MDB earnings call for the period ending September 30, 2024.
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MongoDB (MDB 1.96%)
Q3 2025 Earnings Call
Dec 09, 2024, 5:00 p.m. ET
Key Topics of Discussion:
- Detailed Prepared Remarks
- In-Depth Questions and Answers
- Meet the Call Participants
Engaging Prepared Remarks:
Good day, everyone, and thank you for your patience. Welcome to the MongoDB third-quarter fiscal year 2025 conference call. Please note that all participants are currently in listen-only mode. Following the presentations, there will be a question-and-answer segment.
[Operator instructions] Kindly note that this conference is being recorded. Now, I will hand over the call to today’s speaker, Brian Denyeau. Please proceed.
Brian Raferty Denyeau — Investor Relations
Thank you, Lisa. Good afternoon, and I appreciate everyone joining us today to explore the financial results for MongoDB’s third-quarter fiscal 2025, which we disclosed in our press release issued after market close today. I am joined on the call by Dev Ittycheria, the president and CEO of MongoDB, along with Michael Gordon, our COO and CFO. During this call, we will issue forward-looking statements, which will encompass our market outlook, anticipated growth avenues, macroeconomic expectations for fiscal 2025, the influence of AI, the advantages of our product suite, competitive dynamics, customer patterns, financial forecasts, and our strategic investments in AI growth.
It’s crucial to acknowledge that these statements carry certain risks and uncertainties, which may lead to actual results deviating significantly from our projections. For more information on the risks that could impact our real results, please consult the risks outlined in our quarterly report on Form 10-Q for the quarter ending July 31st, 2024, filed with the SEC on August 30th, 2024. Any forward-looking statements made during this call represent our views as of today, and we are not obligated to update them unless required by law. Additionally, we will touch on non-GAAP financial metrics throughout this call.
For further details, please refer to the tables in our earnings release located in the Investor Relations section of our website, providing a reconciliation of these metrics to the nearest GAAP measure. With that, I will now turn the call over to Dev. Dev?
Dev C. Ittycheria — President and Chief Executive Officer
Thanks, Brian, and thank you to everyone for being here today. I am delighted to share that we experienced a robust quarter marked by substantial new business opportunities, effectively capitalizing on our expansive market potential. Let’s begin with a review of our third-quarter outcomes before I provide a broader update on our company’s progress. We reported revenue of $529 million, reflecting a remarkable 22% year-over-year growth that surpassed the higher end of our guidance.
Notably, Atlas revenue surged by 26% year-over-year, now constituting 68% of our total revenue. Furthermore, we achieved a non-GAAP operating income of $101 million, translating to a 19% non-GAAP operating margin, and we concluded the quarter with over 52,600 customers. In summary, we are pleased with our performance in Q3, especially in terms of new business acquisitions and our growing workloads on Atlas.
Our non-Atlas business significantly exceeded our expectations, largely due to several large multi-year agreements, highlighting the value customers place on our adaptable strategy and their desire to forge long-term partnerships with MongoDB. Additionally, Atlas consumption slightly outperformed our expectations in an environment that remains consistent with our observations from the first half of the year. Michael will elaborate on consumption trends shortly. Retention rates stayed strong in Q3, underscoring the essential nature of our platform.
During our Q1 earnings call, we discussed three major strategic initiatives aimed at maximizing our long-term opportunities. I’d like to update you on our progress in these areas. First, we are amplifying our investment in the enterprise channel because we identify this segment as offering the greatest returns. Specifically, we are expanding our strategic account program as we anticipate more accounts will benefit from increased investment in the coming year.
In addition, we are dedicating resources to educate developers within large enterprise accounts, enhancing their MongoDB skills. Many of these organizations employ thousands of developers who have historically focused on SQL applications and are unaware of the full potential of MongoDB. Educating these developers about the advantages of our platform has proven to drive significant incremental adoption. To support these up-market investments, we are reallocating part of our mid-market resources.
While the mid-market continues to present a viable opportunity for us, we believe that prioritizing investments in the enterprise sector will yield robust returns in the current market landscape. We also see potential to serve the mid-market more effectively through our self-service channel and other technology-enabled sales and customer service initiatives. Secondly, we are optimistic about the potential to expedite legacy application modernization through AI and are investing more in this domain. Earlier this year, we conducted successful pilots demonstrating that AI tools, coupled with professional services and our relational migrator product, can significantly decrease the time, cost, and risks associated with migrating legacy applications to MongoDB.
In our observations, we have noted a reduction of over 50% in modernization costs. Due to these promising early results, customer interest has exceeded our expectations. Large enterprises across various industries are experiencing acute challenges with their legacy systems and are eager for more agile, efficient, and cost-effective solutions. Not only do customers show enthusiasm for engaging with us, but they are also looking to focus on their most critical enterprise applications, further illustrating the significant long-term potential.
