MongoDB Q2 23

Investment Analysis Clubs Saul’s Investing Discussions
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It wasn’t a great quarter for MDB unfortunately, despite beating estimates.

That large S&M spend doesn’t appear to be gaining them much, the recent reaccelerating subscription revenue growth has reversed, operating margins have reversed their “getting better” course, and stock-based comp is up as a percent of revenue.

Revenue growth was reasonable at +52%, but slowing again from the brief period of reaccelerating.

They’re guiding to $1.206B revenue for the full year, and $303.6m for the next quarter, which implies (at the top end) Q4 of $313m. So flat Q2->Q3 revenue, and Q4 is +17% yoy.

Customer adds were about 1800, which is the lowest sequential for the last 2 years. It’s not by much, but the amount of Sales and Marketing spend has doubled over that 2 year period, so it really seems like the go-to-market motion is not gaining them much.

For example, last quarter they spent $150m on Sales and Marketing, and this quarter added $40m in annualised gross profit. This quarter they spent $182m which will gain them, maybe $50m in GP ARR next quarter?

Essentially, the “reacceleration” looks like an anomaly, recession headwinds are having a significant and ongoing impact, which undermines the “digital transformation” thesis. We know from other companies that digital transformation is ongoing, Mongo have built a bunch of new capability, so why are they

I listened to most of the call, but will review the transcript. I only have a small position here, but will be looking to exit tomorrow.

cheers
Greg

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MDB had worse than expected revenue guidance and worse than expected op income guide. We knew deceleration was coming this Q2 but it was deeper than anticipated, in my opinion.
They blame the challenging macroeconomic environment for this.

“Our expectation that the mid-market slowdown we saw in Europe in Q1 would become global in Q2. This is what we experienced, but the slowdown was more significant than we had expected, specifically the digit layer subset of the mid-market experienced slower growth in their applications as a result of macroeconomic conditions, and therefore, their underlying consumption growth of MongoDB slowed as well.”

Analyst: So I just wanted to make sure I understand what you’re assuming. Are you indeed assuming that things get worse in the second half from what you saw in July? One would assume so, given that you didn’t carry the full 2Q beat into your full year raise, but I just would love to clarify.

Management: So I think when you think about our second half assumptions, we generally think that they’re broadly in line with what we experienced in Q2.

Translation: it’s looking bad

“…we are continuing to invest in building out sales. And as you think about what the implication is in terms of rolling through some of the slower cohort expansion of existing Atlas customers that we’re seeing. And when you run the math through, that winds up having a slight impact to our full year op income guide.”

Sounds like they need to spend more money on sales to compel the customer to use more Atlas, as the excuse to why the op income was guided down.

Overall, sure, MDB may have a long term growth opportunity ahead of them. But with the current valuation backdrop, I see more risk than reward if they continue to decelerate and fail to improve profitability, in the near term. I exited in after hours.

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Does not sound like MDB is “mission critical”.

Huh…who would have thunk?

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For example, last quarter they spent $150m on Sales and Marketing, and this quarter added $40m in annualised gross profit. This quarter they spent $182m which will gain them, maybe $50m in GP ARR next quarter?

Yeh - the return to travel and in person events is clearly a cost of business that companies got used to not spending. All I can say is that it will take exactly 1 quarter of this impact for finance to put an end to this jamboree. Companies can’t afford 3000 person events - not unless they are SalesForce or JP Morgan.

I can’t see unfettered travel and meetings spend continuing after this quarter in most companies I have visibility to.

Ant

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Thanks to Greg and Jon and Ant for the concise thoughts on Mongo. I ended up selling the rest yesterday. Waiting cost me, but I had to digest the report. On the one hand it seemed like the issues could be temporary, but on the other, it really seems like this quarter showed that they cannot control the leverage in their business model, or they have no desire to do so. Yes, they say they’re spending to grow…and you can say that I am being short sighted. But I’m not looking at this company in a vacuum. We have other companies at a similar ($1b+ revenue) scale, that have no trouble producing positive EPS and FCF, even in tough times. Why should Mongo, which was able to do so last quarter, be allowed to backslide so much, when the huge increase in spending is something they can (ostensibly) control? I think the market is telling them: they’re not allowed to do so.

