MongoDB, Inc. (MDB) Annual William Blair Growth Stock Conference Transcript

MongoDB, Inc. (NASDAQ:MDB) Annual William Blair Growth Stock Conference June 8, 2023 5:40 PM ET

Company Participants

Jason Ader – Equity Research Analyst, William Blair

Conference Call Participants

Michael Gordon – CFO & COO

Serge Tanjga – SVP Finance

Jason Ader

All right. Good afternoon, everyone. Thanks for joining us in our last session here. Jason Ader from William Blair. I’m pleased to introduce Michael Gordon, COO and CFO of MongoDB; and Serge Tanjga, SVP of Finance.

Before we begin, I’m required to inform you that a complete list of research disclosures or potential conflicts of interest is available on our website at williamblair.com. We’re just going to do a fireside chat format.

Question-and-Answer Session

Q – Jason Ader

But let’s start out, Michael, for those investors less familiar with MongoDB, could you give us a quick overview of the history of the company? What do you guys sell and who your customers are?

Michael Gordon

Sure, absolutely. First of all, thanks for having us. Great to be here. It’s been a great day. Saw a number of you over the course of the day, so thanks for all the questions. Recognizing that it’s a wide audience and a lot of generalists, everything else, maybe will just take a step back and just try to give a little bit of context for what we do.

So we provide enterprise software specifically, we have the leading developer data platform. What that’s — the core of that is a database. People understand the database market and understand that it’s large, but there are a ton of pure-play database companies out there.

So maybe I’ll talk a little bit about the market, just to put it in context for you. So this is one of the largest and most important markets within all of software. IDC’s numbers have the database market at roughly $81 billion in the current year, going to $136 billion in 2027, so growing at kind of 14% a year.

One of the things I think is noteworthy and puts things in context, if I just think about mature markets like databases around for decades, I tend to expect or would assume that more mature markets would tend to grow roughly in line with GDP, right? And so like why does the database market grow so much more quickly. And I think that’s really a testament to the fact that it’s so strategic and so central to companies and, ultimately, their ability to drive competitive advantage.

So if you think about companies today of all sizes and scales from start-ups to Fortune 500 companies, you’ll hear these phrases like software is eating the world or every company becoming a technology company or you hear about large Wall Street firms talking about having more developers than Silicon Valley firms. All of that is shorthand for the fact that, today, the way that companies derive competitive advantage is from their technology, specifically, their internally developed and built software.

If it’s off-the-shelf software, obviously, that doesn’t provide advantage because it’s available to everyone. And so that’s what people are doing is they’re taking and hiring developers and engineers to create more feature functionality, better user experiences and things like that and building applications. At the heart of each one of those applications is a database, and that’s where we provide and that’s the kind of the core of our developer data platform.

The company was founded in 2007, went public in 2017, so been public a little over 5 years. And the opportunity, as I mentioned, is large, $80-plus billion. It’s not new. Their incumbents have this market, have this share, have those dollars. And there have been a lot of other people who have been drawn to it, right? There aren’t that many markets that are this large and have been unchanged in terms of the leadership and the wallet share and the market share distribution for decades. And so that attracted lots of capital, including companies like MongoDB.

But the reason that we’ve been the one to sort of break through and break out and have success and reached critical mass is really a couple of things. The first is we have a great developer community. So we’ve sort of won the hearts and minds of developers. The product is incredibly easy and intuitive to use. And happy to talk about the technology as much as helpful, but I’ll start at a high level given the audience.

So won the hearts and minds of developers, also had a general purpose positioning. So not just a niche application or sort of the hammer that looks at every problem as if it’s a nail, but really providing a general purpose nature to what we do. And then we married that with really good execution to create the success that we’ve had overall.

In terms of the customers, they run across the range. We have over 40,000 customers. They range from, again, Fortune 500, Global 2000 largest players, migrating mission-critical, their most demanding workloads off of legacy technology because they run into problems of scaling and growing. And so that’s part of the problem that we solve all the way to current start-ups who built the entirety of their business or at least the core of their business on MongoDB.

