MongoDB earnings just came out and they really beat expectations by a wide margin. The stock is up about +8% so far after hours
Guidance for Q2 was for $392 million at the top end (+29%) and they came in at $424 million (+40%). Total revenue actually outpaced Atlas, which grew at +38% this quarter.
Non-GAAP income from operations was guided at $36 to $39 million, and came in at $76.7 million.
Third Quarter guidance is only for +21% revenue growth, but according to the person on CNBC, it’s a significant increase from what the street was expecting.
And, although I initially thought maybe some revenue had been pulled forward from Q3 to Q2, that’s probably not the case because they significantly increased the full year guidance, especially for income. Three months ago when reporting Q1, MDB’s full year guide on Revenue was $1.52 to $1.54 billion, and they have just increased the FY guide to $1.59 to $1.61 billion.
More importantly, the full year Non-GAAP income from operations was previously guided for $110 to $125 million three months ago, and just they increased it to $189 to $197 million. That’s a +58% increase on the top end to this year’s expected Non-GAAP income from operations.
The call starts at 5pm Eastern. I’ll be listening and see if what more they share
A large part of the revenue outperformance was due to large licensing deals that, according to the company, were more one-off in nature. (From Q1, we know that the Alibaba deal added about $10m in such one-off revenue. Apparently there were more such deals in the Q.)
I was looking for a stronger guidance to follow on the fantastic growth in Q2 but it looks like they will be back to 20+ growth, 30% at best.
This may or may not be related, but I notice they have -$91m in deferred revenue cash flows this year. That means something big came out of deferred and they recognized it…and that they didn’t get enough new deferred to backfill. Probably no big problem, but it’s worth noting. Does smack of some one-off revenue. @mekong22 or @CompoundingCed, did they say anything about this on the call?
I also would have liked to see more than +21% in the guide for next quarter. They probably are sandbagging a little bit but I agree that I don’t expect to see much more than 30% in a best scenario for the actuals. Then again, I never really thought they would get back to 40%+ again, given the growing scale, yet I still think they can grow at a nice clip in the 20%'s and 30%'s for at least several more years.
I do think that they are probably being very conservative with the Atlas consumption expectations which have correlated with the weaker macro environment recently.
If so, I don’t blame them, considering that they had such an outperformance on the top line this quarter, management probably figured they could be very conservative with next quarter’s guidance and the market wouldn’t punish them too badly given the Q2 results. Always better to underpromise and overdeliver when you can. Maybe I’m totally wrong, but I would get why they might be thinking that way and could have layered it into their expectations.
I would clarify a little bit that the outperformance they saw this quarter in non-Atlas sales wasn’t exactly “one-off” or nonrecurring. That new business will be regular recurring subscription revenue, most likely for years to come.
But you’re right that under the accounting rules of ASC 606, more of the early part of those new sales got recorded as revenue upfront this quarter. So it won’t be as smooth with those jobs hitting revenue on a monthly basis over the next year or so. Once they get to the end of the term (it could be one year, maybe two, etc depending on the term that the customer committed to) unless they switch from MDB to another db company, there will be a renewal. Depending on how that renew gets done and what they commit to at that time, there could be another big chunk of revenue upfront, or it could become more of a smooth monthly billing/revenue recognition going forward afterwards.
This folds into something that management has been talking about on recent calls. In the past, they incentivized salespeople to get customers to commit to longer terms and multiple years of licenses when signing on. Which theoretically makes perfect sense, they want to lock in the customer and guarantee as much future revenue as they can.
But what they discovered is that most of their customers, once they switch over, stay with MDB’s products and aren’t looking to jump ship at the end of the term. Their ARR expansion rate is still over 120%. I’m sure it’s not easy, and is a big project to move your data to a different database, including when Mongo convinces customers to come onboard to MDB.
I believe they found that the more that they encouraged and pushed customers to commit to upfront, the more likely that those customers would start small, putting a smaller number of workloads onto MDB, and then more slowly migrate other workloads to Mongo, given the longer upfront committments and terms.
They realized that the sooner they can get customers to move more and more workloads over, the sooner those workloads and any related consumption, would result in growing recurring revenue streams for MongoDB. So management concluded that pushing customers to commit to long terms upfront is a bad thing.
I forget exactly when it started, but I believe only in the past year that they started incentiving sales people to get customers to maximize the workloads being brought over, and to no longer incentivize them for committments of longer terms.
Under the accounting rules, this actually has created a headwind for revenue recognition as less and less of their new customer signings are being recognized as a large chunk of the long initial term’s revenue upfront, which has caused difficult comparisons in recent quarters because the de-incentivized long terms that boosted upfront revenue in prior periods is not as lumpy with extra spikes of as much revenue upfront recently.
But over the long run, it bring more and more workloads into their products, more quickly, which means more recurring revenue for years to come. In my mind, it really matches the timing of when they will recognize revenue in the future more comparably and accurately with when they provide the service to the customers. Accounting rules don’t always lead to common sense results and the big upfront recognition that 606 shows with longer term committments is one of those cases.
Now of course that flies in the face a bit of what we saw with the spike in non-Atlas deals this quarter, which they referred on the earnings call as “multiyear” deals, to result in the bump in upfront revenue that resulted.
