MongoDB, Inc. (MDB) 25th Annual Needham Growth Conference – (Transcript)

MongoDB, Inc. (NASDAQ:MDB) 25th Annual Needham Growth Conference Call January 10, 2023 11:45 PM ET

Company Participants

Michael Gordon – Chief Operating Officer and Chief Financial Officer

Serge Tanjga – Senior Vice President of Finance

Conference Call Participants

Mike Cikos – Needham & Company

Mike Cikos

I’m Mike Cikos, analyst with Needham on the infrastructure and analytics space. With us today, we have the management team from MongoDB. Michael and Serge, thank you very much for joining us.

Michael Gordon

Thanks for having us.

Serge Tanjga

Thanks for having us.

Mike Cikos

Maybe to start the fireside here, for folks who are brushing up on the name or newer to the name, can you kind of just walk through the value proposition here? What MongoDB is solving for your customers? And how you’re differentiating versus other offerings out there?

Michael Gordon

Sure. Yes. Maybe we’ll just take a step back. The database market is one of the largest in all of software. So, the latest IDC numbers have the 2022 market at $84 billion and that’s growing to $138 billion in 2026. So, very large market, but also actually growing at a fairly healthy clip. And so, one of the questions is why is the market so big and why is it growing too much? And I think it’s really because this is sort of at the heart of this strategic nature of what software is all about.

So, if you hear these phrases like software is eating the world or every company becoming a technology company, those are all shorthand for the fact that companies today are driving competitive advantage on the basis of their internally built technology, specifically, they’re internally built software, right. Off the shelf software, it’s actually a competitive advantage because everyone can go buy it into the way that our drive competitive advantage is [they go build] [ph] software.

And every application that I build has a database at its heart, at the center of it. And that’s really what determines the nimbleness, the speed, the agility, the scalability of your business. And so, people today are hiring developers. You hear about Wall Street Banks talking about having more developers than large brand name consumer technology companies and those developers are expensive.

People want to get more out of those developers and so developer productivity speed and rate and pace of innovation is really where, you know we kind of come into play. The technology that sort of predominated previously is relational technology that was really built for a different era that was built for an era where storage was a big constraint. Storage was incredibly expensive in the 1960s and 1970s when relational technology was pioneered. That’s now not the case. And so, we sort of help bring a different paradigm, almost a better mousetrap to help solve the challenges today.

Happy to go in any of the details, if that’s useful or interesting for folks, but that’s really where our value prop resonates and the reasons why people are increasingly picking MongoDB. The other advantage in addition to, sort of having that developer mindshare is the general purpose nature of what we do. So, rather than being sort of a point solution or built for sort of a specific use case, we have this general purpose positioning that allows companies to ultimately standardize on MongoDB as their modern alternative. Why don’t I stop there. I can go on and on.

Mike Cikos

Yeah. Yeah. And if I just think about the market for a second, right. So, if we’re talking about the IDC estimate, let’s use that, so [85 billion] [ph] in 2022 going to 138 billion in 2026. Have you guys broken [that] [ph]? Like how much of that is locked up by incumbents? How much of that is still held by let’s say the relational databases and how much of that growth is expected to come from non-relational databases?

Michael Gordon

Yes. So, I’ll say a few different things. So, I think the distinction in relational, non-relational is sort of interesting, but not relevant for us because we can serve all the different workloads. Many of the other folks who were challenging the incumbents came up with technologies that can only do certain things or have very narrow applications or, sort of work for a specific used case. So, we’re a little bit different way.

Obviously, industry analysts have to come up with some way if you’re Gartner IDC or some way of like kind of describing or characterizing the market, but it doesn’t tend to map our reality. So, we win and a healthy chunk of business from relational people who run into, if you’re a customer and you’re prospecting, you’re running into challenge with scaling Oracle or one of the other traditional legacy players, MongoDB can be picked for that. So, it sort of underscores the fact that this sort of relational versus non-relational or relational versus no sequel sometimes is how it’s referred to. It’s not really the way the market plays out.

