MongoDB (MDB) Q4 2020 Earnings Results Review

On March 17, MongoDB (MDB) released earnings results for Q4 FY 2020 and provided estimates for FY 2021. Q4 results far exceeded expectations. FY 2021 estimates were tempered by anticipated impact from COVID-19. They also announced a CTO leadership change. The market reacted the next day by initially spiking the stock price up 9.6%, but then closing down by 7.7% in a late day sell-off. A lot of the volatility can be attributed to COVID-19 market gyrations. Since then, the stock has recovered and is now trading about 23% above it’s pre-earnings price. Analyst reactions to the results were mixed, with expected price cuts due to the macro environment, but positive feedback for leadership’s transparency over headwinds in 2020 with COVID-19. Let’s take a detailed look at the results.

Headline Financial Results (EPS is Non-GAAP)

• Q4 Revenue was 123.5M vs. $110.7M expected, representing growth of 44.4% year/year. Beat of $12.8M or about 11.6% of total. Original Q4 revenue estimate provided with Q3 results was $110M, representing growth of 28.6%. So, actual Q4 revenue growth represented outperformance of about 15.8% over prior growth estimate. While this kind of outperformance each quarter isn’t guaranteed, it provides context for future guidance.
• Q4 EPS was ($0.25) vs. ($0.28) expected, representing a beat of $0.03. Q4 FY 2019 EPS was ($0.17).
• Q4 Non-GAAP loss from operations was $12.0 million, compared to $9.7 million in the year-ago period. This represents an operating margin of -9.7% in Q4 versus -11.3% in Q4 FY 2019.
• Q4 FCF was -$10.9 million, compared to -$12.6 million in the year-ago period. This represents -8.8% FCF margin in Q4 versus -14.7% in Q4 FY 2019.
• FY 2020 Revenue was $421.7M, representing growth of 58% over FY 2019. FY 2019 annual growth rate was 60.8% over FY 2018.
• FY 2020 EPS was ($1.00), compared to ($1.00) in FY 2019.
• FY 2020 Non-GAAP loss from operations was $53.7 million, compared to $54.2 million in the prior year. This represents -12.7% operating margin, versus -20.3% in FY 2019.
• FY 2020 FCF of -$35.0M, compared to FCF of -$48.8M in the prior year. This represents FCF margin of -8.1%, versus -18.3% in FY 2019.
• Q1 FY 2021 Revenue guidance of $119-121M vs. $115.1M consensus, representing about a 4.2% raise and 34.2% annual growth at the midpoint. Management set a $1-2M downward adjustment from their original estimate, due to COVID-19. Without this adjustment, year/year growth would have been 36%. Note this is higher than the original Q4 FY 2020 revenue growth estimate of 28%.
• Q1 FY 2021 EPS guidance of ($0.25) – ($0.22) vs. ($0.24) consensus.
• Q1 FY 2021 Non-GAAP loss from operations of $14-12M for an operating margin of -10.8% at the midpoint.
• FY 2021 Revenue guidance of $510-530M vs. $525.6M consensus, representing growth of 23% at the midpoint. This was adjusted by $15-25M, due to uncertainly with the COVID-19 situation. Without this adjustment, annual growth would have been 28%. Note that original guidance for FY 2020 issued in March 2019 was for $367M in revenue, or growth of 37.4% over prior year. Actual FY 2020 revenue was $421.7M, representing growth of 58%. This corresponds to outperformance over the year of almost 21%. Applying the same outperformance to FY 2021 would yield 49% growth. Obviously, with the COVID-19 situation, that is a stretch, but helps investors get a sense for potential revenue deceleration – from 61% growth in FY 2019, to 58% in FY 2020 to optimistic view for 49% in FY 2021.
• FY 2021 EPS guidance of ($1.40) – ($1.23) vs. ($0.78) consensus. Below consensus by $0.53. FY 2020 EPS was ($1.00).
• FY 2021 Non-GAAP loss from operations of $78-68M for an operating margin of -14.0% at the midpoint. As a reminder, FY 2020 operating margin was -12.7%.
• As of January 31, 2020, MongoDB had $987M in cash, cash equivalents, short-term investments and restricted cash.

