First Look at MongoDB’s Q1 FY2023 Earnings Report

MongoDB (MDB) announced Q1 FY2023 earnings on June 1st. Overall, the results for Q1 were strong – particularly considering they represented improvement from a robust Q4 report. Revenue growth accelerated, profitability increased and customers expanded use of MongoDB’s application database platform. Forward guidance was tempered, however, with management expecting a slowdown in growth for small to medium customers as a result of macro headwinds. They quantified the revenue impact and raised Q2 and full year guidance slightly.

Audio Version
View all Podcast Episodes and Subscribe

The market reacted favorably to the results, pushing the stock up nearly 19% the following day. This still leaves MDB down almost 50% on the year, which may offer more upside if the macro environment doesn’t deteriorate further. I won’t rehash all of the metrics, as those are readily available online in the earnings report. Rather, I will focus on the highlights and add my perspective around the investment thesis. Additionally, MongoDB has a major customer event coming up this week from June 7-9, called MongoDB World. As part of this event, MongoDB will hold an Investor Session on June 7. These should provide updates on leadership’s longer term view of the business and overall product strategy. Information coming out of these events could represent a catalyst for the stock. For more background on MongoDB’s business, product offerings and competitive positioning, see my deep dives from past blog posts.

The Good

Overall, I was very happy with the Q1 results. These followed strong performance in Q3 and Q4 of last year. The trend of annual revenue growth acceleration each quarter for the past year continued. This growth has been driven by the strong adoption of MongoDB Atlas, their cloud-hosted solution. Atlas once again delivered annualized growth over 80% and makes up 60% of total revenue at this point. Atlas provides a convenient on-ramp for enterprises that want to bring their MongoDB installation with them to the cloud. At the same time, MongoDB’s self-managed, licensed offering (Enterprise Advanced) is experiencing high demand. As large enterprises consider maintaining (or even shifting back) some application workloads into their own data centers, MongoDB can serve both markets.

I was also pleased with the continued improvement in operating leverage. In today’s investment environment, growth at all costs is being scrutinized. The market now expects to see progress on operating margins as much as sustained revenue growth. MongoDB delivered here as well in Q1. Adjusted gross margins ticked up sequentially to 75%. Adjusted operating margin turned positive, improving 760 bps y/y. Free cash flow margin was positive for the second quarter in a row. On the closely watched Rule of 40 metric, MongoDB is clocking in over 60. This was not the case over the past two years.

Growth Metrics

Annual revenue growth in Q1 accelerated to 57.2%, up slightly from Q4’s strong performance of 55.8%. This beat the company’s prior estimate set in Q4 for 46% growth by over 11% of annualized growth. Revenue growth was up 7.1% sequentially from Q4 as well. This dipped from Q4’s 17.4% sequential beat due to seasonality. The sequential gain this year was higher than the Q4 to Q1 growth from a year ago of 6.2%.

Atlas revenue (their cloud solution) increased 82% y/y and now makes up 60% of the total. This hypergrowth in demand for the cloud-hosted version of MongoDB is the driver of the overall revenue growth acceleration. Growth in Atlas has been above 80% for several quarters in a row now. This rate will likely moderate over the next couple of quarters, but will continue to pull overall revenue growth upwards.

Even the licensed version of MongoDB (Enterprise Advanced) experienced sustained growth in Q1 of 30% annually. This is unusual as Q1 is normally a softer quarter for EA, due to seasonality. As some enterprises may dial back their cloud spend or “repatriate” it back to their own data centers, MongoDB is well positioned to meet this demand.

Hyperscaler Relationships

Atlas growth is being driven by strong relationships with the hyperscalers, most notably AWS and GCP. During the quarter, MongoDB further solidified these relationships. In March, they announced an expanded collaboration with AWS. As investors will recall, AWS was a competitor to MongoDB after launching their look-alike solution DocumentDB back in early 2019. At that time, many analysts speculated that competition from the hyperscalers would seriously impact MongoDB’s prospects. Fast forward to today and the situation is completely opposite. MongoDB and AWS are now actively co-selling Atlas to enterprise customers considering a cloud migration. I explored this dynamic between the hyperscalers and several independent software providers in a prior post.