So, how to think about the market maybe a quantitative exercise we can use. I mentioned that sort of 84 billion going to 138 billion over four years. That’s a little over 13 billion of growth every year, right? So that tends to be new applications, new opportunities, people building new applications. And just for perspective, large organizations will have not just hundreds, but thousands or even tens of thousands of applications that they’ve built internally. And so, they don’t tend to be just sort of one just sort of monolithic application.

So, we’ve got 13 billion of new growth in the market a year and that 84 billion that exists, it’s predominantly with the incumbents to your point. Doesn’t do an RFP every year, right. Like, it can be working perfectly fine. And if it’s working perfectly fine, there’s no reason to go change it out. If just for simplicity sake amongst the group of us here, we say an average application is a 10-year life cycle. That means it’s about 8.5 billion every year that’s coming up for grabs. You marry that with the 13 billion, you’ve got sort of north of 20 billion a year that’s kind of in play.

From a technological standpoint, we at MongoDB can address that. I think one of the challenges that we have is developers are opinionated. They’re smart. We’ve continued to evolve our product over time, but the MongoDB product today is not the same MongoDB product that it was 5 or 6 or 7 years ago. And so, if you experiment it with it back then, and we’ve got an open source component to what we do. And so, you’re engaging with it in an uncurated fashion.

You would have rather said, oh, well, it was good for this, but not good for that. We’ve subsequently addressed that from a technical standpoint, so there are no technical constraints for why you couldn’t use MongoDB, but we continue to invest in sort of the awareness and perception of all the improvements that we’ve made.

Mike Cikos

That’s great. And one more on the market opportunity, but you just cited, let’s say, this 10-year application life cycle, right? With the way that the world is shifting, is it fair to think that there’s a collapsing of those life cycles and there’s [Multiple Speakers] over time?

Michael Gordon

I think that’s right. I think of the 10 years is merely somewhat arbitrary and imperfect and we can have a whole session just debating how long that is, but I think there’s no question that whatever the starting point is, they are shrinking, right. Those life cycles are called compacting and you’re seeing higher velocity because just if you think about the way your expectations as a consumer of what – how you interact with applications, you bring that consumer mindset to your work mindset.

So, even if it’s not a consumer facing application, even if it’s [B2B application] [ph], you expect to interact with things in a fast, easy, intuitive kind of way. And so, I think that’s one of the many forces that’s sort of driving application life cycle shorter and ultimately making applications more – making applications smarter really and we benefit from that trend.

Mike Cikos

Great. Shifting gears to let’s talk end market demand, right, especially in the current macro. What has been some of the changes you’ve seen, whether it’s customer adoption, customer growth in consumption trends? Can you just set the level there as far as the audience that we have today?

Michael Gordon

Yes, sure. One of the things that we’ve tried to do is, sort of help break down the underlying dynamics that we’ve talked about, sort of winning new business and new workloads and then the performance of existing workloads that are on our platform and we found that to be a helpful way. Not just for us to think about the business, but also to share and communicate out with all of you.

So, to date, we’ve not seen any impacts on terms of new business from the current macroeconomic headwinds. It’s been pleasantly surprising to see. It’s a testament to the product. It’s a testament to the fact that we’re in this big market and we’re relatively small piece of the puzzle and it’s obviously a testament to good strong execution. None of that of course precludes that from happening in the future, but to date, we really haven’t seen those headwinds.

We haven’t seen the deal slippages or other things that some other software public traded software companies have talked about. We have seen an impact on consumption of existing applications. And that really relates to the fact of the consumption of Atlas, which is our databases service product. Directly mirrors the underlying end user activity with the application. So, it’s really more of a second order effect of what we’re seeing for our customers’ customers or our customers end users interacting with their applications.

We’ve seen those grow at slower rates. We’re still seeing growth within this, but we’ve seen those rates of growth grow more slowly. It’s broad based. It’s been across the board, across sector, across geo, and as we sort of map and triangulate and kind of slice and dice ties back to underlying slower macroeconomic activity.