Other Notes

• Non-GAAP gross margin was 74% for Q1 FY 2020, compared to 72% in the prior quarter and 71% in Q1 FY 2019. On the call, management discussed the sequential improvement in gross margin, which they attributed to efficiencies created in the Atlas business. They did remind investors, though, that Atlas overall has lower relative margins, so long term, they “expect we’ll see some modest reduction in overall gross margin as Atlas continues to become a bigger portion of our revenue.”
• Atlas revenue grew 80% year/year and now makes up 41% of total revenue in Q4. This compares to 185% and 40% in the prior quarter. In Q4 FY 2019, these numbers were 400% year/year growth and 32% of total revenue. However, these comparisons are skewed by the fact that Q4 FY 2019 was the first quarter to include Atlas customers and revenue from the mLab acquisition. Atlas customer counts nearly doubled quarter/quarter from Q3 to Q4 FY 2019. This should temper some concern around the rapid deceleration in Atlas annual growth rates.
• While Atlas growth is exciting, there is still a similarly large growth opportunity in the self-hosted Enterprise Advanced product offering. Management called out a large Fortune 50 customer expansion in Q4 of several million dollars that utilizes EA. “We believe that the growth of EA will continue to be strong. Why? Because there are many customers who want to consume MongoDB on their own in terms of maintaining and managing their own database infrastructure, either because they have a lot of sunk costs, or there’s regulatory requirements that require them to run EA on their premises or in certain datacenters that they’re allowed to do businesses in.” Management reminded investors that one of MongoDB’s key value propositions is the ability to run MongoDB anywhere.
• The CEO announced that long-time CTO, Eliot Horowitz, has decided to step down as CTO after 13 years with the company. He will become a technical advisor, after leaving his full-time role in July. There are no plans to recruit an outside replacement CTO. The CEO mentioned that two of Eliot’s direct reports have been with the company for more than seven years. They will be assuming a bigger role. Also, a Chief Product officer was hired a couple of quarters ago, which split the CTO role.
• Downloads of MongoDB are growing rapidly, increasing to over 90M at the end of Q4, compared to 60M a year ago and 40M two years ago. There are now more than 1.5 million free deployments on Atlas, with about 1% currently paid.
• MongoDB had 17,000 total customers at end of Q4, representing growth of 27% annually. Of those, 15,400 are Atlas customers, which grew 35% year/year.

