MongoDB, Inc. Q2 FY2023 Earnings Call

Thank you for joining us for MongoDB's Second Quarter Fiscal Year 2023 Earnings Conference Call. All participants are currently in listen-only mode. Following the presentation, there will be a question-and-answer session where each participant can ask one question and one follow-up. Now, I will turn the call over to Brian Denyeau of ICR. Please proceed.

Thank you, Latif. Good afternoon, and thank you for joining us today to view MongoDB's second quarter fiscal 2023 financial results, which we announced in our press release issued after the close of the market today. Joining the call today are Dev Ittycheria, President and CEO of MongoDB; and Michael Gordon, MongoDB's COO and CFO. During this call, we will make forward-looking statements, including statements related to our market and future growth opportunities, the benefits of our product platform, our competitive landscape, customer behaviors, our financial guidance, and our planned investments. These statements are subject to a variety of risks and uncertainties, including those related to the ongoing COVID-19 pandemic and its impact on our business, results of operations, clients, and the macroeconomic environment that cause actual results to differ materially from our expectations. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks described in the quarterly report on Form 10-Q for the quarter ended April 30, 2022, filed with the SEC on June 30, 2022. Any forward-looking statements made on this call reflect our views only as of today, and we undertake no obligation to update them, except as required by law. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures to the most directly comparable GAAP financial measures. With that, I'd like to turn the call over to Dev.