The last thing I’d say if you kind of try and tie the piece together, in the short-term, our results are more impacted by the expansion of existing workloads and or behaviors of existing workloads just given the size of the installed base, but over the medium to long-term, the much bigger factor is how many new workloads, how many new customers are we winning and so that kind of helps paint the whole picture.

Mike Cikos

And on that last point, I do want to come back to the Atlas and consumption trends, but sort of, why do you think the new workloads has persisted as far as the growth? Like there’s no change in new business you’re seeing on those workloads, right. So, I’m just curious why that has persisted in this environment?

Michael Gordon

Yes. So, I think there are a couple of things. I think that what we’re doing is incredibly high value. So, there is a stock ranking, right, that people are doing in terms of what deals they’re going to move forward with, where they’re going to just spend money, people are being more selective about that. It doesn’t mean we always win out, but I think in general, the problems that we’re solving are at the top of the list for folks. And so, we’ve benefited from that and been able to execute well, sort of despite the headwinds.

I would also say, it is a huge market and so even if there are pressures or even if IT budgets wind up coming under scrutiny or things like that were the vast majority of the time are share gainer, rather than an incumbent who’s got a lot to lose. And then I think the third piece is we’ve done a good job from an execution standpoint. Our sales team is very focused on execution. We have even unrelated to today’s current environment long standing views around pipeline qualification assessing things.

I’ve heard some of these stories or examples or anecdotes that people have talked about with, you know, deal slippage or companies, customers prospects, introducing additional approval thresholds, previously, the CFO of company XYZ only needed to sign-off $1 million deals and they moved it down to $0.5 million deal because they’re trying to provide scrutiny over the spend levels internally from the salesperson. That would be a terrible excuse, right.

Part of your job as a salesperson in terms of qualifying a deal and getting a deal across the finish line is to understand the paper process at the customer, right. And so, especially in the current environment, it’s very logical that people change their approval thresholds, do all those things all the time. And so, part of just the day-to-day managing of the sales process is being aware of that and getting ahead of that. So, internally, it wouldn’t fly very well as an excuse to go figure that out. So, I’d [chalk it up] [ph] to our execution and our focus on to kind of rigorous pipeline qualification.

Mike Cikos

Great. And for the Atlas consumption trends this year, right, during 2Q, I think they came in lower than there was a weakening in those consumption trends, right? And in 3Q, we did see an uptick. Can you talk about the various puts and takes that led to that and then we can start to talk about maybe some of the commentary you guys had as far as the guidance you had for Q4?

Michael Gordon

Yes, of course. Do you want to…

Serge Tanjga

Yes. So, I guess I’ll start as at the end of Q1 and walk us through at a high level what happens since then and we can dive into any specific as a follow-up. So, near the end of Q1, we started seeing slower growth in certain parts of our Atlas business when it comes to growth of existing applications, specifically in Europe, specifically in our self-serve and mid-market business. And as we look to sort of the underlying dynamics behind that slowdown, it became apparent to us that this is a macro slowdown. And from there, we concluded that macro slowdowns, then not to be limited to a particular geography or particular segment, but then to be broader than that.

So, we expected – going into Q2, we expected business to – consumption of outlets to slow down everywhere. And that’s largely what happened. We saw consumption slowdown and we provided a relatively detailed sort of checklist of how we expected things to play out when we provided our guidance in our Q1 calls, so that would have been May. And then Q2 largely played out as we expected, but with some puts and takes. And most notably, and this was a significant topic of conversation with investors in time.

The European enterprise business and our mid-market channel globally grew slower than we expected. There were other areas that were better, but those two came a bit lower than expected. So, fast forward to Q3, consumption did better in Atlas across the board than in Q2 and that wasn’t what we expected and that wasn’t implied in our guide. And there were two factors driving the improvement in Q3 versus Q2 as we understand it.

The first is, based on how Q3 played out, we believe we benefited from seasonal strength in Q3 versus Q2. And the way we see that is that the back half of Q3 was better than the first half and similar thing happened last. And it was driven by the underlying usage of the applications and it was pretty broad based. And what we think is going on is, sort of a seasonal back to school, if you will or back to work after the summer phenomena where people engage with the applications in their lives more than they did during the summer.

