MongoDB Inc

NASDAQ:MDB

Earnings Call Transcript 2019-Q3

[Operator]

Good day everyone and welcome to the MongoDB Third Quarter Fiscal 2019 Earnings Call. Today's call is being recorded.

At this time, I would like to turn the call over to Brian Denyeau, ICR, Investor Relations. Please go ahead, sir.

[Brian Denyeau, IR]

Thank you, Ann. Good afternoon and thank you for joining us today to review MongoDB's third quarter fiscal 2019 financial results, which we announced in our press release issued after the close of market today. Joining me in the call today are Dev Ittycheria, President and CEO of MongoDB; and Michael Gordon, MongoDB's CFO.

During this call, we may make statements related to our business that are forward-looking under federal securities laws. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial guidance for the fourth quarter and full year fiscal 2019, our market opportunity, our go-to-market and growth strategies, the potential advantages of our new products and enhancements, our ability to expand our leadership position and drive revenue growth and the anticipated benefits from our acquisition of mLab.

The words anticipate, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We do not have plans to update these statements except as required by law. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K filed with the SEC on March 30, 2018, our quarterly report on Form 10-Q filed on September 7, 2018 and our other periodic filings with the SEC.

These documents are available on the Investor Relations section of our website at www.mongodb.com. A replay of this call will also be available there for a limited time. Additionally, non-GAAP financial measures will be discussed in 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 Dave.

[Dev Ittycheria, President and CEO]

Thanks, Brian, and thanks to all of you for joining us today to review our third quarter results. We delivered terrific performance in the third quarter across all aspects of our business. Our ability to generate best in class growth at significant scale, which now exceeds $0.25 billion revenue run rate reflects our strengthening position as the next generation database platform of choice.

We serve one of the largest markets in enterprise software. IDC now forecasts that the database market is $59 billion in size in 2018, growing to $84 billion in 2022 reflecting a 9% compound annual growth rate. We believe MongoDB is uniquely positioned to capture growing share of this market given the power of MongoDB's sophisticated document model, large developer mindshare, and compelling customer proof points across nearly every industry and geography.

To quickly summarize the third quarter results, we generated revenue of $65 million, a 57% year-over-year increase, which was above the high end of our guidance. We grew subscription revenue 59% year-over-year.

Atlas revenue grew more than 300% year-over-year and now represents 22% of revenue. We ended the quarter with over 8,300 customers, up 69% compared to a year ago and we saw strong growth across all major regions, including North America, EMEA, and Asia.

I do want to note that our results do not include any impact from the acquisition of mLab, which closed on November 1. Our success with customers is based on the strength of our database platform.

At our recent MongoDB Europe event, we announced the general availability of MongoDB Mobile which gives developers a uniform way to work with data wherever the data resides. MongoDB Mobile allows developers to build faster and more responsive applications that can take advantage of the document model for data held on the mobile device. Previously, developers were stuck using a feature limited tabular database for a mobile app.

We also included several updates to MongoDB Stitch, our serverless platform, including the MongoDB Stitch SDK which allows data access regardless of whether it is held on the mobile client or the backend. This allows developers to query mobile and IoT data anyway they want with local reads and writes, native JSON storage, indexing, and aggregations.

With Stitch Mobile Sync now available in beta, users can automatically synchronize changes between data held on an end device and a back-end database, even after the device has been offline. Expanded integration options, including more than 20 AWS services and additional authentication providers which can all be exploited without learning new APIs or adding back-end code.

Last week, we also introduced updates to MongoDB Atlas, including high throughput clusters on AWS that will enhance real-time workload processing to accelerate new and existing applications. These clusters are optimized for low latency, very high IO performance for large datasets.

Support for cross-region VPC peering which allows Atlas to communicate with the customers' virtual private cloud across regions via private networking. This will enable customers to connect data between disparate data and database nodes without utilizing the public Internet significantly reducing security risks and operational work overhead and improving performance.

We also introduced the Server Side Public License, or SSPL, a new licensing model for open source development in the cloud era. We are in a unique position to decide how our softwares license because we are full copyright holders of all underlying MongoDB database code.

We created this new license for Community Server, our free to download offering to make explicit the conditions for providing MongoDB as a service. We are strong believers in open source and believe it leads to more valuable, robust, and secure software.

By introducing SSPL, we have given the community a new licensing model built on the spirit of AGPL. We will continue to provide the same freedom to the open source community to use, review, modify, or redistribute the software. The only substantive change is an explicit condition that any organization attempting to offer MongoDB as a third party service must open source the software that uses to offer such a service.

Turning to our third quarter results in more detail, we again saw a healthy mix of new wins and strong upsell activity, including customers migrating existing workloads from legacy databases to MongoDB. Our performance in the quarter exemplified the power of a land, expand and expand model and our multiple vectors for growth.

We saw success across the board. A number of exciting customer wins came from outside the United States, including countries where we are either beginning to establish a direct sales presence or where we have partners that are expanding our market reach.

