Earnings Call Transcript - MDB Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to MongoDB Third Quarter Fiscal Year '23 Earnings 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, Brian Denyeau from ICR. Please go ahead.

Brian Denyeau, ICR

Thank you, Carmen. Good afternoon, and thank you for joining us today to review MongoDB's third quarter fiscal 2023 financial results, which we announced in our press release issued after the close of 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, including those related to the COVID-19 pandemic and the adverse macroeconomic environment and their impacts on our business, results of operations and clients that could cause actual results to differ materially from our expectations. For a discussion on certain 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 July 31, 2022, filed with the SEC on September 2, 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 measure. With that, I'd like to turn the call over to Dev.

Dev Ittycheria, CEO

Thanks, Brian, and thank you to everyone for joining us today. I will start by reviewing our third quarter results before giving you a broader company update. We generated revenue of $334 million, a 47% year-over-year increase and above the high end of our guidance. Atlas revenue grew 61% year-over-year, representing 63% of revenue. And we had another strong quarter of customer growth, ending the quarter with over 39,100 customers. Overall, we are pleased with our performance and execution in Q3 despite the challenging macro environment. Let me give you a bit more context on what we saw in Q3. We had another strong quarter of new business. We added over 500 direct sales customers, and we keep winning new workloads in existing accounts from start-ups to Fortune 500 companies. Our new business from Enterprise Advanced also significantly exceeds our expectations, which is particularly notable in this environment given that EA requires an upfront commitment. Turning to Atlas consumption trends. We have seen an improvement in Q3 versus Q2, albeit still below historical levels. Michael will cover this in more detail. Finally, retention rates remained very strong in Q3, demonstrating the mission-criticality of our platform. Indeed, our Q3 results are an indication that our value proposition resonates with customers even in a difficult macro environment. Let me remind you of the key pillars of our developer data platform. First, MongoDB enables customers to unleash developer productivity. The more productive developers are, the faster the organizations can innovate. The document model, which underpins MongoDB, has proven to be the best way for developers to work with data because it aligns well with how developers think and code. Second, MongoDB supports the performance and scale requirements of the most demanding modern applications. MongoDB is built from the ground up as a distributed platform and allows organizations to easily and cost-effectively scale their applications to address the most exacting performance requirements. Third, MongoDB allows enterprises to remove enormous complexity and cost out of their technology stack. MongoDB is a general-purpose platform capable of serving a broad array of use cases, including transactional, time series, mobile, search and application-driven analytics. MongoDB continues to be the most popular modern data platform with developers. In the last 12 months alone, our open source community server has been downloaded more than 115 million times from our website, which is more than in our entire company history through the beginning of 2020. And in Q3 alone, we had over 300,000 sign-ups for Atlas free tier, which is up 15 times over the last five years. We also see growing evidence for how our value proposition resonates with IT decision-makers who are known for their focus on ROI, especially in economic environments, such as the one we're in today. Customers who are moving to the cloud at scale, such as companies in the financial services industry, are increasingly choosing MongoDB as their underlying data platform to modernize their application portfolio. IT decision-makers value not being locked into any one environment. And by building apps on MongoDB, customers preserve their ability to run these apps on-premise, on any cloud and to easily switch between cloud providers. IT decision-makers are also increasingly interested in consolidating vendors. By virtue of MongoDB's broad support for a wide variety of use cases as a general-purpose platform, customers can run most workloads on MongoDB rather than a disjointed set of narrow point solutions that increase the cost and complexity of the data architecture. Finally, we continue to gain mindshare with our partners, and we see them leaning into co-selling with MongoDB as they also want to leverage the popularity and value of our offerings. Starting with the cloud providers. All three hyperscalers now showcase MongoDB Atlas on their consoles to make it easier for customers to sign up for Atlas given the increasing popularity of using MongoDB in the cloud. A number of large systems integrators are in the process of setting up business units focused on MongoDB given the size of the growing MongoDB practice. A growing number of ISVs continue to build their products in MongoDB. We currently have close to 200 ISVs co-selling relationships, which is up more than 2 times compared to two years ago. Our growing popularity has tangible benefits for our business, especially in periods of economic uncertainty. In times like these, customers typically default to vendors they know and trust and with whom they can consolidate spend while reducing overall costs. We see the current environment as an opportunity to establish ourselves as an enterprise standard with more of our customers. Now I'd like to spend a few minutes reviewing the adoption trends of MongoDB across our customer base. The following customers are running mission-critical apps in MongoDB Atlas, leveraging the full power of the developer data platform, incorporating services such as search, in-app analytics, and mobile services. These include Toyota Financial Services, Ulta Beauty, Mediastream, and Vodafone. Vodafone is the world-leading telecoms company with over 625 million global customers in 65 countries. Vodafone is creating hundreds of new cloud-native apps. Underpinning these apps is MongoDB Atlas, which provides a scalable, resilient, and flexible data platform. Atlas also supports Vodafone's IoT ecosystem of 140 million-plus devices. MongoDB is part of a suite of fully vetted tools that Vodafone allows developers to use to build any application. Several MongoDB customers are embarking on their digital transformation journey by choosing MongoDB Atlas and migrating from on-premise to the cloud, including American Tire Distributors, Schwarz IT, and Volvo Group. Schwarz IT, part of the Schwarz Group, uses MongoDB's Enterprise Advanced on-prem to drive innovation and fuel their own cloud service. With more than 13,000 locations across 32 countries and brands like Lidl and Kaufland, Schwarz Group is Europe's largest retail company. Their internal IT arm, Schwarz IT, works with both internal teams and external customers to ensure smooth operations of their tech stack. Schwarz IT also runs STACKIT, a cloud provider that offers its customers all the benefits of cloud deployment while ensuring that data is stored in Germany under EU regulations. In 2022, STACKIT launched a MongoDB service to help their customers modernize apps and services and improve performance. Hugging Face, Okta, Washington Post, Cisco, and L&T-SuFin, a B2B e-commerce platform, are currently developing a number of applications across different parts of the business and significantly expanded the use of MongoDB Atlas throughout their tech stack. Hugging Face, a fast-growing AI company, migrated from MongoDB Community to MongoDB Atlas to scale their open-source platform and online community for machine learning. Their company's shift to Atlas allowed them to rely on our developer data platform for software and security compliance, take advantage of change streams to speed decision-making, simplify the infrastructure through a single control plane for managing data, and reduce time spent on maintenance through Atlas' integrated services. In summary, I am pleased with our execution in the third quarter. We had another strong quarter of new business, demonstrating that our value proposition continues to resonate in the marketplace and with developers, IT decision-makers, and partners alike. We are pleased to see a rebound in Atlas consumption in Q3 and continue to closely monitor usage trends. We remain focused on winning new workloads with new and existing customers and are committed to profitable growth as we pursue our enormous market opportunity. With that, here's Michael.

