Mongo and Elastic, some clarification

[SaulR80683]

Let’s look at revenue growth rates from most recent to oldest quarters:

Elastic 62.59% 69.95% 71.65% 79.00%

Mongo 85.37% 70.33% 56.64% 61.49%

The bolding is mine. Unfortunately we are used to reading from left to right so Duma’s presentation above, has caused some confusion. The point he was trying to is that Elastic’s rate of growth has been slowing and Mongo’s has been rising.

Let me give you Elastic’s five most recent quarters, in order, starting from April 2018, and ending with April 2019. I’ll round them to the nearest whole percent for clarity. Here they are:

82%, 79%, 72%, 70%, 63%

They are clearly descending, which is normal with increased size, and not alarming in itself, although the fall from April 2018 to 2019 of 19 points from 82% to 63% is probably more than we’d want to see. Let me be clear. I feel that they are still growing at a VERY rapid rate. The share price will inevitably rise. That’s not my problem. It just has too many issues for me, and I look for a clearer picture.

Now let’s look at Mongo’s five most recent quarters, in order, starting from April 2018 and ending with April 2019. I’ll also round them also to the nearest whole percent for clarity. There is a complication as the first four quarters were given in ASC605 accounting standard (starting with Apr 2018 and ending with Jan 2019):

49%, 61%, 57%, 85%

And then they switched over to ASC606. We only have Jan (the last of the above four quarters) and April 2019 under the new standard. Under the new standard the 85% for the Jan quarter became 71% (still WAY up from the 57% growth the quarter before sequentially). Then the April quarter was 78%. So for the five quarters we have:

49%, 61%, 57%, 85%/71%, 78%

The rate of growth is clearly accelerating, which is evident no matter how you look at it, even though the change in accounting standards confuses it a bit. This is not normal with increased size, and is undoubtedly due to the increase in revenue from Atlas which is becoming a larger and larger part of their revenue.

We saw that year-over-year, from April 2018 to April 2019, Elastic’s growth rate fell 19 points from 82% to 63%.

We now see that year-over-year, from the same April 2018 to April 2019, Mongo’s growth rate rose 29 points from 49% to 78%.

There may have been some effect either up or down from the change in accounting standards, but the direction is crystal-clear. (For disclosure, I have a large position in Mongo and none in Elastic.)

I hope that that helps

Saul

[Retirementdough]

Saul,

I have recently taken a position in ESTC again. A couple of things on this topic from recent earnings call that may help explain what looks to be a revenue deceleration but I think might not be as bad as you are thinking.

Two things I think maybe masking some of the growth. First one is currency exchange rate issue. I tried to quickly find MDB’s international growth rate but could not find it. I did see where MDB did get more their foreign currency in British Pounds and some other currency, some of ESTC is China. I did not do a deep dive to see where ESTC versus MDB foreign currency is coming from, it may be no difference, if I look harder. However ESTC referenced “constant currency basis” a few times in earnings call. I looked back at ESTC last earnings call, that phrase was never used.

“Constant currency” would change that 63% revenue growth number to 68%.

The other may be due to a revised pricing model that ESTC did for their SAS product. I have yet to do a deep dive on it, but from the call it seems that the SAS product is cheaper than the other product and probably has different accounting method (my assumption from following other companies). That change has altered the comparison of previous quarters. Additionally the SAS product has been growing at a faster rate, so it would amplify that issue.

Tyler Radke

Great. And then maybe a follow-up. As we think about the guidance for next year, maybe just help us understand your expectation for the SaaS revenue business. I know you made some changes with the one hot architecture, which I think offered more favorable pricings, customer based on their memory usage. But just help us understand the context of that as we think about the growth in that line for next year.

Janesh Moorjani

Hey, so this is Janesh. Happy to do that. Overall, we remain very bullish about the SaaS opportunity that we see ahead of us. You will see that for the past few quarters our SaaS business has continued to grow faster than the self managed business. Broadly, I would say we would expect that trend to continue in the future. We don’t do anything that tries to influence customer behavior one way or another. We are relatively agnostic when it comes to customer preference in that regard. And so we will continue to serve the customer in the best way that makes sense for them, but we do expect that that business will grow a little bit faster than what we’ve seen before. The other piece, I will just take the opportunity here to point out is that we made the architecture changes that you talked about around three quarters ago. And in conjunction with that, we had launched our revised pricing model, and so we’ve still got one quarter of that pricing headwind to go before we lap that at the start of Q2 of this fiscal.