We are also seeing a growing number of wins with customers in traditionally conservative industries and markets reflecting the growing popularity and mass appeal of MongoDB. We believe both of these trends demonstrate the mainstream adoption of MongoDB and growing recognition by the industry that we are the modern database platform of choice. We also believe it illustrates the strong returns we're getting on our sales and marketing investments.

I would like to spend a few minutes reviewing the details of some key wins in the quarter. An important indication of MongoDB's strength and positioning within the ISV ecosystem is an agreement we signed this quarter with SAP. This agreement will enable our joint customers to rapidly build and deploy new applications leveraging MongoDB within the SAP Cloud Platform, its enterprise platform as a service offering.

Her Majesty's Revenue & Customs are HRMC, the U.K.'s tax payments and customs authority, has increased its use of MongoDB this past quarter. HMRC has enhanced its digital platform by using MongoDB as a core database and MongoDB Atlas is helping to further improve the experience of citizens who submit tax self assessments online.

We signed one of our first Atlas Enterprise transactions in South Korea. Rainist, a leading financial asset management mobile application company achieved increasing developer velocity and flexible support for the sophisticated financial requirements in a secured environment by using MongoDB Atlas Enterprise.

We signed our first Atlas win in Argentina with a large vertically integrated energy company that wanted to migrate its existing logistics platform from a relational database to a technology that enables their multi-cloud strategy without having to rewrite a line of code.

The Maryland Health Exchange which provides different insurance plans to residents chose MongoDB for complex requirements like interfacing with multiple government agencies and being able to quickly determine if a consumer is eligible for a subsidy. One of the largest banks in China chose MongoDB to build a new loan processing platform, which is expected to process thousands of loan approvals daily and significantly reduce loan processing times.

Michelin, a global tire manufacturer, chose MongoDB Atlas to serve as a single highly performing database to manage the content of hundreds of websites in 70 countries around the world. Replacing a legacy database, real-time replication and continuous backups were required to deliver a compelling user experience in every region.

A large Italian government institution chose MongoDB to create a single view of the customers as part of its digital transformation initiative. Using MongoDB, they were able to bring together multiple previously siloed business units to create a holistic view of their customers and unlock new opportunities to better serve their constituents.

One of Europe's largest manufacturers and distributors of gas and electricity recently moved critical billing data for multiple services from Oracle to MongoDB. This allowed for significant performance improvements, lower TCO, and enabled the organization to capture new business more quickly.

Oasi, a leading Italian anti-money laundering and supervisory reporting software company re-platformed the applications from legacy relational databases to MongoDB to quickly identify anomaly indicators for suspicious transactions and to improve the performance and scalability of the overall application.

Buffer, a social media management platform that consolidates social media publishing and engagement in real-time moved multiple applications to MongoDB Atlas to significantly improve performance by eliminating queued reads and writes and dramatically reducing disk storage requirements.

These wins were with customers of various sizes across different industries and countries but all were driven to use MongoDB rather than alternative database technologies due to a pressing need to innovate more quickly to better serve their customers and to take advantage of new business opportunities. These wins showcase the growing acceptance of MongoDB as a general-purpose database and demonstrate that we are winning in a database market forecasted to be $84 billion by 2022.

To further extend our leadership in the cloud, we recently acquired mLab, a pioneer in the database-as-a-service market since its founding seven years ago. mLab has been particularly successful focusing on developer-centric startup communities via self-serve model.

We are excited to bring that self-serve and databases service expertise into MongoDB and believe mLab is an efficient way to capture a large number of customers. We will shortly begin the process of moving mLab customers to Atlas.

Before I wrap up, I wanted to provide a quick update on our leadership team. I'm pleased to announce that we have appointed Michael Gordon to the newly created role of COO, which will be in addition to his current CFO responsibilities. This well-earned promotion reflects Michael's significant contributions and active role across all aspects of the Company.

To wrap up, we delivered outstanding results in the third quarter. We are seeing increased market momentum as the growing number of customers recognize the value MongoDB can enable for their businesses. Our products have never been stronger and our efforts to establish MongoDB as a strategic vendor for enterprises are paying off. We are well positioned to carry this momentum into the fourth quarter and beyond.

With that let me turn the call over to Michael to review the financials.

[Michael Gordon, CFO]

Thanks Dave.

As mentioned, we're very pleased with our third quarter performance, which reflects strong growth at significant scale. 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 2019.

Total revenue in the quarter was $65 million, up 57% year-over-year, subscription revenue was $60.1 million, up 59% year-over-year and professional services revenue was $4.9 million, up 36% year-over-year.

The strong performance of the business was broad based during the quarter with healthy new logo and upsell activity among enterprise customers, as well as continued rapid adoption of Atlas. Atlas represented 22% of revenue during the quarter, up from 8% in the third quarter last year and up from 18% last quarter.

