MongoDB Inc. (NGM: MDB). This mid-cap enterprise software company has been growing revenue at double-digit rates, but is not yet profitable on either a GAAP or a non-GAAP basis. Although the company now expects negative COVID-19 effects to last through the end of FY21 and into FY22, it has a strong technology base and customer additions are robust. We think that MongoDB could become a disrupter in the large enterprise database software market, with the opportunity to capture market share as enterprises migrate more critical IT workloads to the cloud. Valuation for this small unprofitable startup remains extraordinarily high.
MDB shares fell 1% on December 9 in a tough day for tech stocks.
Management again raised its FY21 revenue guidance by $24 million, based on the midpoint of the new range of $574-$576 million, implying growth of 36%. The company also narrowed its FY21 non-GAAP loss forecast to $1.04-$1.07 per share from $1.21-$1.29. Despite the improved guidance, management projects some margin erosion in 4Q21 as hiring is pulled forward to take advantage of new market opportunities.
Fiscal 3Q21 revenue jumped 38% year-over-year to $150.8 million, remarkable in the current business environment, though still down from 53% growth in 3Q20. The company’s primary revenue stream, subscription revenue, rose 39% to $144 million. The MongoDB Atlas product was again a major growth driver in 3Q. MongoDB Atlas revenue grew over 47% and comprised 47% of total revenue, up from 40% in 3Q20. Management noted that COVID-19 continues to impact MDB’s business and that it expects continued headwinds in fiscal 4Q and into FY22. However, management also noted that business expansion growth from existing Atlas customers has returned to pre-COVID levels.
Management continues to expect a ‘modest reduction’ in the gross margin as Atlas becomes a larger portion of the revenue mix. The non-GAAP loss from operations widened to $16 million from $14.3 million a year earlier due to a higher cost of revenue as operating costs held steady. The largest exclusion from the non-GAAP loss from operations was the charge of $40 million for stock-based compensation, up from $19.4 million in 3Q20.
The non-GAAP net loss widened to $0.31 per share from $0.26 in 3Q20.
EARNINGS & GROWTH ANALYSIS
Our FY21 loss estimate is within management’s revised loss range of $1.04-$1.07 per share.
Like other enterprise tech companies, MongoDB expects to grow by increasing both its customer base and its ‘wallet-share’ of spending at existing customers, the so-called ‘land-and-expand’ model. At the end of 3Q21, the company had 20,600 customers after adding 2,400 customers in the quarter. We continue to see nice acceleration in customer acquisition out of the fiscal 1Q21 COVID-19-induced trough. The customer base rose 42% year-over-year in 3Q21, also showing acceleration from 30% growth in 1Q and 35% in 2Q. MDB saw similarly strong growth in its high-value segment, i.e., customers with annual recurring revenue of more than $100,000. The company added 79 customers in this segment in 3Q for a total base of 898, up 31% from the prior year.
CEO Dev Ittycheria has laid out three ‘pillars’ of strategic differentiation for MDB. The first pillar is the company’s modern database technology, which relies on a ‘document model’ rather than the legacy relational database technology used by so many larger industry peers. The company’s database technology relies on a ‘distributed architecture,’ enabling customer applications to scale easily and cost effectively while also providing resilience, all adding to superior performance. The second pillar is ‘developer mind share.’ Since its early days, MDB has courted the developer community, the actual prime users of database software, and continues to do so with its free-to-use entry-level product, Community Server. The third pillar is enabling customer platform independence. In October 2020, MDB launched the industry’s first multicloud cross-functional database on its Atlas platform. This is an important innovation as it enables applications to run across multiple clouds simultaneously, thus allowing customers to avoid being locked into a single cloud provider.
MongoDB expects to ride the wave of secular growth in the worldwide database software market as more and more enterprises upgrade applications while also migrating on-premise applications to the cloud. MongoDB only has about 1% of the global database market, so there is plenty of room for growth. Management also notes that about a quarter of the company’s business from new customers actually comes from the migration of applications from legacy systems.
MongoDB is working to create a large community of developer users of its platform through its free-to-download Community Server, which includes some core functionality but lacks certain features of its commercial platforms. The company then seeks to convert Community Server subscribers to its commercial products. Subscriptions to MongoDB’s software products account for 95% of total revenue.
