I finally had a chance to listen to the earnings call and go through the new 10-Q filing for MongoDB. After seeing the market reaction and various posts, I was expecting doom and gloom and a pessimistic outlook. I was already starting to think about how I might reallocate a portion of my MDB holdings.
But that’s not what I’ve come away with. To the contrary, I feel that the tone on the call was really positive and optimistic. The quarter itself was very good, particularly on the top line. the costs weren’t entirely unexpected. The new revenue guidance is soft for sure, but I think it might prove to be conservative and the long term story remains intact.
For what it’s worth, MDB is one of my biggest positions, at more than thirty percent of my portfolio, which has been a core holding for 3+ years, much of which has a cost bases in the $50-$80’s per share.
Some of the quotes from the earnings call, I quoted from the TMF transcript here:
What are they saying?
I really struggled to find much that resembled pessimism or anything from management on the earnings call warning investors that things are not going to plan. Perhaps my glasses are more rose-colored than others, but here are several quotes from the CEO and CFO/COO that I noted that stood out to me:
“we remain incredibly optimistic about the opportunities in front of us”
“The new business environment continues to be robust.”
“We have seen no change in deal activity in sales cycles. We believe our strong new sales performance is a demonstration of the critical business value our developer data platform delivers and our superior go-to-market execution.”
“We have very fractional penetration and continue to see robust new business.”
“almost every bank on Wall Street is using us for some important use case. We have large Fortune 500 companies in industries like telecom, media, tech, healthcare, etc., who are using us for very mission-critical use cases.”
“I would say that we’re still early in the journey in terms of having greater share in those large accounts. “
“And when we’ve sort of crossed 1% market share and are closing in 2% market share, and our biggest challenge is we’ve talked about sort of each call probably, is that our footprint coverage is very thin.
When we are in conversations and in dialogues. Our win rates are exceptionally high.”
“ I would say the tone is very positive, and we feel really, really good about winning new workloads. The morale of our sales force is very high. They’re very excited about the opportunity in front of them. And so we feel really, really good about the opportunity to add both new customers as well as new workloads onto our platform, and that’s a huge priority for us in the back half of the year as well.”
One item that I noted is, in response to a question from an analyst about Snowflake having a similar vision that MDB management has laid out, that they specified that they are not seeing Snowflake as a competitor in the opportunities that they bid on. CEO Dev Ittycheria said “I want to make it clear to everyone that we don’t see Snowflake in any deals”. Maybe that changes in the future as their products continue to evolve and diversify, but at least for now, it appears that they aren’t going up head to head.
When they reported Q1 results three months ago, the top end of their revenue guidance was $282 million for Q2, which would have been +42% YOY growth. They came in about 7.5% percent better at just over $303 million, which was a +53% YOY. I wasn’t optimistic that they would break 50% growth this quarter, so that was a nice surprise.
This was despite the European slowdown being “more significant” in Q2 than the company had expected when providing the guidance. This was more than offset by consumption growth in North America being above expectations. While being above expectations, they still called out that the slower than historical Atlas consumption growth is being impacted by the macro economic environment.
So yes, the new revenue guidance provided is only for +34% YOY in Q3 and then implies a paltry +18% in Q4. Others have pointed out that this would be essentially no sequential growth in either of the next two quarters.
The second half of fiscal 2022 (last year) was driven by “very strong” Enterprise Advance (EA) performance (which includes a larger portion of revenue recognized upfront due to the accounting rules of ASC 606), as well as what they describe as “exceptionally strong” Atlas growth in the second half of last year.
So they’ll be up against tougher comps over the next couple of quarters than they have had in recent periods.
But they also specifically said they are expecting a sequential decline in EA as the renewal base is sequentially lower. Given that most MDB investors are in the stock for Atlas, that’s not such a bad thing. That means that, even without any beat on the current guidance, there is a sequential gain in Atlas implied (net of the sequential decline in EA). However, exactly how much that will be, I have no idea how to estimate.
Cost Savings benefits for MDB customers
They called out a few examples of customers realizing what sound like pretty significant cost savings when moving to MongoDB. As much as MDB generally sees headwinds (not tailwinds) when the economy gets weak, it also presents an opportunity to emphasize to customers and potential customers that moving to MDB can save them money and won’t be an incremental increase in expenses in many situations. A couple quotes from the call:
“A multinational trillion-dollar financial services company chose MongoDB to power the next-generation trading platform to cover all of their various trading businesses with one solution.
Since launching the new service, the customer has been able to decommission eight legacy trading systems and realized cost savings of almost $50 million in annualized expenses.”
“A leading Canadian security provider migrated its IoT and AI security platform away from an open-source relational database to Atlas. With the ability to use MongoDB’s native charting to distribute their database over lower cost instances, the company has been able to significantly reduce their database spend by 60%, which is particularly compelling given the open-source nature of their prior solutions.”