Thanks, Brian, and thank you to everyone for joining us today. I will start by reviewing our second quarter results before giving you a broader company update. Let's start with our second quarter financial results. We generated revenue of $304 million, a 53% year-over-year increase and above the high end of our guidance. Atlas revenue grew 73% year-over-year, representing 64% of revenue, and we had another strong quarter of customer growth, ending the quarter with over 37,000 customers. Overall, we are pleased with our performance in execution in Q2 despite the challenging macro environment. Let me give you a bit more context on what we saw in Q2. The new business environment remains robust as evidenced by our record increase in direct sales customer accounts. We have seen no change in deal activity in sales cycles. We believe our strong new sales performance is a demonstration of the critical business value our developer data platform delivers and our superior go-to-market execution. As we have said in the past, nearly every organization uses software to drive their value proposition. Consequently, these organizations seek modern solutions that make their developers more productive. Furthermore, expansion rates remain strong, further evidence that MongoDB is a non-discretionary spend for our customers. As expected, we did see the macro environment weigh on the growth of Atlas consumption. As we discussed last quarter, it's important to understand that the slower-than-historical consumption growth is a result of slower usage growth of our customers' underlying applications due to macro conditions. Our customers' spending on our platform is well aligned with the performance of their business. In the current environment, some businesses, and consequently, their applications are growing more slowly. Michael will address the second quarter consumption trends in more detail. Let me tell you how we are navigating the current environment. First, we are doubling down on velocity. As we discussed with you in the past, we are in the business of bringing new workloads onto our platform and focusing on making those workloads successful. In the current environment, we are even more focused on removing friction in acquiring workloads from new and existing customers. The strength of our new business performance in the first half of the year demonstrates our success in this area. Second, we will continue to invest for the long term, and we'll make investments in our growth initiatives and platform capabilities where we are generating strong returns. We have never taken a growth-at-all-cost approach, and we will remain vigilant and prioritize our highest return areas. We are confident that the recent consumption trends will improve as the macro environment normalizes over time. The value proposition of the MongoDB developer data platform has never been stronger. Our conviction comes not only from our results, but also from the success our customers are having with our platform. Customers are very focused on removing complexity from the technology stack. They understand that complexity is a tax that increases expenses, creates risks, and slows down innovation. They are increasingly turning to our developer data platform to address this challenge. A multinational trillion-dollar financial services company chose MongoDB to power the next-generation trading platform to cover all of their various trading businesses with one solution. Since launching the new service, the customer has been able to decommission eight legacy trading systems and realized cost savings of almost $50 million in annualized expenses. A leading Canadian security provider migrated its IoT and AI security platform away from an open-source relational database to Atlas. With the ability to use MongoDB's native charting to distribute their database over lower-cost instances, the company has been able to significantly reduce their database spend by 60%, which is particularly compelling given the open-source nature of their prior solutions. Another one of our customer priorities is to invest in their core competencies and outsource or eliminate everything else. They understand that clinging to the old ways of delivering innovation is not only time-consuming but also incredibly expensive. A global travel technology leader is in the process of getting out of the business of managing their own data centers. They turned to MongoDB in order to modernize a key legacy application and move it to the cloud. The monolithic application was originally built on Oracle and Elasticsearch, but the customer decided to migrate the application to Atlas because they couldn't meet their timeline and performance requirements with their existing solution. A web 3.0 pioneer started by building and managing their own computing infrastructure. However, the development team quickly reached a point where they were overwhelmed by the day-to-day tasks of managing infrastructure. By migrating to MongoDB Atlas, the company saved three years in development time and reduced the need to hire 40 developers. Finally, in this environment, as in any other, customers understand that high performance and scalability are critical to their success. A Fortune 500 consumer technology leader turned to MongoDB to replace its existing compliance platform as it needed to double the performance while lowering costs and enabling real-time visibility of operations. MongoDB was able to address the performance requirements while lowering costs by 70%. One of the world's largest healthcare companies, historically an Oracle shop, was unable to meet their desired performance expectations and had to spend tens of thousands of hours just to maintain their existing environment. Over the last few years, they have implemented MongoDB for the most demanding new projects, such as the COVID vaccine application as well as their digital health app. Perhaps the best way to illustrate how the perception of MongoDB has changed is to review our relationship with one of the world's premier commercial investment banks. Four years ago, a senior executive of the bank told me that he didn't think MongoDB was ready to be declared a standard for their mission-critical applications. At the time, they had a myriad of relational and non-relational technologies deployed across the organization. Since then, not only has the bank become more focused on and confident in moving workloads to the cloud, but the bank's leadership team also observed how overwhelmingly popular MongoDB had become with their development teams across the organization. As a result, they decided to make MongoDB one of their enterprise standard offerings as part of the journey to the cloud. In the second quarter, they signed a multimillion-dollar agreement as a sign of their desire to use MongoDB as a preferred platform for mission-critical workloads. Our customers are not only excited about our current product offering but also by our roadmap. We received enthusiastic feedback at this year's MongoDB World about our developer data platform vision as well as our product announcements. To highlight a few, we announced Queryable Encryption, an industry-first feature that allows customers to query data while it remains encrypted. Given the heightened focus on security and privacy, this announcement received a lot of attention from both customers and the academic community. Currently, over 60 companies, the majority of whom are Fortune 500 customers, are in development with this feature. We also announced Relational Migrator, a product that simplifies the process of migrating workloads off relational databases and onto MongoDB. Our early access program is oversubscribed, and we're getting great customer feedback. Given most companies' increased focus on cost management, we believe this technology will accelerate customer confidence in replatforming applications off relational databases. We also received positive feedback related to our analytics announcements. Most notably, Atlas Data Federation and Atlas Data Lake storage are seeing healthy early adoption in use cases related to ingestion, data transformation, and querying of large volumes of data to provide greater insights from data generated by applications on Atlas. Now I'd like to spend a few minutes reviewing some additional customer wins and interesting use cases from the second quarter. A leading German retailer, Conrad Electronic, built an online B2B marketplace on MongoDB. Turning to MongoDB for simplicity as the marketplace grew, it moved from MongoDB Community Edition to Atlas for further scalability and to reduce management complexity. Conrad Electronics' database now hosts over 8 million active SKUs, which is estimated to reach 100 million SKUs by 2024. Locus Robotics, a leading warehouse robotics company, leverages Atlas to store data uploaded from their physical warehouses, including metadata, logs, configurations, and reports. Their Locus Cloud warehouse orchestration platform utilizes Atlas to store and access data for operational reports, ensuring seamless and reliable functionality for their customers. Locus Robotics selected MongoDB Atlas because they needed a fully managed data platform to allow them to build faster and handle vast amounts of data. In their efforts to improve their automation processes, e-commerce platform Rent the Runway selected and implemented MongoDB Atlas as a database platform to streamline how garments were sorted and cleaned in their fulfillment centers. With Atlas, Rent the Runway is able to seamlessly extract data and perform real-time analytics from the robotic sorting arm and X-ray machines, resulting in a 67% decrease in processing time. In summary, I am pleased with our execution in the second quarter. Despite macroeconomic uncertainty, we are focusing on what we can directly control, namely bringing new customers and new workloads onto our platform. The breadth of adoption across many use cases gives us continued confidence to judiciously invest across our business to best position ourselves to fully capitalize on our long-term market opportunity. With that, here's Michael.

