Tag: MDB (Page 1 of 3)

After guiding for a sequential 4% drop in revenue for Q1, MongoDB delivered a strong beat. More importantly, their preliminary estimate for Q2 revenue would achieve a reacceleration of annual growth if they outperform at the same level as Q1. The revenue projection for Q2 even leapfrogged past the analyst consensus for Q3. While the market expected some conservatism, this level of outperformance caught investors by surprise, with the stock surging 28% the next day.

Equally impressive were improvements in profitability. In the past, MongoDB has been discounted for poor operating leverage. The transition to 2023 has brought record levels of operating income and FCF, closing the gap with peers in the software infrastructure space. This also led to a significant beat and raise on EPS, which we don’t often see with high growth SaaS companies.

Even customer activity notched records. Both total customer additions and those with spend over $100k in ARR represented all-time quarterly highs. Of new customers, over 200 companies are categorized in the burgeoning AI industry, providing another catalyst as these start-ups are landing new capital at levels on par with the Covid beneficiaries of 2020-2021.

MongoDB has emerged as a hot stock once again, with its valuation multiple now pressing up against the top of its peer group. The stock has more than doubled in 2023 and reached its 52-week high recently. MongoDB is well-positioned to capitalize on tailwinds from AI, as enterprises revamp their data infrastructure to deliver new insights and services from their proprietary data sets. With new product announcements at MongoDB.local in June, MongoDB is further supporting the case for consolidation of application workloads onto its developer data platform.

With MongoDB’s Q4 earnings report following most peers in the software infrastructure space, investors were bracing for decelerating revenue growth and a conservative guide for the upcoming year. MongoDB delivered just that. While Q4 notched a nice beat on revenue with growth of 36% annually, the preliminary guide for FY2024 came in at just 16% growth, almost 10% below analyst estimates.

That level of deceleration would normally torpedo a stock, but MDB closed the following day lower by about 8%. In subsequent weeks, the stock recovered that drop and recently closed above its pre-earnings price. Granted, most software stocks benefited from a favorable boost over the last week. This price action implies that the market is anticipating a recovery for the software sector and that preliminary revenue guidance may be conservative.

While sales growth is struggling, MongoDB is demonstrating a rapid improvement in profitability. Q4 was their highest level of Non-GAAP operating margin to date, passing 10% for the first time. This coincided with a 400 bps improvement in gross margin and record free cash flow. Looking forward, preliminary estimates for EPS surpassed analyst targets. The full year FY2024 operating margin target is starting at 5%, slightly higher than what was delivered in all of FY2023. I expect this to increase as the year progresses, just as it did in 2022.

Similar to peers, MongoDB’s explanation for subdued revenue growth is slower spend expansion by existing customers. In times of economic stress, MongoDB is hit by a double whammy. As a consumption business, if their customers experience a slowdown in digital activity, then Atlas usage decreases. Additionally, customers will delay workload migration projects, as they try to manage costs. These factors combined to force MongoDB leadership to set a low revenue growth target for FY2024, expecting that these headwinds will continue.

In Q3, MongoDB reversed a number of the trends that hampered their Q2 earnings report. They delivered a strong beat on revenue growth, a return to positive operating margin and a nice bump in customer activity. The market reacted as positively to the Q3 report as it did negatively for Q2, pushing the stock up 23% the following day. Since then, MDB stock has appreciated further and now hovers around $200 a share. This is still below the $241 close the day after the Q2 report, but is well above the 52 week low of $135 touched before Q3 earnings.

While the trends turned back in a positive direction in Q3, the broader macro environment may still pressure growth for the next couple of quarters. Atlas sequential and annual revenue growth were the lowest in the last two years. Much of the revenue outperformance for Q3 was attributed to strong growth in EA license revenue. Nonetheless, these results were much better than expected coming out of Q2. Adding to the upside momentum, MongoDB resumed its path to profitability, with positive operating income and improved gross margin.

For the long term, I still think MongoDB is well-positioned to participate meaningfully in the secular trends of data growth and platform consolidation. Going into the second half of 2023, year over year comparisons become easier and the current investment in S&M will drive further growth. The inflection to sustained positive operating margin should provide support for the valuation multiple. MongoDB’s competitive position is defensible, as industry analysts rank it above comparable alternate solutions in features and capabilities. While the hyperscalers offer competitive products, the depth of MongoDB’s collaboration and partnership agreements with each is actually increasing, providing an additional tailwind to growth.

After fairly positive earnings in Q1, MongoDB’s Q2 report reflected increased pressure from the macro environment. Product-market fit, competitive position and GTM motion with large customers all remain consistent. What appears to have changed is a marked slowdown of utilization expansion for specific customer segments, compressing revenue growth as a consequence of MongoDB’s consumption model. This impact is being compounded by the mix shift of EA license revenue to Atlas.

In spite of this, management is continuing to invest heavily to drive large customer growth. Sales and Marketing spend increased significantly in Q2, highlighted by a surge in sales headcount and the resumption of in-person events, particularly the MongoDB World conference. These are resulting in growth of Direct Sales customers, which hit record net additions in Q2 and now account for 86% of total revenue. As new salespeople ramp up, more customers should push over the $100k ARR spending threshold.

In this post, I review the results, unpack how these are related to customer behavior and provide some signals that investors can monitor to track MongoDB’s progress going into 2023. For the next couple of quarters, I think that MDB stock will be under pressure. However, when headwinds to customer expansion abate, the reversal could be swift, reflecting a similar pattern that we observed in 2021, magnified by the greater mix of Atlas revenue. This could provide a favorable set-up for second half of 2023, as the company laps this year’s results. However, that means investors would need to stay invested and have faith in MongoDB’s product vision.

MongoDB held their annual user conference last week, bringing together customers, partners and employees at an in-person event in New York. As we would expect, MongoDB leadership used the conference to introduce a number of new product offerings and enhancements. They also hosted an Investor Session to tie the product announcements to MongoDB’s broader expansion strategy. The overall theme was to enable customers to address more application workloads with the MongoDB platform. Given the breadth and depth of the product improvements announced during MongoDB World, I think they easily achieved this goal.