MongoDB, Inc. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the MongoDB Fiscal Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Brian Denyeau from ICR.

Thank you, Josh. Good afternoon and thank you for joining us today to review MongoDB's fourth quarter fiscal 2023 financial results, which we announced in our press release issued at the close of the market today. Joining me on 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 and including the results of operations and clients that have caused 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 October 31, 2022 followed the SEC on December 8, 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 their most directly comparable GAAP financial measure. And with that, I'd like to turn the call over to Dev.

Thank you, Brian. Thank you to everyone for joining us today. I will start by reviewing our fourth quarter results before giving you a broader company update. I also want to take a moment to acknowledge that today is International Women's Day and recognize all the amazing women at MongoDB who make us a very special company. Now turning to our results, we generated revenue of $361 million, marking a 36% year-over-year increase and exceeding the high end of our guidance. Atlas revenue grew 50% year-over-year, representing 65% of total revenue, and we experienced another strong quarter of customer growth, ending the quarter with over 40,800 customers. Overall, we executed well in Q4 despite a challenging macro environment. Before we delve into the details of the quarter, let me remind you of our operational framework and how we analyze performance. Our principal focus is on acquiring new applications, which drives our long-term growth. In our market, competition centers around workloads; our goal is to get both new and existing customers to deploy new workflows on our data platform. Once a workload is onboarded, its growth is largely out of our control and varies based on business drivers, the macro environment, seasonality, and other factors. Although we can't control the growth rate of existing workloads, we are aware that they generally grow over time. Therefore, as long as we continue to acquire new workloads at a healthy rate, we are well-positioned for the long run. In Q4, we had another strong quarter for new business acquisition, adding about 500 net new direct sales customers, and we succeeded in creating new workloads within existing accounts. Unlike many of our peers, we did not see the macro environment hinder our ability to gain new business. We attribute this to the mission-critical nature of our platform, strong ROI, and the excellent work of our go-to-market teams in navigating hurdles in the sales process. Regarding Atlas consumption trends, Q4 was below our expectations. In our Q3 call, we mentioned that we started Q4 strong and expected a holiday slowdown in usage during the latter half. This slowdown did occur but was more significant than we anticipated, impacting our Q4 results and outlook. Consumption growth in February improved compared to December and January and was in line with the average growth we've seen since the macro slowdown began in Q2 of last year. We believe the recent fluctuations in consumption are primarily due to macroeconomic trends that we've seen across various geographies, vertical markets, and customer segments. Retention rates continued to be very strong in Q4, showcasing the value customers gain from MongoDB. Looking ahead to FY 2024 and beyond, I am excited about the opportunities in front of us. My enthusiasm is driven by our customers. Our value proposition and product vision resonate well, as shown by our new business activity and our growing numbers of 100,000-plus and million-plus customers. For example, some of our largest customers plan to significantly increase their MongoDB deployments. After several years of collaboration, two global financial institutions are preparing to deploy hundreds of applications, both new and existing, on Atlas in the coming quarters. Large enterprise customers take a comprehensive and long-term perspective when selecting their operational data platform standards due to the scale and complexity of their businesses. Both clients chose to standardize on MongoDB after an extensive review of their options based on developer preference, the flexibility we provide for workload deployment, and confidence in our ability to meet their demands both now and in the future. The main drivers for MongoDB's adoption include: first, customers increasingly find that legacy technology limits their ability to respond swiftly to business changes, realizing that failing to address this now often incurs costs greater than the initial friction of change. A senior IT executive in the travel industry recently mentioned that most of their Oracle systems will transition to MongoDB. Second, our developer platform allows customers to reduce technology complexity and costs by consolidating workloads onto one platform, which is particularly important in the current macro environment as companies aim to streamline their vendor relationships and reduce operating costs. Two of Europe’s largest retailers are eliminating a variety of legacy systems, replacing them with substantial Atlas Service and Atlas Device Link deployments. Lastly, customers recognize that their software applications reflect their business strategies for developing new products and services as well as managing operations. MongoDB's modern platform enables them to enhance their innovation pace and improve business performance. At a recent advisory board meeting, a gaming industry executive stated they are standardizing on MongoDB because we make application development very simple for them. These customer conversations and the consistent strength of our new business performance give us great confidence in our long-term opportunities. We will continue to invest appropriately, as we believe this will create the greatest long-term value for the business. At the same time, we acknowledge that we are operating within a different macro environment, providing us with an opportunity to evaluate our structure, systems, and processes for greater efficiency. In fiscal 2024, we aim to elevate our performance, positioning ourselves to take advantage of long-term opportunities when economic conditions stabilize. To that end, we are implementing several changes this year. We will drastically reduce our overall headcount growth, having grown by 30% in fiscal 2023, and now expect that number to be in the single digits for FY 2024. We will maintain our focus on aligning all go-to-market activities with our primary goal of acquiring new workloads. We will enhance cross-functional coordination to establish the necessary systems, tools, and compensation structures for acquiring workloads more efficiently. We will also continue to increase our quota-carrying sales team while prioritizing investments in regions and channels that yield the highest returns. Additionally, we will decrease investments in some support areas. In our product and engineering organizations, we will concentrate on our key priorities, such as improving our core database, enhancing our search and time series capabilities, and sowing the seeds for future growth opportunities. In General and Administrative, we will focus on investing in systems that deliver automation, repeatability, and scalability to further drive efficiency improvements. Now, I would like to take a few minutes to discuss MongoDB's adoption trends among our customers. Many companies, including Avalara, Electrolux, Bosch, and Telefónica Tech, have realized significant cost savings by using MongoDB. Telefónica Tech, part of Telefónica S.A., leads the digital transformation services and technology. They needed a platform capable of handling the increasing usage of 30 million IoT devices on their managed connectivity platform and chose MongoDB as their primary database to ensure uninterrupted user service while cutting expenses by 40%. Customers across various sectors and regions, such as Cathay Pacific, Iron Mountain, Polaris, and Midland Credit Management, are executing mission-critical projects using MongoDB Atlas, taking full advantage of our developer data platform. Iron Mountain shifted to MongoDB to transition from traditional physical asset storage and shredding to offering intelligent document processing solutions. They required an agile system to swiftly respond to customer requests, and MongoDB's document model allows for quick data ingestion with a flexible schema. MongoDB's developer data platform supports Iron Mountain's clients in searching through millions of documents, returning queries in milliseconds. Many customers, such as Amadeus, Penske, and Clear, have moved from legacy technology or alternatives to MongoDB. Penske, a leading transportation services company, chose MongoDB Atlas to modernize its customer notification platform, which was originally built on a relational system that lacked the flexibility needed for rapid iterative development. After migrating to MongoDB Atlas, Penske saw improved developer productivity, seamless scalability, enhanced platform performance during traffic spikes, and increased overall customer satisfaction. In summary, I am pleased with our execution in the fourth quarter and excited about our long-term prospects. I have experienced several challenging macro environments in my career, and I remind our team almost daily that these times present valuable growth opportunities for employees at all levels. I genuinely believe that challenging periods offer a chance for great companies to differentiate themselves. We aim to do just that and will emerge from this slowdown better positioned to achieve our goal of building a generational software company. With that, here's Michael.

