with all the hyperscalers and all their Copilot products. We give them our documentation. We are invested in making sure that their technology works. But this is the third thing, I would say, which is if you broadly divide our competitive advantage, I would put it into 2 buckets. The first one is developer affinity and/or ease of use for the developers. So this is the idea that our product is intuitive to use, doesn't require translations into rows and columns, and that's some of the reasons why it became as popular with developers as it is. The second, though, is that our databases operates better. It is more scalable. It is more performance and offers lower latency. And over time, you'll see what incremental features will offer, the unique security that nobody else has. So even if you sort of imagine some world in which a developer no longer matters,and, therefore, it's kind of the first element of our competitive advantage is diminished, we find it hard to see that world over any conceivable time horizon. But even if you're interested in that, the second thing still remains and only grows more important over time because all of us expect more from apps in their lives, and that requires a better database.

Yes. I think about it simplistically, and the developer affinity is really a result of having a better product and developers being rational about that and ensure we have great T-shirt swag or whatever. But that's not what it is if you think about MongoDB.

I kind of like that.

Right. Exactly. But the bots or the machines, whatever you want to call them, will be at least as rational. And we have to do well with that.

We will end on the toughest question, which has varied from year to year, what you call, competition, the big bear thesis and concern with the cloud natives, right, 2 years ago. Open Source, at least with the investor community, has really risen to the top of that concern, right? "Oh, is Mongo going to lose share to the Open Source community Postgres?" As you think about competition, have you seen any sort of resurgence in interest in Open Source or not, relative to a competitive environment?

So the answer is no. We have really not seen any change. And so I'll address Postgres and sort of how we see the competition. But what appears to us that has happened is we had a tough Q1. And we weren't very happy about that, and we lowered our guide. And we sort of offered our sort of list of explanations as to why, but investors, it's their job to pick and prod and come up with -- it's so only Postgres has become this thesis. Postgres has been on for 30 years. Nothing has changed in terms of the way we compete with them. Postgres in its many forms is a principal competitor of ours, just to be clear about that, but that's been the case for years. So what do I mean by that? Postgres is not a company, it's a technology. The way it actually primarily monetize is through the cloud provider solutions. And we've been telling you guys for years that cloud providers are our greatest partners, but also our greatest competition and not just their non-SQL offerings, but also their relational offerings, which are all really variance of Postgres. Postgres benefits from being cheaper and slightly easier relational, but doesn't fundamentally solve the structural challenges of relational, which go about sort of the developer productivity and difficulty of scaling and performance. And we have great win rates when we actually compete against them. But they do have this built-in tailwind of lift and shift, right? So if I'm a company, I'm leaving to go to the cloud. If I want in the process leave my legacy relational expensive proprietary databases behind, it's a cheap alternative. So it isn't surprising that they are gaining in popularity, but it's not in our expense. And when we do compete with them, we like what we see.

Yes. I would just add, on the Open Source space, obviously, that's at our roots. And so we're big fans of Open Source and benefited from that a lot ourselves.

Out of time here. Thank you so much for joining us.

Thank you very much. Thanks for having us.

Yes. Appreciate you.