MongoDB, Inc. (NASDAQ:MDB) Piper Sandler Growth Frontiers Conference Transcript September 13, 2022 4:00 PM ET
Executives
Michael Gordon – Chief Financial Officer
Serge Tanjga – Senior Vice President, Finance
Analysts
Brent Bracelin – Piper Sandler
Brent Bracelin
Good afternoon. My name is Brent Bracelin, Co-Head of Tech Research here at Piper Sandler. Thank you for joining us. The next fireside chat is going to be with MongoDB. We have Michael, CFO; and Serge. Thank you from MongoDB joining us today. Welcome to Nashville.
Michael Gordon
Thanks for having us. It’s great to be here.
Question-and-Answer Session
Q – Brent Bracelin
Absolutely. So, obviously, three things that love the audience to come away from this session with a better appreciation on Mongo. One, we talk a lot about what could go wrong. We have macroeconomist team here that walked through a lot of things that could go wrong as a global recession risk increase. So I would love to better understand what could go right in the business. I think it’s a healthy exercise to go through. Two, Atlas competitive moat. And then, three, the go-to-market, just a refresher on what’s working, what’s not working over the last couple of years. So what could go right? Obviously, a lot of uncertainty out there on the macro, I think if I look at your guidance for the second half of the year, lowered to 25%, which employs — implies my Q4 growth rate could slow to the high-teens, mid-teens. That compares to 55% growth in the first half. So one of the questions we are getting from investors is, is there something structurally wrong, maybe walk us through what’s factored in to this material slowdown in your growth profile, particularly looking at what that implied sub number could be for Q4?
Michael Gordon
Yeah. Sure. And like I said, thanks for having us. It’s great to be here, happy to run through a bunch of different things, maybe just in the macro sense, meaning big picture, not macroeconomic.
We should talk a little bit about sort of some of the drivers of the business and the time horizons and then we can get into some of the nitty-gritty around the guide and the implications for Q4, kind of the implied guide, obviously, we haven’t explicit guide, but I understand that all of you excel at full function math.
And so when we look at it, I think the key thing is that it’s helpful, I think, most couple think about the business in two different piece parts. And the piece parts are the new customers that we win, the new logos that we win, the new workloads that we win from existing customers and what the dynamics of that are as compared to the expansion of existing applications.
And all this is within the context of Atlas. Atlas is our Database-as-a-Service offering. It’s 64% of the business within the last quarter, growing at 73%. So that gets a lot of the investor attention.
We manage and run the business on a channel basis, but given that the consumption dynamics that we are describing play most in Atlas, I will spend some time there. But that’s not the entirety of the business.
And the Enterprise Advanced, which is the other key product has really outperformed our expectations. Again, we run the business on a channel basis, but it’s a little bit of help to get people to understand things.
So if you think about winning new customers or new workloads from existing customers. That tends to be the biggest governor of our success over the medium- to long-term, right? We are playing in this market. That’s a market that’s $85 billion in 2022, growing to $138 billion in 2026.
So the fact that we are at a $1.2 billion run rate is great, but we have kind of just crossed 1% market share. We have got a long way to go and so the medium to long term is much more dictated by the outcomes of how we are acquiring new customers and further penetrating our existing customers.
The good news is we are doing incredibly well there, right? Q2, we reported a record number of net customer adds in the direct sales channel. We have not experienced any of the sales cycle elongation, deal slippage, deals getting incremental scrutiny, those kinds of things that a lot of other companies talked about.
And I think that really speaks to the value proposition that MongoDB offers, the fact that we are at the top of the priority list from a funding project prioritization standpoint and so we continue to be very successful there.
In addition, I think underscoring the mission criticality of our offering. We haven’t seen any upticks in churn or any of those kinds of things that might be associated with macroeconomic issues or concerns.
So all that’s going quite well and so when we think about the medium- to long-term in the future, we feel really quite optimistic and bullish and all those kind of leading indicators are flashing bright green. The good news is those are also the things that are within our control.
If we think about what governs the short-term more, it’s really more about the expansion of existing workloads, right? When you given — when you think about the average new workload comes on pretty small, grows quickly over time from there. But we have gotten to a size and scale where the installed base is reasonably large, right? And so the near-term results are much more dictated by the expansion of existing workloads.
And so that’s where we have seen some slower growth, not outright contraction, but what we are talking about here is slower growth. And the reason why we have seen that and we can walk through whatever level of granularity people want to get into. But the reason why we have seen that is our value proposition is very closely mirrored to the underlying value that our customers get out of MongoDB, out of our platform.