Thanks, Dev. As mentioned, we delivered another strong performance in the second quarter, both financially and operationally. I'll begin with a detailed review of our second quarter results and then finish with our outlook for the third quarter and full fiscal year 2023. First, I'll start with our second quarter results. Total revenue in the quarter was $303.7 million, up 53% year-over-year. As Dev mentioned, we saw a continued strong new business environment and experienced no noticeable change in sales cycles. To us, this is an indication that we remain a top priority for our customers. Shifting to our product mix. Enterprise Advanced exceeded our expectations driven by upsells to existing customers. Moving on to Atlas. Atlas grew 73% in the quarter compared to the previous year and now represents 64% of total revenue compared to 56% in the second quarter of fiscal 2022 and 60% last quarter. As a reminder, we recognize Atlas revenue based on customer consumption of our platform, and that consumption is closely related to end-user activity of the application, which can be impacted by the macroeconomic environment. Overall, our performance this quarter was strong, and we're pleased with our results. We do think it's helpful to provide investors some incremental context around the puts and takes that we are seeing in consumption trends. As you probably recall, on our Q1 call, we shared with you that we were starting to see the impact of macroeconomic uncertainty on Atlas consumption in certain pockets of our business and discuss with you the framework on how we expected the macro impact to play out for the rest of the year. Let me update you on our performance compared to this framework in Q2. Starting with our self-service channel. You'll recall that we experienced slower-than-historical consumption growth in Europe in Q1 and in the U.S. in May. The May consumption patterns generally continued for the remainder of Q2 and self-serve did modestly better than our expectations. Moving on to the mid-market channel. For context, the customers in this channel tend to be traditional medium-sized businesses. This channel does not tend to include a disproportionate share of digital native, fast-growth companies that have built their businesses on MongoDB. Our expectation that the mid-market slowdown we saw in Europe in Q1 would become global in Q2 materialized. However, the slowdown was more significant than we had expected, specifically the digital native subset of the mid-market experienced slower growth in their applications as a result of macroeconomic conditions, which caused their underlying consumption growth of MongoDB to slow as well. Finally, turning to enterprise, our largest channel. As in Q1, we had not seen any impact on consumption, but we expected a modest impact to manifest itself in Q2. Here, consumption growth was above our expectations in North America, while in Europe, we experienced greater-than-expected macroeconomic headwinds. The slowdown in Europe was evidenced across all sub-regions and industries. Turning to customer growth. During the second quarter, we grew our customer base by over 1,800 customers sequentially, bringing our total customer count to over 37,000, which is up from over 29,000 in the year-ago period. Of our total customer count, over 5,400 are direct sales customers, compared to over 3,600 in the year-ago period. Q1 was a record quarter of direct customer net additions, which speaks to the popularity of our platform, and the relevance of our value proposition. As a reminder, our direct customer count growth is driven by customers who are net new to our platform as well as self-service customers with whom we've now established a direct sales relationship. The growth in our total customer count is being driven in large part by Atlas, which had over 35,500 customers at the end of the quarter compared to over 27,500 in the year-ago period. It's important to keep in mind that the growth in our Atlas customer count reflects new customers to MongoDB in addition to existing EA customers adding incremental Atlas workloads. We had another quarter of our net AR expansion rate above 120%. We ended the quarter with 1,462 customers with at least $100,000 in ARR and annualized MRR, which is up from 1,126 in the year-ago period. Moving down to the income statement. I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross profit in the second quarter was $223.2 million, representing a gross margin of 73%, which is up from 72% in the year-ago period. Our year-over-year margin improvement is primarily driven by improved efficiencies that we are realizing in Atlas. Our loss from operations was $12.4 million or a negative 4%. Operating margin for the second quarter compared to a negative 2% operating margin in the year-ago period. As a reminder, in Q2, we saw the return of large in-person events, most notably our flagship event MongoDB World, which attracted approximately 3,000 attendees to the Javits Center in New York. Net loss in the second quarter was $15.6 million or $0.23 per share based on 68.3 million weighted average shares outstanding. This compares to a loss of $7.7 million or $0.12 per share on 63.4 million weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow. We ended the second quarter with $1.8 billion in cash, cash equivalents, short-term investments, and restricted cash. Operating cash flow in the second quarter was negative $44.7 million after taking into consideration approximately $3.9 million in capital expenditures and principal repayments of finance lease liabilities. Free cash flow was negative $48.6 million in the quarter. This compares to free cash flow of negative $22.7 million in the second quarter of fiscal '22. I'd now like to turn to our outlook for the third quarter and full fiscal year 2023. For the third quarter, we expect revenue to be in the range of $300 million to $303 million. We expect non-GAAP loss from operations to be in the range of $10 million to $8 million, and non-GAAP net loss per share to be in the range of $0.19 to $0.16 based on 68.9 million estimated weighted average share count. For the full fiscal year 2023, we expect revenue to be in the range of $1.196 billion to $1.206 billion. For the full fiscal year 2023, we expect non-GAAP loss from operations to be in the range of $13 million to $8 million and non-GAAP net loss per share to be in the range of $0.35 to $0.28 based on 68.6 million estimated weighted average shares outstanding. I'll now provide some more context around our guidance. First, we expect the Atlas consumption trends we experienced in Q2 to continue for the remainder of the year. Second, in the second half of last year, as we called out at the time, we had exceptionally strong Atlas consumption growth leading to difficult Atlas year-over-year comparisons for the back half of the year. Lastly, we expect a sequential decline in Enterprise Advanced in Q3 as the renewal base is sequentially lower. Looking into Q4, we expect a seasonal uptick in revenue from EA. But recall, we faced a very difficult year-over-year comparison given strong EA new business activity we saw last year. To summarize, MongoDB delivered strong second-quarter results. Our new business performance and record direct customer net additions indicate a strong underlying demand for our developer data platform. We will continue investing responsibly in pursuit of our long-term opportunity.