Michael Gordon, COO and CFO

Thanks, Dev. As mentioned, we delivered a strong performance in the third quarter, both financially and operationally. I'll begin with a detailed review of our third quarter results and then finish with our outlook for the fourth quarter and full fiscal year 2023. First, I'll start with our third quarter results. Total revenue in the quarter was $333.6 million, up 47% year-over-year. As Dev mentioned, we continue to see a healthy environment for new business. Thus, this is confirmation that we remain a top priority for our customers, and our value proposition continues to stand out even in this market. Shifting to our product mix, let's start with Atlas. Atlas grew 61% in the quarter compared to the previous year and now represents 63% of total revenue compared to 58% in the third quarter of fiscal 2022 and 64% 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 macroeconomic factors. Let me provide some context on Atlas consumption in the quarter. Overall consumption trends improved compared to what we saw in Q2, though they are not back to historical levels. Specifically, there are a couple of trends worth noting. First, we saw a bounce back in areas that were below our expectation in Q2, namely the mid-market channel globally and our enterprise business in Europe. Second, we saw stronger sequential growth in underlying application usage in Q3 versus Q2, a trend observed across most industries and geographies. We observed a similar pattern last year, and we believe that this may be an emerging seasonal effect. Turning to Enterprise Advanced. EA significantly exceeded our expectations in the quarter, and we have continued having success selling incremental workloads into our existing EA customer base. As a reminder, under ASC 606, the term license component of the entire deal value is recognized as revenue upfront. This leads to the increased variability and reduced comparability of our EA results and is particularly impacted by multiyear EA deals. This quarter, we benefited from more multiyear EA deals than anticipated. Turning to customer growth. During the third quarter, we grew our customer base by over 2,100 customers sequentially, bringing our total customer count to over 39,100, which is up from over 31,000 in the year-ago period. Of our total customer count, over 5,900 are direct sales customers, which compares to over 3,900 in the year-ago period. Q3 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-serve 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 37,600 customers at the end of the quarter compared to over 29,500 in the year-ago period. It's important to keep in mind that the growth rate 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 1,545 customers with at least $100,000 in ARR and annualized MRR, which is up from 1,201 in the year-ago period. Moving down the income statement, I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross profit in the third quarter was $247.8 million, representing a gross margin of 74%, which is up from 73% in the year-ago period. Our year-over-year margin improvement is primarily driven by improved efficiencies that we are realizing in Atlas. Our income from operations was $19.8 million, or a 6% operating margin for the third quarter compared to a 3% margin in the year-ago period. The primary reason for our strong operating profit results versus guidance is our revenue outperformance. In addition, our operating profit benefited from the steps we've taken to moderate the growth rate of expenses as we prudently manage our investments in the current environment. Net income in the third quarter was $18.7 million, or $0.23 per share based on 80.4 million diluted weighted average shares outstanding. This compares to a net income of $2.6 million, or $0.03 per share on 78.5 million diluted weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow. We ended the third quarter with $1.8 billion in cash, cash equivalents, short-term investments, and restricted cash. Operating cash flow in the third quarter was negative $5.7 million. After taking into consideration approximately $2.7 million in capital expenditures and principal repayments of finance lease liabilities, free cash flow was negative $8.4 million in the quarter. This compares to free cash flow of negative $9.2 million in the third quarter of fiscal 2022. I'd now like to turn to our outlook for the fourth quarter and full year fiscal 2023. For the fourth quarter, we expect revenue to be in the range of $334 million to $337 million. We expect non-GAAP income from operations to