Good day everyone, 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 Bedell, ICR Investor Relations. Please go ahead, sir.
Thank you, Anne. Good afternoon, 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 the market today. Joining me in the call today are Dev Ittycheria, President and CEO of MongoDB, and Michael Gordon, MongoDB 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, 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 a 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 30th, 2018, our quarterly report on Form 10-Q filed on September 7th, 2018, our other periodic filings with the SEC.
These documents are available in 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 on this conference call. Please refer to the tables in our earnings release on the investor relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Dev.
Thanks, Brian. Thanks to all of you for joining us today to review our third quarter results. We delivered terrific performance this third quarter across all aspects of our business. Our ability to generate best-in-class growth at significant scale, which now exceeds a quarter billion-dollar 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 a 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 our 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. 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 first. 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 SQLite 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 back end. This allows developers to query mobile and IoT data any way 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 and very high I/O performance for large data sets. Support for cross-region VPC peering, which allows Atlas to communicate with the customer's virtual private cloud across regions via private networking. This will enable customers to connect data between disparate 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 software is licensed 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 that builds 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 it uses to offer such a service. Turning to our 3rd 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 U.S., 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're 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 and Customs, or HMRC, 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 the 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 secure 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 technology that enabled their multi-cloud strategy without having to rewrite a line of code.
The Maryland Health Benefit 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 performant 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 their 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 their 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're 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 a self-serve model. We're excited to bring that self-serve and database as 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 want 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 Chief Operating Officer, 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 a 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.
Thanks, Dev. 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 MongoDB Atlas. MongoDB 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 MongoDB Enterprise Advanced features into MongoDB Atlas, we expect the product distinctions between the two will blur. Instead, customers will choose 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 count 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 MongoDB 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 MongoDB Enterprise Advanced customers as well as new MongoDB Atlas customers. It is important to keep in mind that the growth in our MongoDB Atlas customer count reflects both new customers to MongoDB as well as existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. We also continue to see healthy expansion from existing customers. Our net ARR 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 has 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 will 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's 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 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 is negative $9.7 million in the quarter. Short-term deferred revenue is $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-based model and generates less deferred revenue than Enterprise Advanced. 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 1st. As Dev mentioned, mLab substantially enhances our self-service knowledge and provides additional databases and 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 break-even 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 for 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 -$21 million to -$20 million, and non-GAAP net loss per share in the range of -$0.39 to -$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 fiscal 2019, we are raising our revenue outlook to $243.7 million-$244.7 million. We're also improving our profitability outlook with non-GAAP loss from operations now expected to be in the range of -$81.1 million to -$80.1 million, and non-GAAP net loss per share to be in the range of -$1.53 to -$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 2020, 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?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you are using a speakerphone, it may be necessary to lift your handset before making your selection. Again, star one if you would like to ask a question. We'll take our first question from Raimo Lenschau with Barclays Capital.
Hey, guys. This is actually David Rainville on for Raimo today. Thanks for taking our question. Again, congrats on another impressive quarter here. Maybe we start with Atlas, because 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're seeing now versus what you were seeing a year ago? Maybe an update on where you feel you are on your journey of bringing Enterprise Advanced features onto Atlas, as you're trying to play this ASP game going forward.
Sure. Just as a reminder, Atlas was introduced about two and a half years ago. 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. We're clearly seeing now large, sophisticated customers moving mission-critical workloads to Atlas. That's reflected in both the sizes of deals as well as the broad-based set of use cases that customers are using for. I think people are viewing Atlas as a truly viable platform to run mission-critical applications.
Makes sense. Thanks for that. Maybe just a quick follow-up on SSPL. Any early customer feedback or feedback from the community from the changes that you've done?
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. That was really a non-issue. I think generally, the feedback from the community has been quite positive. There'll always 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. The SSPL, a lot of people have said, is the best way to do that.
Makes sense. Thanks for that.
We'll go next to Sanjit Singh with Morgan Stanley.
Hi, Sanjit.
Hi. Thank you for taking the call. Hi, Dave. Congrats, Michael, on the promotion. Well deserved. I had two questions. Actually, it's a two-parter on just getting an update on go-to-market. Dave, I think when you updated us 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. I wanted to see if you got an update there for us on sort of the partner ecosystem contribution. Secondly, in terms of penetrating that long tail, you guys are up to, I think, 45 million downloads. I think it was around 30 million downloads at the time of IPO, 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.
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. 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. That relationship is really working well, and I speak to the GM of the business who's most closely tied to us on a monthly basis. We have a pretty deep relationship up and down the organization. With regards to Accenture, I'm not sure I said that things were not taking off yet with Accenture. We're actually doing quite a few deals with Accenture.
In fact, some of the pretty material deals we did this quarter were through partners like Accenture. Accenture is also helping expand our reach into markets where we may not have a lot of in-market coverage. That relationship is going well.
