Informatica Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 11 speakers on the call.

Operator

I'd now like to hand over to Victoria Hyde Dunn, Vice President of Investor Relations. The floor is yours. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining Informatica's Q3 2023 earnings conference call. Joining me today are Amit Walia, Chief Executive Officer and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors. Informatica.com.

Speaker 1

Our prepared remarks will be posted on the IR website after the conference call concludes. During the call, we will be making comments of a forward looking nature. Actual results may differ materially from those expressed or implied as a result of various risks And uncertainties. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors Included in our most recent 10 Q and 10 ks filings for the full year 2022. These forward looking statements are based on information as of today, And we assume no obligation to publicly update or revise our forward looking statements, except as required by law.

Speaker 1

Additionally, we will be discussing certain non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U. S. GAAP measure can be found in this afternoon's press release And our slide presentation available on Informatica's Investor Relations website.

Speaker 1

It is my pleasure to turn the call over to Amit.

Speaker 2

Thank you, Victoria. Thank you, everyone, for joining us today. I will start today's call by summarizing 3 key points. First, we delivered a solid Q3. We exceeded guidance across all top and bottom line metrics, Driven again by strong customer momentum and execution from a cloud only consumption driven strategy.

Speaker 2

In addition to exceeding guidance in Q3, based on our strong performance, we are raising non GAAP operating income And adjusted unlevered free cash flow after tax guidance for the full year. This is in addition to the raise we did on these metrics from our previous earnings call. 2nd, we continue to accelerate our innovation led cloud transformation to make IDMC Powered by our AI engine, Clear, the data management platform of choice for enterprises across the globe, as they build their modern data architecture to drive the AI driven digital transformation. 3rd, as we look ahead to next year, we remain committed to delivering balanced profitable growth while continuing to build on our successful cloud only consumption driven strategy. As a part of this, we announced a restructuring today, Which I will discuss in more detail at the end of my remarks.

Speaker 2

Now let's discuss these topics in more detail. Turning to Q3 results. We exceeded the high end of guidance for ARR and revenue metrics. Cloud subscription ARR grew 37% year over year to a record by 50,000,000 Our subscription ARR grew 15% year over year and total revenue grew 10% year over year. We strengthened our cash position and beat the high end of guidance for non GAAP operating income and adjusted unlevered free cash flow after tax as well.

Speaker 2

The macro environment remains stable for the Q3 consistent with the prior quarter. We continue to be encouraged by the momentum of our cloud only consumption driven strategy As the sales mix shifts from self managed to cloud subscription ARR, with cloud subscription ARR now representing 51% of subscription ARR, Up from 43% a year ago. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads And expansion, with the remaining 15% from on prem cloud migration. Furthering the trend of accelerating migrations of our On prem and maintenance base to IDMC. At the end of Q3, we have now migrated 5% of that base to cloud compared to 4.5% at the end of Q2.

Speaker 2

Customers adopting the IDMC platform with new users and use cases across organizations. In the 3rd quarter, customers are spending Customers spending more than $1,000,000 in subscription ARR increased 17% year over year to 2 24 customers. Customers spending more than $100,000 in subscription ARR increased 7% year over year to 19 78 customers. Let me share a few customer stories highlighting our best of breed solutions capabilities on the IDMC platform. Mercedes Benz France has been an Informatica customer for over 2 decades And as recently extended their partnership with us, IDMC will help them address evolutions of their data architecture And further enable use cases such as data anonymization, mass ingestion, data quality and more to enhance their operations.

Speaker 2

Holland America Line is a leading cruise line company offering cruises throughout the world. An existing cloud data integration and mass ingestion customer, They recently expanded their IDMC footprint, accelerating their power center modernization to the cloud and adding other platform capabilities. Whataburger is an American regional fast food restaurant change headquartered in San Antonio, Texas. As an existing Informatica customer, they selected the IDMC to lay their cloud platform foundation as they seek to scale their number of locations to increase revenue and improve customer experiences in their restaurants. As the higher education industry is moving to cloud, Clemson University in South Carolina sought to partner with us To accelerate the enterprise transformation initiatives, recognizing our best of breed IDMC platform, the selected our cloud data integration, Master Data Management and Cloud Data Governance and Catalog to create a single source of truth for the data driven strategy.