Thanks, Dev. As mentioned, we delivered a strong performance in the fourth quarter, both financially and operationally. I'll begin with a detailed review of our fourth quarter results, and then finish with our outlook for the first quarter and full fiscal year 2024. First, I'll start with our fourth quarter results. Total revenue in the quarter was $361.3 million, up 36% year-over-year. As Dev mentioned, we continue to see a healthy environment for new business. To us, this is confirmation we remain a top priority for our customers and that our value proposition continues to stand out, even and sometimes especially in this market. Shifting to our product mix, let's start with Atlas. Atlas grew 50% in the quarter compared to the previous year and now represents 65% of total revenue, up from 58% in the fourth quarter of fiscal 2022 and 63% last quarter. As a reminder, we recognized Atlas revenue primarily 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 macroeconomic factors. Let me provide some context on Atlas consumption in the quarter. As Dev mentioned, consumption growth in Q4 was weaker than we expected. In fact, consumption growth in Q4 was the slowest quarter of the year. As a reminder, in our prior quarterly call, we noted consumption growth in Q4 was off to a solid start with November growth similar to Q3 trends. However, we also noted that we expected to experience a seasonal slowdown for the rest of the quarter driven by lower usage of applications during the holidays. Broadly speaking, this is what happened in Q4. However, the slowdown was more pronounced than we expected. The holiday slowdown was a global phenomenon and visible across all industries and channels. February trends showed an improvement and were in line with the average growth we've seen since the macro slowdown began in Q2 of last year. In addition, due to slower Atlas consumption growth during fiscal 2023, we recognized several million dollars of incremental revenue in Q4 from a small portion of our customers that reached the end of their contracts without having consumed their entire commitment. Revenue from contract expirations happens in the normal course of our business and is usually not a significant factor affecting our results. The higher level in Q4 is a function of the cumulative impact of lower consumption trends over the course of the year as well as Q4 having the largest number of customer contracts up for renewal. Turning to Enterprise Advanced. As you know, we faced a difficult EA compare in Q4 and that is reflected in our slower year-over-year Enterprise Advanced revenue growth. However, EA once again significantly exceeded our expectations in the quarter as we continue having success selling incremental workloads into our existing EA customer base. The continued strength of EA new business is particularly notable in this environment, given that EA requires an upfront commitment. Turning to customer growth. During the fourth quarter, we grew our customer base by approximately 1,700 customers sequentially, bringing our total customer count to over 40,800, which is up from over 33,000 in the year-ago period. Of our total customer count, over 6,400 are direct sales customers, which compares to over 4,400 in the year-ago period. Q4 was another very strong quarter of direct customer net additions. 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 primarily by Atlas, which had over 39,300 customers at the end of the quarter compared to over 31,500 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 with our net ARR expansion rate above 120%. We ended the quarter with 1,651 customers with at least $100,000 in ARR and annualized MRR, which is up from 1,307 in the year-ago period. We also finished the year with 213 customers spending $1 million or more on our platform compared to 164 a year ago. Moving down the income statement, I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross profit in the fourth quarter was $280.8 million, representing a gross margin of 78%, which is up from 74% in the year-ago period. Our gross margin improvement in Q4 was positively impacted by a one-time benefit of roughly 2.5 percentage points related to one of our cloud partner contracts. We are very pleased with our gross margin progression even excluding the one-time benefit, especially in the context of Atlas representing 65% of our overall business. Our income from operations was $37.2 million, or a 10% operating margin for the fourth quarter compared to a 5% margin in the year-ago period. The primary reason for our strong operating income results versus guidance is our revenue outperformance. In addition, we benefited from significantly lower-than-expected headcount growth in the fourth quarter, as we slowed down hiring and prioritized