MongoDB Atlas is the company’s cloud-based database-as-a-service offering (DBaaS), which has become its flagship commercial product. Introduced more than three years ago, Atlas has become the company’s growth engine, helped by the secular trend toward enterprise cloud software adoption. Management recognizes the advantages of cloud-based software services. Atlas gives the company real-time data on how customers are using Atlas. This enables MongoDB to be proactive about resolving issues and enhancing service. Cloud delivery also means that MongoDB can rapidly launch new innovations through periodic cloud updates rather than wait for the traditional annual software refresh. As noted above, the ability of Atlas to work with the three largest cloud providers also enables clients avoid vendor lock-in with one cloud provider. Atlas has a mix of ‘self-serve’ customers and customers from traditional sales channels. Self-serve customers are billed monthly based on usage, while traditional customers are billed annually upfront and monthly based on usage. Aside from winning one more large hyper-scale cloud provider, the Alibaba deal enables MongoDB to enter the legitimate Chinese market.
MongoDB Enterprise Advanced is the company’s other lead subscription package. Enterprise Advanced includes a commercial database server based on proprietary software, enterprise management capabilities, a graphical user interface, analytics integrations, and technical support. Enterprise Advanced gives enterprise customers the flexibility to run the database in the cloud, on-premise, and in hybrid environments. Enterprise Advanced subscriptions are generally for one year and billed upfront.
FINANCIAL STRENGTH & DIVIDEND
We are raising our financial strength rating on MongoDB to Medium-Low, the second-lowest point on our five-point scale, from Low. MongoDB’s operating income and adjusted EBITDA are negative and thus do not cover interest expense. In 3Q21, trailing 12-month free cash flow was negative $49.4 million, expanding from negative $36.7 million in 3Q20. While MDB’s financial strength is by no means enviable, its slow cash burn rate and substantial cash holdings give it a large cushion. Of course, its financial position could constrain M&A. MDB is unrated by the credit agencies.
As an early-stage tech company, MongoDB does not pay or intend to pay a dividend.
MANAGEMENT & RISKS
MongoDB was founded in 2007 by Dwight Merriman, Eliot Horowitz and Kevin Ryan, the same team that founded digital advertising platform DoubleClick before it was sold to Google. Mr. Merriman remains involved in the company as a board member. Dev Ittycheria has served as CEO since 2014. Mr. Ittycheria previously held positions in venture capital, including at Greylock Partners. He has also been a tech company founder and worked at BMC. Michael Gordon has been CFO since July 2015 and COO since November 2018. He previously worked for Merrill Lynch.
MongoDB competes with more established software companies with vastly greater resources. Tech giants IBM, Microsoft and Oracle all have competing business lines. While the company has partnerships with the major public cloud providers, Amazon’s AWS, Microsoft’s Azure, Alphabet’s Google Cloud Platform, and Alibaba Cloud, these extraordinarily large partners could also become competitors offering customers large discounts or free services.
The company’s key software product, the MongoDB database, generates nearly all of its revenue and cash flow, and any bugs in the software or implementation difficulties could hurt the company’s financial outlook. Also, the adoption of MongoDB Atlas, the company’s cloud database-as-a-service offering, launched in June 2016, may not occur as quickly as the company expects.
As a tech startup, MongoDB has a relatively short operating history that has been marked by both GAAP and non-GAAP unprofitability.
Under its ‘freemium’ business model, the company offers its Community Server as a free-to-download version of its database. It also offers a free tier for its Atlas cloud database. However, free users of the company’s software may not convert into paying users.
The company will likely continue to invest heavily in R&D to revise, update and extend its product portfolio as well as in expanded marketing efforts, which may not produce the desired returns in the expected time frame. MongoDB also relies on systems integrators and other third-party partners to help sell and implement its solutions. If these third parties fail to implement properly or turn to other vendors, MongoDB’s sales could be affected.
As with all software vendors, MongoDB’s products could be attacked by hackers. Community Server is particularly vulnerable since it requires users to actually turn on security functions. The company’s results are seasonal in that the largest revenue quarter is 4Q, followed by the lowest in 1Q.
The company faces integration risk from recent acquisitions, as well as risks related to patents and intellectual property. Realtime filed a lawsuit against the company with regard to three U.S. patents in March 2019.
MongoDB relies on third-party cloud providers to provide infrastructure support to its Atlas product. As a result, MongoDB clients could be subject to service outages for reasons beyond the company’s control.
MongoDB provides an advanced scalable general purpose database or data information management software platform. The MongoDB database is used by enterprises to develop applications that are at the heart of modern enterprise technology. MongoDB uses hybrid open-source and proprietary technology as the basis for its ‘freemium’ software business model. MongoDB was founded in November 2007 and made its initial public offering at $24 per share on October 19, 2017. Original investors and insiders hold more than 95% of voting control through their supervoting (10 votes per share) Class B shares.
On December 10 at midday, HOLD-rated MDB traded at $306.90, up $26.89.