As a reminder, with the introduction of enterprise Atlas - Enterprise Advanced features into Atlas, we expect the product distinctions between the two will blur, instead customers will choose between based on which consumption mode best suits their needs.

We continue to see strong global demand for our offerings. During the third quarter, we grew our customer base by approximately 900 customers, bringing our total customer account to over 8,300, which is up from over 4,900 in the year-ago period and over 7,400 at the end of last quarter.

Of our total customer count, over 1,700 are direct sales customers, which compares to over 1,600 at the end of the prior quarter and over 1,400 in the year-ago period. The growth in our total customer count is being driven in large part by Atlas, which had over 6,200 customers at the end of the quarter compared to over 5,300 at the end of the second quarter.

The growth in total customers includes growth in our Enterprise Advanced customers as well as new Atlas customers. It is important to keep in mind that the growth in our Atlas customer count reflects both new customers to MongoDB as well as existing Enterprise Advanced customers adding incremental Atlas workloads.

We also continued to see healthy expansion from existing customers. Our net AR expansion rate in the third quarter remained above the 120% for the 15th consecutive quarter. We ended the quarter with 490 customers with at least $100,000 in annual recurring revenue and annualized MRR, which is up from 438 in the second quarter and 320 in the year-ago period.

Driving expanded adoption and spend among existing customers is a key component of our growth strategy and that's been a consistent area of success. We believe MongoDB comprises a small fraction of the total database spend of most of our largest customers, which represents a large and attractive market opportunity for us over time.

Moving down the P&L, I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross profit in the third quarter was $48.1 million, representing a gross margin of 74%, which was consistent with the year-ago period. We saw gross margin improvement on a quarter-over-quarter basis for Atlas, for subscription revenue not related to Atlas and for professional services.

We are pleased with the gross margin performance in the quarter, particularly in light of Atlas' growth. Atlas includes the underlying infrastructure and our success in reducing the infrastructure and support costs related to Atlas have resulted in improved Atlas gross margins. However, we continue to expect that we'll see some modest reduction in overall gross margin as Atlas continues to become a bigger portion of our revenue.

Our operating loss was $16.8 million or negative 26% operating margin for the third quarter compared to a negative 44% margin in the year-ago period. The more than 1,800 basis point improvement in operating margin indicates the operating leverage we are driving in the business while investing in our continued growth. Net loss in the third quarter was $16 million or $0.30 per share based on 52.7 million weighted average shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with $522.7 million in cash, cash equivalents, short-term investments, and restricted cash. Subsequent to the end of the quarter, we closed on the acquisition of mLab for approximately $68 million in net cash consideration.

Operating cash flow in the third quarter was negative $7.6 million. After taking into consideration approximately $2.1 million in capital expenditures, free cash flow was negative $9.7 million in the quarter.

Short-term deferred revenue was $136.6 million, up 48% year-over-year, while total deferred revenue of $153.8 million was up 34% year-over-year. Keep in mind that Atlas is a usage base model and generates less deferred revenue than Enterprise Advanced.

Also as a reminder, Atlas is often billed monthly in arrears versus the annual and advanced billing terms we see in our Enterprise Advanced customers. Lastly, quarter-to-quarter comparisons of deferred revenue can also have similar level of variability due to timing.

Before I turn to guidance, I would like to review the financial impact of the mLab acquisition which closed on November 1. As Dave mentioned, mLab substantially enhances our self-service knowledge and provides additional database as a service expertise. From a revenue perspective, our current expectation is mLab will generate approximately $5 million of revenue in the fourth quarter and approximately $18 million of revenue in fiscal 2020. From a profitability perspective, we expect mLab to be roughly breakeven in the fourth quarter and in fiscal 2020. Our intention is to migrate the mLab customer base to Atlas in the coming quarters.

Our expectation for a modest decline in revenue in fiscal 2020 is driven by two assumptions. First, Atlas and mLab have different pricing models, we intend to honor existing pricing from migrated mLab customers when advantageous to them. For customers for whom Atlas is priced at a discount to current mLab pricing we will realize lower revenue as those customers benefit from the new lower pricing package.

Second, we anticipate the potential for some customer churn due to the disruption from switching platforms and the large number of small customers in mLab's customer base. Importantly, these assumptions were part of our acquisition thesis and incorporated into our purchase price.

We should also call out that mLab customers spend significantly less per year than self-serve Atlas customers have experienced to date, reflecting the breadth of appeal of offering MongoDB as a service to the long tail of the MongoDB community.

I'd now like to turn to our outlook for the fourth quarter and our full-year fiscal 2019. Beginning with the fourth quarter, we expect revenue to be in the range of $73 million to $74 million, non-GAAP loss from operations is expected to be in the range of negative $21 million to negative $20 million and non-GAAP net loss per share in the range of negative $0.39 to negative $0.38 based on 53.9 million weighted-average shares outstanding. Again as mentioned, this includes $5 million in revenue from mLab.

