MongoDB, Inc. (NASDAQ:MDB) Goldman Sachs Communacopia + Technology Conference September 12, 2022 6:45 PM ET
CorporateParticipants
Dev Ittycheria – President and Chief Executive Officer
Michael Gordon – Chief Operating Officer and Chief Financial Officer
ConferenceCall Participants
Kash Rangan – Goldman Sachs
Kash Rangan
The first time I met Dev was 2006, you had this amazing company called Blade Logic, which was fabulous IPO. And that’s public for a couple of quarters. And then you’re now back at a more even more exciting company congratulations and congrats to you as well.
Let’s talk about at a high level MongoDB. Dev what are your goals? What are your aspirations for the company four to five? Let’s say you come back to the Goldman Sachs Communacopia and Technology Conference, what is it 2027? What would you like MongoDB to look like at that point? And what are your strategic goals? And how do you plan to accomplish them at a high level?
Dev Ittycheria
Sure. So we’re going after probably the largest market in enterprise software, and it’s been dominated by one vendor for a very long time. We believe we’re offering a very disruptive way of working with data, it’s proven by the fact that we are the most popular modern data platform in the world today. And right now, we have a small percentage of share.
Even though it’s a big market, we’re a billion-dollar business, even with small percentage share, but we think that opportunity in front of us is enormous and we’re aggressively pursuing it. So we would like to be the essentially the default very people build modern applications. And we think we’re on that way on that journey there.
Kash Rangan
And how big could that mean, it’s a big market and I was just, we had a chat with Jetson Altaf, who is the Chief Commercial Officer who says good things about you guys, by the way, good partners at MongoDB. And we were struck by the fact that the database market is now the fastest growing market in software, it used to be GDP type growth, people were like, oh, it’s boring. Now. it’s the fastest 17.6% growth rate, right. And you have small share, and you have this amazing potential, public in MongoDB.
Dev Ittycheria
We think we can be a very large, if not a seminal software franchise, but I think the reason for that is when you look at software, I mean, almost every company today, some form of the value proposition is enabled, defined or created through software, which means that developers obviously very, very important to every enterprise, a company’s journey in terms of enabling or transforming their business. And developers have gravitated to tools that enable them to be very efficient, effective in the way they work. And one thing we proven very clearly is that we enable people to innovate very, very quickly using MongoDB. Which is reason why we’re so popular.
If you look at any kind of studies out there, we’re considered to be the — one of the most popular database platforms and the most popular modern platform out there. And the only people “Who are more popular than us are technologies who have been out there for over 30 plus years.” So I think we’ve proven product market fit, we’ve proven that we are truly a mission critical platform by virtue of the size and diversity of our customer base, and also the use cases that people are running for — using us for and so for us, it’s all about kind of driving future growth.
Kash Rangan
Got it. On the topic of future growth, I mean things that work for a company, congrats, you went from 100 million to a billion — a certain set of strategies get you to that point, and there is less than stellar successful rate going from billion to 2 and then 2 to 5, 5 to 10, 10 to 15, 15 to 30. Has you studied companies that have gone through those phases, infrastructure, software companies? What are the things you’ve learned? And how do you plan to adapt your strategy to achieve your goals?
Dev Ittycheria
Yes, so because we’re going out to such a big market, we quickly realized early on that you can’t just have one mode of going to market the typical ways, hire a bunch of field salespeople, try and cover as much territory as possible, scale them as fast as possible. But we knew that didn’t make sense because of how large this market is. So we have not only just an enterprise sales organization, we have a mid-market team that’s predominately inside sales. And then, we have a self-service business and we also have a partner organization. And the partner organization works with both like large partners like our hyperscale partners, as well as SIs and ISVs because this market is so big, and it’s a very large ecosystem. So I think we’ve been very innovative in terms of thinking through how to go-to-market, not everything started day one. We’ve listened to customers, we’ve also changed the way we engage with customers with our cloud business. The classic enterprise software motion is to get someone to sign up for big commitment up front. But in the cloud business, when the customers don’t even know how large or how much their app is going to grow. It’s very hard to get them to commit out early and realize, given the high retention rates that we have, and that databases and data platforms are so sticky, let’s just get them on the platform. And that’s paid huge dividends for us, as evidenced by Allison’s growth the last few years.