Speaker 2

Next, we added product innovation to IDMC's cloud native AI powered platform to improve productivity for our customers and partners. In our cloud data governance and catalog service, we added REST APIs to extend the reach of rich metadata for our 3rd party apps, Expanded data classification capabilities for Databricks, Kafka and Microsoft Power BI and expanded breadth and depth of metadata connectivity with new scanners for Microsoft Our focus on IDMC becoming the metadata system of record for enterprises continues to accelerate. In our MDM and 360 app services, We added many innovations for data stewards for their productivity, including bulk edit to the change management process And dynamic modeling experience to capture context sensitive attributes, a very important feature for them. Our investment towards Faster time to value continues as we launched a new material master extension designed for centralized authoring and mastering of material data. This when combined with the Supply 360 and Product 360 can manage the entire value chain of an item as it moves from raw material to finished product, which you can see is critical in terms of product innovation, shipping and profitability for companies.

Speaker 2

Turning to PravitR. We continue to make good progress integrating the technology capabilities into the IDMC platform and this should be done by the end of Q1 of 2024, Including the ability to use IPUs to consume Privatar capabilities. Next, our AI clear is embedded in all our solutions, Leveraging ML algorithms and NLP on metadata to drive intelligence and productivity, accessing 50,000 metadata aware connections, Now leveraging 36 terabytes of active metadata in the cloud and the platform processing over 71,000,000,000,000 mission critical cloud transactions As of September 30, growing 60% year over year. We continue to accelerate our progress In AI with ClearGPT, now available in private preview as a native IDMC service, we will utilize IPUs to drive usage and help democratize and simplify that data. In the beta, we have enabled data discovery and metadata exploration use cases.

Speaker 2

Over the next few months, we will enable data exploration, ELT pipeline creation and content generation. As for Clear Copilot, which is already available to our customers, we released Clear generated pipeline capability that allows customers to utilize AI to automap sources to master data management targets. Additionally, we added clear powered FinOps capabilities that help users set detailed runtime data management parameters based on desired performance and cost SLAs. Our commitment to delivering product differentiation And innovation has won us a recognition from industry analyst. Dresner Advisory Services ranked us as the number 1 in its 2023 Dresner Advisory Services Master Data Management Market study.

Speaker 2

For the 3rd consecutive year, Blue Research named us a champion in its market update for Master Data Management 2023 report. And for the 4th consecutive year, Constellation Research has named Informatica to its Constellation shortlist metadata management, data cataloging and data governance. As for our commitment to customer centricity and ensuring that customers get value from a market leading product in IDMC, That has also won us recognition from thought leaders. Our focus on our customers and their success was recognized by JV Power for delivering an outstanding customer service experience to customers globally under its certified assisted technical support program. This is the 3rd consecutive year Informatica earned the certification and met the current software benchmark for customer satisfaction.

Speaker 2

The TSIA or Technology and Services Industry Association named Informatica a winner and the 2023 innovation in customer portals That improved digital customer experience category. Turning to partners. In Q3, we furthered Co selling activities with our ecosystem partners and announced new partnerships with Oracle Cloud and Google Cloud above and beyond the many existing partnerships that we have. At Oracle Cloud World, we announced the launch of our North America point of delivery on Oracle Cloud, which is now live And the expansion of our cloud data governance capabilities with the autonomous database and Golden Gate. We're also a launch partner for Oracle Cloud's Marketplace Private Offer Program.

Speaker 2

At Google Next, we announced a new solution combining our SaaS MDM on Google Cloud with Google Cloud's customer data platform based on Google BigQuery. With our GSI partners, we've seen a significant increase in GSI partners doubling down with us and building The data and AI growth plans with IDMC as the standard solution. During the last quarter, we launched a joint strategic growth plan with LTI Mindtree To help customers accelerate cloud modernization and bring their data and AI to life across the 12,000 strong data and AI practice employees. We also became a launch partner for Randstad Digital, while building a data and AI practice consisting of informatic IDMC scape people. Capgemini launched an ESG solution built on IDMC to help customers define an ESG data strategy and build a data management hub.

