MongoDB, Inc. (NASDAQ:MDB) Barclays 2022 Global Technology, Media and Telecommunications Conference December 8, 2022 1:25 PM ET
Company Participants
Michael Gordon – Chief Operating Officer and Chief Financial Officer
Serge Tanjga – Senior Vice President of Finance
Conference Call Participants
Raimo Lenschow – Barclays
Raimo Lenschow
Hey, welcome to our next session. Really happy to have a team from MongoDB here.
Michael Gordon
Same here. Thank you very much.
Raimo Lenschow
We were joking it’s like our offices right across from each other in New York, that we traveled all the way. That’s what we do.
Michael Gordon
Exactly, great to be here.
Raimo Lenschow
Good to hear from you.
Michael Gordon
We are here for you. Yes, I know.
Raimo Lenschow
Yes, I was missing one trip before my stay there.
Michael Gordon
Well, thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions]
Raimo Lenschow
You have like, maybe let’s start with the kind of brief recap. So you had like a really good strong Q3 results. That was this week, couple of days ago.
Michael Gordon
You’ve had a busy week. We have too.
Raimo Lenschow
We, I got a lot of questions, but maybe just to kind of level the playing field here. Just kind of what were the highlights from your end?
Michael Gordon
Yes, so overall, Q3 was a good quarter really pleased with the results. For those who don’t know or need the quick recap, revenue growth of 47%, Atlas, which is 63% of the revenue in the quarter grew 61%. The new business environment continued to be strong for us, we did not see any meaningful delays in sales cycles or deal slippage or some of the things I know others have commented on. We had 500 net new customers added in our direct sales channel, which is a strong and healthy number for us. In terms of the sets the new business environment, which is the biggest factor in the medium and long term, in the short term, the near-term results are much more dictated by how does the existing set of Atlas workloads grow. And we saw a recovery and a nice rebound in the growth rates in Q3. That was terrific to see, it was particularly more pronounced in some of the placing and dicing some of the regions and channels that had seen a little bit slower growth in Q2, and/or more macro affected. So it’s nice to see that bounce back. It’s a very strong quarter for EA. We can talk about that more, I’m sure but really strong. So good to see the continued demand and incremental penetration into customers there. And then maybe the last thing, just sort of the headline level that I’d touch in touch on is, that revenue, strong revenue performance and really outperformance relative to our guide flow to the bottom line. And so roughly $20 million in non-GAAP operating income at a 6% operating margin. So really great to see the progress there. And so all-in-all, really quite pleased with quarter.
Raimo Lenschow
Yes. Okay. And then let’s kind of unpack that a little bit like the number one, while one of the kinds of strong ones was EA. Can you talk a little bit about like the factors there?
Michael Gordon
Yes, so if you think so EA, enterprise advanced, this is self-managed, MongoDB customers are buying annual licenses. And there’s so we don’t tend to sell a bunch of new customers on EA. They tend to be people who’ve been using it for maybe a little bit slower to public cloud adoption, but are expanding their MongoDB footprint yes, no, nothing to call out anyone in particular. But a little bit slower in their public cloud adoption, but expanding their MongoDB usage. So they continue to buy EA, we continue to see strong and healthy businesses there. This quarter was particularly strong 26% year-over-year growth on enterprise advanced. And the dynamic there is customers, the value prop continues to resonate. We’re increasingly seeing people look at enterprise advance as an on ramp to the public cloud. So if you take someone in a company or industry that isn’t as cloud forward, they know they will eventually get there. Right? A number of their software developers, their engineering team wants to start building towards that. And because you can run MongoDB in any environment, on-premises and the cloud and private cloud and hybrid environment, multi cloud. It’s a good on ramp to the public cloud. And so they in some ways, they look at that as sort of future proofing their businesses. It’s not quite the dichotomy, that it might seem just based on the usage, or the deployment model. The other thing that I call that that we benefited from in Q3 was in addition to strong EA overall, is we saw a little more contract activity on multiyear basis than we typically see for EA. We always see some, most of our contracts are one year in nature. But we saw some more multiyear EA contracts, which is particularly relevant given just rev rec under ASC 606 requires us to recon as the term license from that. And so that’s why we try and call it out. And that drives us sort of increased variability and reduce comparability, was trying to help give everyone enough breadcrumbs to sort of follow the bouncing ball.