As legacy applications encompass a diverse array of database types, programming languages, versions, and customer-specific variables, we anticipate that modernization projects will continue to necessitate substantial service engagements in the near and medium term. Consequently, we are enhancing our professional services delivery capabilities, both directly and in collaboration with partners. In the long term, we aim to automate and simplify substantial portions of the modernization process. To this end, we are leveraging insights gained from early service engagements to develop new tools that will facilitate future modernization efforts.
Although we acknowledge that scaling our legacy application modernization capabilities will take time, we are increasingly convinced that this initiative will significantly contribute to our long-term growth. Thirdly, we are strategically investing to leverage our inherent technical advantages as a critical component of the emerging AI technology stack. MongoDB is uniquely positioned to query rich and complex data structures commonly found in AI applications. The capacity of a database to handle these intricate data structures is vital, as AI applications often depend on detailed, interconnected, and nuanced data to deliver accurate predictions and decisions.
For instance, a recommendation system analyzes not just a single customer’s purchase history, but also their browsing patterns, peer group behavior, and product categories, necessitating a database that can interlink and query these complex data structures. Furthermore, MongoDB’s architecture consolidates source data, metadata, operational data, and vector data within an integrated platform, eliminating the need for multiple database systems and convoluted backend architectures. This creates a superior developer experience compared to alternative solutions. Currently, we observe that most customers in the AI market are in the experimental phase, working to ascertain the effectiveness of their underlying tech stack while developing initial proof-of-concept applications.
Despite this, we are witnessing a growing number of AI applications moving into production. Presently, there are thousands of AI applications operating on our platform. However, many of these applications have yet to achieve significant product-market fit and traction. As we analyze the broader landscape of AI applications, we find that only a small fraction have reached the scale typically seen in enterprise applications.
We do have some AI applications that are rapidly expanding, including one that has already become a seven-figure workload and has grown tenfold since the beginning of the year. Similar to previous platform shifts, as the efficacy and cost-effectiveness of AI technology improve, we anticipate the emergence of many more AI applications that successfully achieve product-market fit, though predicting the timing of this widespread adoption remains challenging. We are confident that we will secure our fair share of these successful AI applications, as our platform is favored by developers working on sophisticated AI use cases. We continue to invest in enhancing our product capabilities, including the enterprise-grade Atlas Vector Search feature, to build on this momentum and strategically position MongoDB to seize AI opportunities.
Additionally, as previously announced, we are extending our search and vector service offerings to our community and EA products, leveraging our competitive advantage of being able to operate anywhere within the AI landscape. Finally, we are expanding our MongoDB AI applications program (MAAP), which supports enterprise customers in developing and deploying AI applications by providing reference architectures, integrations with leading technology providers, and coordinated services and support. Last week, we unveiled a new cohort of partners, including McKinsey, Confluent, Capgemini, and Unstructured, as well as our collaboration with Meta to enable developers to create AI-enhanced applications on MongoDB using Llama. Now, let me share a brief product update.
At our local developer conference in London in October, we revealed the general availability of MongoDB 8.0, which is the fastest and most efficient version of MongoDB to date. MongoDB 8.0 demonstrates performance improvements ranging from 20% to 60% against common industry benchmarks compared to prior versions, designed to meet the highest security, resilience, availability, and performance standards set by our customers. To better serve our customers, we routinely assess and prioritize our product portfolio to allocate resources to products that meet the highest demand. Consequently, we have decided to consolidate our Atlas serverless offerings with our smallest dedicated tiers to create Atlas Flex, a new offering with a more straightforward architecture that provides elastic features akin to serverless capabilities. We will commence migrating eligible customers to this single, simplified entry-level solution in Q4. We also decided to phase out Atlas DeviceSync and other underutilized features to focus our engineering resources on our core platform. While these decisions are not made lightly, they allow us to deliver maximum value to the largest customer base, reinforcing our commitment to being the premier modern database and facilitating faster growth.
Next, I would like to review the trends in MongoDB adoption across our customer base. Customers from various sectors worldwide are leveraging MongoDB Atlas for mission-critical projects, capitalizing on the full potential of our developer data platform. For example, the Financial Times, CarGurus, and Victoria’s Secret have all migrated to MongoDB Atlas as part of their digital transformation efforts. Victoria’s Secret & Company, a global specialty retailer, transitioned its e-commerce platform to MongoDB Atlas. By utilizing a fully managed platform, they simplified their architecture and enhanced performance, enabling a resilient, secure, and rapid web and mobile e-commerce experience for their millions of customers globally.