The only other thing that maybe I’ll just say at the beginning that’s hopefully helpful is while we sell enterprise software, our market is a little bit different than a lot of other markets within enterprise software. So our unit of competition is the workload.

Most companies view the competition is the company or the customer or the account level. If I sell HR software and I win a big bank or a big retailer or a big media company, I’ve kind of won the whole thing, right? All the departments are running on that. That’s not the way that applications are built within companies. They’re not treated as monoliths. Each application, as I mentioned, has its own database. So it’s a more fragmented market that goes sort of workload by workload.

And so when we win or displace or someone does a big Oracle migration to MongoDB, it’s not like they’ve kicked out Oracle out of their other hundreds of thousands of applications that they have. And so that’s a sort of a dynamic of our market. It means we’re never shut out of a customer, but it means there’s sort of a continued effort to sell and win more and more workloads. So when you hear us talk about our results, we talk about winning new customers. We talk about winning new workloads. And that’s really kind of the key thing.

The last thing I’d say, from a product mix for those who aren’t familiar, you hear us talk a lot about Atlas, which is our Database-as-a-Service offering, that’s 65% of revenue in the last quarter. The other 1/3 is roughly Enterprise Advanced, which is a self-managed product. So that’s not something that we’re offering as a managed service in the cloud, but that’s maybe for an organization that isn’t as in the cloud and is running and managing some applications, either on premises or in their data centers, things like that. So why don’t I stop there? But…

Jason Ader

Great. The founders, obviously, in 2007, they looked at the database market, and they said there’s got to be a better way. From a technology standpoint, what did they build that was better?

Michael Gordon

Yes. So they were developers themselves and actually had run into the challenge of scaling relational databases and eventually said, “Why don’t we go build the database we would want to use?” And so the challenge that they ran into is that relational databases were built and designed for a different era. And so the technological problem that relational databases were built to solve was how do you store data efficiently, right? Because in the 1970s, storage was incredibly expensive.

And so they look to store data as efficiently as possible by distributing across these tables of rows and columns. And those of you who used Excel, which I’m assuming is everyone in the room, will be familiar with that relational database structure. Relational database is basically a spreadsheet on steroids.

And so the reason why — and maybe I’ll use an analogy here again, given the audience is helpful, is if you’re trying to solve for scarcity and storage, you wind up doing some unnatural things to the data and breaking it apart. So if you imagine, we had a garage that we owned here in downtown Chicago and our goal was to store as many cars as we could in that garage to drive the profitability or revenue profile of our garage, what you do as the garage — as the car came in, you disassemble the car, and you put all the fenders to the fenders and the tires to the tires and steering wheels to the steering wheels and everything else. And that’s actually what a relational database does, it distributes the data all in this highly efficient deduplicated way.

The challenge is, if you’re the parking attendant, and Jason now gives me his ticket and I have to go retrieve it, I have to remember where I put all these things. And I have to say, “Okay, tires here at column BB, row 234, I have to go to that cell and find it.” And in the software application development process, the software engineer is in the role of that parking attendant, right? And that’s an enormous amount of attacks, of cognitive overload that they need to manage and keep track of. And so it’s very counterintuitive. It’s very non-accessible to developer.

Obviously, if you scroll forward, storage is incredibly cheap. And so what we built is a document-oriented model, which isn’t tables of rows, of columns, but simply an object. And as many of you probably know, most modern programming languages are object-oriented databases, so it’s very easy to interact with our document model. And so they don’t have any of the challenges that they used to have, and that’s part of what’s led to the popularity and developer fondness for MongoDB.

Jason Ader

Got you. And maybe talk about the use case evolution because I know MongoDB started out more sort of like systems of engagement and has evolved into more systems of record. But maybe talk about that evolution and maybe just define for everybody the difference.

Michael Gordon

Yes. We started off with the vision of being a broad general purpose database, but there are wide ranges of use cases. And simplistically, if you think about some are more write-intensive, meaning you’re recording more data. So imagine an IoT application that’s got sensor data. You’re doing lots of writes to the data. Other applications are more read-intensive, and so you see a different thing.