hiring to the highest-need areas. Net income in the fourth quarter was $46.4 million, or $0.57 per share based on 80.8 million diluted weighted average shares outstanding. This compares to a net income of $8 million, or $0.10 per share on 78.7 million diluted weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow, we ended the fourth quarter with $1.8 billion in cash, cash equivalents, short-term investments and restricted cash. Operating cash flow in the fourth quarter was $25.9 million. After taking into consideration approximately $2 million in capital expenditures and principal repayments of finance lease liabilities, free cash flow was $23.8 million in the quarter. This compares to free cash flow of $16.8 million in the fourth quarter of fiscal 2022. I'd now like to turn to our outlook for the first quarter and full year fiscal 2024. For the first quarter, we expect revenue to be in the range of $344 million to $348 million. We expect non-GAAP income from operations to be in the range of $10 million to $13 million, and non-GAAP net income per share to be in the range of $0.17 to $0.20 based on 84.3 million estimated diluted weighted average shares outstanding. For the full fiscal year 2024, we expect revenue to be in the range of $1.48 billion to $1.51 billion. For the full fiscal year 2024, we expect non-GAAP income from operations to be in the range of $69 million to $84 million, and non-GAAP net income per share to be in the range of $0.96 to $1.10 based on 85.1 million estimated diluted weighted average shares outstanding. Note that the non-GAAP net income per share guidance for the first quarter and full year fiscal 2024 includes a non-GAAP tax provision of approximately 20%. I'll now provide some more color around our guidance starting with Q1. First, we expect Atlas revenue to be flat to slightly down sequentially in Q1. As a reminder, Q1 has three fewer days than Q4, which represents a revenue headwind. Second, weaker-than-expected Atlas consumption during the holidays will have a bigger impact on Q1 revenue than it did in Q4, thereby negatively impacting sequential revenue growth. Finally, the higher than typical unused commitments that benefited Q4 revenue are making for an incrementally harder sequential compare. On a year-over-year basis, Atlas continues to face a difficult compare as we're lapping last Q1, which is the last quarter of strong consumption growth before the macro slowdown. Second, we expect to see a meaningful sequential decline in EA revenue. As discussed in the past, Q4 is our seasonally highest quarter in terms of our EA renewal base and our EA renewal base is an excellent indicator of our ability to win new EA business. In Q1, the base is sequentially lower, which we expect to have an impact on our ability to generate new business and the associated license revenue under ASC 606. Next, we expect operating income to decline sequentially because of the lower revenue outlook. In addition, in Q1, we see a sequential expense increase because we award annual merit compensation increases to the majority of our employees. Moving on to our full year guidance, a few things to keep in mind. We expect Atlas consumption growth to continue to be impacted by the difficult macroeconomic environment throughout fiscal 2024. Our guidance assumes consumption growth that is in line with the average consumption growth we've experienced since the macro slowdown began in Q2 of last year as well as what we observed in February. Moving on to EA. Similarly to Q4 of fiscal 2023, we will begin facing very difficult compares throughout fiscal 2024. We remain confident in our ability to keep upselling our EA customer base with incremental workloads but last year's strong performance combined with the ASC 606 dynamics will represent a meaningful headwind. In terms of our operating income guidance, the key variable to keep in mind is our headcount growth, as Dev mentioned, we'll meaningfully slow down hiring this year, expecting to grow headcount in the single digits. However, in terms of year-over-year OpEx growth, keep in mind that we'll also be annualizing the impact of the 30% headcount growth we experienced last year. To summarize, MongoDB delivered solid fourth quarter results in a difficult environment. Our new business performance and strong direct customer net additions indicate the robust underlying demand for our developer data platform. The continued macro uncertainty is putting pressure on Atlas consumption, and we've incorporated that into our outlook. As a result, we are modulating our pace of investments with laser focus on key priority areas and increasing efficiency across the company while still running the business for the long-term. With that, we'd like to open up to questions. Operator?