Our first question comes from Sanjit Singh of Morgan Stanley. Sanjit Singh, your line is open.

Congrats on the strong deal activity and momentum in Q2. I had a couple of clarifying questions, Michael, on the profile in terms of the different trends that we see across the business. How much of the mid-market represents as a percentage of ARR? I think self-serve is pretty straightforward to figure that out. But between the split between mid-market and enterprise what's the relative size of those? And did you see going into August being sort of sustaining coming out of July? Or did things get worse? Or did things modestly improve?

Yes. So in general, the mid-market is a small portion of the overall direct business and, therefore, their business overall. In terms of August, August was consistent with what we experienced in Q2.

Understood. And then just a question on the operating income guidance. That did come down versus your prior guidance. I was wondering if you could provide more context there on what seems to be a higher level of OpEx spend in the back half. What's driving that? Where are those investments going?

Yes, a couple of different things. From a macro standpoint, if you take a step back, we're investing relative to our long-term opportunity. We have very fractional penetration and continue to see robust new business. As you think about the business more holistically, new customers and new workloads are what really determine the long-term outcome and success. And so, we continue to invest in sales and marketing and in the R&D of the platform to position ourselves to capitalize on that long-term opportunity. As it relates to expansion of existing workloads, which is the other piece of the equation, that's more relevant in the short term, not as relevant in the long term. And so, that's where we've seen the slower growth that we've described. We're continuing to take a long-term orientation. We're obviously not doing that in a vacuum or with blinders on. We've always maintained a high level of financial discipline and scrutiny, and we continue to prioritize the highest level investments and constantly monitor things to ensure that we're positioning ourselves for the long run.

Our next question comes from the line of Raimo Lenschow of Barclays. Raimo Lenschow, your line is open.

I have two quick questions. Dev, could you elaborate on the interesting customer stories you mentioned regarding large deployments on Atlas enterprise? How has the journey progressed in terms of companies moving from experimentation to managing substantial workloads on the platform compared to a few years ago? And for Michael, regarding EA, you mentioned a sequential decline in Q3. Can you explain the factors contributing to this? Is it related to more companies transitioning to the cloud, and how is that affecting consumption? Any insights to help us understand the run rate better would be appreciated.

Raimo, to your first question, we've been essentially being used for mission-critical applications for some time now. That's evidenced by almost every bank on Wall Street using us for some important use case. We have large Fortune 500 companies in industries like telecom, media, tech, healthcare, etc., who are using us for very mission-critical use cases. I would say that we're still early in the journey in terms of having greater share in those large accounts. You've heard us talk about our focus on accounts. We are bringing more resources to bear to really drive the expansion of those existing accounts and get more workloads on our platform. That's, as Michael mentioned, going well. But in terms of MongoDB's readiness for mission-critical platforms, we feel like we're really well positioned. We've added some new capabilities, which we announced at MongoDB World, and our roadmap is very rich with features. Our customers truly view us as a strategic platform, and that's why you're seeing more and more customers standardize on MongoDB.

Yes. And Raimo, on your question on EA, as you know, we manage the business on a channel basis, not a product basis, but certainly want to try and call out some of the trends so that people can put the guide in context and some of the things we're thinking about. The new business environment continues to be robust. But EA continues to be a smaller percentage of that overall new business environment. As you look at the back half of the year, that continuing evolution and share is important to take into account. In addition, EA is subject to 606 accounting and the term license component there, which adds to the increased variability and reduced comparability that we see period-to-period. Lastly, as I mentioned in the prepared remarks, we did have very strong performance of EA in the second half of last year. Not only does that set up a tough comparison in the classic sense, but depending on the nature of the structure of a deal, that's a multiyear deal, the term license revenue can be recognized upfront. So not only does it boost the current period that now becomes the year-ago period, but the current period, which is now the present period in the back half of this year doesn't have that license revenue. So you've got a two-factor impact there. I'm just trying to call that out for folks so they understand.

Our next question comes from Kash Rangan of Goldman Sachs. Kash Rangan, your line is open.

One for Dev and one for Michael. Dev, you mentioned the significant customer wins. When are we positioned for a turning point in the database market, particularly regarding more affordable yet technologically effective solutions like MongoDB? You noted the tipping point, and during an economic downturn like the one we're experiencing, we initially see a decline in spending. However, as customers start to appreciate the value, are we poised for a situation where customers recognize that they can benefit during these transitions, as compelling price-performance technologies gain market share over more expensive alternatives? I would like to hear your thoughts on this. Michael, for you, as you navigate the tougher comparisons in the latter half of the year, is that related to Atlas momentum? If so, how does calendar 2023 look if we project these Atlas trends? What should we anticipate regarding the normalization of growth rates?