Speaker 2

In August, towards the middle of the month, we launched Power Center Cloud Edition, our new cloud modernization program that Significantly lowers the migration time from on prem Power Center to IDMC. In addition, it allows Power Center users more flexibility to manage the migration of Individual workloads over time once the initial implementation of PowerCenter Cloud Edition is live. In the first quarter Off its availability and as I said it was middle of the quarter, we saw 1 third of our migration deals using this new technology. Going forward, we expect the vast majority of our migrations to use Power Center Cloud Edition, which has the potential to accelerate Power Center maintenance migrations in future periods. Now looking ahead, we continue to manage the business for long term durable growth.

Speaker 2

And let me give you some context around the restructure that we announced earlier today. Look, since 2016 Informatica has been on a product led Innovation focused transformation journey. We have steadily invested in supporting our new product led self managed and cloud businesses, Driving our transition to a subscription business model. In January of this year, we transitioned to a cloud only consumption driven strategy As part of a multiyear plan to drive cloud centric, balanced, profitable growth as we shift from on prem subscription to cloud native subscription. As a part of the strategy, we have been focused on simplifying our organization from hybrid to cloud, creating operational efficiencies, Synergies and improving our agility and speed of execution.

Speaker 2

In that context, today we announced plans to reduce our global workforce by Approximately 10% or 5 45 rolls and reduce our global real estate footprint. Mike will share with you the financial details later in the call. We made this decision as a part of the final step in our cloud only consumption driven transformation to streamline our cost structure. The increased focus and simplicity of our cloud only strategy will enable us to maintain our sales capacity, while delivering continued Best in class product innovation and customer satisfaction as an AI powered cloud company with strong cloud subscription ARR growth. You see the strong momentum in our business execution reflected throughout the year and in Q3 results that we reported today.

Speaker 2

We executed very strongly against all top line and bottom line metrics. We continue to see the same momentum going into Q4. We are confident in delivering strong growth fueled by AI Tailwinds to data management use cases, new and expanding enterprise customer relationships, Strong cloud led retention rates and our economies of scale. We plan to discuss more at our Investor Day on December 5. In close, I'm proud of our teams, thankful and grateful to our customers and partners for continuing to help drive our cloud focused growth.

Speaker 2

With that,

Speaker 3

Let me now hand the call over to Mike. Mike, please take it away. Thank you, Amit, and good afternoon, everyone. Q3 was another solid financial quarter across the board with key growth and profitability metrics exceeding our expectations. As I did last quarter, I'll begin the review of our Q3 results by reminding everyone how to best understand Informatica's ARR and GAAP revenue.

Speaker 3

Our ARR and revenue fall into 3 basic categories: Cloud subscriptions, which we have guided to ARR growth of 35% for the full year self managed subscriptions, which we are no longer actively selling In which we have guided to decline year over year in FY2023 and maintenance from perpetual licenses sold in the past, which we also expect to decline going forward. We also earn a relatively small amount of revenue from implementation and education services, which we expect to decline slightly this year As our professional services partners perform more of that work for our customers, this service revenue is not counted as ARR. With that in mind, I'll start with our total ARR for the quarter, which was $1,580,000,000 an increase of 7% over the prior year. This was driven by new cloud workloads and steady renewal rates. We added $108,000,000 in net new total ARR versus the prior year.

Speaker 3

Foreign exchange negatively impacted total ARR by approximately $1,400,000 in line with expectations when we set our guidance in August. Turning now to the 3 components of Informatica's ARR. Cloud subscription ARR was $550,000,000 a 37% increase year over year, Which was $10,000,000 above the midpoint of our August guidance. Cloud subscription ARR represents 35% of our total ARR, up from 27% a year ago. New workloads and strong renewal rates drove cloud subscription net new ARR of $149,000,000 year over year $37,000,000 quarter over quarter.

Speaker 3

Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansion of existing cloud engagements With the remaining approximately 15% from on premise customer migrations. Our cloud subscription net retention rate was 118%, Up 3 percentage points year over year and up 2 percentage points versus last quarter. Self managed subscription ARR declined slightly in the quarter as to $528,000,000 This was flat sequentially and down 2% year over year, in line with expectations. We expect self managed subscription ARR to continue declining next year, yielding a negative year over year growth rate. This decline is the direct and intentional result of our cloud only consumption driven strategy.