Kash Rangan
Got it. I know this is a — the basic tenant of Mongo and how you’re structured as a database, your foundational technology and how that’s relational — different from the relational model. If you could just to touch upon that. Where do you see this as an enduring competitive advantage for the company? You’ve gotten to the [indiscernible] revenue to go farther can the document model really help supplant the relational database technology out there? So what is one of the challenges that you need to conquer more to make this even more mainstream, as successful as you’ve gotten to this point?
Dev Ittycheria
Yes. So we obviously, for those of you who have followed us, I’ve noticed, probably known that we’ve built our capabilities. And so we address a wide variety of use cases. The document model is really a superset of other models. It’s a superset of not just relational but key value store. It’s a superset of things like in the graph. We already have a time series capability. So by definition, our developer data platform is in some ways, enables a vendor consolidation play. So what we’ve heard very clearly from customers, if they don’t want to use a net new use case, for every net new, I’m sorry, net new technology for every net new use case. And so because the cost of learning, managing and supporting all these different technologies just becomes overwhelming. And so we’re seeing customers gravitate to our platform to run a variety of use cases. And I’m sure a lot of you have done your channel checks. And so we have some of the largest companies in the world running very mission critical workloads, as well as startups, whose entire business runs on MongoDB. And so that gives us a lot of confidence.
And I would say, what I also want to add is, a lot of people don’t realize the limitations of relational databases, essentially, there’s three core limitations that we address. The first one is that how you model data in a tabular format is very counterintuitive to the way developers think and code. You think about like a product SKU or a customer SKU, you have to disaggregate that data and put it in a bunch of tables. So the cognitive load on developers is very high if you’re thinking about modeling and managing their data model.
The second issue is that it’s very hard to add features, right? So as the data model grows, it becomes more and more difficult to add new features. So you slow down the pace of innovation. And the third issue is that relational databases are not designed to scale. They’re designed to be truly single node systems. So MongoDB was designed from the ground up to be a highly distributed platform. So we address the intuitive nature of how developers think and code is very analogous to documents you can set up relationships between different entities that are very easy to understand way. It’s very easy to add new capabilities fast and allows you to scale massively. So we have some of the largest application the world running on MongoDB.
So given those attributes, that’s why developers are flocking to MongoDB, which is why, they’re using us for so many different use cases.
Kash Rangan
Somewhat later I do plan to ask you about [indiscernible] discussed with the trillion-dollar balance sheet customer. But moving over to Michael, the current macroeconomic environment, I know you’ve reported just recently, consumption models, everybody’s just so focused on consumption models, can you give us a bit of a primer? How much of your average revenue is, is a fixed component versus variable component? Is that likely to change? Is that contract with contracts sort of different? How different are you? Maybe you’re similar snowflake, but maybe there’s some differences help us understand?
Michael Gordon
Yes. Sure, happy to. And thanks, again, for having us here Kash. I will walk through a couple of different things. I think the key thing to remember is, if you think about our business Atlas, which is our database service offering, is 64% of revenue in the most recent quarter, GAAP requires us to recognize that revenue on a consumption basis, I think it’s important to remember, as consumption has become a little bit more of a topic among investor circles, it’s not really a business model, so much it is a RevRec and the business models is sort of the underlying value that you deliver for your customers.
For us, when you think about the way that the opportunity plays out, both over the long-term as well as the short-term, is it easiest to bifurcate the universe and to think about new customers that we’re winning, and new workloads that we’re winning within existing customers as of one dynamic, and then there’s a different dynamic as it relates to the expansion of existing applications that are already on our platform.