Economic Recovery Timing
The very last question of the Q&A during last week’s earnings call from the Macquarie analyst, I thought was an interesting one. Because Atlas revenue is driven by consumption/usage of their customers’ underlying applications, they may have seen a negative impact faster than other companies did/will, but it also suggests that, when the macro economic conditions improve, MDB should see a boost to growth very quickly as well:
Fred Havemeyer – Macquarie Research – Analyst
Hey. Thank you. When you look at your Atlas consumption model, do you think that Atlas’ alignment with your end customers’ demand trend means that you’re more or less seeing the macro downturn in essentially real time, something that maybe is a little more unique here versus other software vendors? Do you think that this alignment also means that you can see the benefits of economic recovery sooner than other annual subscription software models?
Michael Gordon – Chief Operating Officer and Chief Financial Officer
So I think the run on to Fred is yes. We do think it’s a more real-time reflection given that we’re really sort of a second order effect of the underlying activity in their applications. And obviously, we’re not macroeconomists, and so I’m not forecasting recovery, we guess theoretically that if there were increases in activity and increases in underlying usage, that would drive incremental consumption of our platform.
Costs and Expenses
I’ve seen plenty of comments about concerns that MDB is not moving toward profitability, or taking a “step back” with their latest results. I get that companies are no longer being rewarded for revenue growth at all costs and the ability to show income, or a path to profitability is being weighted much more heavily by investors and the stock market lately than in the recent past. Fair enough. At the same time, I don’t think we’re seeing anything in MDB’s costs that is surprising based on what they’ve told us to expect, and in building the business for the long term, they have a strong balance sheet, aren’t burning a significant amount of cash, I can’t see anything to surprising or disappointing here.
Well there is a lot to unpack, so let me touch on some of what I think are key in understanding their spend and how it fits with their profitability trends.
FY’23 Guidance and Expectations
When the year started, MDB gave full year guidance showing, at the low end, non gaap loss of operations of -$22 million. Even despite some of the macro challenges so far this year, they’re likely to do better than that, as the latest range guides for -$8 to -$13 million and I won’t be surprised if they come in even better than that, close to break even.
During the year end earnings call in March, management seemed to caution analysts not to expect FY 2023 (the current year that is now half over) to be a profitable or cash flow positive. One of the analysts had questioned, at the time, if we should expect ’23 to be cash flow positive, to which management replied “it’s not a specific milestone that we’ve focused on” for this year.
You ask “why would that be?” If revenue grows much this year, shouldn’t we see at least some of that fall to the bottom line and demonstrate a trend toward profitability? To better understand this, we have to consider MongoDB’s historical spend and how it has been impacted during the past couple of COVID years.
Travel, events and office expenses, have been unusually, temporarily, reduced the past couple of years given the pandemic environment. In Q2’23, MDB hosted their big MongoDB World event for the first time since before COVID. So a significant chunk of this year’s budget is not so much incremental spending, but more normalized spending after a couple years of abnormally reduced expenses in certain areas. It’s a bump in cost growth just this one year to get things back to where the company believes they should be to best run their business over the long term.
Just three months ago, during the last earnings call, management specified
“As a reminder, our fiscal '23 guidance assumes a post-COVID normalization of travel, events, and office expenses starting in Q2, resulting in an incremental $45 million to $55 million in those expenses in fiscal '23.”
So over these nine months (Q2-Q4 2023) we are going to see an incremental $50 million of expense. That is significant for a company that only had $215 million of gross margin this past quarter. If the latest guide (which I think will prove to be conservative) of very little sequential growth over the rest of this year holds, that would mean about $645 million of margin over those nine months, so these additional costs will be somewhere between 7.0% and 8.5%. And I would bet that the largest portion of that incremental spend probably took place already in Q2, given that the MongoDB World event was probably very expensive to put on, and we may see a lesser impact in Q3 and Q4.
Stock Based Compensation
I’ve seen plenty of comments about Stock based compensation being high, and it is certainly a large item that we need to pay attention to. Through the first half of fiscal 2023, SBC was $180 million, and the company’s net loss was $196 million, so one could argue that SBC accounts for most all of MDB’s losses. On the bright side that confirms that, net of the stock based comp, they are essentially breakeven already. Of course the flip side to that is that there is a real cost to investors when it comes to dilution.
I spent quite a bit of time today poring over MDB filings trying to better understand their SBC and to be completely honest, I came away still without a strong grasp of the components. This was 180 degrees different compared to when I looked into TTD’s SBC not long ago and posted a long analysis on the premium boards that detail why I felt they were structured in such an stockholder friendly way and shouldn’t be very concerning to investors. Frankly, if someone like myself that understands SBC, and how awards get valued and expensed has a hard time getting to the bottom of how MDB’s SBC works, it would make it extremely difficult for an investor without an accounting background to understand what’s going on.
That being said, the majority of the SBC expense, we can see relates to restricted stock unit (RSU) grants from past years, and not new grants during this year. Looking back at MDB’s latest form 10-K, they specify that:
As of January 31, 2022, there was $768.0 million of unrecognized stock-based compensation expense related to outstanding RSUs that is expected to be recognized over a weighted-average period of 2.55 years.