be in the range of $6 million to $8 million, and non-GAAP net income per share to be in the range of $0.06 to $0.08 based on 83.3 million estimated diluted weighted average shares outstanding. For the full year fiscal 2023, we expect revenue to be in the range of $1.257 billion to $1.26 billion. For the full fiscal year 2023, we expect non-GAAP income from operations to be in the range of $30.8 million to $32.8 million, and non-GAAP net income per share to be in the range of $0.29 to $0.31 based on 80.2 million estimated diluted weighted average shares outstanding. I'll now provide some more context around our guidance. First, in Q4, we expect slower sequential Atlas consumption growth than we experienced in Q3, but better than what we saw in Q2. We're encouraged by the improvement in consumption trends we saw during Q3. But as noted earlier, we believe some of that was driven by seasonality from which we will not benefit in Q4. Second, given the significant outperformance of EA in Q3, we do not expect a sequential uptick in EA revenue between Q3 and Q4. Finally, on a full-year basis, we expect a non-GAAP operating margin of 2.5% at the midpoint of our guidance, about a 1 percentage point improvement compared to last year. We have consistently demonstrated operating leverage each year since going public, improving margins by over 35 percentage points over that time period. We will look to continue improving our margin profile over time, and we are pleased with our rate of progress this year. To summarize, MongoDB delivered strong third quarter results. Our new business performance and strong direct net customer additions indicate the robust underlying demand for our developer data platform. We are pleased to see an improvement in the Atlas consumption trends in Q3. We'll continue monitoring the environment and investing responsibly in pursuit of our long-term opportunity. With that, we'd like to open up to questions.

Operator, Operator

One moment for our first question please. It's from the line of Kash Rangan with Goldman Sachs.

Kash Rangan, Analyst

So Dev and Michael, just wondering what you've seen in the month of November with respect to consumption trends? And what do you make of the new Atlas wins in the quarter? I would assume that given that there was a lot of belt tightening in the quarter from a macro standpoint, rates went up. These new customers are probably even more discerning customers. Their plans with MongoDB are probably even more certain than the customers that might have been part of other cohorts. And as you look into calendar '23, what is your outlook for how you think about consumption patterns as your Atlas customer base becomes bigger and easier to predict, not easy but easier to predict?

Dev Ittycheria, CEO

Yes, let's start with the Atlas wins. First, thank you for the question. I want to highlight the Atlas wins, and then I'll have Michael discuss consumption trends in November. The key point to understand is that software is central to every company's value proposition. Recently, in discussions with customers, our customer advisory board, and at re:Invent last week, it's clear that our customers are focused on modernizing to enhance differentiation, operational efficiency, and agility. The platform message we promote resonates well because it enables high developer productivity, allowing teams to achieve more with fewer resources. Additionally, the platform allows customers to consolidate on a single solution instead of having to connect various disjointed tools. This approach reduces the cost and complexity of data architecture and offers a strong return on investment, which encourages new customer additions.

Michael Gordon, COO and CFO

And just on the consumption questions, a few thoughts, Kash. First of all, Q4 generally does not see anything that we would describe as a seasonal benefit. When we look at the November patterns, they were consistent with Q3, and that effectively implies that the latter part of the quarter will be slower growth because, in general, we haven't historically seen anything that looks like seasonal growth in Q4. So that will give you a sense for the balance of this year. And as it relates to fiscal '24, we're obviously not providing guidance right now. We'll update that in the March call. It's obviously good to see the continued success in new business as well as the recovery in those growth rates, but it's certainly a very fluid macro environment and we're monitoring the situation closely.

Operator, Operator

It's from the line of Brad Reback with Stifel.