Thank you. Our first question comes from Sanjit Singh with Morgan Stanley. You may proceed.

Thank you for taking the question. Dev, I want to get an understanding of some of the factors that's driving the weaker consumption trends. As a transactional database, I guess transaction volumes for the MongoDB applications are down. But to what extent is broader slowdown in sort of cloud transformation, cloud migration deals impacting the business? And do you see any impact of any sort of optimization customers sort of downsizing to less powerful causes as a headwind on consumption growth?

Thanks, Sanjit. We are going after a really large opportunity. We're really pleased with our new business traction in terms of new customer acquisition and as well as new workload acquisition. But I do want to say that obviously, the new workloads we acquire have very little impact on near-term revenue. In terms of optimization, we've really seen no changes in the dynamic. The value of what we offer is tightly aligned to the value that customers see. When customers build an application they want that application to be used. They want that application to be consumed. And obviously, as it's consumed, that drives more value for them and drives more revenue for us. Now we have seen some corner cases, where some customers under significant financial duress may re-architect their MongoDB clusters to have less resilience or less scale but that obviously comes with a lot more risk. And again, that's not really a sustainable approach. And so in general, our retention trends are very strong and as one CTO said on the buy-side call, we are a necessity not a luxury. So, we feel good about the long-term. It's just a function of the macro environment and the second order effects we're seeing from our own customers.

I understand. Thank you for the insights, especially regarding gross retention. I want to follow up on your comment about February performing better than the holiday slowdown in January. Can you elaborate on how February's performance compares to November? It seemed like a solid start to the quarter. Was that consistent with your observations at the beginning of November and in Q3 overall, or is there a difference in the underlying cohort usage during that period?

Yes. So, one of the things that we'll call out, Sanjit, is as we have more and more data on Atlas we've tried to expose to everyone the underlying seasonal trends that we see. So, that November period that you're specifically asking about is consistent with the Q3 timeframe, which is one of the seasonally stronger periods. We had mentioned that the latter part of Q4. So, basically December and January tends to be slower and normally those kind of wash each other out. So, November would have been higher in line with Q3. And what we're seeing in February is really consistent with what we've seen since the very beginning, so sort of the average. So, if November Q3 are a little bit on the higher side and inventory is more in line with the average, you can sort of conclude where that is.

I appreciate the thoughts, Michael. Thank you so much.

Thank you. Our next question comes from Kash Rangan with Goldman Sachs. You may proceed.

Hi, thank you very much. Congrats on the quarter. Help us understand Dev and Michael, if you will, a dichotomy between consumption growth slowing down. But at the same time at the other end of the funnel, you are adding new customers. So, help us understand why these two seems to be happening, although you would generally think that during a downturn new customers a lot of hard time making new technology decisions? That's one. Number two when I look at Atlas customer growth in the most recent quarter that loan was up some 25%. So, how do we square that with guidance for 15% to 18% growth rate, it feels like at some point when people start to feel slightly better about the economy, these transaction volumes can pick up, case in point, you did Atlas growth which was pretty significant in the quarter, while going through consumption slowdown. So, despite that you put up good numbers. So, help us understand how to look at the guidance in light of slowing consumption but this time we're modeling in a pretty significant slowdown in the overall revenue growth. Thank you so much. I hope this question still makes sense.

Thank you, Kash. I’ll address the first question and then Mike will respond to your second one. Regarding the difference between usage and new customer acquisition, it’s important to recognize that companies express their business strategies through the products and services they develop using software and how they operate their business. They aim for greater efficiency, seek new business opportunities, and react to emerging threats. Our platform, being modern, flexible, and highly scalable, is appealing for customers looking to build applications. However, many workloads begin on a smaller scale, which means the immediate revenue impact is also minimal. Over time, as these workloads expand, the impact will be more significant. The observed divergence between new business and consumption reflects secondary effects within our customer base. As previously mentioned, we are noticing a slowdown in transaction volumes, with customers purchasing fewer items through digital platforms, traveling less, or utilizing other products and services less frequently. Consequently, these customers aren't witnessing business growth, leading to a reduced necessity for them to expand their MongoDB clusters. This essentially explains the divergence in trends.

Yes. I would like to add that we are experiencing success in acquiring new customers and workloads even in the current market, which highlights the value of our offerings. As mentioned, these customers typically start small. We are seeing strong initial growth for new workloads, but all workloads are influenced by the overall economic climate. This leads me to emphasize our framework: in the short term, outcomes are primarily driven by the expansion of current allocations, while in the long term, particularly given our low market penetration, our success will rely more on our ability to attract new customers and workloads.

Thank you so much.

Thank you. Our next question comes from Raimo Lenschow with Barclays. You may proceed.

Hey, thank you. You talked about a new dynamic this quarter in terms of customers not kind of fully utilizing their credits and that kind of helped you on revenue. How much of a theme do you think that will be going forward? Is that just a specific one for this year, or do you anticipate that for the coming year? And does that kind of trigger maybe thing to go back to the customers that they kind of want to renegotiate the contract or optimize the contract. Like how much of a real impact is this for you? And then I had a follow-up please.