Also they not only failed to improve their full-year EPS guidance, but they actually worsened it (it went backwards):

As of Q4 F2022: -.29
As of Q1 F2023: -.16
As of Q2 F2023: -.28

Obviously you build in beats, so the lack of foresight here is disturbing. 90 days ago, they already knew the environment was going to be tough. They shouldn’t have increased this and then changed the plan. That’s just not how smart management operates.

Side note: I think sometimes people get the (wrong) idea that all we at Saul’s board care about is hypergrowth. Mongo’s revenue will grow slightly lower than 50% YoY next quarter. That wasn’t a surprise. And that’s not why I sold. You have to be a lot more nuanced than that.

I’m not saying this company is going to fail or that the long term is doomed. I’m saying that I want to own companies that are a) willing and able to do what they say they will do, and b) powering through tough times, and showing that they can thrive in any environment. I have other companies like Datadog and Crowdstrike and Bill.com that are thriving even though they are in the same tough environment as Mongo. So, yesterday due to new information and also due to realizing I was probably wrong – that my hopes in Mongo might have been misplaced, I changed my mind. My new thinking: My other companies deserve the dollars I was allocating to Mongo.

Bear

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I ended up selling the rest (of MDB) yesterday. Waiting cost me, but I had to digest the report. On the one hand it seemed like the issues could be temporary, but on the other, it really seems like this quarter showed that they cannot control the leverage in their business model, or they have no desire to do so.

Like Bear (and StockNovice), I also exited Mongo yesterday. I didn’t get out in the aftermarket the day before as I was too jet lagged to digest what was going on, but I did get out in the pre-market yesterday (mostly at $269.50. They closed at $241 and change). I felt that this was more than a poor quarter, it felt like something was seriously wrong for them to guide to zero sequential growth.

I put the money into more Sentinel, Snowflake, and Cloudflare, among others. With Sentinel I was very fortunate and able to buy it down 7% or 8% when it had reported an excellent quarter. Here are some of Sentinel’s figures:

Revenue up 124% yoy !
Revenue up 31% sequentially!(sure some of that is inorganic, but still, those are enormous numbers)
Gross margins of 72%, up from 62% a year ago
Customers over $100k up 117%
NRR 137%, up from 129% a year ago
etc
etc
Sure they are still losing money, but op margins at -57% which was improved from -98% a year ago, and from - 73% sequentially. (It was their best ever).

Saul

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Like many others, I also closed out my MDB position. My reasons were similar but also a tad different. I sold about 20% in the evening hours of the report and the rest before the bell opened. I thought I was taking big advantage of the market not seeing what’s going on with S and plowed most of it in there, only to get another shellacking!! haha I’m much more confident S will come back quicker though given what they reported.

My biggest concern with MDB is how quickly Atlas is slowing. We knew they’d be under 80% YoY but they came in at 75%, which in and of itself isn’t horrible. What really shook me was when I plugged in their guide then calculated the current % of overall revenue (64%). This indicates that either EA is going to fall off a cliff or that Atlas is going to slow to somewhere in the mid 60s. That’s quite significant and I don’t want to wait around to see which of these it is.

In addition, my previous conviction that MDB is mission critical seems to either be wrong or management is misleading. Companies have many many applications built across various technologies. For example, one of my clients is a hospital and there are applications for various units, applications like Epic that are hospital-wide, tech focused applications, such as VDI that allows remote connectivity to the network… Most of the databases are in SQL Server but there are also some MySQL, a little Mongo, and a few others. Some applications are more mission critical than others.

I didn’t like the color on the call about their sales staff calling clients trying to get clients to use their applications sitting on Mongo more… “Hi, Community Hospital. This is your MongoDB sales rep, can you please use the Mongo apps you’ve built more, thanks”

So, either applications with a Mongo database are in general less mission-critical, or there is another reason for the big Atlas slowdown that wasn’t mentioned on the call.