Maybe I’m wearing my rose colored glasses, but that says to me that, despite MDB de-incentivizing sales people from getting longer committments, these customers still wanted to lock in to a long muti-year term, and it really moved the needle on revenue this quarter. It sounds like a great validation that customers really want what MDB has and desire to get in and plan to stay in for a long time.
And I’d also note that one of the analysts asked if any of the bump this quarter was due to the previous Alibaba deal being bigger than they originally estimated, and management said “no”, the bump this quarter was unrelated to Alibaba, and was related to other customers.
Here’s the exchange from TMF’s posted call transcript:
Karl Keirstead – UBS – Analyst
OK, great. Maybe this one to Michael. I wouldn’t normally ask about the other segment, but it’s such an outlier. If I could ask a two-parter.
First is, what surprised on the upside there? Was the Alibaba deal much larger than you thought, or did you grab a few others? Maybe you could unpack that. And secondly, you did tell us that the second-half guidance assumes a significant decline in the non-Atlas business. Is it fair to assume that this other category might return back to the levels it was at pre the July quarter? Thank you.
Michael Gordon – Chief Financial Officer and Chief Operating Officer
Yeah, thanks, Karl. No, other deals, not Alibaba. Alibaba was, you know, baked at the time of the last guidance call. So, it was sort of incremental deals that surprised us to the upside there.
And, yes, obviously, it’s a – it’s a volatile or variable, especially given the 606 and the nature of it where it goes given the lumpiness of the term license revenue and things like that. And so, yes, I think that this is not a repeatable performance, and I think it should settle back down to a more – to a lower and more normalized level.
and the follow up from that same analyst, to @PaulWBryant 's comment, asked about the deferred revenue reduction:
Karl Keirstead – UBS – Analyst
OK, and then if I could ask a follow-up, Mike, you did a good job explaining the changes in the model and the licensing on cash flow. But it’s not a metric you often talk about, but your deferred revenue balance was actually down year over year. Highly unusual, is this basically the same explanation that would be impacting DR? Thank you.
Michael Gordon – Chief Financial Officer and Chief Operating Officer
Yeah, I think it’s the same explanation or discussion, you know, overlaid with our, you know, recurring discussion around billings. And that’s sort of not a – not a metric that we focused on and that we’ve sort of discouraged people from – from using, and that we’re focused sort of on those workloads and winning new workloads rather than large upfront commitments. But one of the ways that plays out is absolutely, you know, in deferred and for anyone still doing – you know, defer – I mean, calculated billings – calculations that will affect that there as well, yes.
I’m guessing a bit here, but I think the response is trying to say that deferred revenue has dropped and is expected to drop as they discourage the longer term committments and upfront billings that had been incentivized in the past.
I realize that’s a bit paradoxal when I was describing above how the longer term committments result in higher upfront revenue (which is counterintuitive to putting deferred revenue on the balance sheet) but I think both are true. I believe the “old” longer term committments resulted in a large amount of cash paid upfront, some of which had to be recognized as revenue under 606, and some of which still went into deferred revenue when the cash was received and then got recognized to revenue on the P&L over the course of the deal term.
Again, I kind of scratch my head as I say that because you would think the big spike in non-Atlas multi-year deals this quarter would then have had some portion of the upfront that goes into deferred and would have increased the balance.
My best guess is that the new multi year deals which required recording a lot of upfront revenue, didn’t require the customers to prepay a huge amount of that muti year term and still just bills them monthly. So the prepaid cash that would normally create new deferred revenue doesn’t happen as much as in the past (e.g. they must consider these new clients to be very creditworthly and have less concern about collecting from them over the course of the term) but accounting rules still require a good chunk of the deal to be recognized upfront when the agreement is signed, before cash comes in the door.
Great point, and I agree with your clarification that these aren’t exactly one-offs, just a one-time (at least until renewals come up) juicing of revenue this quarter. Maybe that should have been more obvious to me, since MDB revenue was up 15% sequentially, which of course isn’t going to happen every quarter.
I kinda went down a rabbit hole on deferred revenue since pretty much all our companies are seeing shorter contracts. When deferred revenue increases year after year (typical for a growing subscription business with a steady contract length), it’s a steady component of FCF. But like I said, for Mongo this year it’s been a $91m headwind to FCF. That makes their improvement from -$40m FCF in the first 6 months last year to +$24m in the first 6 months this year seem a lot more significant. With no headwind it would have been +$115m FCF and if there had been a tailwind of deferred coming in, it could have been much higher (so a FCF margin at or over 15%). That’s a pretty big thing to note – and the market hasn’t missed it, I don’t think. That’s probably why MDB is one of the most expensive stocks around. The market is giving MDB full credit for its soon-to-come (when the headwind dissipates) profitability.
I jumped back into MDB after earnings. One thing that I like is that their average beat (on their guidance midpoint, I don’t care about consensus) in the last 4 quarters is 7.4%.
Compare that to CRWD whose average is 1.9%, DDOG 3.4%, ZS 5.1%, NET 2%, MNDY 5%.
Clearly they have become good at sandbagging. Sometimes when a lot of “one off good things happen”, more “one off of good things” happen. I take this as bullish.