And in terms of the new applications, or the new logos, those are the biggest driver of our success in the medium to long-term. Shorter term, it’s more disproportionately affected by the growth of existing applications. And so we look out on things and we see what’s happening in the market. Obviously, there are macroeconomic challenges. Despite all that, we’ve continued to have exceptionally strong new logo wins, incremental penetration of existing customers in terms of new workloads, that shows up in the numbers in Q2, so in Q2 we had a record quarter of net new additions to our direct sales channel. We didn’t see any of the elongation of sales cycles or deal slippage, or other issues at some of the other companies that reported commented on.
We haven’t seen any uptick or increases in churn or any of those kinds of dynamics. And so all the leading indicators that are the primary governors of our success of the medium and long-term are actually quite strong are basically flashing kind of bright green.
In terms of the short-term, though, to your point, we are — our business model is the underlying data platform or developer data platform, the value that our customer is getting, the value that we provide to our customers is very close, directly correlated to the underlying usage of the application that they’re seeing. And because we’re general purpose and because we’re so broad based and so well diversified, it does mirror the underlying economic activity. And what we’ve seen, this quarter which we started to see the very beginnings of in Q1 is slower growth of existing applications still growth, not contraction, but slower growth than what we’ve historically seen, given the more muted economic environment. And so if you think about a single workload, if I had a normal lifecycle where I went along, and then there was more activity, and it kind of needed to upgrade to the next, instance size, given all the requirements and the storage, compute and reads and writes and everything, that’s just taking a little bit longer. And so that manifests itself through in terms of our revenue and then with the consumption the way that we recognize it.
I’d say the only other thing to sort of not necessarily compare contrast, it’s a point out a difference versus other people who also want to recognize revenue from a consumption standpoint. Our value prop is the piece that’s so closely linked to the value that customers are driving. And so we talk about slower growth, it’s really a second order effect of the underlying usage of that application, as opposed to the customer intentionally doing something, right. They’re not looking and saying, oh, it’s a difficult environment, I need to optimize my MongoDB send, that’s not really the dynamic that we see. It’s much more about the underlying activity, because if you think about our customers, they’ve usually spent their most scarce resource, right, engineering developer time, right? What they’re trying to drive competitive advantage from, to build this application. And so they want that application to grow and to be successful, of course, yes, on balance, they’d rather pay us less than more of like anyone. But that’s not really what they’re trying to do. They want to see that application be successful. And so as we’re seeing slower growth, it’s really just because the underlying usage.
Kash Rangan
Let’s say, I’m one of these digital natives and I do a [indiscernible] ACB with Mongo, then all of a sudden my business slows down, 365, I’m just hypothetically making this up 365 days a year, like doing nothing the last day, I just light it up. So what does it leave you with your ability to collect the revenue that I have effectively contracted with you for. What point do you say, okay, your time’s up. We don’t care if you’re doing not doing well we’re going to recognize revenue because you paid us.
Michael Gordon
Yes. So a few different things there. So, first, in that scenario, you’re talking about an annual contract, most of our contracts are annual contracts, typically what customers do, because at the end of the contract, if I, it is sort of a user to lose it commitment. People tend to commit for less than they think they’re going to spend, and usually a lot less than they think you’re going to spend because I know, it’s actually a commitment, right. And so that’s part of the dynamic that happens. And so one of the things that we’ve done, though, over time over in the last several years, is we’ve purposely tried to reduce that friction around us negotiating isn’t a million dollars, it’s not a million dollars, you’re launching this new application, you don’t really know exactly how big or successful it’s going to be. If I’m a salesperson, and my commission’s entirely driven off of, how big a commitment I get, I’m going to spend all my time trying to convince you to do a million dollars, you’re like, yes, maybe only comfortable 700,000, whatever the number is, and we’re wasting all this time and all of these cycles from our standpoint. And so what we’ve done is we’ve sort of reduced that friction, we’ve encouraged sales folks to get the application on, if it’s going to do 750, it’s going to do 750. And because as Dev said, we’re going after one of the largest markets, one of our biggest challenges is our footprint coverage of sales, right? The database market, 85 billion in 2022, going to 138 billion in 2026. We have quota carrying headcount measured in the hundreds of reps, right versus our competitors at 1000, or 10,000.