Speaker 3

Subscription ARR, which is simply the sum of cloud ARR and self managed Grew by 15% year over year to approximately $1,080,000,000 which was more than $22,000,000 above the midpoint of our August guidance. Subscription ARR now represents over 68% of total ARR, up from 64% a year ago. Foreign exchange negatively impacted by approximately $1,500,000 again in line with expectations when we set our guidance in August. The 3rd component of total ARR is maintenance on perpetual licenses, which represents 32% of total ARR. Maintenance ARR was down 6% year over year to $499,000,000 in line with expectations.

Speaker 3

As a reminder, we no longer sell a meaningful amount of perpetual licenses. As a result, we expect maintenance to continue declining gradually at a fairly constant rate. Through the Q3 of this year, we have migrated 5% of our legacy maintenance base to cloud subscription, up from 4.5% last quarter with an average 2:one ARR uplift ratio. In total, these three components summed to 7% total ARR growth for the quarter. Cloud subscription growth of 37% drove this increase, Offset by intentional and expected gradual declines of self managed subscription and maintenance.

Speaker 3

This financial trajectory of high cloud growth combined with the gradual decline of self managed and maintenance is the direct result of our cloud only consumption driven strategy. We expect these trends to continue in the Q4 and beyond. We saw good growth in our average subscription ARR per customer in the Q3, growing to over $283,000 a 13% increase year over year. We have 3,799 active subscription customers, an increase of 78 subscription ARR customers year over year. Now I'd like to review our revenue results for the Q3.

Speaker 3

GAAP total revenues were $409,000,000 an increase of 10% year over year. This exceeded the midpoint of our August guidance range by $9,000,000 due to a slower than expected decline in maintenance revenue and strong renewals. Revenue from our Privitar acquisition was not material in the quarter. Foreign exchange positively impacted total revenues by approximately 5,000,000 on a year over year basis. The accounting impact of Informatica's shift to cloud subscription sales and away from self managed on prem sales Was a headwind to revenue again this quarter.

Speaker 3

If our cloud versus self managed new bookings mix was the same this quarter as it was in Q3 last year, Total revenues would have been approximately $19,000,000 higher than we reported, increasing our year over year revenue growth rate to approximately 15%. Subscription revenue increased 22% year over year to $262,000,000 representing 64% of total revenue compared to 58% a year ago. Our quarterly subscription renewal rate was approximately 94%, flat year over year. Maintenance and professional services revenues were 147,000,000 Representing 36% of total revenue in Q3, in line with expectations, standalone maintenance revenue represented 30% of total revenue for the quarter. Our maintenance renewal rate in the quarter was 95%, also in line with prior periods.

Speaker 3

Implementation, consulting and education revenues Comprise the remainder of this category, down $7,000,000 year over year, representing 5% of total revenue. The decline in services revenue is due primarily to the lower Catch rate of Informatica implementation services to new IDMC sales. Our implementation partners are taking on more and more of that work, Bring us to focus on high value software and consulting sales. Turning to the geographic distribution of our business. U.

Speaker 3

S. Revenues grew 8% year over year to 2 $63,000,000 representing 64 percent of total revenue, while international revenue grew 14% year over year to 145,000,000 Using exchange rates from Q3 last year, international revenue would have been approximately $5,000,000 lower in the quarter, Representing international revenue growth of 10% year over year. Consumption based IPUs are a frictionless way to access the IDMC platform and are a core part of our Approximately 60% of 3rd corner cloud new bookings were IPU based deals. IPUs now represent 45 percent of total cloud subscription ARR, up 2 percentage points sequentially. The remainder of our Q3 cloud bookings were Also sold under multi year consumption based pricing, such as customer or supplier records for our MDM products.

Speaker 3

Now I'd like to move on to our profitability metrics. Please note that I will discuss non GAAP results unless otherwise stated. In Q3, our gross margin was 82%, up 2 percentage points year over year even as our software sales mix shifts to the cloud. Operating expenses were consistent with expectations. Operating income was approximately $128,000,000 for the Growing 53% year over year and exceeding the midpoint of our August guidance range by $13,000,000 Operating margin was 31.3%, An 8.8 percentage point improvement from 22.5 percent a year ago.