My personal opinion with ZERO information is that this bigger slowdown coincides with their SERVERLESS offering going GA. In my basic research of this offering, it seems more similar to the Snowflake serverless than the traditional cloud platform serverless offerings (Azure SQL Database Serverless, Aurora). This is GREAT for customers and for Atlas, however, the impact to Atlas of clients moving from the more traditional way to the serverless could have a much bigger revenue impact than the improvements we saw Snowflake do.

I also don’t like what they said on the call about their future being very dependent upon new clients and new workloads. The new workloads piece worries me. Especially when their “innovations” are not big deals in my opinion. Their two biggies they discussed, one is available in SQL databases everywhere and the other doesn’t focus on the biggest hurdle to migrating platforms to Mongo. Consider the innovations coming from Snowflake; much much much larger and potentially game-changing innovations; bigger vision and goals.

So… like I said, with the big slowdown, I don’t want to sit around hoping its one thing or another. Mongo is the only of my companies (so far, still have ZS coming) that talked on the call over and over and over about macro. macro macro macro… So I closed my position. Will continue to watch and hope that I’m wrong.

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I’m maintaining 2/3rds of position held prior to ER

Quotes from Mongo’s recent Conference Call:

Despite the ‘optics’, referred to in the QnA, of increasing spend on growing this company when Revenue growth is also taking a hit from Mid-Market Customer Usage trends (‘worse than expected in Europe, better than expected in the US’ = War between Russia and Ukraine), I believe MongoDB management is signaling Bullishness here. If I didn’t know this team really well, from years of following Mongo, I’d sell out on current ‘execution’. I do know this company and when Management is bullish and I view guidance as including the unknowable consideration such as with War, x-ing out macro and given ‘Revenue accrual reflecting real time transparency of customer consumption’ being afforded by their business model, I’m cognizant of the fact that if I get out with the intention of trying to time when to get back in then I’m likely better off just staying in for now.

Yes, a ‘fraction of a fraction’ of overall revenue accrual was negatively effected by some Mid-Market customer usage decline. And Mongo is spending to grow there business at the same time. Im likely wrong; but, I’m bullish here, with now 8.5% in MongoDB.

Best

Jason

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Related to Mongodb’s lower 2nd half projections I don’t recall seeing the issue of 606 accounting being brought up on these boards.

In addition, EA is subject to 606 accounting and the term license component there, which adds into the increased variability and reduced comparability that we see period-to-period.

And then lastly, as I mentioned in the prepared remarks, we did have very strong performance of EA in the second half of last year. And so not only does that set up a tough compare in the classic sense but depending on the nature of the structure of a deal, that’s a multiyear deal, the term license revenue can be recognized upfront.

And so not only does it boost the current period that now becomes the year ago period, but the current period, which is now the present period in the back half of this year doesn’t have that license revenue. And so you sort of got a two-factor impact there. I’m just trying to call that out for folks so they understand.

I have not done the math. But recall that AYX and some of Roku’s rev had to be recognized upfront and it artificially pushed their growth rates up as well.

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Bear, et al,
Yes, Mongo the company, that would be the management of the company messed up pretty much without excuse. As you observed, they could have seen this coming at least a quarter ago, in fact, maybe they did, either way, they failed to take the environmental situation into account, plan and act accordingly.

But, I think the trouble runs deeper. I have been periodically hot and cold on Mongo. My thinking had run along the lines of this is a repeat updated story of Oracle. I watched Oracle grow and relentlessly take DBMS share from all competitors during my years in IT at Boeing. I didn’t invest in them (or Microsoft, or Amazon or . . .) as I simply didn’t pay attention to investing in the stock market at the time. My sense was that Mongo was winning mindshare in the NoSQL DBMS arena and therefore their long term success was assured.