Kash, thanks for your question. On your first question, I just want to remind everyone, we're not seeing any change in deal sizes or sales cycle times. I think your point about customers facing this macro headwind is interesting. There is indeed an opportunity for them to drive more efficiency in their business, and we're definitely seeing customers starting to do that. We're seeing customers look at their legacy platforms and recognize how expensive and brittle those platforms are and are more motivated to move to more modern platforms like MongoDB. Frankly, to help customers in that journey, that was a motivation for us to release the Relational Migrator product, which is aimed at helping customers reduce the cost of moving off relational to MongoDB. I think you're going to see more and more customers take a hard look at their legacy infrastructure and think about modernizing potentially sooner than later.

Yes. I want to address your second question regarding the second half of the year and comparisons. I compared the current situation to our performance last year. We experienced significant cohort expansion in the third and fourth quarters last year, which makes this year's comparisons challenging. Additionally, as we enter the second half of the year and begin the third quarter, the slower growth we've observed and the expansion of existing cohorts mean that our starting Annual Recurring Revenue (ARR) is lower. This will also influence our results for fiscal 2023. While we are not providing guidance for fiscal 2024 during this call, we plan to do so in March. It's important to note that how the next six months unfold will affect our starting position for fiscal 2024.

Our next question comes from DJ Hynes of Canaccord Genuity. DJ Hynes, your line is open.

So Dev, Snowflake has increasingly talked about its evolution to a cloud app development platform. In some ways, it sounds similar to the vision you've laid out for Mongo's developer data cloud. I know you and I have talked about this, but I still get the question from investors. Can you just talk about where you see the intersection of those efforts and where the key differences lie today?

Yes. Thanks, DJ. First of all, I want to make it clear to everyone that we don't see Snowflake in any deals, right? So in terms of customer buying behavior, there's no confusion. Obviously, there is acknowledgment that there is potentially some trend of overlap between analytics and operational OLTP stores. What we believe is that the future analytics will really be powering more intelligent applications, which is automating human decision-making that is done today using existing BI tools and data warehouses. As apps become more sophisticated, it's really all about software and automation, which is a developer challenge. One thing I think we've proven is to know how to build tools for developers to be more productive and effective. That's what we plan to do. I should also point out that this trend of developers doing more, we've seen it in the DevOps space where developers have taken on more of the operational responsibility that operators and data centers used to do or in the security space where developers are taking on more responsibility for security and the whole advent of new security-focused developer tools. We think the same thing will happen in analytics, where developers will embed more analytics into building smarter applications.

Yes. Yes, that's great color and a helpful explanation. Michael, a follow-up for you. Just what does the strategy become with the mid-market digital natives that seem to be getting hit the hardest in terms of their consumption trends? I mean, is it just about waiting it out? Or how do your conversations with those customers change given that dynamic?

Yes. I think it's a couple of different things. There are two flavors here. Again, I would just sort of go back to how to look at the market and how it flows through in terms of the numbers. There are new customer wins. New companies are obviously being created regularly in that digital native part of the mid-market, that subset. We continue to have a very strong value proposition there. We continue to resonate. We continue to be a platform of choice in that regard. In terms of the consumption side, and that's ultimately what's most important for the long term. Our ability to land those customers and continue to have success with those customers is a long-term asset and contributes to our long-term value proposition. In the short term, depending on how long the current macroeconomic environment goes on, we will see slower growth from those customers that will impact numbers in the short term, but that's a relatively small part of the equation. If I think about the long-term opportunity and the relative market share we have, everything else, it's fairly early on. We've got to navigate through that period and talked about our desire to keep a close pulse on things, but that's really how we think about it.

Thank you. Our next question comes from Karl Keirstead of UBS. Your question please, Karl Keirstead.

So maybe I could just ask you about what assumptions you're embedding in your guidance. I think one thing that investors took comfort from, at least I did, on the last call is your assumption that things get worse. So I just wanted to make sure I understand what you're assuming. Are you indeed assuming that things get worse in the second half from what you saw in July? One would assume so, given that you didn't carry the full Q2 beat into your full year raise, but I just would love to clarify.

Yes, sure. When you think about our second half assumptions, we generally think that they're broadly in line with what we experienced in Q2.

Okay. Got it. And then if I could ask a follow-up. Just building on the last question around these digital native customers, you probably don't want to specifically size it, but I think it might be helpful, like what does MongoDB's exposure to that customer segment? And was there anything specific to your vertical exposure that is worth calling out in 2Q?

As I look at the vertical exposure and the regional exposure across the mid-market, it was pretty broad-based. I don't think there's anything specific worth calling out there. In terms of the mid-market overall, it's a small portion of the direct business, and those digital natives are just a subset of the overall mid-market. So we're sort of talking about fractions of fractions here as we kind of winnow down. What we saw in terms of the slower growth was across regions and across industries.