So if you think about it, organizations, companies are building applications, they are spending their scarce and precious developer time to build an application and then we — they basically in cocas with us as the underlying application is used, right?
So the growth and expansion of the existing applications is much more of a second order effect around the underlying end-user activity of that application and that’s what we have seen to be affected by the current macroeconomic environment, most pronounced in sort of like the mid-market, which is effectively the low end of the direct customer side and in Europe and so that’s sort of the dynamic at play.
I will sort of pause there just for a second, but maybe, Serge, if you want to comment on specifically the Q4 setup and kind of some of the implications around the guide to get to Brent’s question.
Brent Bracelin
And maybe before we go there…
Michael Gordon
Yeah. Sure. Yeah. I could pause there.
Brent Bracelin
Right. What is the percentage of the business tied to the mid-market and what’s the percentage of business tied to Europe and then I think Q4 color would be great?
Serge Tanjga
Yeah. So we — in Q1 when we first started seeing the macro weakness, we wanted to give you a framework as to how we think it’s going to play out and we thought that the way that made them more sense was to do it by channel.
Brent Bracelin
Yeah.
Serge Tanjga
And then when we just reported Q2 10 days ago, we wanted to make sure that we sort of grade ourselves against the framework that we provided and give you the transparency and the intellectual honesty in terms of where things went better versus worse than we expect.
So we said at the time was self-serve, which is about 14% of our total business, which by the time of our Q1 call had already slowed down in most geographies of the world. We expected this low growth to continue and self-serve did a little bit better than we expected it to, rough justice in line.
The mid-market channel, which is another mid-teens portion of our business, at the time it was only weak in Europe, but we thought that the weakness would spread everywhere and that, in fact, did happen, and not only that, but the business slowed down a little more than we expected it to and I will circle back to the why.
And then by far the largest channel enterprise or to the rest, we thought it would modestly slow down, less so than the other channels and what ended up happening is that North America did better than we expected in Q2 whereas Europe was weaker.
And so to then, you are just kind of — so on the score board, North America enterprise and self-serve did better than expected, EMEA enterprise and mid-market below our expectations and so the EMEA mid-market, there a very classic micro slowdown.
We saw it across industries, across geographies, to Michael’s point, driven by end user application growth slowing down, and frankly, we have been talking to a lot of investors since we reported earnings. That seems to be very common. We are very little surprise or follow-up questions in Europe.
When it comes to mid-market, at the high level it sort of doesn’t make sense, right? At the very low end is doing in line with your expectations. The high end is doing sort of based on geography, but doing kind of in line what you would expect it to. So how come the middle is underperforming?
And that goes to the fact that this is the part that we wanted to explain a little bit to our investor base and analysts that our mid-market segment is not your typical mid-market company. It’s not local, regional retailer or a chemical or a fertilizer company, it’s companies that build their own software.
So they are going to be more tech forward going forward and the more tech forward and in fact, as a subset of them, which we refer to as a significant minority that we call digital native. So these are companies that are tech-forward, high growth, whether they are competing in a consumer environment or a B2B environment, they are disrupting the end market that they are going after and they likely built their core application at MongoDB.
We have seen those players slow down more than the average during Q2 and that was the reason why mid-market as a whole, which again is 15% of the — certain market, the mid-teens percentage of the business do worse than we expected.
We got a lot of questions from investors and maybe some people thought that we were signaling that this is like a pretty dramatic fall off in that group of customers and maybe parallels to some other companies, really all we are trying to do is sort of grade ourselves against the framework and give you the complete picture.
Brent Bracelin
Moving to risk, risk that you see potentially unfolding in the second half of the year?
Serge Tanjga
Well, let’s actually talk about that, because although Q2 slowed down, as we expected it to and there are puts and takes around it, but we kind of saw a global slowdown manifested itself. The business and the consumption trends in Atlas have been reasonably consistent for the last several months.
And unlike in Q1, where we had every reason to assume that what was starting to look like a global slowdown will spread and become one, now we are in one and we sort of — we get a taste of what it looks like in fields, including through the month of August, which is the first month in this current quarter. So our guide assumes that this current slower than normal growth rate continues and that brings us to your question around Q4.
The first thing to remember about our implied Q4 revenue guide is that we had an exceptionally hard compare. And even if you go back to our market call when we first introduced the fiscal year 2023 guide, we were saying that the business was going to decelerate meaningfully in the back half of the year because the compare was so tough.