This agreement with AWS builds on the current multi-year relationship between the two, aimed at driving customer adoption of MongoDB Atlas on AWS. In an effort to further improve the customer experience, both companies have agreed to collaborate across sales, customer support, solution architecture, marketing and other areas to make MongoDB Atlas a better experience for developers on AWS globally. This includes increased workload migration incentives and enhanced tools to help customers move from legacy technologies in on-premises data centers to MongoDB Atlas on AWS. Finally, the partnership will support MongoDB’s expansion into more AWS Regions across the globe and the US Public Sector with FedRAMP authorization.

Under this six-year agreement, MongoDB and AWS have committed to a broad range of initiatives to make it easier for joint customers to advance their cloud adoption journey, including integrated go-to-market activities across sales and marketing, developer enablement and training through shared developer relations activities, and both technology integrations and commercial incentives to streamline the migration of on-premises workloads to MongoDB Atlas on AWS.

MongodB press Release, March 2022

For further proof of AWS’ commitment to drive users to MongoDB Atlas on AWS, I noticed recently at that Amazon is buying ads on Google for the term “MongoDB Atlas”. At first, I thought this was MongoDB marketing, but checking the “About this Advertiser” link, the source is Amazon Web Services, Inc.

What is going on here? Simply put, AWS has realized they can generate more profit by promoting use of MongoDB Atlas on their cloud infrastructure than by trying to build and support a competing product. This is because AWS generates revenue on the compute and storage utilization of MongoDB Atlas. Managing their own solution like DocumentDB incurs costs in development and support staff. Additionally, any enterprise considering a cloud migration to MongoDB Atlas would also purchase compute (EC2), object storage (S3) and other ancillary hosting services from AWS.

Not to be left out, Google Cloud Platform (GCP) struck a similar agreement with MongoDB in April. In this case, it is a pay-as-you-go offering available directly in the GCP console. Customers will just be billed for MongoDB Atlas based on their consumption, with no up-front commitments. This makes provisioning seamless, as customers can initiate the relationship through GCP and consolidate costs onto their existing GCP bill. Atlas is deeply integrated with a number of other GCP services including BigQuery, Tensorflow, Cloud Run, App Engine, EventArc, Cloud Functions, Google Kubernetes Engine (GKE) and Dataflow.

We can expect these relationships to drive increased adoption of Atlas. What is also notable is that these deep relationships are unique to MongoDB. Publicly traded competitor Couchbase (BASE) doesn’t highlight these types of relationships in their press releases. The same applies for private competitors. MongoDB’s preferred relationship with the hyperscalers provides a competitive advantage for them that effectively narrows the field of options for enterprises considering their migration to AWS or GCP.

Profitability Measures

Driven by strong revenue growth, profitability measures demonstrated positive improvement in Q1 as well. This represents an important step in MongoDB ‘s journey, as a common gripe over the past couple of years has been a lack of movement on operating margins in spite of high revenue growth. This situation has improved over the past four quarters, demonstrating that MongoDB is on a path to generate reasonable cash flows and profitability while growing revenue.

Non-GAAP gross margin ticked up again sequentially in Q1 to 75%. This is up from 74% in Q4 and 72% a year ago. I like to see this continued operating improvement. Atlas is driving these efficiency gains. As Atlas use scales, the MongoDB team is finding efficiencies to support more installations with less cost. Additionally, they likely benefit from volume discounting with the hyperscalers. This continued improvement in gross margin aligns with other cloud-based software infrastructure providers and it’s reasonable to assume MongoDB’s gross margin can reach the high 70% range.