And we saw it last year, we’re seeing this year, it’s only two data points because Atlas is a very young business still. So, we can precisely pinpoint and quantify the size of it, but we definitely think it was a factor in Q3 and we wanted to make sure we share. And then the second piece, which is over and above the seasonality, those areas they were particularly weak in Q2 or slower than we expected them to be namely European enterprise and mid-market, those did better.

And what we think happened there is that those customers pause the investments in the growth of their applications because those were segments that were most immediately impacted by macro. Europe is – shouldn’t be a surprise in mid-market also because those tend to be younger companies.

And they went back to investing more in Q3 seems to us. Doesn’t mean that it’s like the new normal, doesn’t mean that we [bottom ticked] [ph] it in Q2 and that Q3 is the right level to think about it going forward. It’s just we wanted to make sure you understand that we did sell those two areas of improvement. One is seasonal and one seems to be more related to those specific segments.

Mike Cikos

And just to close the loop on the seasonality, right, because I think during the earnings call, you guys called this an emerging seasonal trend, but to your point, Atlas was much younger if we rewind three years ago as far as its growth in its size. So, that’s why we’re defining it as being emerging currently right? You referenced those two data points, and that’s really why we’re citing that.

Michael Gordon

Yeah. I don’t think the emerging is, you know, shorthand for like a current working hypothesis or something. Like, we don’t have enough data points to sort of state it definitively or declaratively, but when we look at it and use our best judgment that seems to be a contributing factor.

Mike Cikos

Is there anything to think about for that seasonality besides back to school or vacations or is that kind of it is for, it is the way…

Michael Gordon

That’s what we see right now because it was pretty broad based. So, yeah, we can’t sit here, oh it’s like prep for the holiday season or anything like that. It was it was pretty broad based in every geographies and across all industries. So, we think it’s fundamentally the way people work with their apps.

Mike Cikos

Okay. Okay. Also on the consumption, so you guys had specified that November, the consumption trends were, correct me if I’m wrong, about in-line with what you guys saw in Q3, right? But the 4Q guide implied, I guess, consumption growth [fee sales] [ph] from what we had November during December and January. And I’m guessing that’s based on, again, typical seasonality, holidays, maybe fewer days in those months…

Michael Gordon

It’s not fewer days, it’s literally the mirror image of what we saw, the strength in September, October, which is during the holidays people engage with apps [less] [ph]. Just less use. You do other things during the holiday.

Mike Cikos

Is there a way to think – like, if I rewind a year ago when we were in January, February, I think the big thing, and I know we’ve all learned that consumption models are different, right, but like there was weakness cited from consumption models, from Datadog, from New Relic, [Confluent] [ph], like there was a host of consumption models that we’re talking about, maybe developers were returning to work on a slower basis than what they’d historically seen. Maybe there was vacation angst coming out of COVID. Did you guys, if you rewind a year ago, did you see that? And has that in any way been incorporated into the Q4 guidance we think about?

Michael Gordon

We did not see that a year ago. Nothing other than normal usage based slowdown is baked into the current guide because we see no reason as it moves parallels. Like you said, consumption sounds like it’s all the same, but in fact, when you look under them, they’re all very different. So, you got to be kind of mindful of what is the actual driver for each of those companies.

Serge Tanjga

Yes. I think in those examples, at least as I understood and as I heard people talk about them, they were describing internal behaviors within their company that were, you know, affecting things or internal behaviors within their customers. What we’re talking about is, you know, their developers, you know, showing up people taking more vacation whenever. What we’re talking about is, end user activity, right? So, this is not confined to our customer, but this is our customers’ customers, our end users. Consumers, if it’s a consumer application, business users if it’s an internal application. And so, it’s just sort of a different, you know, dynamic than what others have.

Mike Cikos

Okay. And a more basic question on the consumption about the pricing mechanisms, right? If I think about, let’s say storage or compute or anything, like is there a way you can give us broad brushstrokes for how much revenue is being derived from each of those or do you not look at it based on different mechanisms?