We feel very good about that relationship. They've 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 off legacy platforms, et cetera. We feel really good about that relationship as well. In terms of your-- The second part of your question was, just remind me again.
The long tail adoption.
Oh, the long tail.
Well, sure.
Yeah. the long tail.
The long tail, yeah.
Yeah. The long tail. One of the things that really impressed us with mLab was that they built their business without hiring a single sales rep. They basically had to build their self-serve business. Now, we also started off building our business on Atlas with self-serve, they obviously have been doing this a lot longer than we have, and that expertise we're inculcating into our own organization and really expanding our self-serve business. We believe the best way to go after the long tail is through self-serve, at least in the initial customer acquisition. 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. The long tail will be our natural go-to-market motion for going after the long tail. I'm sorry.
The self-serve motion will be the natural sales motion to go after the long tail.
Understood. Thank you for the color and congrats on a strong quarter.
Thank you.
Thanks.
We'll go next to Brad Reback with Stifel.
Great.
Hey, Brad, we're having trouble hearing you. I don't know if you can-
Can you hear me?
It's breaking up.
Hello?
Yep.
Hey, sorry about that. Michael, quickly on mLab, how should we think about the revenue breaking out between subscription and services?
There's really no services. Think of all $5 million as subscription, and analogous to the self-service bucket. Although, as we called out, it's lower spend per customer.
Got it. Quickly, Dev, on your commentary around all these really impressive enterprise wins around the country and 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?
Well, we have seen our initial lands getting bigger and bigger. I think that's a function of people moving and getting comfortable engaging with us with more and more mission-critical workloads, either through our Enterprise Advanced solution or through Atlas. We're also seeing very significant expansion. As Michael mentioned, this is yet another quarter where expansion rates were north of 120%. We don't try. This is truly a land expand business. We don't try and go elephant hunting and try and close the entire business up front. It makes no sense for the customer. Frankly, we'd rather engage with them in a way that they feel very natural. It creates less friction. Once they get more and more comfortable, they start coming back and buying more. That's great for us as a business. That's the typical way we engage with customers.
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.
Great. Thanks very much.
Thank you.
We'll go next to Ted Lin with Goldman Sachs.
Hi. Thanks for taking the question. Congrats on the new role, Michael. I guess so in terms-
Thanks
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 new NoSQL players or the pure play NoSQL players, any color there on win rates, who you're seeing, and if people are standardizing on a single NoSQL offering, or if they're choosing still the best database for every use case?
Obviously, there's some talk by the cloud providers about having 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 is sync across all these different databases. That becomes pretty expensive and time-consuming. We do believe while there may not be one database for everything, that people want a general purpose database to serve a majority of their use cases. We believe we're well positioned to do that. The document model is a super set of a key value store. Our document model supports graph functionality. We support joins in the term of a feature called $lookup.
The breadth, and we announced transactions in the middle of this past year. The breadth and scale of the use cases that customers are running on MongoDB is quite profound. We believe that we're well positioned to go after that market. That's a function of why we believe our developer mind share is really second to none when it comes to next generation databases. That's referenced by all the external market data out there.
Great. Thanks for the color, Dev. 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. Are you seeing demand for third parties that want to offer MongoDB as a service? What are the implications there for Atlas? Thanks.
Right. SSPL was built on the spirit of AGPL. We believe that it was quite clear that if people wanted to offer MongoDB as a service, they couldn't do so given the licensing around AGPL. We started seeing some international providers starting to test the lines about what was and what was not possible. We thought it would just make sense to 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. We want to make that very clear. 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, they've been very positive.
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.
Great. Thank you very much.
We'll go next to Brent Bracelin with KeyBanc Capital Markets.
Thanks for taking the question. I'll start out here with Dev here. mLab's obviously contribution, $5 million here in Q4. If so, what's been the early response after acquiring that asset so far with some of their maybe larger customers?
The short answer is yes, we have talked to some of the larger customers, and the response has been generally very positive. As Michael mentioned, there are some certain SKUs that are more expensive than what we offer MongoDB 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. We expect that to have a little bit of pricing compression. We also expect that there will be some natural churn because there's some really tiny customers who, just in the process of switching platforms, may decide to bring that back in-house. In general, the feedback has been very positive.
We're very excited to basically acquire the entire mLab team, except one person, and they're super excited to be part of MongoDB, and we feel that together, we really can build a very large database as a service offering.
Great. Helpful color there. 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? Maybe just drill down into kind of the dialogue you're having there and why you're kind of calling that out this quarter.