Raimo Lenschow
Yes. And it’s funny, I’m asking the question, because like, you remember a couple of weeks ago, like everything that was said, was the negative for Mongo, and Mongo share price? Now we’re kind of in the, thankfully, we’re back out of that, like the one question I still got, it’s like, whoa, was just multiyear, like, how important was that multiyear for the EA performance?
Michael Gordon
Yes, we call it out. To help people understand, and particularly to understand the Q4 guide, so EA outperformed, period, even without regard to the multiyear, Atlas outperformed. And I sort of have been describing the multi years, kind of like the cherry on the top, or whatever. But, and the reason why it’s important, though, is historically people are used to seeing enterprise advance, grow seasonally, sequentially, sorry about that, grow sequentially from Q3 to Q4. And given how strong and how robust Q3 was, we don’t expect that to happen. And so we just wanted to explain to people why, and sort of put that in context, unless they sort of misunderstand or just think that we’re being conservative or something. But we want to really people understand the contours of business.
Raimo Lenschow
And so on that seasonality point on EA, like, if you think about it, like in the olden days, it’s like you had a pipeline of new customers. And then Q4, it all came together, and you had these big quarters. But then EA is not about new customers necessarily anymore. So do we have to rethink that EA it’s kind of Q4 seasonality and then how much of a kind of just renewal pool kind of play into that as well.
Michael Gordon
Yes. Do you want to comment?
Serge Tanjga
Yes. So first, I would say there was no renewable put forwards in Q3. So the performance was genuinely executing on the existing pipeline and the existing renewal base and excellent performance there plus the multiyear cherry on top. The seasonal dynamic in EA is that renewal base tends to be seasonally highest in Q4, and that hasn’t changed. And renewal base, because there’s not much new customer activity, sort of the best indicator or the ability to upsell. So all that kind of still remains, the only thing that we’re calling out is different because it was so exceptionally strong in Q3, we will not see that sort of sequential growth in revenue. But the overall dynamics are unchanged.
Raimo Lenschow
Okay, perfect. And then last question and then I am going to move on from EA is a customer in this environment, committing to multiyear seems to me like a very strong signal in terms of commitment, like, why is that happening? And how do you see that?
Michael Gordon
Yes, so I take it a couple different ways. Generally, yes, I agree with that. And to your point, it is customer driven, right. Like, we’re reacting to sort of customer desires or whatever. And so it’s customer driven, I think it speaks to the value proposition, it speaks to their confidence in MongoDB as a core platform, a platform to expand on. I mentioned, the sort of future proofing aspect and increasing looking at EA is an on ramp to the cloud. I think the last thing I’d say, and this is the middle a bit of a hypothesis. But I think it sort of helps, like, if you’re trying to connect the dots, how do you put it all together? Especially when other people are talking about getting challenges and getting people to sign commitments and everything else? I think there’s a scenario which the current environment, yes, maybe I’m reluctant to make commitments, but also for core technology and core technology that’s very sticky, and hard to replace. I probably want some price certainty. I kind of probably want to know, so I can lock in my budgets and kind of know what I’m looking forward in the future. And obviously, in our industry, there’s a past practice of people taking significant price increases and everything else. Exactly. And so I think for some, if you’re a procurement team or finance team, and you say, hey, there’s a core technology, we know, we’re going to use it like, hey, let’s go get that price certainty, right before in inflationary environment budgets are going to be tight. Let’s try and lock that in.
Raimo Lenschow
Yes. Okay. Perfect. Makes sense. And then, as you mentioned, some of the other players the question, I get a look like, what are you there, you could think about EA as like a potential kind of upgrade to Atlas top. Are we on that journey already? Or is it for you at the moment you just kind of someone wants to move to move, but like, you’re not going to kind of do anything?