For the full year of fiscal 2019, we are raising our revenue outlook to $243.7 million to $244.7 million. We are also improving our profitability outlook with non-GAAP loss from operations now expected to be in the range of negative $81.1 million to negative $80.1 million and non-GAAP net loss per share to be in the range of negative $1.53 to negative $1.52 per share based on 52 million weighted average shares outstanding.

Given the size of our market opportunity, the strength of our product market fit and the attractiveness of our unit economics, we believe it makes sense to continue investing in R&D and sales and marketing for the long-term benefit of the Company. As a result we will continue to invest in the business in fiscal '20 with the goal of driving continued high growth while demonstrating continued operating leverage.

In closing, MongoDB continued to perform at a very high level in the third quarter. We are successfully executing against our strategic priorities, which is driving strong growth in fiscal 2019 and beyond.

With that, we'd like to open up to questions. Operator?

[Operator]

[Operator Instructions] We'll take our first question from Raimo Lenschow with Barclays Capital.

[David Rainville, Barclays Capital]

This is actually David Rainville on for Raimo today. Thanks for taking our question. And again congrats on another impressive quarter here. Maybe we'll start with Atlas, that's what everybody wants to talk about and the numbers continue to be so strong. Can you give us maybe a little bit more color on the types of workloads that you are seeing now versus what you were seeing a year ago and maybe an update on where you feel you are in your journey of bringing Enterprise Advanced features onto Atlas, as you are trying to play this ASP game going forward?

[Dev Ittycheria, President and CEO]

Sure. So, just as a reminder, I mean Atlas was introduced about 2.5 years ago. So as you can imagine the workloads that customers first started with were probably tier 2 and tier 3 workloads or maybe even development test workloads. And we are clearly seeing now large sophisticated customers moving mission critical workloads to Atlas and that's reflected in both the sizes of deals as well as the broad-based set of use cases that customers are using for. So I think people are viewing Atlas as truly a viable platform to run mission critical applications.

[David Rainville, Barclays Capital]

And maybe just a quick follow-up on SSPL, any early customer feedback or feedback from the community from the changes that you've done?

[Dev Ittycheria, President and CEO]

In general, the feedback has been quite positive. I would say for customers it was a non-event because most customers do not plan to offer MongoDB as a third party service. So that was really a non-issue.

And I think generally the feedback from the community has been quite positive. There always will be some people who don't like any change, but most people recognize that given we are now in the cloud era, there has to be a way for open source companies and open source projects to thrive in the cloud era and the SSPL, a lot of people has said, is the best way to do that.

[Operator]

We’ll go next to Sanjit Singh with Morgan Stanley.

[Sanjit Singh, Morgan Stanley]

I have two questions. Actually it's a two-parner on just getting update on go to market. So, Dave, I think when you updated us on last quarter you said that you haven't seen a whole lot of contribution yet from the IBM and Accenture partnerships and that could be a driver in the second half. So I wondered if you've got an update there for us on sort of the partner ecosystem contribution.

And then secondly, in terms of penetrating that long tail you guys were up to, I think 45 million downloads, I think it was around 30 million downloads at the time of IPO. So a big increase there. Can you give us a sense on how you guys are planning to capture some of that long tail and what mLab can bring in terms of that part of the equation? Thank you.

[Dev Ittycheria, President and CEO]

Sure. In terms of your partner question, last quarter we did do a few deals with IBM. We feel like this is the start of a very healthy long-term partnership. Our pipeline with IBM is growing quite significantly and while I don't want to commit to any specific numbers, we feel very good about the relationship, not just here in the U.S., but actually in Europe and also in Asia.

So, that relationship is really working well, and I speak to the GM of the business who is most - closely tied to us on a monthly basis. So, we have a pretty deep relationship up and down the organization.

With regards to Accenture, we actually - I'm not sure I said that things were not taken off yet with Accenture. We are actually doing quite a few deals with Accenture. In fact some of that pretty material deals we did this quarter were through partners like Accenture, and Accenture is also helping to expand our reach into markets where we may not have a lot of in-market coverage, and so that relationship is going well.

We feel very good about that relationship. They have actually built a bunch of products on top of MongoDB, and they've enabled their people to think about using MongoDB for a variety of use cases all the way from helping customers migrate to the cloud, helping customers migrate of legacy platforms et cetera. So we feel really good about that relationship as well.

And then in terms of your - the second part of your question was - just remind me again, was - the long tail.

[Sanjit Singh, Morgan Stanley]

The long tail, yes.

[Dev Ittycheria, President and CEO]

Yes. The long tail. So one of the things that really impressed us with mLab was that they built their business without hiring a single sales rep. And so they basically had to build their self-serve business. Now we also started off building our business on Atlas with self-serve, but they obviously have been doing this a lot longer than we have and that expertise we are inculcating into our own organization and really expanding our self serve business.

