Summary
- MongoDB is growing rapidly with its database-as-a-service offering.
- Its cloud-agnostic product is resonating based on solid net ARR expansion rates.
- The company is trying to manage expenses, but is also growing as aggressively as possible. GAAP profitability isn't likely in the near term.
- Comparing the company to its peer group, the valuation isn't all that attractive. It's staying on the watchlist for me.
There are plenty of common themes I've covered in my survey of the cloud landscape. These companies are growing at breakneck speed (at least the good ones are), they are spending money like crazy, diluting share counts like it's 1999, and taking over the IT spend around the world. MongoDB ( MDB ) ticks many of those boxes. The company was founded in 2007 and went public in 2017, and has separated itself from the pack with its phenomenal growth and differentiated offering. The company provides a document-based database-as-a-service product, which ultimately allows companies to store unstructured data in a cloud-agnostic framework. The flagship product integrates with the major cloud providers, Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL), and provides visibility, analytics, and search to database developers via on-premises, hybrid, or cloud offerings.
Company Presentation
The company has scaled rapidly, and counts some major companies as clients. The number of customers with over $100,000 annual recurring revenues stands at 1,545 today, up from 1,201 YOY. These companies are generally in a one-year contract, but there's a wrinkle.
The company's offering contains a usage-based element, which means it's not exactly equivalent to another cloud company's ARR. I've included the definition below from the 10-Q:
We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual consumption of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual consumption of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services.
This isn't a knock on the company, as they expect customers to use their product as a fully-integrated part of doing business. However, it does add a variability component to revenues that doesn't affect some other SaaS companies. Specifically, in recent quarters, management has discussed usage has not been at historical levels, and has started to see seasonality, which drives changes quarter to quarter in revenues.
Looking at Gartner Insights, the company is well-rated. Pouring over some of the reviews, in general customers appear satisfied with the customer service and seamless integration of the product. This checks with recent results of customer acquisition.
The company operates with free and paid tiers, attempting to drive customers to paying with additional features. The company has seen 115M downloads in the past twelve months, which was more than the entire time from 2007-2020, and had 300,000 sign-ups for the flagship Atlas product in the most recent quarter, up 15X over the past 5 years.
The stickiness of the product with its subscribers is well-supported by the company's 120%+ net ARR expansion rate over time. I've included the definition below, as it can vary from business to business. From the 10-Q:
We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers.
This number is impressive, and is among the best metrics of measuring the health of the business. MongoDB has customers across the spectrum in terms of size, so it will likely always deal with a decent amount of churn. At this stage of growth, net customer adds more than make up for it.
Looking at the most recent quarter, revenues increased by 47% to $334M with Atlas leading the way up 61% to 63% of revenues. The company maintains a 74% gross margin, and has improved its operating margin over time, but is definitely not profitable on a GAAP basis. They reported an adjusted operating margin of 6% due to attempts to moderate expense growth. I will discuss expenses more in a moment.
Looking ahead, management projects for the full-year $1.257-1.26B in revenues, non-GAAP operating income of $30.8-32.8B on a 2.5% adjusted operating margin. The CFO discussed a 35% operating margin improvement since going public, which is good to hear.
Looking at the improvements in expense growth, I want to break it down a little based on perspective from the 10-Q in S&M, R&D, and G&A.
In S&M, expenses were up 57%, with $109M increase from personnel headcount growth to 2,276 from 1,528. An additional $55.6M was spent in services for the increased headcount and $12.2M increase for marketing events.
In R&D, expenses grew 42% on a 26% increase in headcount, resulting in $77.5M more in personnel costs.
In G&A, expenses rose 33% on $23.2M additional personnel costs.
The mix is what I would like to see as far as expenses go. The company is rapidly expanding its headcount and paying up to acquire more customers and get the company's name out there. However, revenue growth of 47% was outpaced by expense growth in S&M, so there's a lot of opportunity here for the company to right-size costs as they scale. However, S&M is where I want to see the bulk of the spending, with the second most in R&D.
Looking at a few GAAP figures, the company reported a net loss of $281M with $279M of that from stock-based compensation. As of the most recent quarter, the company has an accumulated deficit of $1.5B. Putting this in different terms, the company is paying its employees with stock instead of cash, minimizing cash burn to only $38.8M in the most recent 9 months. It's a configuration set to maximize growth, and it comes with the territory for many of these cloud companies. It's important to get that perspective, and look through the reported numbers a little.
Outside of an expense discussion, some of the risks I want to highlight are mainly around the environment MongoDB operates in. Amazon has a DocumentDB offering which from all the accounts I've seen does not stand up well to MongoDB's products. However, direct competition from the tech majors is always a concern in this space. The database market is rapidly shifting, and where there's value to be had, you can bet Google, Microsoft, and Amazon are not far behind with effectively limitless resources to try and take share. Additionally, as the company grows and attempts to expand its offerings, it could just as easily run into the likes of Snowflake ( SNOW ), and other data warehouse companies that are well-entrenched.
MongoDB has carved itself a nice niche, but it needs to continue aggressively growing to establish as much market leadership as possible. There is room for more than one winner as we talk about the entire database spend of the market, which IDC projects at $84B in 2022 and growing at a 13% CAGR to $138B in 2026. However, if at any point the company rests on its laurels, don't anticipate any type of moat there to protect them.
Like I discussed above, the gross margin has been relatively stable, and operating margin has incrementally improved since the company went public. The company has plenty of work to do on expenses, but is in a stage of maximizing growth, so I wouldn't expect GAAP profitability in the near-term.
The company's debt load is manageable, it currently has $1.8B in cash and cash burn is relatively low as discussed above.
Clouded Judgement Substack
Looking at the company's valuation adjusted for growth from the graphic above, MDB is slightly pricier compared to sales than peers based on its growth rates. The company is growing at about the same rate as Paycom ( PAYC ), which I recently wrote about, and is slightly cheaper on a relative valuation basis. However, the two companies are hardly comparable when looking at operating metrics.
Looking at other metrics against the rest of the cloud landscape, MDB is mostly in-line with software gross margins, and has a very negative operating margin as previously discussed. SBC is a little higher than the median at 30% of revenues, which isn't great, but expenses as a percentage of revenues aren't eye-popping compared to peers. It easily checks the Rule of 40 at 51%.
Putting it all together, MDB is an interesting company and one I'll keep on my watchlist. The offering appears to be gaining traction in the marketplace, and the operating metrics confirm that assertion. Management discusses customer use-cases on the call, and the 200 independent software vendors now co-selling relationships. However, the valuations even against the peer group are not attractive at this time. The company is early in its growth journey, and GAAP profitability is not something I anticipate seeing in the near-term. That isn't something I always require to invest in a company, but there isn't enough for me with just looking at a revenue growth rate. Additional operating leverage in the coming quarters could change my mind.
For further details see:
MongoDB: High Flyer Worth Waiting On