Michael Gordon
Yes, we don’t see a ton of people currently moving, what we more likely would see is let’s imagine you’re historic EA customer, right? You don’t, you probably have many 1000s depending on the ledger or 10s of 1000s of applications internally, but you’re running most of them on prem, very few of them are in the cloud. And so you’re running MongoDB, you’re using Enterprise advance. What would be most common is you start to move into the cloud is you’d be putting new applications on there. And so you’d have existing EA as part of your state, but then you’d have some of your newer applications running on Atlas and you’d be sort of buying both. We see very limited movement today of people running EA into the public cloud. I think over time, we’ll see more of that, from our perspective, to your point, it’s very much customer driven, right? If I just think about the time that takes, we’ve already won that workload, right? I’d much rather have the salesperson spend their time getting new workloads within that account, rather than moving it over again, if we’re using Barclays as an example that we are really important to Barclays, obviously, we’d work with them, we do it, we spend the time, but I’d much rather have the salesperson spend time getting more workloads within Barclays. Even though in the long run, we’ll call it –
Raimo Lenschow
And for my fault. Like I remember, we like Serge and I have that kind of running joke. And it’s like our big workload is the customer data. And my regulator says like, you can’t go into the cloud, I am like why not.
Michael Gordon
Right, yes, and we see that, concern industries and —
Raimo Lenschow
And yes, and like let’s move over to Atlas a little bit. The Atlas saw better numbers as well than kind of you talked a little bit of and you call out the quarter before, like, consumption maybe wasn’t quite coming in. And it’s not people stepping down. It’s more people not upgrading to system like, what changed?
Michael Gordon
Do you want to comment?
Serge Tanjga
Yes, so let me just repeat what you said, because I think it’s important to make sure that we’re sort of level setting understanding. So Atlas, revenue is recognized as consumption. So it’s recognized in real time. And in any given a short period of time. It’s primarily driven by growth of the existing applications that are already on our platform. Because the new ones that come, they’re almost always new workloads, and they come in relatively small. So in any given quarter, the vast majority of the performance is influenced by applications you already had started the quarter. So in Q2, we saw a macro driven slowdown, we expected to see it and we saw it. And it was driven by slower growth in the underlying application and usage of underlying applications and therefore consumption of our platform slowed down still growing but slowdown. We’ve seen that get better in Q3; we did not expect that. And in particular, we had two flavors of outperformance versus our expectations. The first one is that areas that were particularly slow growing in Q2, namely mid-market globally and European enterprise, so a bit of a bounce back. But then the second thing that we saw was a more broad-based improvement that we believe this season. And so as we compare trends, I’d say as a young business, seasonality is hard to call. But if we look at the two Q3 is after COVID, meaning this one in the last one, we noticed similarities in patterns in terms of intra quarter performance. And we believe there’s an element of usage growth across our application portfolio as vacation season is over and people go back to work, but not just work, but just interacting with apps in their lives. And we saw better September and October than what we saw in August, and it was similar last year. It certainly is two data points. But our hypothesis is that seasonality it played to our advantage, but we take it for what it is and obviously are happy with the outperformance but as we think of forecasting the business in Q4 and beyond, we just keep in mind that we think this was a seasonal benefit.
Raimo Lenschow
Okay. And then the other thing that came up in conversations this quarter a lot was like, oh, it’s coin base, it’s like Instacart like, and that sort of stuff like, how much of a factor is that for you guys like that kind of technology, technology assets?
Serge Tanjga
Yes. So we’re very well diversified across the board. Some of those customers, we know they are exact customers, we get a lot of questions around. And in Q2, we called out what we call digital natives as a part of our mid-market segment. And just to give you a sense of mid-market is mid-teens of our revenue. And those digital native companies are a minority, but a significant minority of that segments that gives you sort of the size of the exposure, we did see that segment slowed down more than others in Q2, and we have seen a rebound more than others in Q3. And so our hypothesis is that those customers took a bit of a positive, the macro environment adjusted to figure out how they’re going to invest to drive their own growth. But there’s been a bit more investment there and industrials up in the consumption of our platform.
Raimo Lenschow
Okay. Because like the one question that kind of comes with and it’s like, it’s macro didn’t necessarily get better in Q3 versus Q2 , it kind of got a little bit worse, but your consumption trends got better and okay, I get seasonality, but it also looks like people were investing more.
Serge Tanjga
I think a certain bucket buckets, we’ve seen incremental investments.
Raimo Lenschow
Yes.