• Customers spending more than $100k annually grew to 751 in Q4, up 35% year/year. The rate of growth in this metric also appears to be increasing in the last two quarters. Interestingly, this metric is based on expected ARR spend for the following 12 months, so it is forward looking.
• Ended the year with 62 customers with at least $1M in ARR and annualized MRR, which is up from 39 in the year-ago period, representing 59% annual growth. The CEO highlighted this significant improvement, explaining “invariably, those customers are deploying MongoDB for more and more applications and different types of workloads. So it’s not one app per se that’s growing very, very quickly.” For investors, MongoDB is landing with large companies for a single use case and then expanding into many different workloads. Spend over $1M a year on a database solution would only be generated by the largest companies, so this is a positive sign for enterprise adoption.
• On the earnings call, management confirmed that DBNER remained above 120%, as has been the case for many quarters. MongoDB doesn’t report the actual number to avoid concern around small quarter/quarter changes.
• Reinforced the large market opportunity on the earnings call, reminding investors that IDC projects the database market to be $71 billion in 2020, growing to $97 billion in 2023. MongoDB has less than 1% share of this. CEO believes that the database market is at the very beginning of a platform shift towards the cloud over the next decade. As applications migrate to the cloud, customers will have a one-time opportunity to review and improve their data storage architectures. Also, many companies are taking advantage of this assessment to break up large, monolithic applications into separate services. This favors MongoDB, as some applications may have a workload that is well-suited for a distributed document data store, particularly where that might be a single micro-service that stores unstructured data, like user profiles, event logs or product attributes.
• Focused on the future growth opportunity around IoT, which has unique requirements. First, there will be a growing need for real-time analytic processing at the edge in order apply business logic locally. Second, with a much higher volume of data being created the edge, solutions will be needed that can easily synchronize data between the edge and the core.
• Called out product enhancements over the past year as drivers going forward. Atlas Data Lake brings transactional and analytical use cases together by allowing customers to query across their operational data store and loosely organized archived data. Atlas Search brings previously separate search functionality into the operational database.
• The integration of Realm and Stitch will address the issue of edge to core data synchronization for gaming and IoT applications. Stitch currently provides a robust serverless platform for exposing data through open APIs for common query and update patterns. Realm is a lightweight data store that allows for localized, temporary storage and easy synchronization with the back-end database. Combining both of these technologies provides an ideal solution for server-side data storage behind distributed applications running on millions of individual devices.
• Launched the MongoDB Modernization Toolkit in partnership with Informatica and Hitachi Vantara Pentaho to make it easier for enterprises to migrate off of legacy databases like Oracle. These partners have developed tools that simplify the process of identifying and moving data out of relational databases into non-relational data stores, like MongoDB. MongoDB intends to reduce the friction associated with application upgrades, which should accelerate the number of customer migrations from legacy infrastructure to MongoDB.
• The CEO highlighted several customer expansions on the call.
  • Square Enix, producers of Tomb Raider, Dragon Quest, and Final Fantasy video games, chose MongoDB to support multiplayer features across their suite of video games. The company continues to invest in MongoDB Atlas for game production. The key requirement is the ability to elastically scale to meet the demands of the game regardless of the number of concurrent players.
  • Software AG chose MongoDB Enterprise Advanced as its operational data store for its leading Cumulocity IoT development platform. The MongoDB platform is used to collect individual device data and synchronize it with central data stores.
  • Unqork, a no-code application platform, expanded its use of MongoDB last quarter because they wanted a data platform provider that was cloud agnostic and scalable, with enterprise security features and large reference customers.
  • Radar Labs chose MongoDB Atlas to power its geolocation platform, which currently runs on more than 25 million devices around the globe, processing billions of location data points each week.

Analyst Reactions

Analyst feedback was generally positive, with several calling out MongoDB leadership’s transparency regarding FY 2021 estimates and COVID-19 impact. All analysts lowered their price targets, due to the macro environment and uncertainty of the COVID-19 situation. Six analysts maintained the equivalent of a Buy rating, while four analysts maintained a Neutral rating.

Analyst	Rating	Price Target
Monness Crespi & Hardt	Buy	Lowered from $190 to $150
Citigroup	Buy	Lowered from $200 to $175
Piper Sandler	Overweight	Lowered from $158 to $138
Needham	Buy	Lowered from $189 to $172
Oppenheimer	Outperform	Lowered from $155 to $140
Barclays	Overweight	Lowered from $145 to $130
Stifel Nicolaus	Hold	Lowered from $185 to $135
DA Davidson	Neutral	Lowered from $143 to $105
Morgan Stanley	Equal-weight	Lowered from $171 to $141
Goldman Sachs	Neutral	Lowered from $171 to $146

Comments were generally positive. Citi analyst Tyler Radke maintained the highest price target and provided the following overview of the results.

Citi analyst Tyler Radke lowered the firm’s price target on MongoDB to $175 from $200 and keeps a Buy rating on the shares. The company last night reported “strong” Q4 results with total revenue 12% above expectations, while total billings were 18% above the Street, Radke tells investors in a research note. Further, MongoDB, with its guidance, is the first software company to proactively address and quantify the COVID-19 impact, adds the analyst. As such, Radke now sees numbers at MongoDB “as most de-risked” among his coverage.

