MongoDB (MDB) beats and raises

Investment Analysis Clubs Saul’s Investing Discussions
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Old timers on this board will recall that MongoDB used to be in Saul’s portfolio. The company continues to knock it out of the park, as evidenced by the earnings they just released.

Latest quarter results

  • Revenue = $227M (+50% YoY) vs $204M consensus (11% beat)
  • Next quarter revenue guidance = $241M vs $227M consensus (6% raise)
  • Atlas revenue $132M (+84% YoY)
  • Gross margin = 70%

Compare this to last quarter when they grew revenue 44% YoY with Atlas growing 83%, and you see accelerating revenue growth here.

The market seems to like this result, with the stock now up 17% after hours.

-Ron
Long MDB since early 2018

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Agreed Ron.

Whilst I have top sliced this above the $500 mark previously, I am comfortable holding this. There seems to be no let up in the Atlas take up and now Atlas revenues has moved passed 50% of total revenues this will continue to pull the overall growth rate upwards. Customer count continues to advance and on a Non-GAAP basis there is real progress towards profitability, (GM ticked up as well I see). These guys continue to exhibit strong premium pricing power which has to be the sign of both demand and a secure moat surrounding their solution.

I’m happy to hold this 50%+ grower with accelerating revenue growth and emerging profitability.

Ant

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Hi Ant,

Atlas revenue has moved past 50% of total revenues…

Yes, Mongo Atlas is the #1 NoSQL Database as a Service product sold by subscription, and it’s delivering $500M of ARR (annually recurring revenues). Atlas now represents 58% of MongoDB’s total revenue.

Customer count continues to advance and on a Non-GAAP basis there is real progress towards profitability.

Correct, they added 2,000 new customers this quarter, and now have 31,000 total customers, including Verizon, JNJ, and the Mayo Clinic. This is 10x the number of customers they had when they IPO’ed only 4 years ago in Oct. 2017. Incredible.

On today’s conference call, they said “We had another quarter with our net AR expansion rate (DBNER)
above 120%. We ended the quarter with 1,201 customers with at least $100,000 in ARR and annualized MRR, which is up from 898 in the year ago period.”

They are already close to being profitable on a non-GAAP basis, but, like most of our SaaS companies, they are choosing to spend money on marketing, sales and R&D to capture more of the market. And why shouldn’t they? The NoSQL database market is estimated to be about $5B today (so MDB has about 20% of it), but is expected to grow to $22B by 2026. If they continued to capture the same 20%, their 2026 revenues should be over $4B. So it’s still early days for this technology.

Here are some other notes from today’s conference call.

Dev Ittycheria, CEO
"Third, the performance and scale expectations of modern applications continue to grow. MongoDB’s distributed architecture supports unlimited horizontal scaling, allowing organizations to linearly scale costs as applications grow and to easily address data sovereignty regulations or to ensure responsive and predictable performance, whether users are local or across the world. Today, we have customers who have workloads doing over 1 million transactions per second with data sizes of hundreds of terabytes.

Legacy platform struggled to address these demanding performance and scale requirements.
…
And fifth, customers want choice on where and how they deploy their applications. Developers can build and run MongoDB applications in data center, in any cloud and at the edge.

"What I would say is that the cloud partners have kind of realized that when the workload and Atlas workloads moving on the cloud, they’re the beneficiary of multiples of the revenue that spent with us on their platform between the consumption of the underlying storage and compute as well as all the other ancillary services that that customer may use. And so it’s truly – it sounds like a cliche, but it’s truly a win-win relationship. So we’ve seen our partners. And obviously, last week, we had some great relationships with senior level people at AWS because the relationship is really working, and we’re seeing a lot of – we’re doing a lot of business together, and we’re becoming a very, very meaningful partner for them. "

-Ron

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A few thoughts on MDB:

Bear mentioned Atlas revenue is eating into the non-cloud revenue. I don’t think that’s the case. Non-cloud revenue has been growing surprisingly steady at 20% per year! Non-cloud revenue keeps growing. Non-cloud revenue QoQ growth is volatile and it only decreased 2 quarters out of past 12 quarters. Even though Atlas revenue is growing at around 88% per year, after 3 more years, Atlas will be just 85% of total revenue because non-cloud revenue will continue to increase. There’re use cases for both but cloud is clearly in a secular growth trend. If Cloud revenue is 100% of MDB revenue, I am all for it since there’s more money to be made in the Cloud but it’s not going to happen anytime soon.
The only minus is the seasonality of the business so the revenue and customer QoQ growth rate go up and down. This seasonality distorts the whole picture and some people can’t see the trend.

My analysis:
-QoQ: 14.2% is the fastest since early 2019. Clear re-acceleration
Medium term expectation:
-20% per year growth in non-cloud revenue
-80% per year growth in Atlas cloud revenue
Overall revenue growth: 60% per year, slowly accelerates to 70% per year.
-Atlas revenue is currently 58% of total revenue. It was just 22% 3 years ago. Because Atlas Cloud revenue is growing faster than non-cloud, Atlas revenue will make up around 70% in 1 year, 75% in 2 year and 80% in 2 year. It’s unlikely to reach 100%.