Michael Gordon
I think the other way and no, this is sort of hard to get out to, but I’ll give it a shot and make a little bit interesting. People sort of expect when we say macroeconomic that somehow there’s this sort of one-to-one coefficient between our underlying consumption and GDP or something like that. And it’s a sort of multivariable equation, right? Well, what we can see is we can see the underlying activity, right, the reads and writes in the database, right, that drive the consumption and the usage, and that’s a reflection of the end user activity and therefore that’s the value that our customers are getting, but we don’t have some 10-factor model where I can piece out all the different components and what the coefficients are for each of the variables to sort of like, directly map it exactly. He is working on it.
Serge Tanjga
Haven’t figured out yet.
Michael Gordon
But I just so people understand it’s not quite that one for one that people might ideally like or would be more easily — easy to intuit.
Raimo Lenschow
Okay. Then like, Michael, I need to thank you on the earnings night because you kind of kept me busy all night, with people asking like, okay, so you talked about consumptions in Q3 improving over Q2. And then we all kind of doing our own math in terms of like, well, how much dollar was added, and actually then didn’t correlate. So now I kind of like had to try to answer it all night long. So maybe just clarify for everyone.
Serge Tanjga
Let me give it a go, I have some practice over the last couple of weeks. He’s really confused. So if you don’t mind, I’ll phrase it in percentages, because that’s how we think about it, that dollar and percentage are the same thing. So the question that we got back from analysts and investors was, well, hold on, you’re telling us that assumption got better in Q3 versus Q2. And what I see is Atlas sequentially grew 14% in Q2 over Q1, and only 9%, Q3 over Q2, so it’s slow down. So what gives, here the explanation, most of that has to do with the 14, the sequential growth in Q2, and we talked to, about that in the context of our Q2 numbers, but I think it’s helpful refresher. So first to remember, just happens to be basic math, but it happens to be true. Q2 has three days more than Q1. And because we recognize revenue in real time, regardless of macro or any other environment, like we get three days extra, that’s like 300 plus basis points of growth. So that’s 14, it goes down to 10 in change. Okay. And so that’s the first part of your bridge. And we’ve called that up before. It was seasonal.
Raimo Lenschow
You talked about that, yes.
Serge Tanjga
Well, of course, that was six months ago, not for like six years. The second piece is, the revenue in any, sequential revenue in any given quarter is a function of consumption growth in the prior quarter, as well as in the existing quarter. So Q2 revenue in that was benefited from strong Q1 consumption, because we said in Q1, we were still seeing expansion along the lines of historical terms. So that means that starting ARR was quite strong, and much of their revenue benefit of ARR growth in the prior quarter actually materializes is revenue in the next quarter. So when you go from 14 to 10, and change after three days, then you have to take a meaningful chunk out of that, because of the historically strong — in line with history expansion that we saw in Q1. And so that’s how like, we haven’t quantified that. But that’s like how you actually get too closer to the real number of consumption expansion in Q2, whereas Q3 did not have that dividend. Because Q2 consumption was gross. So there was no benefit overflow, at least not to the same extent. And but the consumption in Q3 did rebound. And that’s what sets up the 9%. But also, just going back to your question in the guide, most of our raise for q4 is actually Atlas driven. Because that better than expected, starting ARR point actually helps our Q4 numbers. And that’s part of the reason why, although the beat was mostly EA, the raise is mostly Atlas.
Michael Gordon
One of the ways that I think about it, maybe this is too simplistic, but is when we’re talking about the growth trends, we’re talking about the trends in ARR. Right, and what you’re measuring is sort of the lagging, what’s happening in revenue, right, which is affected by the seasonality and all these other things. Fewer days, meaning –
Serge Tanjga
In less volatile environments to distinguish them is less important. But in this environment, it is important. And obviously, there’s hyper vigilant, some relatively short term, so we just want to be as explicit in as transparent as we can.
Raimo Lenschow
And then the last question on that subject, again, it’s more fundamental question is like, so consumption models are different than seat-based models. And I just had Mike Scarpelli, from Snow on here, his consumption was slightly different. And but we just we talked about that. And I wanted to ask the question, he was like, how do you even forecast this? Like what’s kind of what are you using?
Serge Tanjga
We are, we’re coming at it multiple different ways. We’re looking at a cohort behavior, we’re extrapolating near term trends. We’re looking for leading indicators, although we’re struggling to find many, and we’re still sort of looking at it kind of the traditional way through the sales productivity and sort of the growth of capacity and inability. And we end up triangulate. And the beauty of sort of Atlas is that it really reduces the friction of acquiring new workloads. And that is additive to our growth rate in the long run. But it does increase this incremental sort of variability in the near term and we’re getting better at it because the base of existing applications growing sort of our portfolio is more diversified. But macro is a factor. It has been particularly factor over the last couple of quarters.