And that is not just an EA compare where we had very strong Q3 and Q4, driven by our focused accounts by our named accounts, whatever they call in some other companies and we closed a number of large seven-figure deals and sort of that is now what we need to comp against. But we also had a tough Atlas compare.
Q3 was — Q3 of last year was exceptionally strong consumption quarter. You may recall we discussed this. We do and others in quite a bit of detail. And it was across the board strength, much better than the normal sort of range of outcomes and that benefits not just Q3 but also Q4 now we get to comp it.
So that’s a numerator — denominator. Your numerator by the time we get to Q4, Atlas will have grown at this lower pace for three quarters, which is the deficit that lower growth keeps accumulating and that’s what results in the growth rate that we are going to see, but it’s part of compares, part of the current macro environment.
Brent Bracelin
And so let’s put the script walk through what could go wrong. What could go right as you think about between now and end of the year, getting kind of familiar with this logic of a tough compare. We have heard that from you guys for several years now about reminding us about the tough compares. So, Michael, for you, what could go right? Financial services is an area where it still like saw tremendous amount of success, are they adding — could they add new applications at a faster pace, how big is financial services as a percent of the business today for you? Just walk through what are the variables that could go right. Put on your — I know it’s uncomfortable, but put on your positive hat for a second here.
Michael Gordon
I am generally…
Brent Bracelin
What could go right?
Michael Gordon
I am generally very positive. So a couple of things just to get the questions. So we have got quite broad diversification. So it isn’t like real industry concentrations. Certainly financial services is a large part of the IT spending market and certainly is appropriately and comfortably represented.
And I think most of the big, large financial services firms around the world have or are building MongoDB practices and stakes and we certainly are benefiting from some of the transformation that’s happening there for sure.
I think to the comment that we are saying earlier, the biggest things that would go well, I think, relate to — aren’t tied to the macro, right, because we will sort of put that aside and I think we have beat it after that. But really relate to continually strong new additions of winning new workloads and new customers.
To caution folks — not to ignore the spirit of the question, but to caution folks that takes a while to show up, right? We talked about this even in COVID and other times. Part of what we do in terms of providing a developer data platform that allows developers to build applications is inherently not quick twitch, right?
And so, yes, we benefited in the end from COVID and COVID sort of accelerated all the pre-existing secular tailwinds that we were already benefiting from. But people don’t just wake up suddenly and say, oh, I need to digitally transform or to modernize and build an application that afternoon, right, as opposed to going out and saying, oh, I need collaboration or video conferencing software, something that they can instantly provision and it can provide the sugar rush. We don’t have that kind of quick twitch nature to what we do.
But I think that from a positive standpoint and we have run the business from a long-term standpoint, I think the value prop that we have is continuing to resonate. I think the strength of both products, Enterprise Advanced and Atlas really just speak to the fact that what we are offering is of incredible value.
We are seeing that consistently within the market. We see adoption. Investors always use this phrase with us at like tipping point or inflection point and I always worry what that means they are going to do with their models.
But we do see increasing confidence from customers. We are increasingly being declared standard or not everyone’s formal about it, but are treated as a standard that allows for greater penetration. We are getting more intelligent and smarter about what actions to focus on that sort of drive penetration further in accounts.
Because, again, if you go back to the big markets that I talked about, $85 billion going to $138 billion, we have a quota carrying headcount measured in the hundreds of reps, right, versus thousands or tens of thousands for our competitors, right? So our big challenge in terms of capturing the market is footprint coverage, right? When we are in a dialogue, our win rates are exceptionally high.
Brent Bracelin
Yeah.
Michael Gordon
Right. And so, the question is, how do you go out and do that? So we continue to iterate and get smarter around that, and that’s a lot of what allows us to sort of capitalize on this long-term opportunity that we have.
Brent Bracelin
We are going to put a pin in this, as analysts in Wall Street, we like to put pretty bowls around them. So it sounds like mid-teens, high-teens growth implied for Q4 is really macro exacerbating tough compares and the key is that this isn’t a structural change in the growth profile of this business, but it’s kind of isolated factors impacting kind of this implied Q4 run rate? Let’s talk about Atlas and the competitive moat you have here. We continue to get questions from investors around why can’t Amazon, why can’t Microsoft kind of get in this space. So just remind us what are those one or two primary competitive reasons why you win?