Companies like Allianz, Alphamad, Swiss Post, and Paylocity are also turning to MongoDB for application modernization. Paylocity, a leading provider of cloud-based payroll and human capital management software, chose MongoDB to power its proprietary application aimed at enhancing employee engagement. When traffic surged, their original SQL-based solution could not meet performance demands, prompting their migration to MongoDB Atlas, which offers flexible schema architecture, superior performance, and scalability. This transition has resulted in MongoDB costing five times less than the previous SQL database solution, allowing their developers to create applications in minutes instead of weeks.
Both established enterprises and startups are utilizing MongoDB to deliver the next generation of AI-powered applications to their customers, including firms like NerdWallet, Cisco, and Tealbook. Tealbook, a supplier intelligence platform, migrated from Postgres, pgvector, and ElasticSearch to MongoDB to eliminate technical debt and streamline their technology stack. They faced workload isolation and scalability issues with pgvector, along with concerns about inconsistent search indexing, all of which were resolved through their transition to MongoDB. With Atlas Vector Search and dedicated search nodes, Tealbook has achieved greater cost-efficiency and enhanced scalability for their supplier data platform, which employs GenAI to collect, verify, and enrich supplier data from diverse sources.
In summary, we experienced a robust Q3, with both Atlas and EA surpassing expectations. We had a successful quarter of new business, and we are confident in our ability to grow our presence as a strategic provider in our expanding market. Looking ahead, we see significant opportunities to increase adoption in the enterprise sector through new workloads, modernizing legacy applications, and capitalizing on the next generation of AI-powered applications. I would like to conclude with an update regarding our senior leadership changes.
First, as mentioned in our press release, after nearly 10 years, Michael Gordon has decided to step down from MongoDB. Michael has played a vital role in MongoDB’s success over the past decade, leading our successful IPO and driving a nearly 50-fold revenue increase while effectively scaling our business model to generate substantial operating leverage. He has been a trusted advisor and partner to the Board and myself, and I consider him a personal friend. Michael is looking forward to taking a well-deserved break.
We have initiated the search for Michael’s successor, evaluating both internal and external candidates. One of Michael’s proudest achievements has been building a world-class finance team, and I am confident that we will experience a seamless transition. Michael will continue to serve as CFO until January 31st to assist us in completing the fiscal year and will then transition to an advisory role to ensure continuity. If we have not appointed Michael’s successor by the end of the fiscal year, Serge Tanjga, our SVP of Finance, will step in as Interim CFO starting February 1st.
Secondly, we are promoting Cedric Pech, our Chief Revenue Officer, to the newly established role of President of Worldwide Field Operations. In this new capacity, Cedric will oversee all field-based customer-facing and go-to-market enablement teams, including professional services. We believe this organizational structure will best position us to execute our key strategic initiatives, particularly our enhanced focus on the enterprise sector and the app monetization opportunity. I would like to extend my congratulations to Cedric for this well-deserved promotion.
With that, let me turn the call over to Michael.
Michael Gordon — Chief Operating Officer and Chief Financial Officer
Thank you, Dev, and I appreciate the kind words and our incredible partnership over the past decade. The last ten years have been the most rewarding of my career, and I am immensely proud of what we have accomplished together, and of course, the entire MongoDB team. While we have enjoyed significant success, I firmly believe that MongoDB is still in the early stages of realizing its full potential as it continues to capture share in one of the largest markets in software. Now, let’s delve into the results for the quarter.
I will begin with a thorough review of our third-quarter results, followed by our outlook for the fourth quarter and full fiscal year 2025. First, let’s explore our third-quarter results. Total revenue for the quarter reached $529.4 million, marking a 22% year-over-year growth that exceeded the high end of our guidance. Regarding our product mix, Atlas revenue grew by 26% in the quarter compared to the previous year, now accounting for 68% of total revenue, up from 66% in the third quarter of fiscal 2024 and 71% last quarter.
We recognize Atlas revenue based on customer consumption of our platform, which closely correlates with end-user activity within their applications. Let me provide context regarding Atlas consumption for the quarter. In Q3, consumption slightly exceeded our expectations. This year’s seasonal improvement in Q3 was less pronounced than in previous years, as anticipated.
Year-over-year consumption growth remains lower compared to the prior year period. Turning to non-Atlas revenue, it significantly surpassed our expectations, as Dev mentioned, with strong new business in the EA segment and continued success in selling additional workloads to our existing customers.
Additionally, our Q3 non-Atlas revenue benefited from several large multi-year contracts. As a reminder, due to ASC 606, we recognize the entire term license component of a multi-year contract at its inception. Compared to Q3 of last year, the multi-year license component of non-Atlas revenue was more than $15 million higher. Moving on to customer growth.