Michael Gordon
Yes, I would just add, it definitely helps to have a larger portfolio, right? Because some of the stuff that might happen individually kind of balances out for sure. Two, it is more challenging in a more macro uncertain and kind of fluid environment. And so I think we have to take that into account as well.
Raimo Lenschow
Okay. And then the shifting gears a little bit. Atlas as like a database platform. Like the one thing that I walked away with from your customer conference, I think, it was in early June was the conversation I had with SIs and customers about, like, what Atlas is used for is like, oh, shit, that’s much bigger than I thought or like proper, sorry. But if that sounds like a fair observation, like in terms of what do you see in terms of like, Atlas adoption, like, what are people using it for?
Serge Tanjga
Yes, I would, it’s 100% true. And I think that I would divide sort of the narrative in kind of two pieces. One was backward looking. So we’ve done a tremendous amount of investment, to take an interesting, novel, database idea and turn it into mission critical database, which the last major step was sort of multi document asset which we introduced in 2018. And so and then from there on out, we further expand the use cases and continue working on it and went from a database to a developer data platform, we do these incremental use cases that have two things in common. They are focused on helping the developer and they help solve data problems. But that’s what search is, that’s what a sink or edge is. That’s what in analytics, at least, the way that we do analytics is that’s what time series is, obviously. And what we’re seeing is that we are not only mission critical at the core, but sort of expanding in terms of what we can address. And that’s where the incremental R&D dollars continue growing. The thing that’s happening and is lagging is customer awareness of that, because we still find that customers have outdated understandings of what we can do. Developers are opinionated, if you try this in 2012, or 2014, you’re going to have a different view about where we are versus today, when almost a billion dollars of incremental cumulative R&D was put into the product. But that’s an opportunity, it’s an opportunity, it’s updated understanding to bring people along for the ride, and that will ultimately result in winning more new workloads.
Michael Gordon
And I think that sort of hypothetical, like Barclays example that we were walking through, actually is playing out in real life, right, where you are seeing more enterprise adoption, people who have Enterprise advance, but are building new applications, new revenue, generating applications, customer facing applications, mission critical applications, but they’re either modernizing existing infrastructure and legacy applications, or they’re entering into a new line of business or saying, oh, here’s some new capability, mobile whatever it is, and sort of saying, let’s start with that clean and fresh, right, without any of the baggage of the legacy systems and adopting Atlas, as the best methods to do that.
Raimo Lenschow
And as part of that, like, talk a little bit about your hyper scalar relationships, like Forever, our friends at ABS, well, in the early years, Cateura tried to hunt you down with kind of all sorts of new products. I think that’s changed like, so what are you seeing in terms of like, hyper scalars and your work with them?
Michael Gordon
Yes. So I think there will always be a competitive dynamic there, across all the players. But I think what we’ve seen over time is sort of the increasing part of the partnering or cooperation piece was the top and sort of more outweigh the individual relationships with the three are a little bit different, because they’re coming from sort of different positions. Google was pretty early on and part to sort of differentiate themselves from everyone else sort of intentionally picked the best of breed approach. Amazon and Microsoft came up with more. Let’s see if we can try and kind of capture more, sell more proprietary products, create imitation products, recognizing the popularity of MongoDB. I think over time, as we’ve had incredible success, including against their imitation products, and our win rates are exceptionally high. I think they’ve understood the value of partnering with us, understand the sort of, if you’re trying to solve for what solves a customer’s needs best, embracing that best of breed solution does work out well. And then they’ve come to appreciate it now have some years of data around the incremental stickiness and sort of multiplier effect, that MongoDB Atlas brings to their cloud environment, right? So they’re competing and we’re obviously in a very big market. But the infrastructure, storage and compute markets even bigger, and as they compete with each other we want it being a helpful partner. And then kind of differentiator among them. So it’s been effective that, like, there always be components of competition. But we’ve been really pleased, I think, getting to the point where we’ve got integrations with all three consoles where their sellers are compensated, and selling MongoDB, where they use MongoDB Atlas burns down their enterprise discount agreements is all really valuable and reduces a lot of that friction, and allows our kind of best-in-class product to stand out.