And so anything we can do to synthetically increase our footprint coverage is helpful to us. And so we don’t want to have the salesperson wasting their time on this, negotiation with haggling with you about the commitment. We’d rather just say, what, you’re comfortable with 700, great fine, move on, let’s not worry about that extra watch the application grow, obviously have to set it up for success, and things like that, because what we know, is when we’re in competition, we have exceptionally high win rates. And so the challenge for us is just making sure that we’re in the conversation. And part of that speaks to footprint, which is why we continue to invest in sales and marketing.
Kash Rangan
Got it. So that’s a good way to think about the consumption model. So two thoughts, one, maybe two questions. One is, what does it look like coming out of this cycle? How does the consumption model for Mongo Atlas particularly behave? And what are the things that we should be expecting to see? As crazy as it might sound, how does it look like coming out of this in a more positive cycle? Jan Hatzius is my boss’s boss, Chief Economist. He’s talking about a soft landing. And that could be not bad at all, right? So if we do have a soft landing, and things sort of gradually normalize? How does the consumption model behave? So do people say, oh, I have so short sighted man? I mean, sounds ridiculous. Why am I worrying about this? Maybe it’s stepping up and catch up? Have you seen things that happened before? What like, what is the likelihood?
Michael Gordon
Yes. So if you’ve got one, obviously, we’ll leave the economic quality on but –
Kash Rangan
It is costly.
Michael Gordon
Exactly. But, and then also, we’ve provided guidance for the balance of this year, come on March call will obviously talk about fiscal ’24. But I think to the point, we have a very diverse customer base, we’re very broad base for general purpose. And so we see use cases across the board. And so I think when there is more economic activity, we do benefit from that we’ve got a historic — we’re building up a history with Atlas, right? Atlas, isn’t that old, we’re building up some history. We have some pretty normal ranges of what expansion looks like, we’ve talked about how recently we’ve been on the lower end a year ago, we’re at the higher end of those ranges. And so we’ll obviously have to watch and wait and see, but certainly more macroeconomic activities, good for the continued growth of the underlying database usage.
Kash Rangan
We’re going to give you a bit of rest and resume the consumption debate. But I want to switch to you, Dev. Relational database replacements have been a thing and a theme in your quarterly earnings conference calls. What do you see as a trend in your pipeline? Do you see bigger, bolder things as far as replacing RDBMS is concerned?
Dev Ittycheria
Yes. So it’s pretty clear to most people that they want to get off legacy platforms. And so then the question is, how do they do so. One of this, one motion is just stop paying the Oracle Tax. The other motion is like, hey, I really want to modernize my environment.
Kash Rangan
The other one run it on OCI. I mean, take the database and run it on OCI and becomes cloud.
Dev Ittycheria
We don’t see that many customers doing that. So I would say — so what we see is a lot more demand, a lot more interest from customers about accelerating their replatform. So much so that we actually introduced a new product called relational migrator to help automate some of the work and effort required to migrate from a relational or legacy plan to a more modern platform.
Again, it’s in early days, it’s only being used by professional services team. And it’s meant to help us basically people quickly model, what were the schema look like in MongoDB, versus the existing schema on a relational database. And we already — and this is a journey, we’ve already had people doing that, in the past, we’ve had our QSIs build their own tools, because we see so much demand for this. So we wanted to come out with our own product. And ultimately, we will give it to both our partners and ultimately to our end customers. But we want to make sure we work out all the kinks, because there’s a lot of corner cases you have to work through to kind of make sure that you can serve and support a wide number of use cases.
But there’s a lot of demand, and yes, you’re right on the earnings call, we talked about a bunch of examples of customers who are migrating off relational to MongoDB. And by the way, it’s not just started, it’s been happening since our IPO. But we’re seeing clearly more demand for that for two reasons. One, obviously, the economic environment is driving that. The second reason is that I think people are so much more comfortable today than say five years ago when we went public to truly run mission critical workloads on MongoDB.