So we believe the best way to go after the long tail is through self-serve, at least in the initial customer acquisition, and then where appropriate, we will get our sales team to follow up and help expand those customers, depending on the size and scale of those customers, but the long tail will be our natural go to market motion for going after the long tail. I am sorry, the self-serve motion will be the natural sales motion to go after the long tail.

[Operator]

We’ll go next to Brad Reback with Stifel.

[Brad Reback, Stifel]

Michael, mLab how should we think about the revenue breaking out between subscription and services?

[Michael Gordon, CFO]

There is really no services. Think of all $5 million as subscription an analogous to the self-service bucket, although as we called out it's lower spend per customer.

[Brad Reback, Stifel]

And then quickly, Dave, on your commentary around all these really impressive enterprise wins around the country - in the world, that is, how should we think about initial order entry for new customers today versus the size they were maybe two years ago? How much bigger can you start with a customer nowadays?

[Dev Ittycheria, President and CEO]

Well we have seen our initial lands getting bigger and bigger. I think that's a function of people moving and getting comfortable moving engaging with us with more and more mission-critical workloads either through our enterprise advanced solution or through Atlas. But we're also seeing very significant expansion.

As Michael mentioned, this is yet another quarter where expansion rates were north of 120%. And so, so we don't try - this is truly a land, expand, expand business. So we don't try and close go elephant hunting trying close entire business upfront, it makes no sense for the customer. And frankly we rather engage with them in a way that they feel very natural. It creates less friction. And once they get more and more comfortable they start coming back and buying more. And that's great for us as a business.

So that's the typical way we engage with customers but customers are - our lands are getting bigger and bigger as customers get more and more comfortable with using MongoDB for more and more critical workloads.

[Operator]

We’ll go next to Ted Lin with Goldman Sachs.

[Ted Lin, Goldman Sachs]

So in terms of the competitive landscape against both the public cloud guys, which you've noted that you have a technological advantage against in the past. But especially kind of the news NoSQL players or the pure play no NoSQL players. Any color there on the win rates, who you're seeing and are people are standardizing on a single NoSQL offering or they're choosing still the best database for every use case?

[Dev Ittycheria, President and CEO]

So obviously there is some talk by the cloud providers about having a database - a different database for every solution. We don't think that that makes complete sense. One, it's very hard for an organization to train, support and build applications across all these disparate databases. Moreover, you now have to spend a lot of time making sure all that data sync across all these different databases and so that becomes pretty expensive and time consuming.

So we do believe while - they may not be one database for everything that people want a general purpose database to serve a majority of their use cases. And we believe we're well positioned to do that. The document model is a super set of a key value store. It supports - our document model supports the graph functionality.

We support joins in the term a feature called dollar look up. So the breadth - and we announced transactions in the middle of this past year, so the breadth and scale of the use cases the customers are running a MongoDB is quite profound.

So we believe that we're well positioned to go after that market and that's a function of why we believe our developer mindshare is really second to none when it comes to next generation databases and that's referenced by all the external market data out there.

[Ted Lin, Goldman Sachs]

And I guess as a follow-up, digging in on the SSPL versus the AGPL. I guess what drove kind of the change in strategy there? I think you mentioned before that the AGPL kind of prevents people from running Mongo as a service. And so are you seeing demand for third parties out that want to offer a MongoDB as a service and what are the implications there for Atlas? Thanks.

[Dev Ittycheria, President and CEO]

Right. So SSPL was built on the spirit of AGPL. We believe that it was quite clear that if people want to offer MongoDB as a service they couldn't do so given the licensing around AGPL. But we started seeing some international providers starting to test the lines about what was and what was not possible.

And we thought it would just makes sense to be - make it very explicit the conditions required to offer MongoDB as a service. It's not a restriction. Anyone can offer MongoDB as a service, but there are conditions that you need to conform to be able to do that and we want to make that very clear.

And the reaction has been incredibly positive from customers. They think it makes sense. They want to see us continue to grow and be a healthy Company, from users have been very positive. And I would say in general the community has received the feedback quite well as you can see in some of the press reports that have come out since our announcement.

[Operator]

We’ll go next to Brent Bracelin with KeyBanc Capital Markets.

[Brent Bracelin, KeyBanc Capital Markets]

I'll start out here with Dave here. mLab, obviously a contribution of $5 million here in Q4. Have you talked to some of the larger customers and if so what's been kind of early response after acquiring that asset so far with some of their maybe larger customers?

[Dev Ittycheria, President and CEO]

So the short answer is yes. We have talked to some of the larger customers and the response has been generally very positive. And as Michael mentioned, there are some - certain SKUs that are more expensive than what we offer at Atlas and in some cases, there are situations where they have a cheaper price.

So we plan to make it be very customer-friendly and honor the most advantageous price for customers. So we expect that to have a little bit of pricing compression. And we also expect that there will be some natural churn because of some really tiny customers who just in the process switching platforms may decide to bring that back in-house.