The Fly, March 18, 2020

Other Recent Developments

Just after the earnings release, MongoDB made a couple of other interesting announcements .

• On March 19, MongoDB highlighted a case study with Toyota Material Handling Europe on their blog. The IT team wanted to collect billions of IoT data points about the operation of 100,000 warehouse trucks. Their goal was to enable more automation and safety for the trucks’ operation within the warehouse floors (dubbed Industry 4.0). The development team was migrating from a monolithic app for collecting this data to a microservice. They chose MongoDB Atlas running on Microsoft Azure as the new data store for the migrated service. This appeared to be a bake-off amongst solutions, with eight primary criteria. Besides the standard expectations for scalability and operability, one of the requirements was a cloud agnostic solution. This is a trend that seems to be popping up for many enterprises around their data storage choice – they prefer a solution that doesn’t lock them into a particular cloud provider. This makes sense, as a choice to migrate off of one cloud provider wouldn’t be hamstrung by proprietary interfaces or high data transfer costs.
• MongoDB released their new Developer Hub on March 19 as well. The Hub will serve as a central location for technical content, programs and resources for developers using MongoDB. It will include sample code in popular languages like JavaScript, C#, Java and Go, as well as guidance for harnessing other technologies like GraphQL or Starlette. There are also live coding sessions on Twitch, YouTube videos and a project showcase. This should continue to drive MongoDB’s strong developer motion, by engaging the community in hands-on learning with tools to quickly kickstart new projects.

My Take-aways

• The revenue outperformance for Q4 was impressive. Original estimates associated with Q3 earnings had called for only 23.5% revenue growth in Q4. With the published Q3 earnings release, the Q4 estimate was raised to 28.6%. Finally, as mentioned, actual revenue growth for Q4 was 44.4%. This represents over 20% of outperformance, which is impressive. However, Q3 FY 2020 year/year revenue growth was 52.4%. This follows Q2 growth of 66.8% and Q1 growth of 78.3%. We have seen almost 30% of revenue deceleration over the course of the year. MongoDB leadership provided some explanation for Q4 year/year comps specifically referring to the addition of MLab customers starting in Q4 FY 2019. Where revenue growth settles will be an important consideration for investors going forward. The growth rate for Q1 FY 2021 is projected to be higher sequentially, if we assume prior outperformance. However, COVID-19 impact clowds the remainder of the year. Backing out the COVID-19 FY 2021 adjustment of $15-25M, MDB would have estimated FY 2021 growth at 28%. Looking at outperformance for FY 2020 gives some hope, as the difference between original FY 2020 revenue growth (37.4%) and actual FY 2020 revenue growth (58%) was nearly 21%. Applied to FY 2021, this would imply an actual target of 49%. If annual revenue growth settles in the 40% range for FY 2021, then I think the investment thesis will remain intact.
• The FY 2021 revenue guidance adjustments for COVID-19 were prudent and represents refreshing transparency. On the call, the CFO stated “To be clear, at this point, we are seeing minimal impact across our sales channels around the world, including closing transactions in the first quarter, even in the countries hardest hit by COVID-19.”
• Putting aside margin guidance for FY 2021, I liked the trends in FY 2020 around improving operating and FCF margins. We saw year/year improvement of about 8% in operating margin and 10% in FCF margin between FY 2020 and FY 2019. For a high revenue growth company without profitability, I like to see a gradual improvement in margins, as the company scales. Current operating margin projections for Q1 and FY 2021 are -10.8% and -14%, which are roughly inline with Q4 and FY 2020 performance. This is prudent given the macro environment. Ideally, I would like to see MongoDB hit these targets and push for some upside to keep the profitability narrative intact.
• As a hedge to a prolonged downturn, MongoDB does have almost $1B in cash on the balance sheet.
• On the call, the CFO provided more context around planned spending in FY 2021, prior to the COVID-19 adjustments. They prioritized three areas for incremental spend. First, they are growing sales capacity globally. The CFO provided the example in the U.S. that they still only cover 75% of “NFL cities” and have <2 reps in 50% of big cities. They have evidence that adding sales reps directly drives incremental revenue, so this is worthwhile. Second, they are investing in marketing to drive more product leads to the self-service customer motion. Finally, they are continuing R&D investments to further build out the platform and product features. I agree with these investments.
• Expansion within existing customers appears healthy. The 59% growth in customers spending greater than $1M annually is particularly encouraging, as this reflects expansion within large enterprises that likely have much more spend to shift. The addition of new customers is growing meaningfully as well, with 27% new customers year/year. This provides a nice balance between attracting new customers to the platform and growing their spend after the initial land.
• The CTO transition will probably not be as impactful as it seems on the surface. The recent hiring of a Chief Product Officer indicates that the CTO transition was planned and more importantly, removed the product roadmap from the CTO’s scope. This means that the remaining leaders under the CTO need to handle engineering execution versus the full visionary scope of Eliot’s prior role. Given that the two remaining leaders under Eliot are seasoned, this should be fine.
• The emerging focus on IoT use cases is very interesting, as evidenced by customer testimonials from Toyota and Software AG. This represents a big opportunity for MongoDB, as IoT will generate large volumes of data at the edge. That data will need to be processed locally. Transfer of summarized data has to be efficient. MongoDB provides direct solutions for these requirements.