And so a lot of — a system of engagement, maybe a single view of a customer, right, where you’re aggregating a whole bunch of different things for perhaps someone in a call center to do cross-sell, upsell or retention. They want to read lots of data from lots of different — so that was sort of like an initial early use case for MongoDB in part because sort of despite the general purpose positioning in 2013-ish or so, we had excellent best-in-class read performance, but weren’t best-in-class write performance.

We made some technological changes, including buying a company/technology in 2014 that we then integrated and made the default storage engine that addressed the right performance. So you have best-in-class read performance and write performance, which is what enables the product, the technology to deliver against this general-purpose positioning. So you can see systems of engagement, systems of record, mission-critical systems and everything else like that kind of across the board.

The other thing that I’d add is there is a term within databases called ACID, which is basically the highest level of data guarantees, right? So you go to the ATM to make a withdrawal and then your partner goes to make a withdrawal from the ATM. The bank wants to make sure that your transaction is recorded before your partner — what has to happen kind of instantaneously in databases, that’s called strong consistency and you’d see that in ACID transactions.

MongoDB introduced multi-document ACID transactions a few years ago. And that was sort of the last hurdle to the mindset of could MongoDB deliver against all these different use cases. And so I think from a technological standpoint, we’ve accomplished that. There’s still a lot that we have to do in terms of developer perception or awareness, because the product is open source, because you can use it in an uncurated fashion, especially if you used an earlier version, you might not be contemporary or up to date on all of our capabilities. So that’s an ongoing effort that we have in terms of developer relations and sort of awareness and perception of the product.

Jason Ader

Great. Okay. Let’s turn to macro and just talk about the last maybe 12 months in terms of how macro has impacted the business. And are things kind of back to normal yet? Or when do you think things might get back to normal?

Michael Gordon

Sure. So we bifurcate things in a couple of different ways. And for us, it’s most hopeful both in terms of how we analyze the business as well as trying to educate you all about the business, to think about the new business environment, so winning new customers and winning new workloads versus the impact of the macroeconomic environment on the growth of existing workloads, and that’s really how we’ve talked about it.

And in the near term, because new workloads start small, because we’ve reached a fairly large size and scale, the near-term results are much more dictated by the performance of the growth of the existing applications, whereas in the medium to long term, things are much more affected by are we winning new customers? Are we continuing to add new workloads within existing customers and sort of penetrate there?

So in terms of if we take a step back and say, “How has the macro affected things?” I’d say we’ve navigated this macroeconomic environment quite well on the new business side. Our value proposition has continued to resonate. We’ve continued to add significant numbers of new customers. We had our strongest net additions in customer count this past quarter that we just reported in over 2 years. We had the strongest number — record number of new workloads from existing customers. And so we believe that we’re on the continuum of must-have versus nice-to-have. We’re clearly in the must-have camp.

The value proposition resonates. This is sort of mission-critical work that we’re doing and continues to be a high priority within our customers. Our sales team has done a good job of navigating the current environment. So we haven’t seen any of the deal slippages or some of the other sort of effects of elongation of sales cycle or other things that people are talking about. And so we’ve executed well against that.

On the growth of existing workloads, we have seen an effect there. We’ve seen slower growth from the cohorts. What that maps to is underlying slower growth in the usage of applications, right? Our value model is closely tied to the value that our customers derive from our platform. So if you build an application, by the way, you’ve now gone through the expense and effort of using scarce and expensive developer resources to go do that, you want that application to go get used. As that application is used more, as there are more reads and writes on the database, you wind up spending more money with MongoDB.

What we’ve seen, starting a little over a year ago, is slower growth in a broad base, started kind of April, May-ish of last year, a little bit more pronounced in Europe, but we sort of were early on in sharing our belief that not only was this happening, but it was likely to spread and we kind of walk through our macro framework and with some puts and takes, it’s pretty much played out the way that we thought it has. And so what we’ve seen is we have seen slower growth of underlying usage, underlying activity as a second order effect of the less usage, slower growth and usage from our customers and users.