Brad Reback, Analyst

So last quarter, you guys talked about the digital-native customers being a big problem from a consumption basis. Have those businesses now sort of stabilized at a consistent level?

Michael Gordon, COO and CFO

Yes. So a couple of things. Thanks for the question, Brad. I wouldn't have described it as a problem, but we did kind of slice and dice the consumption behavior to see what we were exposed to. Folks what we're seeing, including what areas where we were seeing slower growth. Of which, that part of the mid-market demonstrated that behavior. As I mentioned in the prepared remarks, we saw a rebound in consumption across the board, but including the mid-market, everywhere across geographies and across industries and also in Europe. So not all the way back to historical levels, but improved versus Q2.

Brad Reback, Analyst

That's great. And then on the OpEx side, I know you guys aren't guiding for next year, but Dev and Michael, you both talked about the leverage you guys have generated since IPO, and the results this quarter were astounding. Is there any reason to believe that OpEx won't meaningfully grow slower than revenue next year?

Michael Gordon, COO and CFO

Yes. So as I said, we're not going to guide as it relates to fiscal '24. You can see that the implied guide for fiscal '23 is a 100 basis points improvement in terms of the year-over-year margin on the op income side. We're very pleased with that, and we'll obviously, as we work through our plans over next year, monitor the environment and everything else. I would just add that we have always had a fairly granular view of things in terms of our returns framework and the returns, evaluating and assessing the returns that we're getting out of different investments. We continue to apply that framework, although obviously, the market environment has changed, which sort of implicitly means that the return threshold has gone up. And we've applied that scrutiny, and we'll likely do that as we get through the fiscal '24 guide.

Operator, Operator

One moment for our next question. And it comes from the line of Brent Bracelin with Piper Sandler.

Brent Bracelin, Analyst

Dev, the big surprise for us here is the momentum you're seeing in that EA business. We're seeing some of the peers obviously see moderation just as the overall tech market starts to do more belt tightening. What drove the strength in EA this quarter specifically? And if you could provide any color by industry, that's really the question here, what type of industry is driving the momentum and driving the upside here in EA specifically?

Dev Ittycheria, CEO

Yes. Thanks, Brent. I think what we saw in EA is just evidence that customers are really viewing MongoDB as an important part, if not a standard, in their tech stack. And once you are viewed as a critical element of the tech stack, people are more comfortable investing more aggressively, especially in this environment where people do need to modernize their legacy platforms to drive more efficiency and lower costs as well as drive more agility. So I think that's why we're seeing the upside on EA. And so we feel good about that. And obviously, this shows you that customers also like optionality; by building apps on MongoDB, they can truly run their apps anywhere, not only on-premise, but on any hyperscaler and obviously switch between on-premise or any hyperscalers. So that is also a very compelling benefit to customers in this environment.

Brent Bracelin, Analyst

Helpful color. And then a quick follow-up for Michael here. Short-term deferred growth did slow. I didn't know if there was an impact on payment timing or if you saw a similar slowdown in RPO. So could you just kind of walk through short-term deferred and why it slowed? And if we should expect a similar slowdown in RPO?

Michael Gordon, COO and CFO

Yes. So what I would just point you to, Brent, is that we've talked about that deferred in general and sort of calculated billings more broadly, is not a particularly relevant metric for us, as we've talked about for a few years now, as we continue to make it as easy as possible for customers to adopt usage of our platform, which then allows them to subsequently expand. We have deemphasized upfront commitments and tried to streamline that sort of upfront part of the negotiation. And so that has a natural consequence from a balance sheet perspective as sort of flowing through there. And that's where you see it. And that's why we tend to talk about that as being less relevant for our business.

Operator, Operator

One moment for our next question. And it comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow, Analyst

Congratulations from me as well, and I have two quick questions. Michael, regarding the EA, was there anything in terms of Q4 deals that got pulled into Q3, making the Q3 performance appear like a one-off? Or was it simply a general improvement in performance? And then for Dev, in this environment, there’s a tendency to return to established platforms. What are you observing regarding new customer projects starting with Mongo, as well as efforts to clean up legacy Oracle and IBM systems and consolidating on those platforms? Are those initiatives currently underway?

Michael Gordon, COO and CFO

Raimo, thanks for the question. On the pull forwards, no, we did not see any particular pull activity. The only thing I'd call out, which I mentioned in the script on the EA, is we saw a little more multiyear in EA, which under ASC 606 drives a little more revenue, but no pull forwards.