MDB is a type of business where it can grow at high speed for long time because of the growth driver is Cloud. As a side note, I can see the similar result with Confluent.

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I’ve listened to the call but don’t have the transcript or slides yet but one additional point was made around how much they pulled in by way of early renewals for multi year Atlas deals. Because Atlas contracts are recognised on a consumption basis, it didn’t affect revenues this quarter but apparently had a meaningful impact on Deferred Revenues/RPOs. When I get the number I will share but that sounded positive, (although by their own admission they don’t consider deferred revenues as particularly instructive). Apparently this was achieved due to customer demand where customers want to optimise their spend in advance as they see usage increase, rather than any special terms or perverse sales incentives at play.

Average revenue per direct sales customer was up. Self service customers when they migrate to direct relationships tend to increase usage and spend. Expand impacts revenue more than land as Atlas customers don’t use high volumes right away.

On a cautionary note, they are expecting 2022 to return to pre-pandemic growth and sales motion levels. We will see if that becomes a reality or whether they are just trying to manage expectations.

Ant

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Since towards the end of last year I have read commentary from Peter Offringa which give me the impression that he is bullish on MDB. He recently passed further comments in a Twitter Space discussion hosted by Bear last week. I respect Peter for his fantastic technical knowledge and as a great investor. Peter mentioned that the MDB platform extends the amount of use cases; and that CTOs that are deciding which Tech to use will be motivated to use the Mongo DB as it can uniquely be used for different workloads, thereby allowing companies to consolidate spend. In the 3Q earnings call the CEO conveyed the same message – emphasizing that companies desire a single Tech usable for different workloads.

Peter mentioned that in he sees MDB having momentum on the product side; and that Atlas is now greater than 50% of the total revenue and is still accelerating in Hypergrowth mode.

In Q3 we saw YoY revenue growth of 50% - (which is the highest since I started tracking the company back in Q1 2021 and a clear re-acceleration); QoQ growth of 14.2%.

The Company gave a high-end guide of 242M for Q4. Since Q1,2021, the Company have beaten their high-end guidance by an average of about 8.5% - so being conservative, assuming that they beat their latest high-end guidance by 7%, this would mean a revenue of 259M in Q4 which would be 51.5% YoY growth (further acceleration from 50% in Q3) and 14.1% QoQ (which is a run rate of nearly 70%).

Gross margins have been consistently around 72%.

Atlas revenue grew 84% YoY in Q3, and QoQ growth over the past 4 quarters has been
18,2% (Q4, 2021) → 10,5% (Q1,2022) → 20,1% (Q2,2022) → 18,3% (Q3, 2022)
So, Atlas is still accelerating in Hypergrowth mode. The Company also mentioned in the Q3 call that the NRR is above 120%.

However, if we look at the Atlas customer numbers, we can see that the Altas Customer Numbers growth is decelerating:

Altas Customer Numbers

	Q1	Q2	Q3	Q4
2021	16 800	18 800	21 100	23 300
2022	25 300	27 500	29 500

YoY

		Q1	Q2	Q3	Q4
2021		 	 	48,6%	51,3%
2022		50,6%	46,3%	39,8%

QoQ

	Q1	Q2	Q3	Q4
2021	9,1%	11,9%	12,2%	10,4%
2022	8,6%	8,7%	7,3%	-

@Anthonyms, you mention that you are comfortable to hold MDB and that “There seems to be no let up in the Atlas take up and now Atlas revenues has moved passed 50% of total revenues this will continue to pull the overall growth rate upwards. Customer count continues to advance” - but there appears to be a slow down in growth of Atlas customers. If the bullish thesis is based on Atlas take up and this pulling the overall growth rate upwards, then a deceleration in the growth of Atlas customers must be a red flag?

Finally, Free cash flow has been lumpy over the past 11 quarters. In Q3 FCF was negative free cash flow of $9.2 million, compared to negative free cash flow of $14.9 million in the year-ago period. Comments were made in the Earnings call that they had far less expenses due to the pandemic - they had expected 20-25 Million in expenses, but that it only amounted to 9-12 million; but that they see this as a one-time benefit and expect expenses to return to pre-COVID levels in fiscal year '23. I fear that this may mean that the company may not show movement towards profitability over the next few quarters.

In summary I see MDB having momentum on the product side and this driving revenue going forward; I also see the clear reacceleration in revenue, and the strong guidance (taking account of the Company’s history of beat); however I have reservations about the deceleration in the growth of Atlas customer numbers and the company is not showing a clear movement towards profitability.

Curious to know others’ thoughts on MDB?

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Hi MoneySpin,

Thanks for your well-written summary on MongoDB.

Enterprise Customers vs Total Customers
As you wrote, Atlas has been growing revenues 84% YoY, and about 19% QoQ if you average the last 2 quarters. The fact that QoQ revenue growth has not declined despite the percentage decline QoQ in net new customers tells me that the larger customers are contributing more to MongoDB’s 120%+ DBNER (Dollar Based Net Expansion Rate) than the smaller ones.