So even before this fiscal year started, we knew that there would $768 million of SBC expense over the next two and a half years (again just relating to older award grants from prior years). That’s because the expense is recorded as the awards vest, not all at once when they are granted, and the vesting period is typically multiple years. And it is unlikely that that expense gets recognized evenly on a straight line basis over those 2.55 years. If it was evenly spread out, that would be about $76 million per quarter (over 10 quarters e.g. 2.55 years), but it’s likely to have been at least somewhat higher than that this year and lower toward the end. As the company has had $180 million of SBC during the first half of FY’23, or about $90 million per quarter, most all of the expense relates to these RSU’s that were already out there before this year.
So you could argue that this is good news that they the expense isn’t being driven by lots of new grants this year. I’m sure there are some new grants for new employees, but a big chunk of what was granted in past years and continues to vest likely went to top executives, who have remained consistent with the company for a while now.
For comparison, I looked at what CRWD’s SBC was like when they hit $300 million in quarterly revenue in April 2021 and it was $54 million that quarter, so almost half of the $90 million MDB currently has.
When I have some more time, I’ll dig further into the structure of these to try to understand if they are pretty shareholder friendly like the large grant that TTD CEO Jeff Green has. Until then, I would agree that the high amount of SBC is at least a yellow flag for Mongo. I also wouldn’t expect it to come down very much over the next two years, given there is still probably around $600 million of SBC expense yet to be recognized over the next two years, just from prior year grants.
Looking at the latest guidance for non-gaap loss from operations for the full current year 2023, with a range of -$8 to -$13 million. And a Q3’23 guide for a non-gaap operating loss of -$8 to -$10 million
As of the end of Q2, they had a positive YTD profit/income from operations (non-gaap) of +$5 million.
So using the midpoint of the Q3 and FY guidance, that would mean Q3 will have a non-gaap operating loss of -$9 million, bringing the YTD loss to -$4 million at the end of Q3, and implies Q4 will have an additional loss of -$7 million, bringing the full year to the midpoint of -$10.5 million loss.
And that would make the quarterly breakdown for all four quarters of FY 2023:
Non-GAAP income (loss) from operations Q1 +$17 million income Q2 ($12) million loss Q3 ($9) million loss (midpoint) Q4 ($7) million loss (midpoint)
So at the midpoints, the trend will be a gradual improvement vs Q2, inching closer to non-gaap operating income over the rest of the year. Any significant beats would accelerate the progression. Of course, underperformance to expectations could mean increasing losses. I’m willing to bet that they have fairly conservative expectations built into the second half of the year and are more likely to beat the next couple of quarters, unless the macro economic situation gets significantly worse (which would be bad for many companies we follow).
And again, they were originally anticipating up to -$22 million loss for the year with the initial guidance.
Going into Q3 of this year, I’m reminded of an unusual/surprise they had in Q3 last year. Per the Q4 earnings transcript:
“As a reminder, in Q3, we noted that our deferred revenue benefited from several very large Atlas early renewals. We did not see a similar impact in Q4, but would like to reiterate that some of those large deals that renewed early in Q3 were originally scheduled to renew in Q1.”
So they had a cash benefit with a lot of deferred revenue (think of it like prepayments from customers) that came in during the third quarter that they didn’t expect to close (or get paid for) until Q1, two quarters later. Assuming they don’t have another surprising set of early renewals in Q3 this year, the cash flows could look disappointing to the market when they report if they are expecting to see cash flows in line with the same quarter of last year.
They may not be a big deal, but it is one thing that could get interpreted negatively in the short term when next quarter’s results are announced.
I’ll leave it there. I do think there’s a lot of context to think about when looking at Mongo’s performance lately.
They faced headwinds during the first year of the pandemic when many of our other companies were seeing tailwinds. This led to a surge in growth rates as economic conditions got better over the next year or so (calendar 2021 / fiscal 2022). Now that the economic picture is more cloudy in the near term again, they are right to be cautious, and will not do as well as some others if the macro conditions are weak for an extended period. Expenses are not going to grow as much next year, like they are this year. But SBC is definitely something to keep an eye on.
I think they will beat expectations for the second half of this year, and have the potential to turn the corner to profitability and positive cash flow next year, which is no different from the timing that I believe management had expected at the beginning of this year. And MDB has the potential to see the positive impact from a better than expected macro environment very quickly.
At the end of the day, the story, to me, still feels intact and on track. At this price, I don’t see myself selling a significant amount of my MDB shares. I won’t be surprised if MDB’s stock price doubles, from here, faster than any of the other companies I currently own. But there are a lot of variables at play and it could be bumpy for a little while. My gut says MongoDB still deserves a large allocation in my portfolio, but it’s been wrong before, so I look forward to continuing to follow and see how things continue to play out.