Dev Ittycheria, CEO

Yes. In regards to the question about engagement at current level. So we are definitely seeing customers continue to choose us and standardize us in terms of using Atlas. And the breadth of the platform is really attracting customers to use MongoDB in a wide variety of ways. And so we feel really good about the win rates. We feel really good about our engagement with customers. And obviously, you saw that in the new customer wins. The new customer wins were quite strong.

Operator, Operator

One moment for our next question. And it comes from Sanjit Singh with Morgan Stanley.

Sanjit Singh, Analyst

Thank you for taking the question and very impressive set of Q3 results. Dev, if I go back to the pandemic, some of the initiatives that you guys put in place that really served you well coming out of the pandemic, you saw the new customer adds really accelerate in 2020 as you sort of focus on sort of just onboarding customers at lower overall spend levels. In terms of the playbooks that could unfold in 2023, what sort of your playbook that you're going to be focusing the team more on sort of the app modernization use case? Is it going to be about further accelerating the customer adds? How are you sort of thinking about the sales playbook as we go into calendar 2023?

Dev Ittycheria, CEO

Right. Thanks, Sanjit. I just want to make the point that it was actually pre-pandemic that we decided to make it much easier for customers to engage with us by both changing sales compensation incentives as well as making it easier for customers to commercially engage with us. And obviously, that paid, to your point, paid huge dividends for us during the pandemic. What I will tell you is that it's really more of the same. We're really hyper-focused on acquiring new customers and adding more workloads from existing customers, and that's across the board, across every channel, every industry, and every customer segment. So that is something that we care a lot about. And we're seeing that now and expand in terms of getting customers now to adopt some of the new capabilities we've rolled out to the marketplace. So as I talked about in my prepared remarks, we're seeing a lot of customers embrace the full suite of the platform. So that drives incremental workloads that we would not have gotten in the past. And so we feel really good about that, and that's our real focus. It's all about acquiring new workloads and getting more and more people to build apps on MongoDB.

Sanjit Singh, Analyst

And then just one quick follow-up for Michael. You referred to the ROI framework and what sort of alluding to like a higher bar, given the current environment. Could you give us a sense of like what the team is prioritizing more and what may be following kind of below the line or being deprioritized as you think about driving both sustaining growth, but also extracting more efficiencies in the business?

Michael Gordon, COO and CFO

Yes. I'll do my best to try and kind of walk you through it. I mean I think you kind of have to run sort of type of investment versus type of investment. And obviously, ultimately, we look across the entirety of the portfolio, whether it's go-to-market or R&D or things like that. But it's probably easiest to think about within the different buckets and flavors as it relates today as sort of those teams effectively compete for capital. And so within the go-to-market, we obviously are looking at the returns that we're generating. We are continuing to invest. We are continuing to hire and grow within the teams, but we're backing the areas that are having the most success in delivering us the highest returns. Go-to-market is a little bit easier to measure quantitatively and on a short-term basis. On the R&D side, things take a little bit longer to play out. And you've got a little bit of a lag between when you make the investment and when you see the payback. But we certainly have conversations at a fairly detailed and granular level, even within the R&D side about where do we think we're seeing the most success and the most traction in which areas do we want to incrementally lean into versus which areas do you maybe want to deprioritize relative to the areas generating the highest returns.

Dev Ittycheria, CEO

Yes. To add to that, on the marketing side of our digital programs, we conduct a lot of experimentation to identify what works. We have specific return thresholds, and if certain programs aren’t delivering results, we discontinue them. Likewise, in the sales organization, we invest more resources in teams that are performing well, while we may scale back on those that aren’t. We are essentially continuing with our current strategies and being very thorough in our approach.

Operator, Operator

One moment for our next question. It comes from the line of Phil Winslow with Credit Suisse.

Phil Winslow, Analyst

Congrats on a great quarter. A question for you, Michael, and a follow-up for Dev. When you think about just new workloads, new application go-lives, and the trends that you're seeing there, wondering if you can cross that with what you've maybe seen in previous quarters or maybe even last year? Obviously, you talked about just overall consumption, but curious about the new apps, the go-lives, and the ramp of those. In terms of what you can control in go-to-market, Dev, how do you feel about sales productivity relative to the sort of these new apps, those go lives, new customer wins, et cetera?

Dev Ittycheria, CEO

Yes. What we are observing with the new workloads and sales productivity is that our customer base is highly diverse in both the types of customers and use cases. This is an advantage of our general-purpose platform. We have start-ups that are either creating new industries or disrupting existing ones, and large companies that are rapidly transforming various aspects of their business. The interest in our platform is growing, especially in search and consolidating search workloads on MongoDB. There's notable enthusiasm for time series as well, as it allows for a unified developer experience. Time series contributes to application-driven analytics, helping customers gain valuable insights and integrate automated decision-making into their applications. These use cases are increasingly popular. However, we still see many traditional use cases that our customers rely on. Regarding sales productivity, it really depends on the quality of their sales pipeline, how efficiently they can introduce new workloads on our platform, and how quickly we can bring in new customers. Our sales leadership is concentrating on both acquiring new customers and these workloads. It’s not about one workload yielding a better ROI than another; it’s more about understanding the specific needs and interests of our customers.