Kash Rangan
And you’d referenced a customer that it took four years for them to see the light at the end of the tunnel and bet on the document model. Is that an Atlas deal day? Or is it platform?
Dev Ittycheria
Yes. So what’s happening is that a lot of these large financial services customers, they’re one of the sector’s that’s been slower moving to the cloud for a variety of reasons. One of them in regulatory constraints. And so as those constraints start loosening, they by definition, so they’re going to make a platform shift, and maybe even shut down their own data centers, they’re starting to look at what are the new technologies. And so four years ago, and we still — we know them well and there were user — reasonable size user MongoDB. We did challenge them like and we’re like, how can you standardize on us, because you can do all these things. And they were — they had said, hey, we are one of everything. So we’re not ready to standardize anything.
Past four years later and essentially, what they saw was that their development teams had flocked to MongoDB [indiscernible]. And so they saw MongoDB, popping up everywhere, for a whole bunch of use cases, both internal use cases on prem, as well as they’re starting to run, even workloads in the cloud. And so that’s when they came to us and said, we need to essentially, put our arms around this, have an enterprise agreement, because it’s clear that you’re becoming a de facto standard, let’s make you an official standard.
So it’s still very early days for that customer, we still have very low wallet share, but the opportunity is very large.
Kash Rangan
And it’s a consumption model. So if this bank is successful –
Dev Ittycheria
Some it’s a mix, some [indiscernible] and then there’s some cloud.
Kash Rangan
So your revenue should scale along with the deployment.
Dev Ittycheria
That’s another important thing, our unit of value is workload or application. We want to get more workloads on our platform as fast as possible. Sometimes that’s through acquisition of new customers. And that’s — and for existing customers as acquisition of new apps, that they’ve already built or plan to build.
Kash Rangan
Got it. Coming back to you, Michael. So 2020 second quarter was a tough quarter for many companies. And then, third quarter, you start to see the beginning of some kind of improvement. And then fourth quarter things were up and running. When you look at the MongoDB business model, due to maybe partly because of the fact that it’s Atlas — tilting towards Atlas in a pretty big way. Your improvement, your acceleration really did not happen in Q1 of 2021. And then after that, you’re off to the races, right?
Is there anything discern from that? Is there a lag between improvement in actual new business bookings? That’s a ServiceNow, or Workday, or Salesforce saw in that third quarter versus the first quarter? And then, you’re obviously every quarter, you showed back-to-back acceleration? Anything to take away from that?
Michael Gordon
Yes. Maybe say a couple of things that are — they are hopefully helpful. I go back to this framework that I offered up at the beginning of sort of the difference between new workloads, new logos, new workloads within existing logos, they tend to start off small, but they wind up having a bigger impact over the medium and long-term, as you sort of add on the layer cake of workloads or cohorts, or however you want to think about it. So that’s sort of the first thing. And so yes, as we continue to win those, you wind up seeing the benefit from those several quarters down the road.
And then, the second thing, which is worth calling out, which I know all of you as investors are not only good at math, but you understand the benefits of compounding. But that plays through in terms of our numbers as well. So if you think about last year, in Q3 of last year, we talked about how we had an exceptionally strong expansion of existing applications within that quarter. And not only did that benefit Q3, but that went a bit in Q1 and Q4, because Q4 not only had very strong growth in and of itself, but the starting ARR, if you will, that that growth rate was applied to was higher than it would have been otherwise, right? And so that’s sort of the compounding as it’s built this way positively.
We’ve had a number of questions from folks including during the day-to-day around our guide for the full year and sort of the implications of what our second half guide is and kind of the implied Q4 guide. And it’s really that same dynamic in addition having a difficult compare sort of working in reverse right, because we’re now looking here and we see the compounding where we’ve had slower growth over what we expect will be a couple of quarters such that when you start Q4 on November 1, 2022, even if the growth rate suddenly reverted to historic growth rates which is not our forecast but just illustratively. It would still be a lower quarter because you’ll be applying that to a starting ARR that will have been impacted by the slower growth that we’ve received in the preceding quarters.