And so, but in general the feedback has been very positive. We are very excited to basically acquire the entire mLab team except one person and they are super excited to be part of MongoDB and we feel together we really can build a very large database of service offering.

[Brent Bracelin, KeyBanc Capital Markets]

Helpful color there. And then in the script, you mentioned conservative industries starting to kind of embrace Mongo. You also called it out here on the call. What type of conservative industries are there and maybe just drill down into kind of the dialog you're having there and why you're kind of calling that out this quarter?

[Dev Ittycheria, President and CEO]

Yes, I mean like one example I gave you was HMRC which is really the IRS of the UK. They were existing MongoDB paying customers and they recently expanded their use of MongoDB by using Atlas. So if you had told me six months ago that we would have a large government entity in U.K. using Atlas that frankly would have surprised me, because of those organizations.

We had another large government institution in Italy decide to use us - use MongoDB to serve their constituents better. We have people in Latin America and markets like Argentina where we don't have any of our own people there today who are now using Atlas. We only - we have a very small team in Korea and all of a sudden we have people using MongoDB pretty quickly.

So we feel like what that really speaks to is the popularity of MongoDB as truly the database - the modern database platform of choice and the mass appeal for all these wide and disparate use cases. And so, we feel that that's a strong indicator of the opportunity we have ahead of us.

[Brent Bracelin, KeyBanc Capital Markets]

And then two quick ones for Michael, if I could, hear on deferred revenue. Short-term deferred actually accelerated in the quarter even without less mix shift kind of which I thought would be a little bit of a headwind. What drove the acceleration in short-term deferred and how should we kind of look at that metric versus the mix shift to Atlas, which has little to no deferred revenue component?

[Michael Gordon, CFO]

Yes. So I think the headline trends are - obviously is a very strong quarter. Billings, certainly not something we guide to and has a lot of quarter-to-quarter variability and you are absolutely correct. In the commentary around how does Atlas behave and Atlas doesn't add nearly as much from a deferred revenue perspective as compared to Enterprise Advanced.

So I wouldn't go extrapolating out from the quarterly results, especially as we expect Atlas, which is growing faster than the rest of business which growing quite quickly to be an even larger portion of the business. So I think it's mostly just the fact that it was a very strong quarter across the board.

[Brent Bracelin, KeyBanc Capital Markets]

And then last on the gross margin, particularly the subscription gross margin, it looks like this is the first quarter in over a year that that actually increased even with again Atlas mix shift. Walk through the drivers of improving subscription gross margins. Thanks.

[Dev Ittycheria, President and CEO]

Yes, sure. So we saw subscription gross margins improvements both for Atlas as well as for sort of Enterprise Advanced and the rest of the non-Atlas revenue. So again, the kind of strong across the board. I think the Atlas progress is probably the most notable because that's where we've been actively working and as Atlas continues to become a larger portion of the revenue, we've been very pleased with our progress on that front. A lot of it relates to infrastructure. But we've also started to see very successful internal efforts and the initial fruits from driving lower support costs as a percent of revenue.

And so that's been very valuable. I continue to think that we'll have sort of the shallow view that we've talked about, because the business is growing faster than we can optimize every dial and every lever. And then I guess I'd also call out in the short term mLabs business while small in the grand scheme of MongoDB on a kind of run rate basis based off of the numbers and the guidance we've given close to a quarter of the Atlas business and that was at lower gross margins.

And so it will take a little bit of time when we - to integrate them and kind of harmonize those margins. So I think that will be a Q4 headwind for sure and probably at the beginning of the year in Q1 and Q2, as we kind of work through the integration plan we can certainly update our outlook on that as we get out to March and the Q1 guidance. But want to call that out for folks as well just so people don't get overly carried away in extrapolating numbers and things like that.

[Operator]

We’ll go next to Pat Walravens with JMP Securities.

[Pat Walravens, JMP Securities]

First of all on the Server Side Public License, so was mLabs itself one of the vendors that was sort of testing the limits of the AGPL?

[Dev Ittycheria, President and CEO]

We did have a relationship with mLab in the early days. As we - when we introduced Atlas as you can imagine, that relationship terminated. So while technically mLab did not have an agreement with us to offer MongoDB as a service that ultimately brought the two parties together.

And I think the deal we struck was both good for mLab shareholders and good for MongoDB shareholders, because it allowed us to accelerate our MongoDB as a Atlas business, brought some new competencies around self-serve, and allows us to essentially position us for long-term growth. So, it's a transaction that made sense for both parties.

[Pat Walravens, JMP Securities]

Just one thing. And then can people get around this just by using versions of the Community Server from before October - before I guess October 16?

[Dev Ittycheria, President and CEO]

So any version before our SSPL announcement was licensed under AGPL which we still also believe has pretty broad restrictions around what you can do when offering MongoDB as a service.

That being said, if someone want to really test this using AGPL, they have to fork the code base prior to our announcement and then have to match that themselves, which frankly would be a pretty herculean task.