Michael Gordon, COO and CFO

Phil, regarding the cohort aspect of your question, it's probably easiest to consider it in the context of acquiring a new customer and the changes we made a few years ago that drove additional velocity. We have continued to observe positive and consistent behavior with those cohorts. I want to remind you that the majority of customer additions come from the mid-market, and these customers generally spend less than the average direct sales customer. It's important to take this into account when building models and considering the long-term impact.

Phil Winslow, Analyst

Congrats again. Really awesome.

Dev Ittycheria, CEO

Thanks, Phil.

Michael Gordon, COO and CFO

Thank you.

Operator, Operator

One moment for our next question. It's from Jason Ader with William Blair.

Jason Ader, Analyst

So how do you interpret the bounce back, especially mid-market European enterprise when seemingly macro is getting worse? And I have a follow-up.

Michael Gordon, COO and CFO

Yes. So the first thing I'd say, with Jason is it really relates to the underlying usage of the application, right? If you think about sort of what drives consumption within Atlas, I think that's the critical thing. And so when you think about the usage, we're seeing stronger underlying usage. We were always in a growth environment. What we saw in Q2 was slower growth in the mid-market and in Europe. Those rebounded again, not all the way back to historic levels, but improved levels relative to Q2. Part of our thought process, which we shared in the prepared remarks, is that we believe it's a bit of an emerging seasonal trend, which particularly relates to sort of people coming back from summer vacations and things of that because you'll recall in our September call, we talked about August being in line with what we've seen in Q2. And so that sort of suggests the improvement that we saw in September and October. We saw that same dynamic in the year-ago period. And while we only have a couple of years that are COVID affected where we've got Atlas at scale, that's kind of our best current working theory. But we can see it in terms of the underlying usage of the applications. The other thing I'd say more broadly from a macro standpoint that I think is impressive is on the new business side. We continue to win there. We continue to have our value prop resonate. We haven't seen sort of those increasing deal cycles and other things like that, that others have seen. We obviously are monitoring the situation closely, but we've been really pleased from that standpoint.

Jason Ader, Analyst

Great. And then one quick follow-up for you, Dev, just on cloud marketplaces. Is that something that you guys are going to be able to talk about in terms of, I don't know, any metrics, growth rates, percentage of business going through cloud marketplaces? Because it does seem like, broadly speaking, more third-party software is going through these marketplaces, and it seems like that's a really good thing at a lot of levels.

Dev Ittycheria, CEO

Yes, I’m not sure we will be sharing quarterly statistics on our progress, but we will certainly provide updates. The fact that customers can access Atlas through the consoles of all three hyperscalers is significant. It allows us to reach a new customer base with whom we may not have direct connections and highlights the desire of customers to use MongoDB in the cloud. I believe these two factors have been major drivers of our success. Few companies can claim presence on the consoles of all three hyperscalers.

Operator, Operator

One moment for our next question. That comes from Tyler Radke with Citi.

Tyler Radke, Analyst

I wanted to ask you first about the EA performance. Obviously, a really strong number on pretty tough comps. As we think about Q4, it looks like you're guiding Q4 to be flat sequentially from Q3, which in the last two years you've kind of guided up 7% last year and 4%. Is there something you're seeing in terms of timing on the EA business that would drive a sub-seasonal guide for Q4? Or maybe you're just layering in more macro conservatism given the environment out there? But if you could just kind of unpack your view on the EA business and overall outlook in Q4.

Michael Gordon, COO and CFO

Thanks, Tyler. While we don't provide specific guidance by product, I can share a few insights about Q4. Firstly, it was a remarkably strong quarter for EA, with a year-over-year growth of 26%. When we consider Q4, it seems unlikely that we will see a significant sequential improvement in EA, especially after such a robust Q3. Additionally, we mentioned that Q4 doesn't receive the seasonal advantages that Q3 does, so those are the main factors to be aware of as we look ahead.

Tyler Radke, Analyst

Great. It seems like you've mentioned some improvements in consumption on Atlas. However, when I compare the sequential dollar growth in Atlas from Q3 to Q2, it has decreased slightly. Can you explain why the sequential dollar additions are down despite the improving expansion rates? Is this related to new business? Please help us understand the factors at play.