Michael Gordon
Yeah. So a couple of things. So one I think it comes down to the beauty of software and intellectual property, right? So we have actually created something that is different in that we own the IP rights to…
Brent Bracelin
Yeah.
Michael Gordon
… which is the reason why given the popularity of MongoDB, you haven’t seen the cloud players just take our code and run it as a service, right? Most open source projects that get any level of traction tend to be most effectively monetized by the cloud players because most of those companies or open source projects really are open source intentionally under highly permissive open source licenses because that’s what would allow all of us in this room to be able to collaborate and kind of edit and modify and incorporate the software and I don’t have to worry about adding or building on to the software and worrying I am on accidentally trampling on your intellectual property rights.
MongoDB was different. We built MongoDB. We own the intellectual property of MongoDB. So it wasn’t spun off from some other project or company as sort of non-core technology, as often happens, and people say, hey, community go make it great. It winds up being really about kind of low cost crowd sourced R&D.
That’s not the MongoDB story. We built MongoDB. So have the intellectual property, have the technical acumen to build it. Made it open source in order to drive awareness, right? That’s if you think about how do you drive developer adoption and mind share, it’s letting them experiment and play…
Brent Bracelin
Yeah.
Michael Gordon
… with the product, right? So really used open source in that context, almost much more like a freemium strategy and sort of a trial and awareness component. We did it under a much more restrictive license that prevented the cloud players from taking our code and just running it as a service.
Which is why, as they have seen the popularity of MongoDB, they have all taken slightly different strategies. Google has sort of taken a best-of-breed approach and partner with us. Microsoft and Amazon saw the popularity of MongoDB, tried to create imitation offerings, not using our technology, but trying to sort of capitalize on the popularity and we have had exceptionally high win rates against those clones in particular.
Brent Bracelin
Do you see any change in Oracle going up in the cloud…
Michael Gordon
No.
Brent Bracelin
No?
Michael Gordon
No.
Brent Bracelin
No popping up?
Michael Gordon
No.
Brent Bracelin
Okay.
Michael Gordon
No.
Brent Bracelin
A lot of talk like…
Michael Gordon
We don’t see it. Look, it’s a big market…
Brent Bracelin
Yeah.
Michael Gordon
But we don’t see it, and yeah, we don’t see it.
Brent Bracelin
Let’s shift to go-to-market and as we think about…
Michael Gordon
Actually what — there’s one thing in the cloud that I think is very important for people to understand just quickly before we leave it is, in addition to the technological advantages and superior and the IP protection we have, I think another thing that’s really important in the market for customers is platform independence. They are very, very worried about getting vendor lock-in within the cloud players.
And so the idea of running a proprietary cloud database, right, which locks you in to the application at the application layer, is extremely difficult to port over and so the beauty of MongoDB is not only can you run it in your data centers or on a laptop or in a hybrid environment, but you can move from cloud to cloud.
So we run on all three major hyperscalers. We now have multi-cloud and cross-cloud capabilities. We are the largest database service offering in over 80 plus regions now and so you can have a cluster running on Google and a cluster running on Amazon for the same application.
You could migrate, you could port it over and so customers really value that flexibility and so that vendors sort of independence or platform, cloud player independence is also really critical to the strategy, sorry.
Brent Bracelin
Double clicking in the go-to-market.
Michael Gordon
Yeah.
Brent Bracelin
I think at the time of the IPO, you gave us a stat on percentage of the business driven by kind of Oracle migrations. You updated that stat I think in the last six months and actually is lower, which implies more of your business is driven by actually new apps and new workloads. And I am just trying to put that in context of the freemium offering, the download, 300 million downloads.
Michael Gordon
Yeah.
Brent Bracelin
I think that’s more in the last year than in the first 10 years, 15 years of the company. So talk to me about the value of that download top of funnel, really strong activity, is that something you track, is that top of funnel, is that driving some of the activity in the top of funnel, new logos, just walk us through that…
Michael Gordon
Yeah.
Brent Bracelin
… sort of those in motion?
Michael Gordon
Yeah. So that 300 million downloads, that just to our website alone. There are plenty of other repos and depots that you can also get it from 100 million just in the last year to your point sort of acceleration, right? That’s more…
Brent Bracelin
Yeah.
Michael Gordon
… I think, than we had in the first 10 years or 11 years, to your point. It is absolutely about developer awareness. It works as kind of like an indirect top of funnel, because of the open source nature and everything else, we don’t heavily gate it.