Kash Rangan
Revenue would not be a leading indicator there are other things that could be leading indicator.
Michael Gordon
Right and so that some of the winning of the new workloads and some of the sort of flashing green lights that I was describing earlier.
Kash Rangan
What you saw in Q2, I mean you had like that good green lights.
Michael Gordon
Yes, absolutely.
Kash Rangan
But you’re just being cautious in third quarter, fourth quarter. I didn’t plan to ask this, but maybe it’s a good discussion, under what circumstances, could that guidance prove to be conservative and under what circumstances could that guidance not prove to be conservative, especially as people look at the Q4 in play like 15, 17, right?
Michael Gordon
Yes. So one of the things that we’ve tried to do pretty consistently is be fairly granular and transparent about our thinking and our framework for how we’re looking at things and there have been a couple of moments in time in particular. So I think of the March 2020 call, when the sort of first few days of the general global lockdown was happening with COVID, as well as what we did in the June call of this year of June of 2020, where there was sort of signs of some macroeconomic weakness but they hadn’t really shown up everywhere. And what we tried to do is we just sort of said, look we want to educate you as to how we as a management team are thinking about things.
We sort of went through a fair amount of detail and kind of laid out our framework for what we’re thinking about. And in the most recent call, we sort of marked that call to market, if you will kind of gave ourselves a scorecard as all of —
Kash Rangan
You like mark-to-market.
Michael Gordon
Forecasters who had to put a stake in the ground, right you got to sort of follow that own up to that have some accountability for how you did, what were the puts and takes. It’s interesting because in March of 2020, we turned out to be more wrong than right, right because part of what we saw was more risk on the horizon of deal execution and everything else. People sort of forget that because things worked really well and we executed very well and so it was sort of all of a positive and people sort of forget that our — some of our assumptions turned out to be wrong.
If you score forward to 2022, most of our call was correct in terms of what would happen and how we’d continue to see some of the initial weakness that we saw in self-serve spread across the business both by channel and by geography. Obviously, we didn’t get everything right, some put and takes and some things right, wrong and in particular, there’s more weakness in Europe and more weakness in the mid-market.
But as we’ve mapped out all those things, I think if you’re an investor, part of why we give that to you is, so you can say if you have a different macro view or a different lens, you can dial up or dial down the assumptions, because we’ve been fairly granular about giving you the piece parts about how we’re thinking and when you could say, okay, therefore, I think that that’s an aggressive assumption, or I think that’s a conservative assumption, that’s part of the reason why we do it is, we felt like our job is just to help give you as much information as you can to make your own point of view.
Kash Rangan
On that, I’m going to do a pulse check given the number of clients in the room. Questions, please to ask.
Question-and-Answer Session
Q – Unidentified Analyst
Hey guys, if we go back, we use your layer cake technology that I think is really illustrative. During COVID, when a lot of digital transformation technologies were kind of ramping and ripping and you guys used the layer cake example to explain why it wasn’t expanding as fast as other company layers. Why is it working in kind of reverse now, when you talk about the existing parts of business that, if your underlying customers are slowing, why are you feeling that but if you weren’t kind of, if it was a layer in the layer cake is then, then and it’s really about ramping new workloads? Is it about the workloads are not migrating and they’re not ramping new workloads?
Dev Ittycheria
No, I would — I think I’d take the slight issue with the once the layer that layers in, like once you land a workload like it’s not the next several quarters or the next several years of that aren’t immutable, right they will be affected by economic factors and underlying usage. I mean also maybe the simplest way to think about this is again, try to isolate an individual workload and understand like what the journey looks like. And if you think about, if I’m a new customer, I pick a workload, I pick an instance size, I launch my application, I have some activity, I start to see more activity, I need to increase my instance size and that happens in step functions as you move up. And if along that set of step functions it takes me longer, right? I stay longer at that same level, my growth rate will slow and that’s basically what’s happening in these applications, is the underlying rewrite intensity of the application is growing more slowly and that maps to therefore the underlying usage and like how much more I want to spend per application, and it’s all those all stacked on top of each other.
