2023-03-09 16:15:03 ET
MongoDB, Inc. (MDB)
Morgan Stanley Technology, Media & Telecom Conference
March 09, 2023 11:00 AM ET
Company Participants
Dev Ittycheria - CEO
Michael Gordon - CFO
Conference Call Participants
Sanjit Kumar Singh - Morgan Stanley
Presentation
Sanjit Kumar Singh
All right. Good morning, everyone. Welcome to Day 4 of the Morgan Stanley TMT Conference. Last day of the conference, we're going to end it strong. We're super happy to have the management team from MongoDB join us. CEO, Dev Ittycheria; and CFO of Michael Gordon. Dev and Michael, thank you for joining us.
Dev Ittycheria
Thanks.
Sanjit Kumar Singh
Before we get in discussion, let me go through some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Question-and-Answer Session
Q - Sanjit Kumar Singh
To kick off the conversation, I was looking at [indiscernible] model, I was fortunate enough to lead the IPO way back in 2017. And the revenue from fiscal year '17 to the year that you just completed has increased by more than 11x. So incredible success. And 1 of my favorite themes when I talk about MongoDB to clients is that you guys have been 1 of the most stress-tested companies in the markets in terms of cloud, competing with hyperscalers, partnering with hyperscalers. So it's been a very impressive track record. We did this year, see some slowness. I wanted to like recap some of the themes from the earnings call last night.
In particular, you guys called out some consumption weakness related to Atlas and so maybe either Dev or Michael, how was Q4 different than what you saw in Q2 and Q3? And were there any themes across market segments or geos or verticals of that drove or contributed to the weakness I want to start summarize the quarter.
Dev Ittycheria
Yes. Maybe I'll just start with the quarter. We had a strong quarter, we delivered [50%] year-over-year Atlas growth, 36% growth of the overall business. We delivered 10% operating margins. And in general, our new business activity was also very strong. Retention rates were incredibly strong. So overall, we feel like we had a good quarter. What we did call out was that in December and January, we did see a slowdown. We had expected a slowdown, but it's probably -- it lasted longer than we had expected. And what we talked about is that when we see the February data, the consumption seems to be trending back to the -- to what we saw in Q2, the average of post Q1 slowdown pretty much what we saw the the last 3 quarters of last year. So that was essentially the kind of the highlights. I don't know if you want to give any more color.
Michael Gordon
Yes. No, I think the only other thing is, as we said in the December call, we did expect December and January to be slower, as Dev mentioned, that just was more pronounced. It was across industries and geographies. Obviously, the holiday season is a relatively global phenomenon. And so there isn't a lot of particular interesting undercurrents or differences or divergences.
Sanjit Kumar Singh
Makes sense. And then in terms of Q1, it calls for a flat to sequential decline in Atlas as well as in Enterprise Advanced. Can you just sort of walk us through why that's the case going into Q1, Michael?
Michael Gordon
Sure. A few things just for folks. So on Atlas, there are really 3 things that affect the sequential view of Atlas from Q4 relative to Q1. First, which we've talked about and folks who follow the company well or closely know is that there are fewer days in Q1. So that's about a 3% headwind right there. Secondly, in the call last night, we talked about several million dollars of unused commitments that we saw in Q4. This is the cumulative effect of the slower consumption that we saw earlier in the year in Q2 -- starting in Q2. So Q2, Q3, that's revenue that we typically would have seen from consumption there. And so that creates a several million dollar headwind as you look at the sequential from Q4 to Q1.
And then lastly, when you think about the slower growth that we saw, it means that the starting ARR of Q1 is lower than it would have been and so that presents a headwind. And so that's why we're looking for Atlas to be flat to slightly down. That's atypical. That's sort of not the normal trend. And so I wanted to give you the piece parts to help understand that. And then on Enterprise Advanced, that's a more typical dynamic. Q4 is our strongest selling quarter. That Enterprise Advanced has the term license component under ASC 606. And so we typically expect to see declines from Q1 -- Q4 to Q1 sequentially. And so this year is no different than that. The renewal base is much smaller. We tend to not sell a lot of new customers and Enterprise Advanced, it tends to really be more of an upsell motion and the renewal base is smallest in Q1.