Adjusted operating income jumped considerably in Q1, driven by the revenue outperformance and some costs that didn’t hit in the quarter. MongoDB delivered $17.5M in operating income in Q1, compared to a loss of $2.8M a year ago and $1.3M in Q4. Operating margin was 6.1% in Q1 versus -1.5% a year ago, representing about 760 bps in improvement. In Q4, the company estimated that Q1 operating income would be about -$3.5M at the midpoint, representing a beat of $21M.

This performance trickled down to adjusted EPS as well. MongoDB delivered an adjusted EPS of $0.20, beating the analyst estimate for ($0.10) by $0.30. This represented the largest earnings beat in a long period. Free cash flow was positive $8.4M, the second quarter in a rows of positive FCF. That correlates to a FCF margin of 2.9%. On Rule of 40 basis, MongoDB hit 60 using FCF and 63 using adjusted operating margin.

Further demonstrating MongoDB’s ability to grow without increasing spend, revenue growth of 57% was higher than the annual increase in spending on both S&M and R&D. On a GAAP basis, S&M spend increased 53% year/year, while R&D increased by 49%.

Customer Activity

Customer activity was strong as well. MongoDB added 2,200 customers sequentially in Q1, bringing the total to 35,200. These numbers are up 6.7% over Q4 and 31% annually. In Q4, MongoDB added about 2,000 customers, representing a little acceleration for Q1. Customer additions have been bouncing between 2,000 and 2,200 a quarter for over a year.

I think the consistency in total additions is important, as spend expansion will fuel future revenue growth. I am not worried that the annual percentage growth is getting smaller as the total customer count increases. At over 35k customers, there are plenty of customers to monetize. Large customers will generate the majority of revenue and MongoDB has been focusing their direct sales efforts on these customers. For comparison, Datadog added 1,000 customers in Q1 2022, up 5.3% sequentially and 30% annually, bringing their total to 19,800. I think MongoDB and Datadog have a similar customer profile.

MongoDB measures large customer activity in two ways. First, they count the number of customers with ARR greater than $100k. These customers increased by 72 in Q1 to 1,379 total. This was up 5.5% q/q and 30.5% annually, but down from the record additions in Q4. Looking back four quarters, the total added for Q1 in this spend level falls in the range of values.

MongoDB has a second category of customer called Direct Sales, which is where the potential spend is great enough to warrant a salesperson relationship. The sales team has been focusing their efforts around this segment over the last year with good results in the past two quarters. These customers make up about 14% of total customers, but contribute 87% of revenue. The count of this category of customers increased by 400 in Q1 to 4,800 for an annual growth rate of 45%. Since the majority of MongoDB’s 35k customers are smaller organizations, this emphasis on large customers is a smart strategy to drive spend expansion.

Similar to a few other software infrastructure companies, MongoDB doesn’t report the exact value for the net expansion rate. Rather, they have established a target of 120%. ARR expansion was again above 120% in Q1, reflecting the increase in spend by large customers over the last year.

Areas to Watch

Looking forward, MongoDB leadership tempered guidance for Q2 and the full year. This is attributed to slowdown in spend expansion for certain segments of customers and geographies, due to a decrease in the rate of growth for their businesses. Given that MongoDB provides a database solution, companies cannot just shut it off. However, if their underlying business growth is slowing down due to a weaker economy, then these companies would not increase their usage of MongoDB at the same levels as in past years.

It is this effect that caused MongoDB leadership to factor an estimated impact into their Q2 and full year revenue guidance. Leadership is expecting a $4-5M of revenue impact for Q2 and $30-35M for the full year. If we add these estimates back into Q2 and full year guidance, MongoDB’s growth rates fall back into line. While there is a risk this slowdown in spend is due to other factors (like competition), that is unlikely given the strong results in both Q4 and Q1.