During Q3, we expanded our customer base by approximately 1,900 customers sequentially, bringing our total customer count to over 52,600, up from over 46,400 during the same period last year. Within this total, more than 7,400 customers are direct sales clients, compared to over 6,900 in the year-ago period. The growth in our overall customer count stems primarily from Atlas, which had over 51,100 customers at the end of the quarter, compared to over 44,900 in the prior year.
It is essential to note that the increase in our Atlas customer count reflects not only new customers to MongoDB but also existing EA customers onboarding their first Atlas workload.
Continuing with Q3, our net ARR expansion rate was approximately 120%. We concluded the quarter with 2,314 customers generating at least $100,000 in ARR and annualized MRR, up from 1,972 a year ago. Moving down the income statement, we will discuss our results on a non-GAAP basis unless otherwise specified. Our gross profit for Q3 was $405.7 million, yielding a gross margin of 77%, consistent with the year-ago period.
Our operating income was $101.5 million, representing a 19% operating margin for Q3, compared to an 18% operating margin in the same quarter last year. The primary driver for the favorable operating income results compared to guidance is our revenue outperformance, which includes the high-margin multi-year license revenue benefit. Net income for Q3 was $98.1 million, or $1.16 per share, based on 84.2 million diluted weighted average shares outstanding. This is an increase from a net income of $79.1 million, or $0.96 per share, on 83.7 million diluted weighted-average shares outstanding in the previous year.
Turning to our balance sheet and cash flow, we concluded Q3 with $2.3 billion in cash, cash equivalents, short-term investments, and restricted cash. Our operating cash flow for Q3 was $37.4 million. After accounting for approximately $2.9 million in capital expenditures and principal repayments of finance lease liabilities, our free cash flow for the quarter was $34.6 million. This compares to a free cash flow of $35 million in the same period last year.
In Q3, we did not incur capital expenditures for IPV4 address purchases as previously anticipated, but we commenced these purchases in November and still project a total expenditure of $20 million to $25 million for this fiscal year, as previously communicated. Now, let’s discuss our outlook for the fourth quarter and full fiscal year 2025. For Q4, we anticipate revenue in the range of $515 million to $519 million. We expect non-GAAP operating income to be between $55 million and $58 million, and non-GAAP net income per share to fall between $0.62 and $0.65, based on approximately 84.9 million estimated diluted weighted-average shares outstanding.
For the full fiscal year 2025, we expect revenue in the range of $1.973 billion to $1.977 billion, non-GAAP operating income between $242 million and $245 million, and non-GAAP net income per share ranging from $3.01 to $3.03, based on approximately 84 million estimated diluted weighted-average shares outstanding. Please note that the non-GAAP net income per share guidance for Q4 and the full fiscal year 2025 includes a non-GAAP tax provision of approximately 20%. I would like to provide additional context regarding our updated guidance. First, regarding Atlas consumption, we anticipate a typical seasonal slowdown in Q4, driven by moderating application use during the holiday season.
Secondly, as Atlas consumption remained lower year-over-year in Q3, we expect continued deceleration of Atlas year-over-year growth in Q4. Thirdly, we foresee a sequential decline in non-Atlas revenue in Q4, which deviates from our usual trend. This is due to the significant additional benefit from multi-year contracts in Q3, which we do not expect to replicate in Q4. Furthermore, I would like to clarify how some of our recent product and go-to-market changes will influence the growth of our reported customer count moving forward.
As Dev mentioned, we are reallocating a portion of our go-to-market resources from the mid-market to the enterprise channel. Consequently, we anticipate significantly fewer net additions in mid-market direct sales customers, leading to slower growth in direct sales customer numbers going forward. We believe this reallocation of investment will drive higher revenue growth over time, making this trade-off justifiable.
Additionally, as we introduce Atlas Flex clusters in Q4 and automatically migrate customers in Q1, we expect a one-time decrease in our customer count, as approximately 4,000 serverless customers, who are low spenders, are unlikely to transition to Flex. These customers have minimal revenue impact but will affect our reported customer figures. To summarize, we are pleased with our Q3 results, particularly our success in acquiring new business. We hold a small share in one of the largest and fastest-growing markets in software, supported by several favorable trends, including AI.
We will continue to invest wisely and focus on executing our strategy to seize this long-term opportunity. With that, we would like to open the floor for questions. Operator?
Interactive Questions & Answers:
Operator
[Operator instructions] Our first question today comes from Sanjit Singh of Morgan Stanley. Your line is now open.
Sanjit Singh — Analyst
Thank you for taking my questions, and congratulations, Michael, on a remarkable career. Your tenure at MongoDB has been exceptional, and I am eager to see your next steps, or if you choose to take a well-deserved break. So, congratulations, Michael.
To kick off my questions, when we examine Atlas’s performance in the past two quarters, please correct me if I’m wrong, but it seems