Sanjit Kumar Singh
Makes a lot of sense. And then, Dev, for you, in this sort of weaker environment, can you just sort of walk us through your thinking on how the team is going to operate or invest from a strategic perspective, what areas are you sort of pulling back? And what areas you're sort of doubling down to put the company in a position to come out stronger out of this downturn?
Dev Ittycheria
Yes. So we've turned that inside the company is raising the bar and that really means is essentially having a higher bar for new investments, a higher bar for performance and a high bar generally in expectations, how run the business. And so from an R&D point of view, we're very committed to our road map. We are evolving from a database company. It's a true developer data platform, and that's really resonating with customers, especially as customers want to consolidate vendors in this environment. They love the fact that they can consolidate more and more workloads. I would argue that we've essentially won the no-SQL market. And so rather than using a bunch of bespoke point solutions, customers really want to kind of move to 1 platform with 1 elegant interface and where all the data sits. So that's one.
On the go-to-market side, we obviously assess the different channels we have. We have a fairly complex -- we have a high-end enterprise channel. We have a mid-market channel and we have a self-service business, we are constantly assessing the effectiveness of those channels and especially even teams, sub-teams in each channel. So in areas that we're seeing good results we're doubling down in areas that we're maybe want to see better performance or pulling back. And we're orienting and we talked about this on the call yesterday really focusing on acquiring new workloads, either through the acquisition of new customers or the expansion of existing accounts.
And then on a people side, obviously, we've grown very quickly, and we recognize that not every person was a perfect hire. And so we're assessing and looking at our team and asking our team to raise the bar. Now that's not going to see a cost reduction exercise. It's more of a racing bar exercise, but we are also slowing down growth coming into this year, given what we see in the macro environment.
Sanjit Kumar Singh
A big topic for investors over the last year, certainly over the last several months, particularly we see the results coming out of the hyperscalers as what's the sort of state of cloud and cloud investments. And when you look at some of the key elements that drive growth for MongoDB, new workloads, new applications, re-platform or modernizing existing applications. From what you -- from your perspective, Dev, what do you see in terms of cloud transformation projects, digital transformation products, cloud migrations, are those slowing down materially? How do you see the priority of this category spend, which has been really strong over the last couple of years.
Dev Ittycheria
Yes. What I'm just to make clear is our slowdown in revenue is really a slowdown of existing workloads growing slower than we have seen in the past. Our new business is still strong. We still see customers building lots of new applications, frankly, the talk and excitement about generative AI is spawning a whole new genre of applications. And so we don't see the level of software development slowing down. In fact, I would argue that almost every company's business strategy is expressed through the software products and services that they build in terms of new products or how they want to run their business. And so that's super important.
There is some talk about like seeing the hyperscalers and their slowdown. I think you have to remember, hyperscalers offer lots of services. Not all those services are mission critical. For us, people do view MongoDB as a mission-critical platform. Many customers told us returning you off, we're shutting off the lights and closing the doors because we're like the backbone of their business. And so we feel like -- and we feel, given also the next genre technologies that software development is going to be even more important and developers is going to drive that agenda.
Sanjit Kumar Singh
You mentioned AI, and it was a later question, but let's tackle right now. There's obviously a big excitement around large language models, generative AI. And I think MongoDB as a company that's focused on developers, the acceleration of code development with these types of technologies. Walk us through what do you think some of the knock-on effects for MongoDB could be, if developed productivity is going to materially increase. And any other comments you may have on how AI impacts MongoDB's growth accretion?
Dev Ittycheria
Yes. I think it affects our business in 3 ways. One, as I said, you're going to see this boom of new software applications. I mean you've talked to any venture catalysts out there, they're getting flooded with people with a bunch of AI companies trying to raise money. And obviously, every enterprise company is also like trying to leverage generically I, OpenAI just lowered their API costs. So they're really democratizing the access of their large language model. You've seen that also happen with stability AI and people like hugging phase. So I think that's just going to spawn a whole genre of applications and developers are going to be the center of that.