Dev Ittycheria, CEO

Yes. I think it's mostly a reflection of the starting ARR. So you're basically starting with the compounding slower growth. And so when you think about the entry point, whether it's Q3 in terms of for the second half of the year or Q4 for the final quarter of the year, you've seen several months of slower growth. And so that means at the beginning, ARR is lower on an absolute basis. And even if the growth rates were to revert, the number would be lower just by virtue of the fact that the starting ARR is lower.

Operator, Operator

One moment for our next question please. It comes from Fred Havemeyer with Macquarie.

Fred Havemeyer, Analyst

I was also interested in cloud marketplaces and wanted to follow up on that. With the announcement of cloud marketplaces, you are showing more integration with, for example, Microsoft's entire data platform. What do you believe is attracting these hyperscalers, who have their own competitive database products, to not only sell your product but also consider partnering with MongoDB to offer it through their platform? I have a follow-up as well.

Dev Ittycheria, CEO

Yes. Fred, I think this highlights the strength of the MongoDB platform and its fit in the market, which is evident from our popularity. We are indeed the leading modern data platform globally, and most of our users operate MongoDB in the cloud. Each of the major cloud providers sees significant MongoDB usage across their platforms. You're correct that, in the past, they focused more on competition than collaboration. Many were initially doubtful about our capacity to establish a cloud business while competing with these major providers. Clearly, we have shown that we can succeed in that regard. This also reflects a growing discernment among customers, who are now more selective in their evaluations rather than opting for an assortment of options. Given the value we deliver, hyperscalers are recognizing this shift. Moreover, these cloud providers also gain from our growth; they benefit from the demand for storage and computing power through Atlas and from customers who use Atlas on their platforms and then procure additional services from them. Thus, it creates a mutually beneficial relationship, which is why you're seeing hyperscalers engage with us on a deeper level.

Fred Havemeyer, Analyst

And then a follow-up, it's multi-cloud again related. But I wanted to ask about multi-cloud clusters because I think it's one of the more unique offerings that you have Atlas out of the box. Just generally, could you help us or just describe where you're seeing customer adoption trends with your multi-cloud cluster capability and replica set capabilities?

Dev Ittycheria, CEO

Yes, we are observing significant customer interest in this capability. Customers often have a preferred hyperscaler based on their needs, but as they expand into new geographic areas, they find that their preferred hyperscaler may only operate in one or no regions, prompting them to seek diversity among hyperscalers in case that region experiences downtime. They appreciate the ability to quickly switch to another hyperscaler when necessary. Additionally, as hyperscalers compete and offer different services, customers want to take advantage of features available on one hyperscaler that may not be provided by their preferred choice. Furthermore, there's the advantage of avoiding vendor lock-in and being able to distribute workloads across various hyperscalers. The multi-cloud cluster capability allows customers to run a single application or workload across different clouds, which sets us apart from what most competitors currently offer.

Fred Havemeyer, Analyst

Congratulations on a strong quarter.

Michael Gordon, COO and CFO

Thanks, Fred.

Operator, Operator

One moment for our next question. It's from Mike Cikos with Needham & Company.

Mike Cikos, Analyst

I had a question to start, and I just wanted to come back to the Atlas consumption trends improving quarter-over-quarter in Q3. It sounds like things really began to improve in September. I just wanted to see, was it stable from there on out? Or did you see continuing strength even from September when we think about how October and November played out? And then on a relative basis, are there certain pockets of the market that have maybe a larger delta versus those historical consumption trends you're talking to? And then I do have a follow-up.

Michael Gordon, COO and CFO

Yes. Generally, the improvement was widespread as we noted. The rebound was particularly noticeable in the mid-market globally and in Europe, primarily because those were the regions where we had previously observed slower growth that we highlighted in Q2. As mentioned, August reflected what we saw in Q2, while September and October showed stronger performance. I don’t want to delve into daily specifics, but we did observe that trend, which is also reflected in our results and aligns with what we experienced in the same period last year. This contributed to our commentary about the emerging seasonal trend.

Mike Cikos, Analyst

And the follow-up I had, I just kind of wanted to paint out a scenario for you guys and just to soundboard an idea, if you will. I'm looking at where we have the Q4 guide today. Call this year-to-year growth rate you guys are targeting for about 26% at the midpoint. And the reason I'm bringing this up is if I think about how this year has played out, you guys are going to have a tough comp in the first half of next year with 50% plus growth that you guys delivered in the first half of this year as well as strength from EA. And so the reason I'm bringing this up is if I look at next year, the consensus is currently at, call it, mid- to high 20s percent growth rate versus the exit velocity of this year where we're looking at 26%. And at least from a qualitative perspective, can you provide us any directional comments as far as whether or not that appears to be the right ballpark? Is that aggressive? How should we be thinking about next year's growth?