And so you can’t perfectly recreate like a true funnel of like, okay, how many downloads per conversion or what are your conversion rates on some of those kinds of things in the way that you are sort of analytical marketing line, we want to reconstruct like a more perfect funnel. But it absolutely is an indication of the awareness, the relevance and effectively as a leading indicator of that.
In terms of the relational migration piece, what we see is we see very strong activity both in terms of new application builds, as well as re-platforming of legacy applications. I mentioned in those market size stats, we basically have $12 billion a year of new growth, right, in the market.
So most of that is coming from new applications and as the leading modern general purpose database, we continue to gain share of those that we are gaining over time. But we are also continuing to win a larger and larger dollar volume of relational migrations. You mentioned at the time of the IPO, it was 30% of the business overall.
Most of the Atlas workloads tend to be new and even if they are not out right now, you get to a little bit of a semantic debate, because by the time I am modernizing something and putting it into the cloud, like is it new, is it not new, but like, so mostly people think of it as new.
Brent Bracelin
The mix shift of Atlas may also help that number as well.
Michael Gordon
Yeah. Yeah. And then within pure Enterprise Advanced, they are kind of like more apples-to-apples comparison. The number still continues to be around a quarter. So it may be a hair down. But when we think about the overall volume, we continue to have see more dollars migrating from Enterprise Advanced because of the value proposition.
So we are not focused on one flavor or the other. I think the key thing is the general purpose nature, the mission criticality and compared to several years ago, from a product standpoint, we deliver against that and can deliver in sort of the most demanding of use cases.
And part of the challenge from a marketing perspective is making sure the developers who play with that open source product five years, seven years ago that didn’t deliver at that and experienced it in an uncurated fashion are brought up-to-date around what the capabilities are.
Brent Bracelin
Last week we looked at some of the hiring trends of some of the global GSIs, PwC, Deloitte, Capgemini, it looks like they are aggressively hiring MongoDB engineers. Walk us through the global SI partner channel, is that a meaningful channel yet, is it becoming slightly more meaningful and how meaningful could it be looking out like three years to five years?
Michael Gordon
Yeah. It continue — they are all good partners. We have partnerships with all the folks you listed, more, Accenture and others, et cetera. The key thing is their businesses are such a size and scale that they need to feel confident that they can build big practices in order to move their own internal needle.
And so what we have seen is we have grown from $100 million roughly or at the time of the IPO to the $1.2 billion run rate that we have were more relevant and there’s an easier path for them to see how to build a business around MongoDB.
They are huge beneficiaries of the work that we do and we — especially in relational migrations, right? The sort of hands on keyboard work of re-platforming is their bread and butter. So we have a number of good partnerships with them around that.
They are also away from the global SIs. There are also a number of boutiques that only do things related to newer modern technologies that may be built a whole FI practice around MongoDB and other things and so they have been great partners and so it’s a multipronged strategy. But we care a lot about controlling the direct relationship, but partners have been a nice accelerant and I think will continue to be for us.
Brent Bracelin
Last question, 30 seconds. Serge, what could go right next year for you as you think about offsets to this increasing backdrop, are there company-specific drivers that you are like, hey, this Atlas thing could continue to have wild adoption with new customers, like what could go right?
Serge Tanjga
I think it comes down to adopting more workloads, whether they are the first workload there for a new logo or additional workloads. They can come in multiple flavors. We keep getting better and more focused in our GPM efforts, we talked about some of it now.
Brent Bracelin
Yeah.
Serge Tanjga
In terms of just being laser focused on acquiring new workloads and figuring out ways to attract friction. Then on the product side, we haven’t talked about it here. But we sort of expanded our product offering to go beyond the core database to be the developer data platform that has elements of search…
Brent Bracelin
Yeah.
Serge Tanjga
… elements of agile, elements of real-time analytics, all of those are incremental hooks for incremental workload. So both from a product perspective and from the go-to-market perspective, we have aligned and have been aligning for years around the idea of gaining share by acquisition of workloads, and back to Michael’s point, it’s frustrating that we have these near-term headwinds.
Brent Bracelin
Yeah.
Serge Tanjga
But everything that we are seeing is showing us that at the front end where we actually have control over the outcomes, things are progressing as planned and that gives us a lot of confidence for next year and in the future.
Brent Bracelin
Awesome. Great having you guys in Nashville. Thank you so much. We are out of time.
Michael Gordon
Thanks for having us.
Brent Bracelin
Thank you.
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