Kash Rangan
All right. Good question. Any other question? Please go ahead.
Unidentified Analyst
May be one just on business portfolio, as we think about the portfolio and growth that’s required — how do you think about the incremental like S&M or sales and marketing required to get those like lot of [indiscernible] kind of get that incremental [indiscernible] gets more automatic?
Michael Gordon
Yes. So the buying behavior of using like infrastructure software is quite different than say kind of business application software. A good example would be like Workday. So every organization is going to standardize on one HRIS system, it’d be silly if like finance use one version and marketing use another and sales use another no one does that, right? There is one top down decision, and then everyone use the same HRIS application. But then the trade-off in that business is that an account may have made a decision to go with Oracle, you really can’t go revisit that decision for at least three to five years, because it takes — that’s how long it will take before an organization starts reassessing that decision based on maybe the contract size or how much time, how long it takes to see they’re getting full value.
Whereas in our business, there’s no such thing as an Oracle shop or a MongoDB shop, or a Postgres shop, et cetera. I mean, our largest customers like that bank that was referred to by Kash. I mean they had one of everything or multiples of everything and so we have to win almost every new workload through sales and marketing more sales at that time once you’re in an account. Now, it does get easier and there’s some seminal things that happen in account that makes it much easier one of them is being declared a standard, right? So I joke with people that — early days in account we go in through the side door because the existing team can’t use existing tech stack to address this used case so they use. We prove our value then we kind of get endorsed as like hey, you should consider MongoDB at some point we become part of the mix, but we’re not actually declared standard.
Then the third step is now, we’re in the loading dock for every new application just may be three t-shirt sizes and two of those include MongoDB and one maybe doesn’t, right? And so now you’re part of the standard framework. And so, in this cloud world one of the seminal events for us is negotiating what’s called a cloud services agreement. It’s quite an onerous negotiation because as you can imagine, both the customer will haggle over like indemnity around breaches and we obviously don’t want to be responsible if someone did put any passwords or incorrect passwords or create some vulnerable end zone and they obviously want to make sure that we’re doing all the right things to secure their data.
But once you get through that, that by definition becomes they’re essentially given us a hunting license to go win new workloads and now it becomes much easier, but they’re not going to do that with every vendor they work with, because the negotiation is so onerous. So most customers first start with the hyperscale provider that they’re kind of working with and then they’ll go to the next couple of vendors that they think are going to be the most pervasive in their enterprise.
So by definition, you’re only having that conversation if you’ve proven that there’s a lots of interest in MongoDB and you can address a wide variety of used cases, that’s what our sales teams work on, which yields this negotiation with a CSA that ultimately then unlocks a ton of opportunity. And so that’s typically the buying behavior of — especially large customers. Smaller customers tend to standardize on one stack and so most of our customers are running either all of their business or big parts of the business on MongoDB and by definition, you’re the standard from day one.
And back to the comment about existing applications. That’s not really where it’s helpful or good idea for us to spend lots of sales cycles on growing an existing application that’ll either happen organically, or maybe there’s some customer success angle in terms of getting them to enable some of the incremental features or through other things. We really want the sales folks focus on winning new logos, or winning new applications within existing customers to sort of further drive the penetration to Dev’s point.
Kash Rangan
And that would actually compound that cyclicality of the rebound in a very nice way because you have gotten more and more customers that you have a few of them or even if each and every one of them grow their transaction volumes, slightly faster compounds to a good effect. Yes, please.
Unidentified Analyst
What do you think we are in terms of [Technical Difficulty].
Michael Gordon
Right. So I think we’re still in the very early days. I mean there’s tons of legacy applications running in large enterprises and so we’re in the very early days and yes, you also have to understand that people don’t get up one morning and say I want a re-platform right, there’s got to be some reason to do so. And it comes down to using one of three things. One, the performance of the application is degrading just because of by virtue of adding more data and more users and people say like it’s impacting user performance. Or two, you can’t add new features quickly enough because the data model is so brittle, that developers have to spend enormous amount of time re-factoring the data model to add any new features.