Yes, this dynamic has always existed, but it's lessening over time. To clarify, due to the slower growth we've experienced in recent quarters, there's a higher chance that some customers do not fully utilize their commitments. Many contracts end in the fourth quarter, which is our busiest selling period, and this contributes to the situation. We're highlighting this to help people understand the guidance for the first quarter. Normally, revenue that would have been recognized earlier in the year is impacted because customers are consuming less than their commitment levels at expiration. It's important to note that these are older contracts, some signed at least a year ago, and we've been moving away from emphasizing commitments over the past couple of years. Consequently, this will likely become less significant over time, although it did represent several million dollars this quarter, so we wanted to make sure it was clear for the sequential guidance for Q1.

Yes, okay. For the follow-up, which seems more relevant for long-term investors, can you discuss the split regarding the 5% or single-digit headcount growth you mentioned? There is a potential risk that as we transition out, we might lack sufficient sales capacity, so it's important to gain insight into that aspect. Thank you.

Yes, Raimo. I mean, we are basically making decisions across the business and in a surgical way. This is not some sort of broad-based slowdown. We're investing in channels and markets where we see great performance and we're slowing down that pace of investment in areas that maybe we're waiting for things to get better. On the product side, we continue to invest on product and even in new growth areas that we think will pay handsome returns in the future. I would say that we feel pretty good about our ability to respond to the changes in the market. And so we feel like we have the sales capacity we need going into this year. And we're also, as we talked about, very, very focused on both acquiring new customers and new workloads and we're optimizing for that not served to really increase the rate and pace of new workload acquisition. As we see good returns, we'll continue to adjust accordingly.

Okay. Thank you.

Thank you. Our next question comes from Rishi Jaluria with RBC Capital Markets. You may proceed.

Wonderful. Thanks so much for taking my questions. I wanted to start, Dev, maybe as you think about usage patterns that you've been seeing, was just wondering if you could give us a little bit of color in terms of uptake of some of the adjacent services around Atlas particularly search as well as Data Lake. Just wanted to see how that's trending? And any moves that you can make to drive more usage or more expansions of existing Atlas customers onto the services? And I've got a quick follow-up.

Thank you for the question. Our strategy is to transition from being a database company to a comprehensive developer data platform. The goal is to empower developers to utilize a wider range of use cases on MongoDB. The advantages are significant, as it allows for a unified approach to handle various applications or use cases, keeping all data centralized and making it much easier for organizations to manage their infrastructure. We are noticing a strong increase in search activity within our sales force, and customer demand is high. Customers appreciate the ability to consolidate everything on MongoDB rather than having separate search engines and connectivity between their OLTP database and search database. The message is resonating well, and we are receiving feedback on new features and capabilities that customers wish to see. We are particularly focused on the search market, which is a top priority for growth this year. There is also increasing demand for time series data for similar reasons; customers prefer not to deal with bespoke solutions or juggling new technologies; they want all data in one location. We are experiencing a similar trend with mobile and the demand for online archive, as users want to offload accumulating data from their MongoDB applications to more cost-effective storage solutions while still being able to effectively create and import data from other sources into their platform. This interest is especially noticeable among higher-end customers. We are committed to the platform strategy, and customers are responding positively to this message, particularly in a landscape where they seek to consolidate vendors.

All right. Wonderful. That's really helpful. And then Dev on the prepared remarks you talked about a few customers where they had migrated some of the relational workloads over MongoDB, maybe can you help us understand kind of the nature of those workloads? Were those workloads that maybe should have never been relational to begin with? Are some of them actually correlational workloads that you're able to take away? And to what extent has a Relational Migrator, which I believe was announced last year, been kind of a help or an accelerant to that part of the business? Thanks.

There are several reasons why organizations choose to move their relational applications to MongoDB. Performance is a key factor, as the demands of the applications may exceed what the relational database can handle, prompting the need for a more scalable solution. Additionally, the challenges of evolving data models can lead to frustration among customers, especially when adding new features becomes cumbersome. Cost is another significant factor, as many find that the pricing structures of traditional relational vendors are prohibitively expensive, pushing them towards more economical options like MongoDB. These reasons usually highlight why customers decide to make the switch. Regarding the Relational Migrator, it's seeing usage, but it's important to note that it's still primarily operated by MongoDB staff and hasn't been released for general use yet. There are numerous variations of relational applications, which means there are still scenarios that require some manual effort. However, we are receiving positive feedback on Migrator, and our overall goal is to lower the barriers for customers transitioning from relational systems to MongoDB, and we intend to keep investing in this area.

Perfect. Thank you so much. I appreciate it.

Thank you.

Thank you. Our next question comes from Brent Bracelin with Piper Sandler. You may proceed.