The strong Q1 results and clear attribution of forward guidance to macro consumption headwinds provided support for MDB stock following earnings. Normally, a minimal raise of next quarter and full year results would have been punished by the market. In MongoDB’s case, I think the market focused on the Q1 results and assumed they would continue through the full year if not for the deteriorating economic conditions.

On the earnings call, management shared they are observing slower expansion of workloads using MongoDB Atlas, primarily for self-serve (small) and medium sized businesses. This started in the EU in April and expanded to the US in May. They are correlating this behavior with the effect of macro headwinds, primarily for online businesses. These companies are not reducing their use of MongoDB. Rather, they are expecting to grow usage more slowly, as their online businesses slow. Additionally, they shared that the slowdown in the EU did not worsen in May, showing some stability at the lower growth rate. As the economic situation improves, we could see this effect reverse.

To account for the headwinds, management took the interesting tact of quantifying the specific impact to both Q2 and full year revenue estimates. I think this strategy played well, as analysts were able to project that absent these macro headwinds, revenue growth would have tracked roughly linearly from Q1’s strong performance. MongoDB leadership is assuming these impacts will persist through the year, which is the source of the guidance impact.

While the majority of the effect is manifesting with small to medium sized businesses, enterprise customers are exhibiting generally normal behavior so far. To be safe, leadership is modeling some slowdown in spend for them as well through the year. The magnitude being assumed for the small to mid-sized segment is larger.

For Q2, MongoDB raised the revenue target to 41.2% y/y, or about 2% annualized growth over the analyst estimate for 39.4%. Factoring back in the macro impact would have brought the growth rate to 43.4% and the raise to a more normal 4%. This estimated growth rate is closer to the preliminary estimate for growth in Q1 of 45.9% (from which MongoDB subsequently delivered 57.2% annual growth).

For the full year, they also raised revenue guidance to 35.2% growth at the midpoint, or by almost 2% over the midpoint of their prior range for 33.5%. Without the $30-35M of macro impact, the raise would have been a healthy 5% to about 38.7% y/y growth. We should keep in mind that MongoDB typically increases full year revenue guidance incrementally in a beat and raise cadence as the year progresses, so a preliminary target at this level wouldn’t normally imply deceleration of growth.

Estimated Non-GAAP net income and operating income for Q2 moved back to negative and were below analyst estimates. This is primarily being driven by the lower revenue guidance and includes several one time costs, most notably their user event in June. For the full year, though, they raised the Non-GAAP EPS estimate to ($0.24) at the mid-point, beating the analyst projection by about $0.12. This includes some of the outperformance from Q1.

Other Data Points

Leadership highlighted several customer wins on the earnings call. What struck me is the expanding set of application workloads that MongoDB is addressing. These go beyond their foundation in NoSQL (document-oriented) data stores. Customer wins referenced applications for search, analytics, mobile and mission-critical, transactional databases. The take-away here is that MongoDB has shifted from powering applications of convenience to being at the core of powering customer businesses. This increase in expectations for workloads is making MongoDB’s solution stickier in enterprise environments.

I like to see the expansion of application workloads. A big part of my investment thesis for MongoDB is the assertion that their database platform is appropriate for an increasing number of application data management use cases. With improvements to their product over the past two years, MongoDB can be considered for more data storage segments than just document stores. These “document adjacent” workloads include key value, search and time series at minimum. In some cases, the platform can handle relational, wide column and even graph workloads. The MongoDB query API is designed to map all of these patterns into MongoDB’s underlying document model.

Assuming MongoDB can address application workloads oriented around other data models, it significantly expands MongoDB’s serviceable market. While MongoDB’s TAM represents the $100B database market as a whole, it has historically been constrained to to the small percentage of NoSQL workloads associated with the document model. By making MongoDB suitable for a broader set of database functions, the percentage of the overall TAM that MongoDB could service increases.