Michael Gordon

We don’t look at it that way and the customer doesn’t buy it that way. The way to think about it is, you have your application. It has a certain set of characteristics when it comes to reads rights, transactions, usage of data storage and so forth. And based on that, you pick the instant size that you buy. And that instant size is, sort of fixed until your application growth changes it. And for vast majority of customers, vast majority of the time the applications tend to grow.

So, we think of it as sort of like a staircase of usage, whereas like you use a certain size of instance. As the application grows, you get to the point where you now need a bigger instance to provide the same type of performance and characteristics to your customers, so you upgrade. And as you, kind of move up that staircase, each individual customer has their own pace. And that kind of combined set of dynamics is what drives Atlas consumption.

Mike Cikos

Great. And if I could just take another stab at it. If I’m thinking about the growth like, we’re talking about new workloads versus existing workloads, right? Can you help us frame like, in a given quarter how much of the growth is coming from existing versus new? Has that relationship been relatively steady? And then in the current macro, are you seeing maybe existing workloads growing at a slower rate versus previous cohorts? Like how do we think about all those factors?

Michael Gordon

So, I say a couple of things. Number one, in any given period, vast majority of growth comes from existing workloads. And there shouldn’t be a surprise because new workloads, especially Atlas workloads, start very small. Most of what we do analysis, net new workloads are [indiscernible] start from zero. So, it really takes time for them to build and sort of make that impact.

So, if you think in any given quarter and sort of in the near to medium-term, vast majority of growth is driven by existing workloads and that changes, but given the size of the base, it changes maybe slower than you would guess. So, existing workload is the meaningful driver for near to medium-term.

To your second point though, it’s also very important. Obviously, we get to look at the business, not just in totality, but also across cohorts. And what we’ve observed over the last couple of quarters Q3 improvement notwithstanding is that we’ve really seen a slowdown regardless of, sort of the age of the customer, right? So, it’s not just like that like three plus year Atlas customers have slowed down, but it really across the board and yet again another reason to believe that this is fundamentally and exclusively a macro phenomenon.

Serge Tanjga

Yes, I would just add that all this consumption discussion is about Atlas, which this last quarter was 63% of revenue. The Enterprise Advanced business, which is the vast majority of the balance, does have 606 rev rec. It’s affected by term license revenue. New deals can meaningfully change those numbers right out of the box. And so, just so people aren’t confused by that.

Mike Cikos

Great. And if I’m thinking about like the – I guess the customers on Atlas versus EA, have you guys spoken to, I guess, what’s been the typical trend? Like, is there is there a typical customer as far as migrating from EA to Atlas over time? How much of that should we think about as being a source of growth or does it in anyway [canalize] [ph] the existing revenue? Is there an uplift in spend over time because of that?

Michael Gordon

Yes. So, the typical pattern would be of an existing Enterprise Advanced customer who’s adding additional workloads and decides that they’ve changed their view as it relates to public cloud. We run the business on a channel basis. We make – we want MongoDB to be easy for our customers to use regardless of their IT strategy. As much as people talk in conferences like this about Cloud, Cloud, Cloud, the answer is, not as many workloads are in the Cloud as you would guess.

We’re still relatively early on in that journey. There’s certainly particular industries or companies that tend to be more less Cloud forward, more focused on, yeah, they either have regulatory concerns or other issues. But over time, what we’ve seen is, even within that customer base, which may be somewhat characterized a little bit more laggard or otherwise, starting to adopt Atlas workloads that tends to be for new workloads for MongoDB.

We haven’t seen a lot of behavior activity of someone taking an existing EA workload and moving it to Atlas. That certainly could happen or happen more over time, but unless someone’s hitting or saying, I want to get out of all my data centers immediately tomorrow, I’m going to move everything. You typically sit here and say, I’ve got an application. It’s working well. Like, why do I need to go move it? But you’re looking for increased functionality, increased scalability, there are new applications or existing applications that aren’t performing as well.