So based on that statement with ESTC 82%, 79%, --price change-- 72%, 70%, 68% (constant currency measure). If you kinda put those back into the equation, now all of sudden ESTC growth does not seem to be slowing so much. From the sounds of it, growth may even go back up after they get past the revised pricing comparisons.

Again this was pretty quick and dirty on my part. If you find something different please correct. I just read through the latest ESTC earnings report and felt maybe it was not as bad as it looked in your example.

[brittlerock]

Saul,
I look at products to a greater extent than you do. As you know I was in IT for 30 years and it was my responsibility to look at and evaluate products in far greater depth and detail than I do now. Additionally, I’ve been retired for nine years now which is a long time in IT, especially the last nine years, a lot has changed and my skills and knowledge have grown somewhat stale.

But given that, Elastic’s product offerings are very complicated. It’s not easy to understand what they do or more accurately what they do so much better than other products. Obviously, they have good to great products, they are growing a good pace, but clearly a lot of purchasing decisions are made by non-IT executives. If they don’t hear a compelling story, they are prone to be skeptical. I’m willing to wager that this part of my past experience has not changed greatly.

Combine that with the “open source” business model and it was enough for me to opt out of this investment. I sold my small position this morning. I could be wrong, but in my estimation, open source and increasing penetration in China is not a great plan. If there is any group that might find financial loopholes in the open source offerings it will be the Chinese. I don’t say this as a pejorative, it’s is a cultural thing.

I could change my mind and get back in later, but for the time being anyway I put the money in Zoom. My confidence in Zoom is not particularly high, but I’m more comfortable with it than with Elastic. I might buy back into Elastic in the future, but for now, I’m on the sidelines.

[SaulR80683]

Brittlerock, I agree with your reasoning…
Saul

[seanrapley]

hi all,on this:

Mongo 85.37% 70.33% 56.64% 61.49%

I really have to raise my concern about these quarterly, yoy comparisons. Growth on Mongo DB is quite lumpy, and you can’t just look at quarterly yoy growth in isolation. The Quarterly yoy results will continue to look great until Q4 2019.

Then it is inevitable that Q4 2019 will show a sharp quarterly yoy slowdown - it has to. Q4 2018 was a blow out quarter, with atlas revenue doubling in one quarter! Q4 2019 will be lucky to be 50% above Q4 2018 revenue, then subsequently, Q1 2019, Q2 2019, Q3 2019 will face the same headwinds.

Being a Mongo DB shareholder, I am pleased with the recent run. But I believe the rally has gotten ahead of itself.

Will everyone sell down when Q4 2019 results come out and show a quarterly yoy slowdown?

[12x]

Will everyone sell down when Q4 2019 results come out and show a quarterly yoy slowdown?

Personally, I see the tougher comps the second half of the year. However the timing of when/if the market doesn’t like it is hard to predict. Could be next quarter they forecast weaker growth, causing the selloff. Maybe they don’t. Maybe the market recognizes this already. Maybe not. Maybe Q4 they do have that weak YOY comparison but forecast higher.

Too many unknowns as to what could happen. I’m holding until the thesis is broken. Not before.

[IRdoc]

Will everyone sell down when Q4 2019 results come out and show a quarterly yoy slowdown?

I would look at a longer trend to see if it’s just an artifact of the quarterly/yearly comparison system to which we’ve grown accustomed or if it is an actual slow down. Perhaps the stock will take a hit at next earnings, or after that, but a 15% drop after having grown 30% is not a big deal.

One of the most important things I’ve learned is to act on results, not theories. Management will exaggerate strength or downplay weakness or sandbag guidance or maybe just tell it as it is. I can’t tell.

Selling now because the business is doing too well (which is what one would be doing by selling based on future comparisons) doesn’t make too much sense to me. When I see actual weakness or underperformance in the business is when I think about selling. It might cost me a few percentage points but selling too early can also be costly unless you have something better to buy.