Secondly, the community would - they have a tough time getting a large following because as we add features and new capabilities into our platform, the gap between the fourth version and us will just continue to increase. So that would not be a very attractive kind of option for most people.

[Pat Walravens, JMP Securities]

And then this is a totally different subject. So going back in history, as I look at it really old bottle, I think Oracle went from roughly $320 million in revenue to $612 million from 90 to 91 in just the database item business forgetting the apps. Can the environment support that sort of thing happening again or is it different this time?

[Dev Ittycheria, President and CEO]

Well, one, I would say, there was a very different licensing model, that was a perpetual license model. So you could right it down - so that's the big difference. And obviously the market was much more nascent. And so I think it became clear that Oracle emerged as a leader the market kind of gravitate towards them.

We believe that those same dynamics are applying here where I think people are starting to gravitate to MongoDB. But given our revenue recognition model and so forth, I think it we'll be - I don't want to start setting any guidance, but I think in general, trying to build a subscription business at the same rate as a perpetual upfront business is two very different challenges.

[Operator]

[Operator Instructions] We’ll go next to Tyler Radke with Citi.

[Tyler Radke, Citi]

My question was related to the licensing changes. You talked about some positive responses from your customers. But I'm just curious what the feedback if at all you've had from kind of the major cloud service providers on the licensing change?

[Dev Ittycheria, President and CEO]

Candidly we haven't had much feedback at all. But I think the announcement probably hasn't been lost on anyone because it's pretty widely covered. I don't think - I think there is a lot of debate in the industry today about how much do cloud providers really contribute back to open source - the open source community.

I mean they're very good at taking the open source projects plugging into their cloud platforms and then monetizing it, but they're not so good at giving back the community, especially when you measure it on a percentage of R&D. About half of our R&D goes towards our free Community Server, which really helps everyone and there's no one - no cloud provider that comes even close to that. I would say even spends maybe 1% of the R&D in giving back the communities.

So I think that speaks to the differences in the contributions back the community and I think that's become a burning issue for a lot of people. And when it comes to customers it was really a non-event, because 99.99% of our customers have no interest in offering MongoDB as a service. So it's a mood issue for them.

[Tyler Radke, Citi]

And as we think about just the mix of the business that's tied to legacy replacement, was there any change there? I think, it historically been about - around 25%. And just related to that, how have the use cases evolved with the transaction support. If that's driven any different type of customer, different use case, just those two questions? Thank you.

[Dev Ittycheria, President and CEO]

Yes, sure. So as I mentioned earlier, in one of the earlier questions, we're definitely seeing an increase of mission critical workloads moving to MongoDB. And I mentioned one of the use case on the prepared remarks was an energy company moving lot of its billing data to MongoDB, what's more important than utility than its billing data. And we're seeing customers start using our capabilities around transactions. We've had a bunch of deals close where that drove that deal.

And it also gives a lot of confidence to customers who may not need transactions today but know that it's available for them in the future to really double down on MongoDB. And so we're definitely seeing that people are viewing MongoDB as truly a viable mission critical platform to run the most sophisticated demanding workloads. And I'll let Michael answer the question about the mix of legacy to Mongo.

[Michael Gordon, CFO]

Yes, so given that backdrop, we continue to see very strong increases in the applications that are migrating off of legacy relational workloads. As a reminder, the Group called this out before but Atlas probably sees a little bit less than what we've historically seen in terms of the percent migration. And if you look at sort of like the overall business, it's probably down on a percentage of new business, but if you look at the absolute dollars of migrations that we're driving they're up significantly.

[Operator]

We’ll go next to Jack Andrews with Needham.

[Unidentified Analyst]

It's actually [Connor] filling in for Jack. With the rise of DevOps we are seeing other employees become more important in the buying cycle. So how are you guys levered to some of these changes and it's helped using motions in sales efficiency especially if you consider the self-service nature of Atlas?

[Dev Ittycheria, President and CEO]

Yes. So I mean, so we have multiple modes of going to market to customers. One is obviously self serve. So if a customer just wants to basically engage with us without having to talk to a sales person they can easily do so and sign up for Atlas on our website, pick what cloud platform in instance and they literally get a connection string and they're up and running.

Then you have smaller customers engage with us through our inside sales channel. That channel has been really attractive in pushing Atlas because the product market fit for Atlas is incredibly strong for those customers and they range from very early-stage companies to venture-backed companies. The companies are growing very, very quickly. And we have people around the world who help us close business through that means.

And then we have our field organization who work with the largest set of customers. They could be large banks, media, telco, tech companies et cetera, insurance companies, and there where the buying process is far more complicated, there is multiple stakeholders that need to be engaged typically the deal sizes are bigger, sometimes there may be a business case required that tends to be a pretty rigorous technical validation phase where we need to go in and prove that the technology really works as advertised or really addresses the problems they are trying to address. That's where you need a field organization which also includes both sales people and technical people in the field working with our customers.