The second thing is, I think you're going to see is the developer productivity dramatically increase through things like cogeneration, automation of test cases, automation of documentation, automation of comparing algorithms to see which 1 works and a whole bunch of other ways that developers have increased productivity. So that's going to mean that the velocity of new application development is only going to increase, which is going to be help for us. And the third area I see is that, obviously, with the large language models like open AI, everyone has [access] data. But when companies say, I have this corpus of internal data that I have if I can use that data to train my malls and give me a competitive advantage over others, then I need to be able to access that data. So you're going to see a lot of people start modernizing their legacy stacks because a lot of the data is trapped in legacy platforms, and it's not so easy to use. I think that's another advantage for us. So we view AI as a real accelerant for our business.
Sanjit Kumar Singh
And as an operational database, you owned a lot of that.
Dev Ittycheria
Yes, I mean, said another way, I view us as the -- and for the first category views as the picks and shovels of the gold rush. Like people are -- a lot of AI companies are building on top of MongoDB. They're doing the transformer work. They're doing all the training of the models, but they're using our massively scalable data persistent platform to essentially build those next-generation applications and companies.
Sanjit Kumar Singh
A long-running theme for MongoDB has been the ability to -- the document model to address more and more use cases and more and more workloads. I remember at last year's Analyst Day, I think you called out time series graph and search as additional workloads that can be subsumed or consolidated onto the MongoDB platform. What's sort of the state of play when it comes to those initiatives? And is there anything that the that the team needs to do on the product side to drive more of that standardization and consolidation of those workloads?
Dev Ittycheria
Yes, you started this session by framing that we've been battle tested or battle scars, right, in terms of questions. The first big question when I became CEO, can MongoDB really run mission-critical applications. We answered that question. Then the second question was, can you really be a general purpose platform? We answered that question. Just look at the size of our customer base, look at the variety of use cases across every industry, every geography. And then the more recent question, when we went public was, can you really build a cloud business -- and to end with the hyperscaler is obviously proved that in spades, given that Atlas is now 2/3 of revenue.
And so our platform strategy is based on the fact that the document model is truly a general purpose way to run a wide variety of use cases. It can support key value stores, it can support asset transactional-intensive use cases. We built out search. So people don't need to have a bespoke elastic or solar implementation. They can run everything on MongoDB. Time Series is getting a lot of attention, and we're seeing a lot of demand from customers to run times workloads on us. We also have mobile capabilities and doing very sophisticated enterprise mobility use cases with active device sing. So the list goes on and on and graph. So I believe that all these kind of point solutions are going to really struggle, especially in an era when customers want to consolidate vendors and they see a way to kind of do that with MongoDB.
Sanjit Kumar Singh
Is there any sort of examples of that coming out of the Q4 call about enterprises moving towards that type of motion of standardization and consolidation. I think there was a couple of.
Dev Ittycheria
Yes. There's a number of use cases we called out a bunch of use cases where customers were basically consolidating vendors. And you've had to think about it, the tax of -- if you try and use a net new technology for every net new use case, you could end up with 10, 15 different bespoke database engines, right? How do you learn all that? How do you integrate all that? How do you synchronize the data? How do you even back up all that data? The cost and the tax of managing all those complex bespoke solutions just becomes overwhelming. And so when you look at most of the data is gravitating JSON, developers are the 1 driving the agenda. People want a highly performant and massively scalable platform. They want a platform that people already know and recognize. And so that really posits us well.
Sanjit Kumar Singh
Yes. And I think when you look at like the database lineup or the data management in from the hyperscalers, it is that 15 database lineup, which is.
Dev Ittycheria
Yes, I don't know if any customer wants to use 15 different databases in the enterprise.
Sanjit Kumar Singh
It makes a little sense. Let's talk about sort of sticking on product. And in this era of focus on ROI and cost, the relational displacement opportunity. I remember at the time of the IPO, Michael, you sort of called out 25% to 30% of net new business was driven by relational displacements. Last year, you guys came out with relational migrator. To what degree has relational migration has been a driver of growth in recent years? And how big of a focus can this be going forward?