Good afternoon. Wanted to ask, Atlas consumption by vertical. Have you seen any sort of variances by industry vertical relative to consumption patterns, or has the slowdown been broad-based? Thanks.

Yes. Thanks, Brent. No, it's been broad-based. The holiday slowdown that we anticipated and was more pronounced was also broad-based really across the board. And then when we look at the recovery that we observed in February, that was also broad-based. And so I think we're seeing pretty consistent trends across industries.

Helpful color. And then one quick follow-up, on EA I know that still ratable recognition of the ASC 606, $427 million contribution from EA in fiscal 2023. What's baked into the assumption around EA next year? Are you assuming that business potentially declines to get to the 15%, 16% growth, just any color around what's baked in? I apologize if I missed the color there. But any color on EA expectations built in the guide for this year would be helpful.

Yes, sure. As you know, we run the business on a channel basis, but just given the ASC 606 dynamics, at least try and provide a little bit of color for folks to understand things. So from a Q1 standpoint, we did say we expect EA to be down sequentially Q1 relative to Q4 and that's really a function of the EA renewal base. As you think about meeting the EA renewal basis lower in Q1? And then secondly, if you think about over the course of the full year, EA really is what drove a lot of the outperformance that we've seen this past year in fiscal 2023. And so what that means is that sets up fairly tough compares for the balance of the year across EA. So I think that's just sort of important to keep in mind, as you think through the modeling and the forecast, and that's tried why we provide all that color.

So year-over-year decline is not out of the question then?

We said in Q1, we expect a sequential decline, yes. Long term, just in case it isn't clear, long-term EA continues to be a growth opportunity. While we talk a lot about public cloud and public cloud adoption in these contexts in these settings, there's still a large number of companies and a large number of applications that people have not yet moved to the cloud, and EA continues to find very strong product market fit with those customers. And as we've mentioned before, is increasingly seen as an on-ramp to the public cloud. And so I think it's an important kind of aspect of the MongoDB run anywhere strategy.

Thank you. Our next question comes from Michael Turits with KeyBanc. You may proceed.

Hi, guys. Two questions. One; what's happening with the contracts that were renewed this quarter? What's happening in the level of commits for next year? And then secondly, on margins obviously, your EBIT margins for the full year, the guide is for some expansion but not a lot. And I understand that you have a delayed impact to the cost of hiring last year, but why not more expansion of those margins? Was it that you just waited too long to start slowing with that headcount growth in December or why are we not able to find more ways to get more margin expansion this year? So commits and margin expansion.

Great. Thanks. On the commits, we continue to have very high renewal rates. We've not seen any uptick in churn despite sort of the macro environment, which again I think underscores the mission criticality. And as it relates to commitments, as I've mentioned for the last several years, at least the last three years now, we've been deemphasizing commitments. And so that tends not to be the way that customers think. And the scenario that you're describing, I can give you kind of like an anecdotal insight or perspective. If you think about someone who is sort of under-consumed relative to their initial commitment, oftentimes that can be a result of the product that got started late, right? So they were more optimistic about how quickly they could launch their own internal application. They lost a few months, but the application is taken off and performed nicely. And so you can easily see scenarios, where they're renewing at similar or higher levels. So I wouldn't overly read into that unused commitment dynamic. We really are just exposing that to folks so people can understand the sequential guide. On profitability and margins, maybe I'll say a couple of things. We feel very good about the performance overall. We feel good about the guide. The guide has another 100 basis points of improvement relative to fiscal 2023, once you exclude the one-time credits that we called out, we were able to – we're pleased we were able to maintain that 100 basis point improvement even after Q4 and all of fiscal 2023 came in stronger than we had expected. And so I think that's sort of important to keep in mind as well. And then the last thing I'd say is a little bit to Dev's answer to Raimo's question, we are continuing to invest for the long term. And so this is not an attempt to cut all costs or seize all investment in the future. We believe that we're in the early innings of capitalizing on a large market opportunity. We know the cost of capital is higher. Therefore, fewer things clear the bar. We're being really judicious about making sure that we're focusing on the areas of highest return and highest priority so that we can set ourselves up well to capitalize on this long-term opportunity.

Thanks, Mike.

Thank you. Our next question comes from Tyler Radke with Citi. You may proceed.

Thank you for taking my question. I wanted to ask about the strong direct customer additions and direct sales growth, which remained robust compared to last quarter. I'm curious about the trends you're observing regarding customer segments. Are you seeing more pronounced strength in the enterprise sector, or is it more in the mid-market? Could you comment on the differing trends you’re noticing between SMB and enterprise? That would be appreciated. Thank you.

Thanks for the question, Tyler. We're seeing strength in new business across the board. Our direct sales customers in North America, Europe, and both the large enterprise and SMB sectors have performed well. This is largely due to our focus on acquiring new customers, as gaining access to an account yields significant long-term benefits. Additionally, we're striving to expand our existing customer base by introducing new workloads, which is a key part of our strategy. While we have limited control over how those workloads grow, we can directly influence the speed at which we add new customers and workloads, which is why that remains our focus.