But now I’ve come to believe that quite possibly may not the case. Our board members who are more actively engaged in IT most certainly may correct me if I am wrong, but I now think that there’s a lot of robust competition in the NoSQL space and longer term, Mongo may not be the winner takes most company. While supporting compatibility with Atlas the hyperscalers also compete in this space. Additionally, I’m quite sure that IBM and Oracle have very capable document DB products.

Further, the NoSQL DBMS space is segmented. Document DB (Mongo’s technology) addresses one set of use cases, but there’s also search DBMSs, graph DBMSs, time series DBMSs, key value stores, wide column DBMSs and probably others. As storage technologies become more granular as they focus on different use cases, the TAM available to Mongo is harder to measure, but it is most certainly smaller than the generic overall NoSQL DBMS market.

All things considered, I’m finding it more and more difficult to consider Mongo as a member of my portfolio.

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I’m cognizant of the fact that if I get out with the intention of trying to time when to get back in then I’m likely better off just staying in for now.

Consumption-based revenue cuts both ways, so at some point MDB will see accelerating business momentum again. But guessing when that will happen is uncertain, and is sort of a macro call. Everyone will handle that differently. I sold my position down to a tiny amount so I could keep an eye on it. Holding it until consumption reaccelerates also makes sense. One thing about this board is the relentless pursuit of growth and current business momentum. And so selling out completely to allocate elsewhere also makes sense.

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No disrespect to anyone, but I am confused and looking to better understand things.

MDB has guided to zero or negative growth for the last 3 quarters, so I do not understand everyone's thinking the current revenue guide (by itself) is a problem and it is time to get out NOW.  Why didn't folks get out 3 quarters ago when the guides were also similarly negative? 

Saul: "it felt like something was seriously wrong for them to guide to zero sequential growth."
stocknovice: "A guide for 0% sequential growth is not a good look in any economy."
  

Midpoint revenue guides last 3 quarters vs posted revenue:
          guide next Q         current Q revenue                Guiding for      
Q2/23        301.5M            303.7M                             -2.2M
Q1/23        280.5M            285.4M                             -4.9M
Q4/22        265.0M            266.5M                             -1.5M
Q3/22        240.5M            227.0M                            +13.5M

Even Bear's indication that full year guidance worsened, seems somewhat colored as he used the high side of the forecasts.  If we look at the midpoints and also realize the spreads are significantly decreasing every quarter that still looks "bad", but not as bad to me - the Q4 guide is near where teh edge of Q3 was...

Bear said:
As of Q4 F2022: -.29    Actual guide was -0.315 +/- 0.035
As of Q1 F2023: -.16    Actual guide was -0.235 +/- 0.075
As of Q2 F2023: -.28    Actual guide was -0.400 +/- 0.110

Sure the points Greg and Jon Wayne made seem valid, and may be enough to exit the position, but using as justification that the revenue guide was negative seems very inconsistent to me.  Why was negative guide acceptable for the last 2 quarters and not now?
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nukescott -

For me, it wasn’t just the guide but the performance underneath. That’s why I wrote, “What about the supporting info?” right after the sentence you quoted.

Total customer adds, Atlas customer adds, and cash flows all fell sharply after what had been a stable run. Not to mention I felt management’s tone went from last quarter’s “we’re seeing revenue headwinds, but we’ve got this” to “yeah, sorry, this isn’t looking good for a while.” Sure, that’s just my opinion, but I pay attention to management (https://discussion.fool.com/listening-to-what-management-tells-u…). MDB’s management did nothing to make me feel better about the numbers leaving the call. I didn’t get the impression this was a wink and a sandbag. It sounded more like legitimate operational (notice I didn’t say macro) issues that will take time to work through. I’d rather MDB not hold a portion of my family’s capital while figuring it out.

We get prudent guides all the time. I care more whether the underlying business metrics are staying on trend because that’s what drives those beats that are now a market requirement. In my opinion, MDB slid the wrong way almost across the board this quarter.

The guide wasn’t the fatal flaw. The execution behind it was. I hope that answers your question.

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