I also want to add that we view this segment to be an important part of our business. We expect to add more customers in this segment over time. This segment is frankly a great signal for our future prospects. When the next generation of companies are building on top of MongoDB that makes us sleep a lot better at night. This is a segment that we'll continue to put a lot of focus on, but clearly, as Michael discussed, there are some short-term headwinds.

Thank you. Our next question comes from Phil Winslow of Credit Suisse. Your question please, Phil Winslow.

My question is, obviously, you highlighted some of the announcements from earlier this summer at MongoDB World. Dev, you touched on the relational migrator, but wondering if you could give us some of the early feedback that you're hearing from customers, whether it be the geographic indexing, secondary improvements around time series, search, etc. Anything that you're getting positive feedback on that you think is resonating with customers?

Yes. So we're getting a lot of positive feedback on time series, much like in search, where customers essentially like the unified and seamless platform, a very elegant developer experience, and the ability to drive cost out of the business. We're seeing the same phenomenon in time series. There's a lot of demand. Again, we're taking things slowly. It's a new product. Obviously, we're already seeing customers starting to use it. But it's in the early days, and we expect to get a lot of feedback. As you know, in this space, this is a multiyear journey, but we're really excited about the opportunity to drive more time series workloads on MongoDB. I should also say we used to have many customers use us for time series workloads, especially in the IoT area, but we expect that to happen even more now that we have more capability to address these sophisticated workloads.

Could you elaborate on the opportunity for MongoDB to consolidate not only relational to SQL, but also multiple NoSQL functions and other tools?

Yes. To your point, we do view the developer data platform in some ways, not just as a benefit for customers in terms of having one unified and elegant developer experience. One data silo versus multiple silos, but it enables customers to consolidate vendors and drive more efficiency in their business. I do believe some of these niche companies are going to struggle in this environment because we've always talked about this, and I think it only becomes even more imperative; customers don't want to use a new technology for every new use case. It just doesn't scale as much more complexity to the environment, making the developer's life much more difficult. I think that's going to resonate even more now in this environment.

Thank you. Our next question comes from Jason Ader of William Blair. Jason Ader, your line is open.

Guys, in thinking about the lower op income guide, are you basically saying that the mix of new customers versus existing customers is different than what you expected a quarter or two ago and basically new customers are more expensive to transact with? Is that the right way to think about the lower op income for the year guidance?

I don't view it that way. My perspective is that we are still experiencing solid customer wins and positive market feedback, which reflects strong customer unit economics. We're committed to expanding our sales efforts. Considering the impact of slower growth in existing Atlas customer cohorts, this does slightly affect our full-year operating income guidance. However, I wouldn't interpret this as a judgment or try to calculate it without accounting for the incremental value of workloads. We're focused on observing the market, maintaining a long-term approach, seeing strong new wins, and not experiencing increased customer churn. Our value proposition continues to resonate and remains a top priority for our customers. We aim to keep investing in that, as well as enhancing our product capabilities and executing our platform vision, all while keeping an eye on how everything comes together. To Dev's point, we've never adopted a growth-at-all-cost mindset; our approach has always been financially disciplined, and this is simply a result of that perspective.

Was that a tough decision to make right now, Michael, just given the optics of the revenue guide and then the op income as well?

No. I think when you're looking at the long term and you see the underlying returns that we're seeing and the success we're having in the market, no.

Our next question comes from Mike Cikos of Needham & Company. Please go ahead, Mike Cikos.

I do apologize if this was recapped already. I've just been juggling a couple of different earnings calls tonight. But I did want to ask, I know that on these investments in the second half of the year when you're looking at the sales and marketing and the R&D. So specifically on sales and marketing in that go-to-market. Is there a way to help us think through the anticipated, whether it's headcount growth or those assumptions around productivity? And maybe as a much more basic question, what is the anticipated time for those new hires to ramp? And then the follow-up I had is on the strategic collaborations you guys have. I know last quarter we were talking about the AWS announcement in this current press release we're talking about Google. How do those strategic relationships continue to evolve for MongoDB?