Michael Gordon
Yes. So it continues to be a big opportunity. If we just take a step back right? The market per IDC is $84 billion in 2022, growing to $138 billion in 2026. Now our market is a little bit different, not every dollar of that is doing an RFP every day, right? You have an application that's working fine. But there's about $12 billion of growth in the market every year. We're exceptionally well positioned to go tackle that as the leading modern general purpose database. But there's also this sort of $84 billion that will give -- we can have a debate around application life cycles. But every year, there's an opportunity to compete for a portion of those and that's where you see people modernizing, right?
And the opportunity set there is to move from the legacy relational technology to a modern, scalable database that addresses a bunch of the things that Dev was talking about earlier, not just AI, but a whole range of use cases. And so that really is the core of the opportunity. We tend to see that most in the Enterprise Advanced product that continues to run at about 1/4 of the Enterprise Advanced business is relational displacement. So obviously, our business has grown. The dollars that we are displacing are increasing, and that continues to be an important part of the overall opportunity.
Specifically on relational Migrator, as we announced at our MongoDB World event last year, that's a sort of first phase. It's not meant to be a self-serve tool, relational migrations are complicated. But part of what relational migrate does so successfully is it helps demystify the document model, right? If you were trained 20 years ago, as a developer, SQL was the standard. That was the only way to do things. You didn't -- it was inconceivable that a docu model could deliver acid support, right? And so helping people understand and do sort of the schema visualization to see how would this work in a document model helps sort of debunk some of the concerns. And so it's helpful in that way. We're obviously continuing to invest in that -- right now, it's field-facing for our internal customers to work -- our internal teams to work with customers, but over time, we'll continue to invest in that because it is a big part of the opportunity.
Sanjit Kumar Singh
You mentioned the hyperscalers a couple of minutes ago. I wanted to get a status update on the sort of balance between them as a competitor in them as a partner particularly, I think 1 of the debates out there is in a slower growth environment to the hyperscalers get more aggressive with the cloud infrastructure ecosystem. So Dev, maybe what give us your take on what the sort of status of your relationships with the hyperscalers?
Dev Ittycheria
Yes, I would tell you that our relationships with all the 3 U.S. hyperscalers have never been better. I would say people may remember the year after we went public, Amazon introduced their clone version of MongoDB. Now 1 of the things that's important for investors to realize unlike most other open-source companies, we have a very restrictive license that limits what people can do with that. And 1 thing they can't do is take our free version and go compete with us, which they have done for other businesses. So they essentially had to imitate our features and functions, but they actually built it on the relational back end. Our CTO, Mark Porter, actually was part of that development effort. So we know we have a lot of inside information or knowledge, I should say, on what happened. And so with that approach of building on a relationship back end, there was massive feature and performance trade-offs. And so obviously, it's a big market. They saw so much MongoDB running in their cloud, they said, okay, they want to go after that business, which which should be natural.
What they realized over time, 1 is that they could not compete head-to-head. And if they ended up losing that workload to another cloud, all that business that also was generated around that workload would go with it. And internally, you start realizing for every dollar we saw, they saw multiples that dollar in terms of total spend with the underlying storage and compute and all the other ancillary services the customer would buy.
So long story short, they started recognizing why are we competing with MongoDB, it's truly a win-win relationship. Now we're not naive. They still have their clones. And we have -- our salespeople are trained on how to go compete against those clones, and we have enough reference points where people have switched from the clones to MongoDB. The same situation happened with Azure, where Azure had their own close. They had an API for Kosmos DB. We have, over time, basically gotten to see the fact that they just can't compete head-to-head. And we just recently inked a deal where they're now incentivizing their sales teams, they're doing product integrations and even incentivizing their customers if they use Atlas, they can draw down against their commitments. So it's a much more friendly arrangement.
And then Google has always been friendly. They don't have a competitive offering to us. So that's been really good from the get-go. And I speak to the -- IR team speaks to the senior leadership across those 3 organizations frequently, if not weekly.
Sanjit Kumar Singh
That's a great update. In the database market, it's been siloed for the last couple of decades between the world of analytics, and the world of transactions and interactions where you get more of your business. In the past, there's been movements to bring these 2 worlds together and have this sort of unified platform. And so 1 of these -- it seems like there's another attempt at that going forward. You see companies like Snowflake try and move into the operational OLTP database market. What do you see -- do you see convergence happening between analytics and or data warehousing and the operational database? And how do you feel like MongoDB is positioned for that convergence?