Speaker 3

Adjusted EBITDA was $132,000,000 and net income was 81,000,000 Net income per diluted share was $0.27 based on approximately 297,000,000 outstanding diluted shares. Basic share count was approximately 289,000,000 shares. Q3 adjusted unlevered free cash flow after tax was 96,000,000 Better than expectation is due to higher operating income performance and collections and lower cash taxes. Adjusted unlevered free cash flow after tax Margin was 23.5%. Cash paid per interest in the quarter was $38,000,000 Keep in mind that our free cash flow from quarter to quarter can be quite volatile based on working capital fluctuations and other non linear cash items such as tax payments.

Speaker 3

We ended the 3rd quarter in a strong cash position with Cash plus short term investments of $869,000,000 total debt outstanding was $1,850,000,000 and net debt was 978,000,000 Our adjusted EBITDA over the 12 months through the end of the Q3 was $431,000,000 yielding a net leverage ratio of 2.3 times. Stepping back and looking at our year to date results, we are very pleased with our execution so far in fiscal 2023 and we feel like we have good momentum going into Q4. As Amit discussed a few minutes ago, today we announced a restructuring plan that will reduce our global workforce by about 10% and shrink our global real estate footprint. As a result, we expect to include non recurring incur non recurring restructuring charges of approximately $35,000,000 to 45,000,000 With the majority incurred by the end of the Q1 of 2024. These charges will include cash expenditures for employee transitions, Notice period and severance payments, employee benefits, real estate related charges and other costs.

Speaker 3

We estimate the cost savings benefit of restructuring actions will be approximately $84,000,000 on a GAAP basis or approximately $70,000,000 on a non GAAP basis in fiscal 2024, with only a small amount of savings this fiscal year. Importantly, this restructuring does not negatively impact our full year 2023 guidance. Turning now to guidance. In Q4, we expect the same trends we have been seeing so far this year to continue. Namely, our new sales will be predominate cloud And we expect our cloud ARR to grow by 35% year over year.

Speaker 3

And because we are no longer selling a significant amount of self managed subscriptions or perpetual licenses, Self managed subscription ARR and maintenance ARR is expected to decline on both a sequential and year over year basis. We delivered better than expected results again in Q3 and had good momentum going into Q4. That being said, Q4 is our biggest quarter of the year and Still face a considerable amount of uncertainty in the macro environment. Therefore, we believe it is prudent to reaffirm our previously issued full year guidance for revenue and ARR. With respect to our non GAAP operating income and all under free cash flow, however, we are raising our full year guidance.

Speaker 3

We now expect non GAAP Operating income to be in the range of $430,000,000 to $450,000,000 representing approximately a 25% year over year increase at the midpoint. We now expect adjusted unlevered free cash flow after tax to be in the range of $410,000,000 to $430,000,000 representing approximately a 40 At this point in the year, our Q4 guidance is simply a derivative of our full year guidance, so I'll just Briefly give you the highlights. We expect GAAP total revenue will be in the range of $420,000,000 to $440,000,000 Representing approximately 8% year over year growth at the midpoint of the range, we expect subscription ARR to be in the range of $1,098,000,000 to $1,118,000,000 representing approximately 11% year over year growth at the midpoint of the range. We expect cloud subscription ARR to be in the range of $604,000,000 to $614,000,000 representing approximately 35% year over year growth at the midpoint. And we expect non GAAP operating income to be in the range of $130,000,000 to $150,000,000 representing approximately 23% year over year growth at the midpoint.

Speaker 3

For modeling purposes, I'd like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after tax for the 4th quarter to be in the range of $114,000,000 to $134,000,000 2nd, we estimate cash paid for interest will be approximately $40,000,000 in the 4th quarter And for the full year, the estimated cash paid for interest will be approximately R149. 3rd, with respect to income taxes, our Q3 non GAAP tax It was 23% and we expect that rate to continue for the full year of 2023. We estimate full year 2023 cash taxes to be approximately 80,000,000 On a GAAP basis, we expect the significant volatility of our income tax provision and rate to continue. For the full year 2023, we expect a GAAP Tax provision in line with our cash taxes.