Those are good candidates to move to MongoDB. And if you’ve evolved your posture around public cloud, maybe say, you know what, I’m going to start to put those in the public cloud. The last thing that I’d say, more broadly is, I think historically there’s been this sort of temptation to think about even though we run the business on a channel basis, to think about EA customers as being, sort of laggard legacy types and Atlas folks being new modern. That’s increasingly not the case.

You can see increasing adoption of Atlas within enterprise customers for mission critical applications that shows up in the numbers and that’s been great to see. We expect to see that happen over time. We’re also increasingly seeing enterprise advanced customers thinking about as they expand their enterprise advanced footprints thinking about that as sort of a first step to cloud modernization because you can run MongoDB in any environment.

Maybe they have regulatory other concerns about public cloud, but their engineering teams want to be modern. They want to have modern tools to appear to their engineering teams so they can keep their engineers satisfied. So, MongoDB can be really effective in that regard as well. And so, I don’t think there’s quite this, sort of universe that’s divided into these two things, but over time, we’re sort of obviously seeing more public cloud adoption clearly throughout.

Maybe the last thing I’d say is because we were in the business on a channel basis, maybe it’s helpful to think about the self-serve channel is basically all Atlas. The mid-market is – the vast majority is Atlas. And so ultimately, the MongoDB product mix will be determined by enterprises and how quick do large Fortune 500 Global 2000 folks adopt public cloud.

Mike Cikos

Great. And another point really to, kind of accentuate the difference in consumption models, but optimization is something that’s come up from folks. Like, are you guys facing headwinds from customers trying to optimize their usage of MongoDB?

Serge Tanjga

It’s not a phenomenon that really affect us. And the best way to think about it is that we are very – in fact in the beginning of our conversation, we’re very well aligned with our customers. So, they’ve built the app, they invested their precious developer resources to create this thing. And then how much the app grows and how much that app interacts with the database and therefore how much that grows as the app grows is really fundamentally what drives how much they spend with us.

And they want to see the app successful. And when the app is successful, they aren’t surprised that as a result, they have to pay us more. And just like all of us and with everything in our lives, given two prices for the same thing I prefer to pay less. But ultimately, paying us more is a sign that what they invested in the first place was successful. And so, we’re happy to have that alignment with them.

Michael Gordon

Yes, I think about the key factor being even though people think of consumption as the common trend and therefore there being such a thing as a consumption business, I tend to think of consumption more as a revenue recognition model and the business model is really about what is the value relative to what you’re charging. And so for us, we’ve got this very tight linkage between what we’re charging for is based on the end user activity of the application to which – to Serge’s point, they’ve spent money to go build. They want that to be successful. And so, we have this very tight linkage that doesn’t really lend itself to some of those dynamics that seem to be affecting other folks.

Mike Cikos

And another question on, I guess if we shift from Atlas to EA, can you help us think about like, I think EA has demonstrated outperformance almost every quarter versus what people were expecting? What’s driving that outperformance this year? Is there any common trend as far as why we’re seeing that strength?

Serge Tanjga

You’re right. EA has been the source of upside in every quarter so far this year and Q3 was no exception. Whereas Atlas obviously the trends have been mixed and we talked a little bit about that. When we think about EA strength, at the end of the day, it’s a lot of the same drivers that we talked about when it come to the whole business and Michael sort of ran through this, but first of all, it’s a large market. And we have low share, even in our existing customers.

We believe we’re the best technology. And we have strong go to market execution to go identify new workloads in our EA customers to continue growing. And so far at least, despite the macro environment getting more challenging, where you would think you would hurt EA more, right, because there you have to sign a contract, pay upfront more often than not, we’ve really just been fortunate because of the size of the market and our ability to execute to not see a dramatic or any really macro impact on the EA side so far.

Michael Gordon

I would just call out for those who missed it, that was a friendly modeling tip that next year we’ll have tough compares for EA throughout all the quarters.

Mike Cikos

All right. And I know I still have a set of questions here. I’m going to go through maybe one or two more and then turn it over to the audience if you guys have questions as well. On the profitability, if I rewind, I guess it was two quarters ago, I know management sounded a tone that you guys were definitely trying to invest because you find your win rates go up when you have a seat at the table, which makes sense, right?