Dev Ittycheria
Yes. It's important to understand there's 2 worlds. There's the OLTP, online transaction processing and OLAP, online analytical workloads. Those are the 2 different worlds. They serve 2 different personas. We serve the developer persona. It's -- for our business, it's all about getting developers to use MongoDB to build the applications that run and transform their own businesses. OLAP workloads are all about getting insights in terms of what's happening in my business based on the the data that they're collecting. And so they're very -- 2 very different worlds. And you also have to remember, if you look at cycle DB engines, there's more database companies available in the market than there are days in the year, right? So it's kind of I guess, a large TAM attracts a lot of people. But there's only really 5 to 7 companies that matter.
And so I know there's some companies out there claiming that they're going to try and do at all. I would tell you a lot of VCs come to me about investing in database companies. Database companies require a lot of capital and a lot of time. They require a lot of capital because -- this is not some trivial product you're building. You need to spend a lot of engineering man-hours to basically build the features that customers want, and it takes time to do that.
The second thing, it takes a lot of time to get developer mind share. One of the questions on MongoDB that investors had is, can we really be really successful. And when I looked at the developer mind share that we had and even today, our software has been downloaded over tens of hundreds of millions of times. We have 40,000 customers and millions of us running was. That's the reason we got -- we're winning. It's not -- because we have developers who really have preference of MongoDB over other alternatives.
And so I think it's going to be very hard for an OLAP vendor to move into the OLTP space because you have to get the developer mind share. Now the place that we think we are well positioned for analytics is real-time analytics because your OLTP engine is the place that's generating the data. products have I sold, what customers are buying, what stocks are trading? How much am I billing this customer, et cetera, that data, by definition, is real time then you can use that real-time information to basically speed your time to decision-making and speed our time to insight. And that gives us a very well position. And because we're a highly scalable in performance, perform platform, we can do that in a way without compromising the end user's experience. And that's where we're focused.
Sanjit Kumar Singh
Makes total sense. And this higher cost of capital environment that we're in, I wanted to talk a little bit with you, Michael, on the topic of margins. And maybe sort of frame it. I mean, clearly, the company has been investing for growth. I mentioned on the top of the call, you have 10x revenue in the last 5 to 6 years, which has been fantastic. And so I think next year, you're guiding for sort of 5% operating margins. If we step back and look at like sort of the unit economics of the business and maybe kind of your larger, more mature customers, what sort of margins are you seeing on them on your sort of renewal and expansion business. In line with the fact that you have companies that are at scale at sort of 40% operating margins today, is there anything structurally that prevents Mongo over the long term, reaching those types of terminal margins?
Michael Gordon
Yes. So a few thoughts. First, just back to the IPO, which you brought up. We had long-term target margins of 20-plus percent there. At the time, we were negative 36% margin. So we've made about 40 percentage points of progress towards that 55% that we're looking for. So still work to do, but a lot of progress over the last few years. When you think about the unit economics, I'd offer up a few thoughts. First, as Dev was talking about, he was mentioning workloads, this $84 billion market we're going after really isn't even customer by customer, but it's more workload by workload, right? And so I think it's easiest to think about unit economics on a workload basis. That first workload is the hardest to get, right? It's the most expensive, it's the most difficult. And then what we've seen and we -- you may remember, we had some analysis on this actually in the S-1, that talked about sort of the incremental progress, right, that second, third, fourth application are -- we're more successful. The velocity is higher. You start to win them in bigger chunks. The deals become bigger. And that's really where you see a lot of the operating leverage when you think about the cost of acquiring that workload.
And so customers -- we're still pretty early on in the journey, our relative penetration, even a big large opportunities. But most of our 200-plus million plus customers, we still have very, very small wallet care of, right? And so there's still an opportunity. But yes, you do see improving economics over time. But it's not -- I want to caution people not sort of full on like satin forget it motive like we've acquired the count. Now everything just sort of comes to us. We do need to keep investing in it, but we see meaningful economies of scale.
