2023-03-09 13:24:55 ET
Summary
- MongoDB reported solid financial results for Q4FY23 - it beat both revenue and earnings growth estimates.
- MongoDB has recently achieved FedRAMP Authorization, which opens up the lucrative government agency customer market, expanding its TAM.
- The company has 40,800 customers, and 213 customers spending $1 million or more on the platform, up from 164 a year ago.
MongoDB ( MDB ) is the leading provider of modern "non-relational" databases as ranked by the Gartner Magic Quadrant leader in Cloud database management. A traditional "SQL" database uses a fairly rigid schema and is only really useful for storing simple related information. Whereas, nonrelational databases have much more flexibility, which makes them ideal for storing complex data such as those related to financial services and marketing (unified customer view). In my previous post on MongoDB, I covered its business model and product in more detail. In this post, I'm going to break down the company's fourth quarter financials for FY23 as the company beat both top and bottom-line growth estimates. I also will discuss its multi-cloud approach and "hyperscaler" partnerships, which means the company is poised to benefit from growth in the cloud industry. Then finally, I will reveal my valuation model and forecasts for the company.
Growing Financials
MongoDB reported strong financial results for the fourth quarter of the fiscal year 2023. Its revenue was $361.3 million, which increased by 36% year over year and beat analyst forecasts by $23.4 million. The majority (96%) of this was subscription revenue of $348.2 million, which rose by 35% year over year. This is fantastic to see, as subscription-focused revenue tends to offer greater revenue consistency. In fact, MongoDB operates with a "consumption-based" model, which I will share more details on later. Its services revenue also increased by a rapid 59% year over year to $13.1 million.
The top-line growth was driven by strong customer growth, with 1,700 customers added quarter over quarter. In addition, its customer count has increased by a solid 24% year over year, bringing the total to 40,800 at the end of the quarter. This was a slightly slower growth rate than the 26% YoY generated between Q3, FY22, and Q3, FY23, but it was still solid overall.
It also was fantastic to see the company has increased its direct customer count by a rapid 45.5% year over year to 6,400 customers. As a percentage of the total customer base, its direct customers have increased from 13.3% in Q4 FY22 to 15.7% by Q4 FY23. This is a positive sign as direct customers are more cost-effective (from an acquisition standpoint) than customers where affiliate commissions or similar need to be paid.
MongoDB also has grown its larger (and more lucrative) customer base, with over $100,000 in Annual Recurring Revenue ((ARR)). In this case, that customer cohort increased by 26.4% year over year to 1,651. As a percentage of the total customer base, that cohort increased from 3.9% to 4% year over year.
This is a positive sign overall as these larger customers bring in more revenue (of course) but tend to offer higher retention rates. For Q4 FY23, MongoDB reported an ARR expansion rate of 120%, which is fantastic as it means customers are sticking with the platform and spending more.
Atlas and the Consumption Model
It should be noted that the majority of MongoDB's customer growth is derived from its Atlas database as a service solution. This is a "fully managed" service which means all the underlying infrastructure is automatically set up, provisioned, and deployed. This doesn't just save business customers time but also means the database can scale automatically up or down as required. This is extremely useful for companies with fluctuating demand such as an e-commerce website during Black Friday, which would see a huge spike in traffic.
Atlas continued to be popular with customers, with its revenue growing a rapid 50% year over year, contributing to 65% of the total. The platform operates with a "consumption model" similar to AWS, which means customers only pay for what storage/capacity they use. Now although MongoDB can't control market demand for storage, they can control the number of workloads that can be acquired, thus this is where management focuses. In its Q4 FY23 earnings call, management stated "we have not seen the macro environment impact our ability to win new business." This is a positive sign and represents the non-discretionary nature of its products. Customers don't choose a database provider for fun, they choose one to solve a real problem with data storage and access. However, the company did report a "usage-driven" slowdown in the back half of the fourth quarter. This was expected as if consumers are using services less, then the consumption model fees will also be less.
Cloud Partnerships
MongoDB's platform is "multi-cloud" and the company has a range of partnerships with the major "hyper-scale" cloud providers. In the fourth quarter, the company signed a five-year partnership with Microsoft Azure. This would include a series of joint go-to-market activities and an incentive plan to migrate MongoDB on-premises deployments to Azure. The company also expanded its multi-year partnership with Google Cloud and was named by AWS as the marketplace partner of the year. It's great to see MongoDB has its foot in multiple camps, given the hybrid cloud industry is forecast to grow at an 18.3% compounded annual growth rate ((CAGR)) and be worth $323 billion by 2030.
Margins and Balance Sheet
Moving onto margins, the company reported a gross profit margin of 75% for Q4 FY23, which was surprisingly up from the 72% in Q4 FY22, given the high inflation environment.
From the above graphic, you can see its total operating expenses have increased by 28% year over year. However, a positive is revenue has been growing at a faster rate. Therefore, as a percentage of revenue, expenses have declined from 101% in Q4 FY22 to 95.6% in Q4 FY23. Another positive is a large portion of its expenses (55%) are R&D, which I believe is not necessarily "bad," given technology companies must continue to invest into innovation to stay ahead. The business did report an operating loss of $72.9 million, but this was actually an improvement over the $78.6 million reported in the prior year.
Moving onto the balance sheet, the company reported $1.8 billion in cash, cash equivalents and short-term investments, and restricted cash. The business does have a fairly high debt of ~$1.14 billion, but this looks to be in convertible senior notes and long-term by nature.
Valuation and Forecasts
In order to value MongoDB I have plugged its latest financial data into my discounted cash flow valuation model. I have forecast just 17% revenue growth for "next year" or the next four quarters in my model. This is based upon the top end of management's tepid guidance of between $1.48 billion and $1.51 billion for the fiscal year of 2024. This growth rate is slower than the prior quarter's growth rate of 36%. However, I expect this is mainly due to lower forecasted consumption demand, which would impact its pricing model. I have forecast a faster revenue growth rate of 39% in years 2 to 5. I expect this to be driven by improving economic conditions, which should boost MongoDB's consumption-based revenue. This growth rate also is still slower than the 48% growth rate reported between 2021 and 2022, thus I don't believe it's unachievable. As mentioned in the introduction, its recently achieved FedRAMP authorization should help to boost adoption by government customers, expanding the business TAM or total addressable market.
To increase the accuracy of my model I have capitalized R&D expenses which has boosted net income. I have forecast a 23% operating margin over the next 10 years, which is in line with the average for the software industry. Given the current operating leverage trends which I discussed prior, this level should be possible long term.
Given these factors I get a fair value of $247 per share, the stock is trading at $228 per share at the time of writing, and thus, it is ~7.92% undervalued.
The stock trades at a price-to-sales (P/S) ratio = 12.79, which is 45% cheaper than its five-year average.
Risks
Recession/Lower Consumption
Many analysts have forecast a recession for the calendar year of 2023, with a 57% chance according to Statista data. Therefore, as mentioned prior, this will likely cause a slowdown in consumer demand and thus lower consumption revenue (slower growth) for MongoDB.
Final Thoughts
MongoDB is a best-in-class database company that's a true innovator in the space. The company has continued to execute tremendously and grown its customer base, despite a tough economic backdrop. I believe its number of strategic partnerships with the major cloud providers put the company in a strong position to benefit. The business is "burning" a lot of cash currently, but its losses are improving, which is a positive sign. Given my valuation model and forecasts indicate the stock is undervalued intrinsically at the time of writing, I will deem it to have a good chance of being a great long-term investment.
For further details see:
MongoDB: Double Earnings Beat With Hybrid Cloud Tailwinds