Yeah. One example I give you was HMRC, which is really the IRS of the U.K. They were existing MongoDB paying customers, and they recently expanded their use of MongoDB by using Atlas. If you had told me six months ago that we'd have a large government entity in the U.K. using Atlas, that frankly would've surprised me. We had another large government institution in Italy decide to use MongoDB to serve their constituents better. We have people in Latin America in markets like Argentina, where we don't have any of our own people there today, who are now using Atlas. We have a very small team in Korea, and all of a sudden we have people using MongoDB pretty quickly.
We feel like what that really speaks to is the popularity of MongoDB as truly the modern database platform of choice and the mass appeal for all these wide and disparate use cases. We feel that's a strong indicator of the opportunity we have ahead of us.
Right. Got it. Two quick ones for Michael, if I could here. On deferred revenue, short-term deferred actually accelerated in the quarter, even with Atlas mix shift, 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?
Yeah. I think the headline trends are, obviously, it was a very strong quarter. Billings, certainly not something we guide to and has a lot of quarter-to-quarter variability, and you're 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. I wouldn't go extrapolating out from the quarterly results, especially as we expect Atlas, which is growing faster than the rest of the business, which is growing quite quickly, to be an even larger portion of the business. I think it's mostly just the fact that it was a very strong quarter across the board.
Got it. Last on the gross margins, particularly the subscription gross margin. Looks like this is the first quarter in over a year that that actually increased even with, again, that Atlas mix shift. Walk through the drivers of improving subscription gross margins. Thanks.
Yeah, sure. 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. Again, 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. That's been very valuable. I continue to think that we'll have sort of the shallow U that we've talked about because the business is growing faster than we can optimize every dial and every lever.
I guess I'd also call out in the short term, mLab's 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, is close to a quarter of the Atlas business, and that was at lower gross margins. It will take a little bit of time to integrate them and kind of harmonize those margins. I think that'll 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 in the Q1 guidance. 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.
Perfect. That's all I had. Thank you, and very helpful.
Great. Thanks.
Thank you.
We'll go next to Pat Walravens with JMP Securities.
Hey, Pat.
Hey.
Oh, great. Hi, guys. Thank you. Congratulations. Hey, first of all, on the Server Side Public License , was mLab itself one of the vendors that was sort of testing the limits of the AGPL?
We did have a relationship with mLab in the early days. When we introduced Atlas, as you can imagine, that relationship terminated. 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 our Atlas business, brought some new competencies around self-serve, and allows us to essentially position us for long-term growth. It was a transaction that made sense for both parties.
Okay, great. I was just wondering. Can people get around this just by using versions of the MongoDB Community Server from before October 16th?
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 wanted to really test this using AGPL, they'd have to fork the code base prior to our announcement and then have to manage that themselves, which frankly would be a pretty Herculean task. Secondly, they'd have a tough time getting a large following because as we add features and new capabilities-
to our platform, the gap between the forked version and us would just continue to increase. That would not be a very attractive kind of option for most people.
All right. This is totally different subject. Going back in history, as I look at a really old model, I think Oracle went from roughly $320 million in revenue to $612 from 1990 to 1991 in just the database side of the business, forgetting the apps. Can the environment support that sort of thing happening again, or is it different this time?
Well, one, I would say it was a very different licensing model. That was a perpetual licensing model, so you could.
Oh, yeah.
forever as revenue.
Yeah.
That's a big difference. Obviously, the market was much more nascent, and so I think it became clear that Oracle emerged as a leader. The market kind of gravitated towards them. We believe that those same dynamics are applying here, where I think people are starting to gravitate to MongoDB. Given our revenue recognition model and so forth, 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.
Yeah, great. Thank you.
Thank you.
As a reminder, it's star one if you would like to ask a question. We'll go next to Tyler Radke with Citi.
Hey, Tyler.
Hey, how you guys doing?
Good.
My question was related to the licensing changes. You talked about some positive responses from your customers, 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.
Candidly, we haven't had much feedback at all, I think the announcement probably hasn't been lost on anyone because it was pretty widely covered. I think there is a lot of debate in the industry today about how much do cloud providers really contribute back to the open source community. They're very good at taking open source projects, plugging into their cloud platforms, and then monetizing it, they're not so good at giving back to community, especially when you measure it on a percentage of R&D. About a half our R&D goes towards our free community server, which really helps everyone. There's no cloud provider that comes even close to that, I would say, even spends maybe even 1% of their R&D in giving back to the community.
I think that speaks to the differences in the contributions back to community, I think that's become a burning issue for a lot of people. 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, it's a moot issue for them.
Great. Thank you. As we think about just the mix of the business that's tied to legacy replacement, was there any change there? I think it has historically been about around 25%. 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.
Yeah, sure. As I mentioned earlier in one of the early questions, we're definitely seeing an increase of mission-critical workloads moving to MongoDB. I mentioned one of the use cases even on the prepared remarks was an energy company moving a lot of its billing data to MongoDB. What's more important than utility than its billing data? We're seeing customers start using our capabilities around transactions. We've had a bunch of deals close where that drove that deal. 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. We're definitely seeing that people are viewing MongoDB as truly a viable mission-critical platform to run the most sophisticated demanding workloads. I'll let Michael answer the question about the mix of legacy to Mongo.