Sanjit Kumar Singh
That's a great, great context. I do want to go to the audience, if any questions for the team before I get there, just a couple of follow-ups. On the 20% operating margin target, how should investors think about the time line to get to that level? And then on the topic of stock-based compensation and share dilution, are you managing to a specific dilution level? And what would that be in calendar 2023 and beyond?
Michael Gordon
Yes. So on the target margin to 20 plus, we've not given a time frame. We've made continued progress against that. We said in our December call that we were expecting to make around 100 basis points this year would be in fiscal '23, and we'll be happy with that next year. We end up doing more in fiscal '23. And in our guidance that we gave last night, we were able to kind of deliver the additional 100 to about 250 if you think about it that way. We're pleased with that pacing. We are trying to balance the long-term opportunity that we have. And so we're not trying to aggressively or over course correct to emphasizing profitability at the expense of growth. We're taking a long-term orientation. And I think that's probably the critical thing. Do you want to talk about that.
Dev Ittycheria
So we are obviously in a business where it's really important for us to attract the best people in industry. This will not be a really good business if all we're getting were BRC players. And the thing is -- so we indexed our compensation to the market. And the market is really set by the larger tech companies. And more recently, start-ups. Now obviously, people are starting to rationalize their behavior, but we have to play in that market. That being said, we are not doing any make-whole grants or broad-based special grants to our employees given what's happened with our stock. We recognize that when investors feel pain, employees should also feel the pain commensurately. And that we also do recognize that we are shareholders ourselves, and we do care by dilution. And this is something that we're going to constantly work on as we continue to build the business.
Sanjit Kumar Singh
Yes. I appreciate the thoughts. Let's go to the audience and see if there's any questions for the management team take here in the front. Tom?
Unidentified Analyst
I just want to dig into the February improvement comment a little bit since that does stand out relative to some of your peers in this conference cloud world that still sound very uncertain on the near term and when there's going to be a stabilization on some of the cloud optimization efforts that are going on at customers. So wondering if you think that's something company-specific to Mongo? Or is it kind of a broader market region?
Dev Ittycheria
Yes. So let me address the point about optimization. So you have to remember, one, we've seen no change in the dynamic. But you have to remember, we are highly aligned with our customers. When a customer builds an application, they want that application to be used because they have scarce development resources, so no one's going to build apps that no one's going to use. So they see value when an app is being used and we see that revenue when that app is being used. So we are highly aligned with our customers. Now we have seen in the past year some corner cases and some customers under severe financial duress who've done some things about rearchitecting their clusters to basically sacrifice performance and resiliency and take on more risk.
Now those are corona cases and that's not really stable. But in general, we don't see customers focused on like trying to optimize like many other companies do. And we see the -- what we see is a high correlation with read growth with revenue growth. So as they're using their applications, they're upgrading their clusters. And so -- and that's been a trend for the longest period of time. Maybe you want to talk about.
Michael Gordon
Yes, just February was rebounded from the pronounced holiday slowdown that we saw February also, when you think about the expansion of existing cohorts was in line with really what we've seen, the average that we've seen over the course since the start of the turndown in Q2. And so we're pleased to see that recovery. Obviously, it's still below pre-macro levels, so want to appropriately make sure folks know that. And when you look at our guidance, this all relates to Atlas. When you look at our guidance, from an Atlas perspective, we're assuming that, that is the outlook, right? So we're assuming that things don't get materially better or materially worse, obviously, to the extent that they are better, that would benefit us to the extent that they deteriorate, that would be adverse to us. And then on Enterprise Advance, just to kind of round out the guide view because I know we're coming up on time here. We had a very strong year. We faced a tough compare there. We expect to see growth in enterprise advance, but just not as strong as we saw last year.
Sanjit Kumar Singh
Makes sense. And with that, thank you so much, Dev and Mike, you got earnings last night. You joined us on stage at a 8 o'clock in the morning. We really appreciate you joining us at the Morgan Stanley MTC Conference.
Dev Ittycheria
Thanks for having us.
Michael Gordon
Thank you.
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MongoDB, Inc. (MDB) Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)