Michael Gordon, COO and CFO

Yes. I think the key thing is we'll obviously update that in the March call. We've tried to give you the best lay of the land as we can for the current fiscal year and what we see for Q4. It certainly is a fluid and uncertain macro environment. We're monitoring that closely, and we'll obviously update everyone in the March call around our outlook.

Operator, Operator

One moment for our next question. It comes from Steve Koenig with SMBC Nikko.

Steve Koenig, Analyst

I'll just ask one here. Congrats on the quarter and the rebound here. I'm wondering when it comes to new customers and/or new workloads, given kind of the macro environment and the pressures on business, both SMB and enterprise, what are you guys seeing in terms of customer behavior with respect to how they size the deals or the versions they choose? How does kind of that economic sensitivity manifest itself in terms of those new deals kind of pricing-wise or kind of the scale of the deal?

Dev Ittycheria, CEO

Thank you for your question, Steve. We haven't noticed any significant changes in deal dynamics in Q3. Our EA results clearly showcase the strength of our platform and the interest from customers in running workloads across various environments. I have experienced similar situations in the past, specifically in 2008 and 2000, where we observed increased scrutiny by customers regarding deals, often leading to higher levels of approval required. We are working closely with our sales teams to ensure they accurately qualify their forecasts and thoroughly understand the decision-making process customers must undertake to complete deals. This is a challenge we have faced in previous cycles, and we are committed to focusing on it now.

Operator, Operator

Our next question comes from the line of Michael Turits with KeyBanc.

Michael Turits, Analyst

I want to address seasonality. Different parts of your business experience various seasonal trends. For B2B customers, it makes sense to kick off projects again after vacation. Additionally, in the B2C sector, entering the holiday season should also provide a boost. Therefore, why wouldn't we expect to see typical positive seasonality in the fourth quarter, considering the significant portion of your business relies on consumption?

Dev Ittycheria, CEO

Yes. Thanks, Michael. Just to clarify, I wouldn't say it's coming back and starting new projects. What we're talking about here, again, is the underlying usage of the database. And so whether it's internal applications or B2B applications or consumer-facing applications or whatever, what we see is an increase in the underlying database activity. So this is a different dynamic than people kicking off new projects; right? It's reflecting the underlying activity in the workload or in the application. And given that we've seen this now for two years in a row, we're highlighting it given the behaviors that we're seeing. I want to kind of call that out for folks as what appears to be an emerging seasonal trend.

Michael Turits, Analyst

Okay. Mike, can you quantify the impact on revenue recognition from the shift to a larger percentage of multiyear EA deals? As you mentioned, this pulls things forward a bit in terms of revenue recognition. How much of that shift could we have seen in terms of benefits in the quarter?

Michael Gordon, COO and CFO

Yes, we won't provide an exact figure. Our forecast and guidance assume a certain level of multiyear deals. We observed slightly more than that, which was significant enough to highlight to prevent any inaccurate extrapolation. That's why we wanted to clarify the situation.

Operator, Operator

One moment for our next question please. It comes from the line of Will Power with R.W. Baird.

Will Power, Analyst

Maybe just bigger picture. I know you touched on this a bit. But as customers increasingly focus on TCO in this environment, I'm just kind of curious how much more aggressive customers are getting at moving legacy databases and workloads over to Mongo versus maybe what you've seen six, nine months ago? Any real change in pace of that type of activity?

Dev Ittycheria, CEO

Thank you for your question, Will. We recently held a customer advisory board where we engaged with some larger customers during a few days in Europe. The feedback we received indicated a growing interest in transitioning from legacy platforms to more modern solutions. Companies are finding that the cost structure and fragility of their current architectures hinder their ability to act swiftly and take advantage of new opportunities or address emerging threats. Consequently, there is heightened interest in this shift. We are also witnessing this trend in industries such as financial services, where organizations are beginning to adopt cloud solutions on a larger scale. This development is motivating them to modernize their technology portfolios more aggressively. This trend has emerged recently, and we are pleased with the connections we are establishing within that sector.

Operator, Operator

I'm not showing any further questions in the queue. I would like to turn the call back to Dev Ittycheria for his final comments.

Dev Ittycheria, CEO

Thank you. So we're really happy with our new business performance and see it as evidence that our value proposition resonates with developers, IT decision-makers, and our partners. We're obviously pleased to see the rebound in Atlas consumption during the quarter and expect continued macro impacts, and so we're closely monitoring consumption trends. And we will deliver another year of operating margin expansion despite the macro headwinds, and we are committed to profitable growth. With that, thank you for your time today.

Operator, Operator

Everyone, thank you for participating in today's conference. You may now disconnect. Good day.