Long term, MongoDB has a leading position in the market for application databases. Among modern, commercially available solutions, they are the leader. Couchbase (BASE) is the other modern independent, publicly traded database company. They lag MongoDB significantly in total revenue and growth. Other comparable databases like Redis, Cassandra, MariaDB and CockroachDB have several times lower market reach than MongoDB, according to industry measures like DB-Engines.

This theme of expanded workloads underscored the keynote presentation and investor session a year ago at MongoDB’s annual user conference. Their CTO went so far as to display a slide showing all the standard application database types with the popular solution for each. He contends that MongoDB would be a suitable replacement for all of these. The benefit to customers would be consolidated billing, lower cost through scale, a single implementation interface for developers and fewer vendors to manage. The current vendor sprawl around a multitude of point database solutions does create a lot of complexity for modern engineering teams. An argument to consolidate all of these database functions onto one platform like MongoDB appeals to engineering leadership at a high level. Personally, I would gravitate towards an all-in-one solution like this if it delivered commensurate performance and scale to most point solutions.

Other database vendors are moving to this multi-model offering as well. These include Couchbase, Redis and Microsoft’s CosmosDB. Of these, MongoDB is the most popular with developers and has the most momentum. It will be interesting to see how this positioning is received by engineering teams over the next couple of years. We are seeing some evidence of expanding workloads with customer highlights. Additionally, MongoDB will continue to iterate their product to build depth in these adjacent database categories.

Investors will receive more input on the product development trajectory this coming week. MongoDB is holding their annual user conference from June 7-9 in New York. This will include a number of new product announcements. Additionally, they will hold an Investor event on June 7th. Both events last year provided useful insight and updates on their product strategy. I am expecting the same for this year’s event.

Take-aways and Investment Plan

Overall, MongoDB is continuing to execute. If judged based on just the Q1 results, the investment thesis is right on track. This follows their strong Q4, demonstrating the ability to maintain high annual revenue growth where peer infrastructure companies have been experiencing deceleration at scale. The improvement in profitability in parallel is a welcome development for investors who have been concerned about the lack of progress on demonstrating operating leverage as MongoDB grows.

Customers are continuing to adopt the MongoDB application data platform and expanding the number of application migrations as well as the types of workloads. With MongoDB’s new product positioning to address a broader set of data models, they stand to pick up new spend from customers looking to consolidate disparate database solutions. In an environment of constrained IT spending, this may actually provide some benefit against the broader macro headwind.

Additionally, we should consider that many of the up-and-comer, next generation database providers are private companies that have been flush with VC investment. As private company valuations constrict and VC funding pulls back, some of these players may struggle. This could further improve MongoDB’s competitive position and provide a new source of talent. With $1.8B of cash and equivalents, MongoDB is well-positioned to ride out any economic slowdown and potentially pick up smaller companies in adjacent product categories at a discount.

I think MongoDB will benefit from strong tailwinds from continued transition of company business processes to software solutions. The expanding set of application use cases allows MongoDB to keep winning new workloads from large customers, driving a healthy expansion rate in annual ARR generated. While their growth in second half of 2022 may be limited by the constrained expansion of their end customers’ businesses, databases will not be turned off and the spend is hardly discretionary. As the macro environment improves again, MongoDB will be well positioned to grow revenues, likely re-accelerating similar to their performance over the course of 2021.

Accordingly, I have a 14% allocation to MDB in my portfolio. I added to this slightly following the Q1 report. This was funded from a prior decrease in allocation to SNOW, following their earnings results. I still have a large position in SNOW. I anticipate increasing my allocation to MDB over time if they keep performing, as they have the potential to emerge as a long-term compounder. The market appears comfortable rewarding them with a valuation multiple higher than peers, likely due to perception of the large TAM and potential for durable growth. I think this premium valuation can continue as MongoDB solidifies their position in this mission-critical function within the modern application software stack.

NOTE: This article does not represent investment advice and is solely the author’s opinion for managing his own investment portfolio. Readers are expected to perform their own due diligence before making investment decisions. Please see the Disclaimer for more detail.