A typical enterprise customer may start out with one department trying out Atlas, liking it, and telling another department. They may eventually have 15 different departments and projects using Atlas, and their spend could easily double or triple in the first 2 years, then grow by around 20% after that just because of the growth of their data. Such an enterprise would only count as 1 customer, but their spend is equivalent to 15 smaller customers.

Here’s what the CFO said on the conference call.
"We ended the quarter with 1,201 customers with at least $100,000 in ARR and annualized MRR, which is up from 898 in the year-ago period. The continued strong growth in customers with $100,000 or more in ARR is an indication of the success of our land and expand go-to-market strategy and the fact that we are increasingly becoming a strategic partner for our customers.

Marketing and R&D Spend
Suppose you were a CMO at MongoDB. Your total database market opportunity is estimated at $93B in 2023. Your current revenue is a little under $1B. So you’re the number one NoSQL database provider in the world, and yet have captured only 1% of the TAM. Very early days, right? You know that data is growing exponentially at both Fortune 1000 and mid-market companies, and that once the data size starts to exceed 50 TB, legacy databases like Oracle and SQL Server aren’t cutting it any more because a) they cannot be scaled horizontally and b) their developers want to represent data as flexible JSON documents so that they can add fields on the fly rather have a rigid, set number of fields that they have to define in advance.

Knowing this, wouldn’t you want to plow back as many of your gross profit dollars into marketing and R&D related expenses? So it doesn’t bother me that that’s what they’re doing to capture a larger piece of a $93B market.

-Ron

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As ant and rdutt mention, the expansion of data usage of existing customers is key to their growth. This could be a newer company like Coinbase that may grow fast with an associated growth in data needs (lots of new transaction volume) or a large company like Verizon that has a lot of existing data usage that could be migrated to MongoDB over time.

The Q3 earnings call is full of comments on the expanding data needs of existing customers.

Dev Ittycheria – President and Chief Executive Officer
A key driver of our results is the healthy expansion of our customers as many of them are meaningfully increasing their adoption of MongoDB. As you’ll hear from Michael, some of our largest customers made increased multiyear commitments to MongoDB in Q3.

Coinbase, which is dedicated to increasing economic freedom in the world by building a more accessible, transparent, and equitable financial system, is the trusted choice of more than 73 million individuals, businesses, and institutions to interact with the crypto economy.
The company is moving more workloads to MongoDB Atlas so it can build new products and services quickly and meet the scale and availability requirements of the unprecedented growth in the cryptocurrency markets.

Verizon, is working with MongoDB to bring data closer to the edge as part of its multi-access edge computing and 5G data architecture. This can enable the next generation of low latency applications such as machine learning, intelligent edge, robotics, AR/VR, autonomous vehicle, telemedicine, and more.

Telecom Italia Mobile, or Tim, the communications industry leader in Italy and Brazil develops fixed, mobile, and cloud infrastructure, data centers, service offerings, and products for communications and entertainment. The company at the forefront of digital technologies, TIM selected MongoDB Atlas for fly together, its core digital service delivery platform to accelerate the transition to Google Cloud and enable flexible delivery of digital services through a microservices architecture.

Michael Gordon – Chief Operating Officer and Chief Financial Officer (responses to analyst questions)
In any given quarter, the sequential growth of Atlas is driven primarily by the expansion of the existing applications on our platform.

Within Atlas workloads, that new business doesn’t tend to have as big an impact immediately, whereas under Enterprise Advanced, you’ve got the term license component recognized under 606. And then as it relates to expansion, we’ve seen very consistent like good, strong cohort behavior across the expansion.

Dev Ittycheria – President and Chief Executive Officer (responses to analyst questions)
The bulk of our growth of Atlas is net new workloads.

On Coinbase:
And as you can imagine, in their market, they have a lot of periods where they have some intense trading days.
And then – so they need to scale up capacity very, very quickly to deal with those surges in trading volume and so on and so forth. So, they basically realize the only platform out there that could really address their need was MongoDB.

We have a lot of EA customers who are just expanding their usage of MongoDB in the enterprise

The revenue on Atlas is really all consumption-based. And so, what this is reflecting is the increasing strategic or mission-critical nature of Atlas in those accounts. And so those folks are looking at their run rate. They’re seeing their run rate increase. And while they may get whatever benefits are of the initial commercial deal that they’ve struck given that they’re at meaningfully higher run rates, they want to make sure that they’re getting sort of the best commercial terms out of the relationship and as a result, are entering into committed paying advance contracts for larger amounts to try and make sure they’re optimizing their spend levels with us.

But I also pay attention to the signals of start-ups who are using MongoDB. Because to me, when start-ups are betting on MongoDB, that’s a great sign for our future. Because the question I’d ask you is, how many start-ups today are using Oracle? And I can’t think of many.
So, yes, as we talked about in many of the quarterly calls that we’re trying to grow our sales capacity as fast as operationally possible. Q3 was another great quarter for hiring. And it’s basically – we’re running the same playbook.

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