Great. You mentioned some additional standardization deals this quarter, where customers are likely investing millions in Mongo. I'm curious about the current environment—are you experiencing an increase or decrease in these deals? It’s obviously tough to close larger deals right now. Could you discuss your approach towards these? Also, have you noticed any common trends if there has been an increase? Thank you.

Yes. What I have previously stated still holds true. Being in an account does not automatically mean we have become the standard. Therefore, the responsibility of the account team, depending on the size of the account, is to facilitate the organization in recognizing us as a de facto standard due to our popularity and the preference of developers. Sometimes organizations have a formal process to certify a new technology within their enterprise. When this occurs, it allows developers to use MongoDB without seeking permission, making it applicable for nearly any use case. This unlocks a range of new opportunities for us. For example, in our strategic accounts where we have deployed additional resources, we are either the standard or very close to becoming one. As mentioned before, when we become the standard, the number of new workloads coming to MongoDB significantly increases, which naturally boosts our revenue. That is fundamentally our strategy. Recently, I would say there has been no change in the pace of customers declaring us as a standard. I was trying to explain that these large customers, when they declare a standard, tend to commit for a long time due to the scale and complexity of their operations. Changing standards is not operationally feasible for them. Thus, when they choose to adopt a new platform, they are often making a decade-long commitment to MongoDB as their standard. Consequently, they evaluate us based on our ability to meet their current requirements and anticipate their future needs.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Ittai Kidron with Oppenheimer. You may proceed.

Thanks. First of all for an easy one. Have you made any changes to the comp plan as you enter the new fiscal year?

We always make small modifications of the comp plan. This year for the sales force we are really focused on new workload acquisition and we're more focused on acquiring and getting those workloads to consume and less focus as Michael mentioned, on driving big commitments. Given how sticky MongoDB workloads tend to be. We know once a customer deploys an app on MongoDB, they tend to stick around for a long time. And so it's all about making it very, very easy for customers to deploy on MongoDB. And then obviously over time, customers will come to us when they feel like it makes sense for them to negotiate for a better discount based on a volume commitment to us. But our real focus is just getting our sales force to acquire new workloads as fast as possible.

I guess if that's the case, if you talked about in your prepared remarks about trying to separate yourself on the pack and taking advantage of opportunities in markets like this. And clearly, you had experience and history in this area. While I understand they need to be very focused and scrutinized expenses. Why not be a bit more aggressive actually go the other way and actually double down on your investment and go after those beachheads that long-term will drive really a good strong market positioning for you.

Yes. I think Michael and I and the rest of the leadership team we tend to be a group of people who have seen different environments. And I think we're trying to take a balanced approach. I think we're not the sort of people who put their heads in the sand and don't recognize that there's a change in the macro environment and a change in the cost of capital. So we want to make sure that we're growing but growing profitably, and growing efficiently. And so we're constantly assessing what channels are working or what teams and different channels are working, what adjustments do we need to make. And as you've seen, we've been – we've not been shy about constantly evolving our business and as well as how we go to market. And so transitioning the business from a predominantly on-prem subscription business to now predominantly consumption business has required us to make lots of changes over time. And so where we take a balanced view of balancing both short-term and long-term, an earlier question you got was why not be more profitable. Now you're asking us why aren't you investing more. So that's a classic example of retention that we have to deal with.

Very good. Good luck.

Thanks, Ittai.

Thank you. Our next question comes from Kingsley Crane with Canaccord Genuity. You may proceed.

Hey, thanks for taking the question. So really encouraging to see the expanded partnership with Azure. I wanted to touch on the joint focus and incentive to migrate Mongo to Atlas on Azure. So is this a discussion you're having with customers upon renewal? Are you socializing this with them sooner? And then does this make Azure the de facto preferred platform to run Mongo?

No. The work we've done with Azure has been substantial, and I want to commend our partner team for their efforts in making that deal a reality. This success is due to several factors. Firstly, Azure, like many cloud providers, has recognized the popularity of MongoDB among developers and its performance on their platform. Secondly, they understand that the alternatives they provide don't match the features and performance of MongoDB. Lastly, they face the risk that promoting their options could drive customers to use Atlas on a different cloud provider instead. Essentially, Azure is aligning with what AWS and GCP have already established by offering incentives for customers to choose Atlas, encouraging their sales team to work with us on securing more deals and facilitating product integration. Ultimately, this highlights the platform neutrality we provide, allowing customers the flexibility to run their workloads anywhere, a factor they find extremely important in the context of the industry and the significance of the data platform.

Okay, great. Really well said. That's it for me.

Thank you.

Thank you. Our next question comes from Mark Moerdler with Alliance Bernstein. You may proceed.

Hi, this is Firoz Valliji from Bernstein. Thank you for taking my question. Given that the core product is a core infrastructure product and these types of products usually involve long-term visibility regarding spending and implementation, is it really feasible for customers to significantly reduce their purchases that quickly? I also have a follow-up.