Raimo Lenschow
Okay, perfect. And then a last couple of minutes. Let’s talk about the profit performance this quarter and your comments for going forward a little bit like the, so from the outside, I would say like you kind of plan for a slightly lower revenue run rate, you got surprised the costs were kind of managed to your old guidance, and now you have like outperformance because top line even better, it’s like, is that simple.
Michael Gordon
I think that’s an important driver, I wouldn’t want to suggest that we haven’t also applied incremental scrutiny on expenses and tried to update our frameworks for the current market realities. I think we’ve talked about this in a bunch of different settings and formats. I know, this is not new to you, but like, we’ve always been very rigorous and disciplined about how we look at our costs, how we assess channel investments, unit economics, ROI that we’re getting on different investments, whether it’s sales, marketing, R&D, or whatever it might be. And so we’ve continued to do that. I think it would be foolish not to acknowledge that the cost of capital has gone up, right. And so definitionally, that means the bar gets higher. And so if your projects clear that bar, right as you’re thinking about it, now, we take a long-term view. So that doesn’t mean that you have to bar some cost of capital to today but you, I think you could recognize and look out and say like, over time, the cost of capital will be higher. So we continue to run the business for the long term, we continue to invest. We definitely had strong outperformance on the top line in Q3 Atlas, EA, and then — in the multiyear as well, more of that float to the bottom line, to your point, right. So I think that’s sort of a reflection around some of the discipline that we’re talking about, but also, as we’re looking out over the balance of Q4, and as we’re starting and working through our fiscal ‘24 planning, the challenging and the scrutiny of are we going to get the value out of this? We said we wanted to do these heads, are we still going to get the value of these heads? Or other more important heads? Do we reprioritize? And not just looking at everything on an incremental basis. But trying to really assess things which we’ve always done. I think the other thing in an environment like this separate from the cost of capital, just to try and give people a more real-life sense of what does this mean right away from the spreadsheets and the models that you build. We try and returning all sorts of different dials and levers all the time and testing and iterating on different things which unbalanced of net been highly accretive. But not every single thing works out. Right? And so I think in a lower cost of capital environment, I think the inclination is to say, this project should work. It’s not working. Let’s let it run another couple quarters, right. And I think in a higher cost of capital environment, you sit here and say, you know what, like, I think we just have to accept it. Like, we didn’t figure that one out, like that one isn’t working the way that we should, right. And we need to stop it or deprioritize it, right. And so I think that just because maybe a little bit of flavor that’s useful for some of the thought process.
Raimo Lenschow
And then the last question for me here, and then I need to let you go, like, so how do you think about the future? So now we know we are in positive territory like as you said, cost of capital is higher, like, how do you think about the path going forward now? And I don’t want guidance, but like it’s –
Michael Gordon
Yes, totally, no. We do think about things sort of long term. But if you take the long term in the rearview mirror for a second, right, since the IPO was delivered more than 35 percentage points of margin improvement this past year, was 100 basis points. We were pleased with that progress this year. And so obviously, we will give guidance in the fiscal ‘24 call. But that sort of puts things in context for how we feel about how we’ve been doing.
Raimo Lenschow
Yes. Okay. Perfect. And last question. Last 30 seconds usage of cash. Where we spending there –
Michael Gordon
From –
Raimo Lenschow
Like the cash that you have?
Michael Gordon
Yes. So mostly think of it as opportunistic M&A, and other things like that. But we’ve mostly, we’re not a big cash burner. We’re not a capital-intensive business. And so I think it just helps put us in a good position to be opportunistic.
Raimo Lenschow
How do you think about the dilution effects from stock options, et cetera. You kind of working on that to kind of use cash from that.
Michael Gordon
Yes, we think about that, we talked about that. It’s part of the annual planning process with the board and the comp committee to think about targets for anti-dilution, you think about employee grants and things like that. So, obviously, that’s got heightened focus from everyone and so we’re aware of that.
Raimo Lenschow
Good, okay, perfect. Hey, thank you. Thanks for joining me here today.
Michael Gordon
Yes, good to see.
Raimo Lenschow
Next time we do in New York.
Michael Gordon
Yes, exactly.
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