Fast forward to 3Q one quarter ago, there was a meaningful lift in the operating margins. And some serious demonstration of leverage. Can you help us think about what drove that Q3 upside? I think there was revenue outperformance. I think OpEx even declined sequentially? And then how should we be thinking about management’s willingness to trade-off growth versus profitability in the current environment?

Michael Gordon

Yes. So, I’ll run through a few things. First, specifically for Q3, to your point, we did have significant revenue outperformance and that flowed through the bottom line that obviously demonstrates the operating leverage that exists that hasn’t always been the case in the sense that we’ve had revenue outperformance, but it hasn’t always flowed through the bottom line. So, it’s not just exclusively revenue outperformance.

I think we’re conscious to, I won’t quite say competing trends, but there are at least things that are in our thought process. One is, we are trying to run the business for the long-term. We’ve crossed over 1% market share, closing it on 2% market share, have a tremendous product, have unbelievably strong unit economics, all these other things. So, it makes sense to keep investing in the business for the long-term and for the benefit of long-term shareholders. That said, we’re highly conscious of the current environment. And so, I would describe it as like our investment philosophy, our investment framework hasn’t really changed, but we’ve updated the inputs.

It would be irresponsible not to reflect the inputs. What that means is effectively is a higher cost of capital. That means if you have a set of projects, even if they’re all very high return projects, fewer of them clear the bar if you raise the bar, right? And so that’s really been the dynamic and the thought process internally. Specifically to the sequential decline, it’s probably worth calling out that Q2 is always our highest quarter in terms of marketing and sales spend.

We have our big annual user conference We have some of our excellent clubs and other sort of awards events in Q2. So, we were always going to see a sequential decline Q3 relative to Q2. You’ll note though that the sequential decline was not just in sales and marketing, but you also would have seen that in R&D.

Part of that also though is that people from our R&D team do also travel to that global annual user conference. But I do think it’s worth saying there is incremental scrutiny on expenses both of, sort of discretionary measure, T&E and things like that, but also just on the returns, right. And looking at and saying, if the cost of capital has gone up, our return threshold needs to be higher, different things, not everything clears the bar, not things that used to clear the bar, don’t clear the bar anymore. That’s been a very active conversation and process internally.

The last thing that I’ll say, which is maybe helpful in terms of adding a little bit of context or color is, we’re always trying new things, right? I mean, part of the way that we’ve driven the success and the progress that we’ve had in the go to market side is by tweaking that go to market. It’s not stagnant. It’s not the same playbook. It’s not the same motion that we’ve had that we’ve just been so cranking out at ever increasing scale.

Unbalance those experiments, those initiatives, those pilots have had a very positive effect, but not every single initiative is successful. And so, another way that the current environment plays out on that is if you had an initiative, and you’re a couple of quarters into the data and the data isn’t playing out in the way that you’re expecting, you’re not kind of clearing the bar so to speak.

I think in a lower cost of capital environment, you’d say our intuition tells us that should work, let’s give it another couple of quarters, right, whereas in the current environment and a higher cost of capitalization [indiscernible], you know what, our intuition told us this should work, we now have some data, the data shows it doesn’t work, maybe we need to [stop] [ph] doing this, right. So, I think that’s a little bit about how we’re thinking about things.

I think at a more macro level, if you sort of take a step back, we continue to run the business for the long-term. We do have this very large market that we’re going after. We have exceptionally strong demonstrated product market fit. We’re delivering high rates of return. The cost of capital has certainly gone up, so fewer things clear that bar, but we’ll keep taking that long-term view.

I think in our life as a public company, we’ve got something like over 35 percentage points of margin improvement. This last year was another 100 basis points of that. We obviously haven’t given fiscal 2024 guidance, but we’ve been pleased with that progress so far.

Mike Cikos

If I think about this year with that expansion in operating margin to call it a 100 bps of improvement this year, right, I think at the start of this year, management had guided to an incremental $45 million to $55 million in post-COVID normalization expenses for like let’s say MongoDB World, right? Are we still charting the course for that 45 to 55? Is that still expected this year?