That’s mapped to our revenue. We’ve seen that play out for over the course of the last year. There have been — as we’ve been going through great lengths to explain in all of our investor communications. Some things that are better, some things that are worse. But on balance, I don’t want to say we’ve reached a new normal, but it seems to have stabilized within a range, but that range is less than what it was 18 months ago. And we’ve tried to help people understand that.

Jason Ader

Great. And we’ve definitely seen some mixed results in Q1 from enterprise software companies. Do you have a view of maybe why certain companies are doing better than others? Does it come down to where you play in the market? Or is it execution? Or all of the above?

Michael Gordon

Yes. Obviously, it’s hard for me to fully comment on everyone’s results point by point, but I’d say a couple of things that I’ve observed about sort of ours relative to at least some of the trends. I think some of it goes back to the nice-to-have versus must-have. I think we feel very good amidst the stack.

There’s a trend that a lot of people — that seems to come up in a lot of conversations with other companies around optimization. That’s not primarily are dynamic. As I mentioned, we have this very tight value linkage between you’ve gone ahead and spend all the time and effort to build an application, you want that application to be successful and to get usage.

And of course, you’d rather spend less than more for it. But in general, because the values are tightly linked, that’s sort of the behavior that we wind up seeing as opposed to sort of other folks as they’ve reported where, “Look, my cloud spending’s maybe gotten ahead of my business model. Maybe I need to look to prune cost or cut cost,” so that’s sort of the optimization dynamic.

And at least in my own mind, the way that I think about that is, I have some bill, not all of that bill is in the must-to-have bucket. And so I’m going to whittle away what are some of the nice-to-haves that maybe now in the current environment I can’t afford. And so I kind of try and shrink my spend to the stuff where I’m really getting strong value out of it.

So that, I think, is certainly one of the factors. Execution is incredibly important in any environment. It’s particularly important in this environment. I think we’ve done a nice job there. I’m sure that there’s a range of success of execution amongst sort of the others across enterprise software. I think those are probably the key things.

Jason Ader

Great. And let’s turn to competition. Who are you running into the most these days? Is that changing? And then there’s a lot of database companies out there. Is that a problem or an opportunity?

Michael Gordon

So I would divide the competitor set into three buckets. So the first is sort of — companies that’s sort of are vintage and aged, people who recognize some of the same limitations in their relational system about 15, 20 years ago and who’ve come across different solutions to the same problem. We all together sometimes — what do I need to do? Am I working now? Doesn’t seem like it. Okay. Well, we can do it this way. Better?

Sorry about that. So the competitive set, divided into 3 buckets. The first is relatively new players to the market, companies that have cropped up over the last 15, 20 years to address the same problem or opportunity that we’ve seen, which is some of the inherent limitation in the legacy relational database. If you go back five, seven years ago, that was our primary competitive set. We were one among these companies and — but similar size, and customers will look at all of us and say, “Well, which one of these new things, toys am I going to pick?”

What we’ve subsequently done is sort of differentiate ourselves from the pack, I would say, in two ways. One is our product is general purpose, and we’ve invested, as Michael has talked about quite aggressively to make it so, broadly applicable across use cases, industries, geographies. And frankly, our adoption demonstrates that.

And the second one is execution. We’ve been able to build a very robust go-to-market motion. And as we saw success in terms of our revenue generation, we reinvested back into the model to make the product even more robust, enterprise features support sort of all the things that an enterprise would expect from its data infrastructure partners, and that’s demonstrated with sort of our size today relative to all those players. And frankly, we don’t run into them in the market very often. It’s a large market. And we compete for the — kind of in the biggest middle swim lane, whereas some of these other players are competing in the niches.

Kind of the other side of that is the legacy players, so the Oracles and Microsofts of the world, or at least on the legacy side. We don’t see them as much either because that’s where — not where the new workloads are going. Where we tend to see them is when, frankly, an application that’s running on the legacy technology has reached a moment in which it’s no longer performing and it needs to be replatformed. But at that point, they’re already leaving that technology. Now the question is where they’re going to go, and we are definitely the beneficiary of that trend.