Items to Watch

• Competitive landscape doesn’t appear to have changed and cloud providers have not announced new targeted solutions. However, we will want to continue to monitor all providers of data storage solutions for encroachment onto MongoDB’s leading position in document-oriented data storage. Also, a shift in foundational technology approaches for data storage could impact growth.
• There weren’t any meaningful new product announcements in this quarter’s earnings results. In 2019, MongoDB released several features, like data lake and search, which expanded the addressable market. We will want to see more big feature releases in 2020 to stay ahead of competitors.
• Atlas revenue growth is decelerating, dropping from 400% annual growth a year ago to 80% in Q4. As Atlas becomes a larger part of overall revenue, Atlas growth will dictate company growth.
• As mentioned above, I would like to see continued improvements in operating and FCF margins. While I applaud the spending focus areas for FY 2021, the market likes to see improving profitability along with high revenue growth for a premium EV/Revenue ratio.

Investment Plan

While Q4 results were impressive, the outlook for this year (FY 2021) is lukewarm. Like any investor, an investment thesis is easier to defend when earnings results are a slam dunk across the board. The COVID-19 situation is tempering the outlook, making it harder to assess MongoDB’s growth trajectory. Revenue deceleration over the course of 2019 (FY 2020) is real, even when accounting for difficult year/year comps due to the mLab acquisition. The linearity of profitability improvements has also been reduced with this year’s outlook. The key consideration for valuation will be where sustained revenue growth and operating margins land.

However, 59% growth in customer spend over $1M annually indicates substantial expansion motion in large enterprises and provides an encouraging baseline. Also, new paid customer growth is not slowing down. MongoDB’s addressable market is large and it is still a leading solution for consideration as legions of companies update their application infrastructure and consider document-oriented data stores to address part of their workloads. New product expansions into data lakes and search extend use cases. Tangible traction with IoT applications (like with Toyota’s Industry 4.0 initiative) is particularly exciting, as MongoDB provides real advantages in collecting that kind of unstructured data at scale.

With all this said, my investment thesis for MongoDB over the next five years remains. I still expect MDB to reach a stock price of $490 by 2024. Based on today’s current price around $140, this represents a 3.5x increase from current valuation. This increase is achievable if annual revenue growth over the period averages 35% and the trailing EV/Revenue ratio lands around 15 (versus 18 now). At that point, MDB’s revenue would represent about 2% of the TAM, which is a reasonable assumption. I will monitor MongoDB’s performance over the course of this year closely, particularly as the COVID-19 situation evolves. Long-term investors should see value in this name once we get past current macro headwinds.