Michael Gordon

For fiscal 2023, we’re roughly on track with that. That forecast turned out to be accurate.

Mike Cikos

Okay. Okay. 5 minutes left, I still have questions, but want to open it up. Does anyone have any questions?

Question-and-Answer Session

Q – Unidentified Analyst

Kind of question about competitive landscape, you talk a lot about your [indiscernible] competition against the incumbents, but curious whether you’re seeing any meaningful head-to-head competition from other document database [indiscernible]? And kind about the second point, when you look at the overall [TAM] [ph] of NoSQL databases generally how do you think of the growth of applications, that’s leveraged document databases versus other types of notes [indiscernible] value or perhaps the underlying standard [indiscernible]?

Michael Gordon

Yes. So, a few thoughts. One, I don’t think we’ve seen any fundamental changes in the competitive scape over the last couple of years. Our win rates are exceptionally high against all flavors are big challenges, because the market is so large and our footprint coverage is so thin just not being in conversations, but whether it’s versus relational, non-relational MongoDB imitators, whatever it is, we have exceptionally high run rates really across the board.

I think to the second point of the question, I sort of alluded to this a little bit earlier at the beginning. I don’t really think from a competitive standpoint or from, sort of a product standpoint, it’s super helpful to think about the universe in terms of relational versus non-relational or relational versus NoSQL. At least as it relates to MongoDB, just because we can handle the whole universe of situations.

So, the beauty of the document model is, the document model really is a superset. And so, you can do key value. You can do graph, you can do, you know, whatever you need to do within that, and that’s part of the reason why time series, you can do whatever you want to do. And so that’s why we’ve been so successful is because of the general purpose nature of what we do.

So, we don’t – yes, you can find very niche specialized used cases that would benefit from a highly specialized database, but on balance for the vast, vast majority of workloads, we’ve got the breadth and variety to cover, sort of all those situations. And so, I was reminded earlier this morning at one of the investor meetings, when I first joined the company 7.5 years ago, there’s a whole slew of players, couch-based [indiscernible], all these other people. And we were all roughly the same size.

We were anywhere between kind of $20 million and $40 million, and we’ve obviously broken out and kind of separated ourselves from the pack. And it’s because everyone saw the big market opportunity, but we had a better technology that’s delivered against this multipurpose positioning that drove the developer affinity that we have, right. And so, that’s sort of developer mindshare, that developer fondness that we have. And then we married all that with good execution. And so, as a result, we’re sort of meaningfully bigger and kind of growing faster than all those other players.

Mike Cikos

Additional questions? I thought I saw one of them, yes.

Unidentified Analyst

Just from a customer’s perspective, what is the cost savings on moving their workload forward to you guys over short-term, long-term?

Michael Gordon

Yes. So, the cost savings tends to be valuable and significant, obviously in today’s market environment is particularly top of mind, but cost savings doesn’t tend to be the primary reason why people pick MongoDB. They tend to pick it so that you can innovate more quickly or drive scale and innovation at scale. So that tends to be, sort of a secondary or tertiary consideration.

That said, there is significant TCO. The beauty is back to the developer fondness is, we see such increases in developer productivity, as well as just general efficiency in terms of running and operating MongoDB that most of the savings comes from other sources. So, we don’t even need to be deflation area at the license level. Obviously, we’ve got the opportunity to be, but that doesn’t tend to need to be an area that we need to go to because there’s so many other sources of cost savings.

That said, I think if your sole goal were cost savings, there are cheaper alternatives. And so, again, it goes back to the first point, which is, we tend to be brought in when you’ve got a really big problem. You’re running into scaling or other challenges with Oracle or with your other existing legacy player. And so, you need that scalability, the nimbleness, the agility, and the ability to innovate more quickly. That tends to be the primary driver because that’ll be cheaper solutions if you’re solely cost focused.

Mike Cikos

Great. With that, we’ll have to leave it there. Please join me in thanking the management team.

Michael Gordon

Thanks for having us.