So that leaves the third bucket, that’s the cloud players. The cloud players have a variety of their own database technologies, relational and nonrelational. And they have obviously the benefit of the size and the footprint, but we still compete quite effectively against them because we are the best-in-class technology. And the way we’d like to say it is when we’re in the conversation, when we know about the project, when we get to present the merits of using our technology, our win rates are very high.

Our challenge or opportunity, depending on how you want to see it, is that we’re still footprint-constrained. We’re smaller. We have a sales force that’s measured in the hundreds as opposed to some of the competitors who are in the tens of thousands. So our goal is to increase our reach, increase our awareness, either directly through just growing the sales force, but also other methods to try to reach more of the market because we — again, our success is pretty high when we’re in the room.

Jason Ader

What is your market share today?

Serge Tanjga

So Michael started off with this, we are playing in an $80-plus billion market, and our guide is for just over $1.5 billion of revenue. So we’re rapidly closing in…

Michael Gordon

Closing in on 2%.

Serge Tanjga

2% market share, so there’s a long way to go. And that’s sort of the interesting part of the story, which is that because the market is so fragmented and because the technology is so mission critical, it just takes time to build that base of business, to build that support and, frankly, to get the enterprises to bet on you as the mission-critical data layer.

And we’re seeing success. We’re sort of achieving sort of speed of growth and critical mass, but there’s still plenty to grow. And even our incremental share is still in the single digits, which again speaks to the opportunity to keep growing the business here.

Jason Ader

And where do you think you can get market share over time?

Serge Tanjga

It’s — so the way that we would answer that question is, from a technological perspective, we believe that the entire market is addressable by us. We believe we have a general-purpose platform. Sometimes in these conversations, we hear investors saying, well, there’s the relational portion of the market and then there’s the nonrelational, so we kind of think about your share as the percentage of the nonrelational.

We just don’t think the market works that way. There’s no relational data versus nonrelational. It’s just data. Developers are looking for the best way to work with it. They’re looking for a technology that allows them to be productive as well as build performant applications. So we don’t see a constraint as far as technological constraint in terms of the size of our market share.

Jason Ader

Let’s talk about Gen AI because everybody wants to hear about that. I’m sure you haven’t talked about that at all today.

Serge Tanjga

Not at all.

Jason Ader

But we’d love to hear your thoughts on — is this a tailwind for MongoDB and why?

Michael Gordon

You want to go first?

Serge Tanjga

I’ll take a first crack. So we think it’s a tailwind for Mongo and we’d sort of divide it into 3 buckets. The first — and it’s sort of basic, but it’s worth starting there. It seems like Gen AI is going to make all of us more productive one way or the other, and that includes the developers. So the process of writing applications, of writing code, over time — not over some relatively near period of time, but ought to become more efficient, more scalable, more automated.

What that will mean is that whichever company you are, which — whatever sort of size of your current development — developer footprint, you’ll be able to accomplish more and you’ll be able to go further down your backlog of projects that you want to build because you will have a more productive developer organization.

So what that simply means more applications will get built. So as more applications get built in each of that, regardless of whether it’s an AI application or any other flavor, more applications means more need for operational databases underneath them, and that “rising tide” will help us the same way it’ll help other people as well. So that’s bucket number one.

Bucket number two is if you get into more AI-specific use cases, and you see either new applications being built in this genre or, frankly, existing applications wanting to have more of an AI functionality, we believe and we see early evidence that customers of all sizes will gravitate towards having a modern data layer underneath that will facilitate scalability, facilitate throughput and performance. And ultimately, a document database like ours is better suited than relational alternative. So that would mean kind of more share for us over time.

And the final thing I would say is specific AI-related functionality is built into the platform. We’ve demonstrated our ability to kind of add incremental functionality to our platform while remaining general purpose with kind of a single developer experience. So you should expect this to continue doing over time, which should be further beneficial to us.