Or three, the cost structure that application is relatively ROI it’s providing, it’s just untenable so people want to migrate and so and larger enterprises could have anywhere from 5 to 15,000 applications. So not going to say re-platform everything so they’ll start picking on where they see the biggest returns in terms of — re-platform this app, whether this helps transform the business end user paying or cost that will drive their decision. And we’re still very early and so one of the reasons costs has only become a bigger issue, is because of this macro environment and people saying, I know I have to get off the [flexi] [ph] platform or let’s accelerate some of that. So that drove our release of Relational Migrator to help our customers start automating or helping our production team start helping customers automate the process to do so. But we’re still in the very early innings of that.
Unidentified Analyst
You mentioned that large financial service — customer chances are they have a new Microsoft product in there as well. How do you think about that, what’s your strategy to fend off [Technical Difficulty]?
Dev Ittycheria
Yes, thank you for the question. So one of the things it’s also important for investors to understand is that we have a very different licensing model. So a lot of the cloud, many of the cloud providers build these large data franchises by essentially taking open-source technology that was permissible based on the license taking the free version, adding extensions to run on the platform and offering as a service. I would argue actually open source as a service is the best way to monetize open source.
And so we have a very different licensing model, we originally started with AGPL, which is a more restrictive license than say the GPL or Apache License. And then we actually changed it to have even stronger license called SSPL. The net effect of that was that the cloud providers couldn’t take our free version and offer competing MongoDB as a service against us. What they had to do was then emulate our features and functions by building a clone service and Microsoft did this as well as Amazon but this was built on a relational back end. And essentially, there were enormous feature and performance trade-offs and we’ve actually benchmarked, we constantly benchmarked every new versions on our site and literally they have about 30% to 35% of the features that we do and the performance suffers greatly, because again relational backends are not designed for scale.
So essentially over the last — I remember this, I remember the time in January 2019, Amazon announced this competing DocumentDB service, and it kind of freaked people out, our stock took a beating and I made the point at the time with investors saying this is actually a huge validation for this market. And we knew that we could go ahead and compete against them but obviously, people don’t watch the space then they actually assumed oh, my God is MongoDB roadkill? And if you look at our growth, Atlas has only grown faster since then, right? Because one, it validates the market and our win rates against them as Michael said, we’re very, very high, same with DocumentDB. The deals that we worry about are not the deals that we’re competing on, is the deals are happening as virtue of their larger distribution channels and we’re just not party to. So we want that’s why we’ve been trying to increase our footprint, both organically and synthetically, to try and find more customers to go talk to.
What’s interesting is, we’ve seen a sea change in terms of the cloud providers, because what they have noticed is that as we win more workloads we actually drive more value to their cloud. In fact our Atlas business is significantly larger than both DocumentDB and the Cosmos DB API that Azure has. But we drive so much more business that there’s been a sea change in terms of their approach so much so that Amazon and now Microsoft incentivize their sales people to get quota credit and commissions for Atlas deals running on their cloud and customers can apply their commitments through Atlas purchases. So it incentives two ways.
Unidentified Analyst
So there is gravity.
Dev Ittycheria
Correct.
Kash Rangan
Greater than the API, you made a reference, financial reference, so I wasn’t sure if I completely got it.
Dev Ittycheria
So what we’re saying is that Microsoft has the Cosmos DB API, which is their emulated DocumentDB Service. We have pretty good information to suggest that our business is, our Atlas businesses meaningful larger…
Kash Rangan
That runs on the relational backend. Okay. Got it. With that, I think we’re 16 seconds, 15 seconds out. Thank you so much for your attention and your amazing collaboration making this nice live interactive environment. Thank you, Dev and Michael for participating.
Dev Ittycheria
Thank you for having us.
Michael Gordon
Thanks so much.
Kash Rangan
Next time we’ll find a bigger room. Sorry about that.
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