Yeah. Given that backdrop, we continue to see very strong increases in the applications that are migrating off of legacy relational workloads. As a reminder, I think we've called this out before, but Atlas probably sees a little bit less than what we've historically seen in terms of % migration. If you look at sort of like the overall business, it's probably down on a percentage of new business. If you look at the absolute dollars of migrations that we're driving, they're up significantly.
Thank you.
We'll go next to Jack Andrews with Needham.
Hey, good afternoon, gentlemen. It's actually Connor filling in for Jack. With the rise of DevOps, we're seeing other employees become more important in the buying cycle. How are you guys levered to some of these changes, and it's helped easing motions and sales efficiency, especially if we consider the self-service nature of Atlas?
Yeah. We have multiple modes of going to market to customers. One is obviously self-serve. If a customer just wants to basically engage with us without having to talk to a salesperson, they can easily do so and sign up for Atlas on our website, pick what cloud platform and instance, and they literally get a connection string, and they're off and running. Then you have smaller customers engage with us through our inside sales channel. That channel has been really effective in pushing Atlas because the product market fit for Atlas is incredibly strong for those customers. They range from very early-stage companies to venture-backed companies to companies that are growing very quickly. We have people around the world who help us close business through that means. 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. There where the buying process is far more complicated, there's multiple stakeholders that need to be engaged. Typically, the deal sizes are bigger. Sometimes there may be a business case required. There tends to be a pretty rigorous technical validation phase, where we need to go in and prove the technology really works as advertised or really addresses the problems they're trying to address. That's where you need a field organization, which also includes both salespeople and technical people in the field, working with our customers. Yes, people are moving to more of a DevOps model, where there's a merging of the development resources and the operational resources. In large organizations, there still tends to be a fairly discrete set of stakeholders who need to be bought on.
Above and beyond that, even people who have a 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.
Okay. That makes sense. There's 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 richer query language, are you seeing any changes in the competitive landscape as these vendors make a bigger push in terms of sales and marketing?
No. In fact, we're seeing the reverse. We're seeing our customers bring us into more of these analytic workloads, and operationalizing a lot of the data lake use cases that they had tried with alternative vendors, where they found it was either too complex, too costly, or just took too long to get to time to value. Part of the value of using MongoDB is your most up-to-date and accurate information sits in your transactional database. Being able to run analytics using MongoDB, it really allows people to get immediate insights into their business, and that's incredibly valuable to customers.
Great. Thank you.
Thank you.
We'll go next to Christopher Marai with Nomura.
Hey, guys. Thanks for taking the question.
Hey, Chris.
Can you give us a little idea on where we are in the actual approval process with OSI for SSPL?
Sure. We submitted in conjunction with our public announcement. We made our first submission to OSI on October 16th. 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. 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. That drove the issuance of the SSPL. We did get some feedback that we thought merited some deliberation, and we've come back with some adjustments. I believe it was about two weeks ago, and 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. 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. Like any owner of the IP, we have the right to define the terms of use with our license. There's no risk for us if, for some reason, OSI doesn't ratify this or, in some cases, if it ends up rejecting this. This will not change our posture about the use of SSPL. The purpose of 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.
Got it. Thanks.
We'll go next to Rishi Jaluria with D.A. Davidson.
Hi, this is actually Hannah on for Rishi. Thanks for taking my questions. First off, I was wondering if you've received any specific feedback from Atlas customers on any functionalities they wish Atlas had.
Yes. As you can imagine, we have lots of customers. Frankly, that's how we run our business. We constantly listen very carefully to what our customers are doing, what new features or capabilities they're asking for, or anticipating what new things they may want based on the usage patterns we see. That's frankly part and parcel with how we run our business. 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 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.
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. So that's an area that you'll probably see us make some announcements early next year. That's something that we're looking at very carefully. Again, we have so many different customers of different varieties. There's customers pushing on things like performance and 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.
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 as service offering, which is a very compelling value proposition to customers. I think that's a big reason why MongoDB is winning.
Okay, thanks. That makes a lot of sense. Second, 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 from top-line growth and scaling the business and driving towards more self-serve?
Yeah, I don't think that there's 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. I wouldn't say there's a specific thing per se that will suddenly result in a step function change. I think it's more just sort of the operational blocking and tackling and scaling of the business.
Okay, perfect. Thank you.
Thank you.
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.
I'd like to thank everyone for the time today. We're very pleased with our performance this third quarter, and we will get back to work. Thank you very much for your time. Take care.
This does conclude today's conference. We thank you for your participation. You may now disconnect.