Jason Ader

Great. Okay. Well, in the last 5 minutes or so, let’s talk about the operating model. I think that was the biggest surprise for me from the quarter is just how you guys deliver double-digit operating — non-GAAP operating margin. Just talk about the thought process in terms of spending right now and what should we expect for this company over time because that was pretty impressive.

Michael Gordon

Yes, thanks. I’ll try and walk through our approach and philosophy in this with — hopefully, without standing up in my soapbox too long in terms of how we think about this stuff. So our job as management team and long-term stewards of the business is to run the business in a way that we think drives the best chance of long-term value, right? And so we’ve always taken a very long term-oriented approach, and that’s involved really two things.

It’s involved, one, maximizing and investing to capitalize on the long-term opportunity and, at the same time, making progress from like an operating margin standpoint. So well before — even though we were several years as a public company without generating profitability, we were making consistent progress from kind of day 1 towards improving our margins and showing operating leverage.

So if I think about in the context of the IPO, at the time it went public, we were something like a negative 36% operating margin business and had laid out a 20-plus operating margin view. And so prior to this quarter, where we continue to make progress, we basically made last year, fiscal ’23, we were about 5% margin, so made kind of 40 of the 55 points.

So still plenty of work to do, but not a Johnny-come-lately to the idea of needing to be able to do both, right? Drive revenue, drive revenue growth, maximize — invest for the future and long-term opportunity but also have a sensible, sustainable business model. That’s sort of one point.

The second point I’d say is I think it’s important for us to have that independent sense of the view. And in that regard, our sort of framework, for lack of a better phrase, hasn’t really changed. What we’ve done is we do update the inputs to our framework though, right? And it would be foolish to not understand that the cost of capital is higher in the current market than it was before. But I would say that’s not sort of a reaction or an overreaction to kind of what investors want, but I think it’s just applying the current realities to our framework.

And the reason why I say that is I think it’s just valuable for a management team to have an independent point of view because while I’m sure many of you are very long-term oriented, the reality is the market is a mix of people with different time horizons. And you will change your minds much faster than we can change our strategy, right?

And so if we are trying to optimize our strategy for whatever you are doing in the moment, that is going to be a recipe for failure. So we’ve taken the opposite view, which is to say, we’re going to do what we think is in the right long-term interest of the shareholders and will create long-term value, recognizing that, any moment, we will not be optimally priced for whatever the market is paying up for most in that moment.

So at the time of the IPO, we — it was a less robust market and everyone was sort of expecting to commit to being profitable within 8 quarters of going public. And we said, “No, that doesn’t make sense given our opportunity.” Similarly, a few years into life as a public company, things were crazy go-go, and we were never a growth-at-all-cost company. We said, “No, we don’t want to invest in this thing that would drive revenue because the unit economics of that are not attractive.” So we do not want to do that. And so we’ve tried to take a balanced long term-oriented approach, and I think you see that showing up in the numbers.

Jason Ader

Great. Okay. I think we’re just about out of time. We’ll — let me just ask the last question, which is what do you think the most underappreciated aspect of the MongoDB story is?

Michael Gordon

I have a view, but do you?

Serge Tanjga

Well, first of all, I would say that we have a robust conversation with the investment community. If you craft the stock price since the IPO, clearly, we’ve had a few fans out there. So I don’t want to sit here and suggest that we’re grossly misunderstood.

I think the one area that remains misunderstood or topic of debate is the thing that you asked about, which is like what is our actual addressable market. Of the $80-plus billion, can we really address most or all of it? That’s obviously our belief but there’s still people out there who ask that question.

Michael Gordon

Yes, I’d say two things. One, which is probably like neutral from an orientation, but just most important to understand, which is that our unit competition or basis for competition is the workload, not the customer. And it’s just different than so many in enterprise software and affects a lot of things in our model.

And then secondly, which is probably a negative is I think people don’t appreciate the fact that while we’re incredibly popular and really loved by the developer community, there’s a huge chunk of developer community that is not current and contemporary on what we are capable of doing, and we still have work to do there.

Jason Ader

The breakout is going to be right in this room for everybody that wants to stay. And thank you, guys, very much.