Yes. Sure. On the first question, while we always, regardless of the environment, continue to tweak and optimize which channels and which roles we want to prioritize and allocate, we won't tackle that any differently than we have previously. The overall unit economics continue to be strong, as I mentioned. I wouldn't think of there being any kind of radical rephasing of the sales and marketing. We think about the new customer wins we're having. You saw it was a record quarter for new customer net additions in customer count. Once we've crossed 1% market share and are closing in on 2%, our biggest challenge is that we've talked about sort of each call probably is that our footprint coverage is very thin. When we are in conversations and dialogues, our win rates are exceptionally high. When you marry that with some of the anecdotes and vignettes that Dev shared about customers responding to our developer data platform, we want to continue pursuing that for the benefit of the long-term outcome. Yes. To your second question about our strategic relationships with the hyperscale vendors, they're very strong. One is the function of how popular MongoDB is on their respective platforms. We've been constantly told that we are one of the most popular technologies that developers are running on their platforms. They've also seen that they're the net beneficiary of our growth and the Atlas growth on their platforms, because customers not only consume storage and compute but also end up using other ancillary services. For the hyperscale vendor, it truly becomes a win-win relationship. You talked about the AWS relationship. That relationship is going really well. There's so much engagement happening in almost every theater of the world. The GCP relationship has historically been strong and remains so. The Azure relationship is picking up, and we're seeing a lot more activity with the Microsoft Azure team. In general, I would frame the relationships with the hyperscale vendors to be very solid.

Thank you. Our next question comes from Rishi Jaluria of RBC Capital Markets. Your line is open, Rishi Jaluria.

Wonderful. I wanted to ask, first, maybe just thinking through the consumption patterns and the visibility there. Can you remind us within Atlas, how much spending is maybe in control of the Company or the developers versus those where the usage or consumption is dependent on the usage of the end application itself and by the consumers? Anything directional would be helpful. And then I have a follow-up.

Yes. The underlying usage is extremely tied to the database activity and the application's underlying usage. The value that we're driving is highly aligned to the value that our customers are seeing out of it.

Okay. Great. You mentioned an example of a customer moving a legacy monolithic application to the cloud and noted the displacement of both Oracle and Elastic in that context. Can you discuss how the opportunity for replacement looks since you announced Atlas Search at the conference? How do you view this in the long term, and what early momentum have you observed with that product?

Yes, the opportunity is significant. I want to highlight that Elasticsearch offers capabilities beyond application sources, particularly in logs and certain security use cases, which we are not focusing on. Our main emphasis is on the developer persona, and we see a tremendous opportunity here. The example illustrates that instead of utilizing an OLTP platform along with a separate search database like MongoDB, we now provide a unified platform with a streamlined developer experience. This eliminates the need for customers to invest in tools to transfer data between their OLTP platform and their search database, enhancing system effectiveness and performance compared to using multiple solutions. Customers are responding positively to this approach, and we do not anticipate any market constraints. We are rapidly empowering our sales team worldwide to confidently address this use case with customers. We are very enthusiastic about this opportunity.

Thank you. Our next question comes from Steve Koenig of SMBC Nikko Securities. Your line is open, Steve Koenig.

Steve Koenig here. I wanted to thank you first for the high degree of transparency around the trends in your business, very helpful. One question for Dev and one for Michael. Dev, as you're talking with existing customers that know you well, and they're looking at deploying Atlas for new workloads, new applications, what's the tone of those conversations? And how is that aspect of your business trended in Q2? What are your customers saying about their willingness to invest given macro uncertainties here?

I would say the tone is very positive, and we feel really good about winning new workloads. The morale of our sales force is very high. They're excited about the opportunities in front of them. We feel really good about the opportunity to add both new customers and new workloads onto our platform, and that's a huge priority for us in the back half of the year as well.

So you helped us understand what was behind the lower operating income guidance with some granularity. But maybe if I could just back up and make it super simple for me. You're raising your revenue guidance, but you're lowering the operating income guidance. I guess I would be correct in concluding that you're accelerating the pace of spending in the second half versus what you previously anticipated? If so, in what areas? Yes. It's not quite how I think about it. I think when you look at the investments we are planning on making, they are primarily in both sales and marketing and R&D for all the reasons we've discussed, both in terms of increasing our footprint coverage as well as executing against our product roadmap. What you see is the revenue for the second half of the year implies that we took our guidance up by less than the beat in Q2. You can see there's indeed less implied revenue in the second half. But we are executing against the long-term opportunity, particularly in those two areas. We are aware of the current environment, and we keep a close pulse on everything, but we're not radically pivoting given that we're seeing incredibly strong customer reception, record new customer wins, and our value proposition resonates not just despite the current environment, but in some cases because of it. We aim to position ourselves for the long haul.

Thank you. Our next question comes from Brent Bracelin of Piper Sandler. Your line is open, Brent Bracelin.

I wanted to, Michael, start with you here. If I look at the implied second half guidance and actually drilled down into the implied Q4 revenue guide. It is well below the normal Q4 seasonal uptick that we typically see in this business. How much of that guide is tied to EA, the ratable components of EA and the fact that there's less visibility you have into some of those larger EA ratable deals? Just trying to double-click into what you factored in there on EA.