And I guess - I mean people are moving to more of a DevOps model where there is emerging of the development resources and operational resources, but in large organizations there still tends to be a fairly discreet set of stakeholders who need to be bought on, above and beyond that even people like - people who have security background because obviously they're storing their data in MongoDB and they need to validate that we pass all the stress tests that they may have around the security of our architecture.

[Unidentified Analyst]

And there are some vendors out there making a bigger push into data warehouse specifically with Hive and HBase. Although you guys have a different use case and which are clear language, are you seeing any changes in the competitive landscape as these competitors make a bigger push in terms of sales and marketing?

[Dev Ittycheria, President and CEO]

No, we're not seeing. In fact, we're seeing the reverse. We're seeing our customers bringing us into more of these analytic workloads and operationalizing a lot of the data lake use cases that they have tried with alternative vendors where they found it is either too complex, too costly or just took too long to get to time to value and they're bringing us - and part of the value of using MongoDB is your most up-to-date and accurate information sits in your transactional database. So being able to run analytics using MongoDB it really allows people to get immediate insights into their business and that's incredibly valuable to consumers.

[Operator]

We’ll go next to Chris Eberle with Nomura.

[Chris Eberle, Nomura]

Can you give us - can you give us a little idea on where we are in the actual approval process with OSI for SSPL?

[Dev Ittycheria, President and CEO]

Sure. So we submitted in conjunction with our public announcement we made our first submission to OSI on October 16. And their process, it tends to be an open and transparent process. So you tend to get a lot of feedback in terms of commentary and so forth and we had obviously sought out advice and counsel from a lot of open source domain expertise and we have obviously, as you can imagine, a lot of expertise in-house.

And so that drove the issuance of the SSPL. We did get some feedback that we thought was - were merited some deliberation and we've come back with some adjustments, I believe it was about two weeks ago and we're - we'll see what happens from there. I want to be very clear though that part of our motivation to work with the OSI is to really get SSPL adopted not just by MongoDB but by the industry as a whole. So that's what our motivation was with the OSI.

No matter what the OSI does, we own 100% of the copyright to the code of MongoDB. So like any license - any owner of the IP, we have the right to define the terms of use with our license. So there is no risk for us. If for some reason OSI doesn't ratify this or in some cases rejects or if it ends up rejecting this, this will not change our posture about the use of SSPL. The purpose of you going to the OSI was really to get this established as an industry standard so that others could use this license as they think about their own business models.

[Operator]

We’ll go next to Rishi Jaluria with D.A. Davidson.

[Hannah Rudoff, D.A. Davidson]

This is actually Hannah on for Rishi. Thanks for taking my questions. Just first off, I was wondering if you've received any specific feedback from Atlas customers on any functionalities they wish Atlas had?

[Dev Ittycheria, President and CEO]

Yes, I mean as you can imagine, we get - have lots of customers and frankly that's how we run our business. I mean we constantly listen very, very carefully to what our customers are doing, what new features or capabilities they are asking for or anticipating what new things they may want based on the usage patterns we see. So that's frankly part and parcel with how we run our business. So that's kind of ingrained to the core of who we are.

We run a lot of customer advisory boards in North America and Europe and soon in Asia to just get - continue to make sure we get all the feedback that we think is appropriate along with obviously our direct engagements with those customers.

I would say one big feature that is on the horizon is customers asking to run the same application across different cloud providers. And that's not just for pure lock-in concerns, but it's also based on customers who want to take advantage of different capabilities on different cloud providers because every cloud provider is now obviously trying to compete against other cloud providers.

And so - so that's an area that you'll probably see us make some announcements early next year and that's something that we're looking at very carefully. And again we have so many different customers of different variety - there is customers pushing on things like performance, the scalability and geographic distribution and so forth because we're one of the few platforms, probably the only platform that really enables customers to deploy a globally distributed database.

And I should also point out that given that we run across all the three major cloud providers, we have the widest geographic coverage of any database's service offering, which is a very compelling value proposition to customers. And so I think that's a big reason why MongoDB is winning.

[Hannah Rudoff, D.A. Davidson]

And then regarding operating margins going forward, are there any specific changes you feel you still need to make or do you feel the improvement will just come in top line growth and scaling the business and driving towards more self-serve?

[Dev Ittycheria, President and CEO]

Yes, I don't think that there's like a particular magic bullet other than just sort of the scaling and operating the business in the way that we have and will continue to do. So I wouldn't say there's like a specific thing per se that will certainly result in a step-function change. I think it's more just sort of the operational blocking and tackling and scaling of the business.

[Operator]

And with no further questions in the queue, I would like to turn the call back over to Dev Ittycheria with any additional or closing remarks.

[Dev Ittycheria, President and CEO]

Well, I'd like to thank everyone for their time today. We are very pleased with our performance this third quarter and we will get back to work. So thank you very much for your time. Take care.

[Operator]

This does conclude today's conference. We thank you for your participation. You may now disconnect.