One of the advantages of the cloud is that it allows for a variable cost model. With Atlas, you can adjust your clusters and usage according to your business needs and the performance of your applications. We are not seeing a decline in the business; rather, we are experiencing slower growth in these workloads. This is closely related to the fact that our end customers are also facing a slowdown in their businesses, which means their need to upgrade clusters for growing applications or adding new ones is not as urgent as it was two years ago. So, while there isn't a reversal in customer activity, the growth rate is simply slowing down.

Got it. And I have a quick follow-up. You mentioned that consumption patterns are slower in Q4. Is this a widespread trend, or can you specify any differences between large enterprises and, for example, digital natives or SMB customers? Thank you.

No. The holiday slowdown was indeed more pronounced. We experienced very limited growth during those two months, and this was widespread across industries. Similarly, the rebound we observed in February was also broad-based.

Thank you. That’s very helpful.

Thank you. Our next question comes from Mike Cikos with Needham. You may proceed.

Hey, guys. You have Mike Cikos here from Needham & Company and thanks for getting me on. I think, the first question that I had, and I know it's a little bit more backwards looking, just given the difficult comps that we're citing in the out year. But can you help us think through Enterprise Advanced? And really what I'd like to get at is, is there any way you guys can explain what drove this strength? Because it really did feel like it carried the mantle as far as the growth and outperformance that you guys were able to demonstrate throughout fiscal 2023. Is there any way to help us conceptualize what drove that from those customers? And then, I have a follow-up as well.

Yes. Thanks, Mike. I don’t have much to add beyond what I already stated in response to Brent's question. Generally, we operate the business based on channels, and different customers are at various stages in their journey of cloud adoption. Our aim is to make MongoDB easy for them to implement, no matter their current position. Customers are increasingly viewing MongoDB Enterprise Advanced as a pathway to the public cloud. It's important to recognize that we're targeting a significantly large market, valued at $84 billion in 2022 according to IDC, projected to grow to $138 billion by 2026. Currently, we hold about 1.5% market share. There is a substantial opportunity, especially since, despite the rising number of workloads shifting to the cloud, many workloads are still not there. Thus, the potential is extensive and varied. Our focus is on making MongoDB accessible for customers regardless of their readiness or current situation.

Thanks for that, Michael. As a follow-up, I'm trying to piece together some information and I suspect my colleagues are as well. Given the guidance for the first quarter and the full year, could you help us understand management's view on consumption trends throughout fiscal 2024? Particularly since in fiscal 2023 we noted that the second quarter was below the historical trend line, while the third quarter was closer, yet still below. Is there any way you can provide more clarity on what to expect for the remainder of the year after the current first quarter guidance?

When considering our guidance for the entire fiscal year, we now have a few quarters of data in the current macroeconomic environment. There have been various influences, but overall, things have unfolded as we anticipated with some seasonal variations. For fiscal 2024, we expect Atlas cohort growth and expansion to continue in line with the trends we've seen since Q2, which marked the beginning of the macro slowdown. If the macro environment improves, we will benefit; conversely, a deterioration will negatively impact us. We've mentioned that Q3 is expected to be strong seasonally and discussed several dynamics affecting Q4. We've provided clarity regarding Q1, especially highlighting the impact of having fewer days, alongside other factors relevant to the Q1 setup. We aim to provide a lot of detailed information as we operate on a channel basis, to assist everyone in understanding the various dynamics and in building their models.

Appreciate the context, Michael. Thank you very much.

Thank you.

Thank you. Our next question comes from Jason Ader with William Blair. You may proceed.

Hi. This is Sebastian on for Jason. Can you maybe talk about any changes you saw in your ability to acquire customers or add more workloads to the MongoDB platform starting in January, specifically as we entered a new budget year? Was there any step-up in deal scrutiny or macro laser weakness?

We've observed no change in our ability to acquire new workloads. While there's likely more scrutiny around expenditures in many organizations, the critical nature of our services and the returns on investment that clients experience have enabled our go-to-market teams to effectively overcome these challenges, resulting in another strong quarter of customer additions.

Yes. And Sebastian, to your question, I wouldn't assume any of that is unique to January, right. I think it's more just reflective of the current market environment broadly.

Okay. Great. Thank you.

Thank you. This concludes the Q&A session. I'd now like to turn the call back over to Dev Ittycheria for any closing remarks.

I want to thank everyone for joining our call. I just want to again reiterate that we had another strong quarter of new business performance, while Atlas consumption does remain impacted by macro headwinds. Our new business performance and customer feedback gives us a lot of confidence and optimism about our long-term prospects. We are responding to the macro headwinds by raising the bar on performance and efficiency and slowing down headcount growth and focusing on what we consider to be the highest priority investments. And I do believe that we will emerge from the slowdown stronger and even better positioned to change achieve the long-term opportunity. With that, I want to thank everyone for joining our call, and we'll speak to you soon. Take care.

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