Yes. A few different things. First, continuing to assume EA continues to be a lower portion of the business. We talked about our expectations for Q3 in terms of EA being down sequentially. Secondly, I probably should have started with this. As you know, we run the business on a channel basis and sort of products have to come out, but we do have to have some point of view on product in order to come up with our revenue forecast. What's happening relates to EA. In terms of Atlas, you're seeing two things. One, just like EA, they also have tough Atlas comparisons year-over-year. Remember that in Q3 and Q4, that's when we saw significant acceleration in cohort expansion from existing applications in the year-ago period. The third point is we're entering the back half of the year; we start Q3 with less in the way of ARR than we would have had we seen historical trends. You flow that through, even if you instantly reverted to normalized levels, you'd wind up with less revenue in the back half of the year. We are also assuming that the trends we saw in Q2 continue in the second half of the year, so the guidance we provided for the second half is the output of that.

Yes. Financial services have historically been a strong vertical for us, and it remains. We feel bullish about the opportunities in Financial Services; there were regulatory constraints about how quickly customers could move certain workloads to the cloud. Many of those customers are much more inclined to move workloads now than they were two, three, or four years ago. This trend serves as a tailwind for us. Financial services customers also seek greater innovation as they face competitive pressures from the next generation of companies. They're also quick to recognize their needs to drive their innovation agenda more aggressively, and MongoDB plays a key role.

Thank you. Our next question comes from Tyler Radke of Citi. Tyler Radke, your line is open.

Michael, I just wanted to go back to make sure I understood kind of what your underlying assumptions and commentary are on the macro environment. So I guess, first, how should we think about the relative sizing of these digital-native customers that you're calling out? Is this kind of mid-single-digit percent of revenue? And then last quarter, I think you talked about a $30 million to $35 million macro headwind for the full year. I just want to clarify, are you saying it's a little bit worse than that? Or that's kind of the same expectations as last quarter?

Sure. Remember, the mid-market is the smallest piece of the overall direct customer sales channel. The digital natives are a small subset of the mid-market. We're sort of talking about fractions of fractions here. Now in terms of the Q2 overall new business activity in general was positive; self-serve enterprise in North America continued strong. We had some areas that were better than expected. In terms of existing consumption or growth of existing applications, it was weaker in Europe across the board. Given that as you contemplate the second half of the year, our effective outlook is worse than it was in June, we're assuming the trends from Q2 will continue for the balance of the year. If you think about the enterprise channel on a product mix basis, it'll be disproportionate or more representative of EA relative to Atlas, but we're seeing Atlas and the Atlas value proposition resonate at the higher end of the market as well. I don't think it's just a simple product breakdown for that channel. We still see strong new business in enterprise globally. In terms of consumption patterns, North American Enterprise has been strong and is better than our expectations, while Europe has been comparatively weaker.

Thank you. Our next question comes from Fred Havemeyer of Macquarie. Your line is open, Fred Havemeyer.

When you look at your Atlas consumption model, do you think that Atlas' alignment with your end customers' demand trend means that you're more or less seeing the macro downturn in real-time? Is something that is a little more unique here versus other software vendors? Do you also see the possibility of enjoying the benefits of economic recovery sooner than other annual subscription software models?

The short answer, Fred, is yes. We think it's a more real-time reflection given we're essentially a second-order effect of the underlying activity in their applications. And while we're not macroeconomists, if there are increases in activity and underlying usage, it would theoretically drive incremental consumption of our platform.

And I'll fire one more out there quickly. We got quite excited about Queryable Encryption. I wanted to ask, less about Queryable Encryption, but more about your broader innovation because using structured encryption is very interesting. You're always at the bleeding edge in an already technical market in terms of products and functionality. How do you think about investing in R&D for technical innovation versus incremental platform updates? Do you see tactical hiring opportunities given the rising tech layoffs?

Yes. I'll answer the second part first. We feel great about our team, and we always tend to hire some of the best and brightest engineers in the marketplace. In this macro environment, we will be opportunistic about potential acqui-hiring. On R&D, we are first driven by customer feedback from 37,000 customers. This feedback drives our instincts about the market and developer needs in what lies ahead. We expect the role of developers to expand, and analytics is a significant part of that. Regarding Queryable Encryption, it's a classic challenge that encrypting data secures it but makes it hard to use. If you can make that data queryable while keeping it secure, especially as security and privacy become more critical, that's a win-win. We're looking to incorporate that and are excited about the opportunity in front of us.

Thank you. At this time, I'd like to turn the call back over to Dev Ittycheria for closing remarks. Sir?

I want to thank everyone for joining us today. We had a really strong Q2. The new business environment remains quite robust, and customers continue to gravitate towards the developer data platform to reduce complexity, outsource undifferentiated work, and drive more efficiencies. We did see some consumption headwinds in the quarter, and that's tied to the growth of the underlying applications. Those applications are growing more slowly than historical trends, but we remain incredibly optimistic about the opportunities in front of us, and we will be investing for the long slice of opportunity. Thank you very much for your time, and we'll talk to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.