Speaker 3

And lastly, our share count assumptions for the Q4 of 2023. We expect basic weighted average shares outstanding to be approximately to be approximately 292,000,000 shares and diluted weighted average shares outstanding to be approximately 297,000,000 shares. For the full year 2023, we expect basic weighted average shares outstanding to be approximately 288,000,000 and diluted weighted average Shares outstanding to be approximately 293,000,000 Yesterday, our Board of Directors approved a new share purchase authorization that enables us to buy up $200,000,000 of our Class A common stock through privately negotiated transactions with individual holders or in

Speaker 2

the open market. A committee

Speaker 3

of the Board will determine the timing, amount and terms of any repurchase. While we do not currently have any specific plans to purchase shares, This authorization gives us the opportunity to move quickly if and when opportunities arise. And finally, at our upcoming Investor Day on Tuesday, December 5, We intend to provide a deeper understanding of Informatica's business strategy, product innovation, growth drivers and financial objectives. If you're interested in attending in person, please contact Victoria. Operator, you can now open the line for questions.

Speaker 2

Thank you.

Operator

The question today comes from Alex Zukin with Wolfe Research. Your line is open.

Speaker 4

Hey guys, thanks for taking the question and congrats on a solid quarter. I guess maybe just the first one, When you you mentioned the macro conditions not really changing in the quarter. Can you maybe talk to what you're seeing the combination of impacts? We've heard obviously from all the hyperscalers at this point, some of them talk about attenuating optimization trends And solid AI workloads as being a driver for consumption. Can you maybe just talk about What you're seeing out there in the market, some of these larger projects that you're attaching to, because it does feel like you had some meaningful improvement And some of your consumption dynamics and cloud NRR actually went up.

Speaker 4

So I'm curious if you can tie that into Any comment around stabilizing or bottoming trends there?

Speaker 2

So hey, Alex, thanks for the question. Hope you're doing well. So look, I think first is you have to really realize that how unique we are. When you look at when you ask the question of hyperscalers, we Basically, the Switzerland of data. So when customers are looking to whether it's an Azure or an AWS or a GCP or in some cases a warehouse or a lake, we Solve all of those use cases and map the data management and governance use cases.

Speaker 2

So we kind of have a inbuilt Situation of we have basically sit in the middle of multiple different platforms. So when different demands can move from 1 to another, It doesn't really impact us one to 1. So that's one. 2nd is, look, we've always been focused on mission critical workloads, And we've never shared what I've always said, sometimes nice to have workloads that churn the fastest in a bad economy and I think that has served us well. So when customers buy us, they're always buying us with the idea that I am in it for the long haul.

Speaker 2

I mean, our churn is Very minimal on these NICE cloud workloads. And that strategy has always worked very well for us. Of course, having the best products and a single platform, It also reduces the risk for a customer to go stitch together multiple products also helps them because they don't have to spend more money and create more risk in stitching things together. And then last but not least, like what I'm hearing from customers a lot is, look, customers are optimizing their spend, data tied to AI is definitely amongst the top 3, not the top 2 and all of those things are helping us. And lastly, like I said, Our partnerships, we've been maniacally focused on that.

Speaker 2

We talked about the hyperscale, but the GSI partnerships with them building practices on us, building reference architectures on us, All of those things creates a kind of snowball effect or a tailwind effect as you may like to think about it, Alex.

Speaker 4

Perfect. And then maybe just as a follow-up, you mentioned the restructuring plan, Do you just need because of the consumption dynamics that you're seeing in your customer base, do you just need less people To facilitate that, it's more product led growth and self-service. And then maybe just an update on Our comment on Ithaca and the share repurchase authorization as well.

Speaker 2

I think the first and Mike, please cover Ithaca well. So yes and more to the first question that you said. I think look I said that even beginning of the year that as we transition to the final version of our Transformation Cloud only, There's a lot of hybrid duplicative things, parallel things that we were we had that there was just no way around it. We took one round of simplification earlier this year And certain other things were there and I've been saying that in every earnings call that there is more operating leverage that we feel we will be.

Speaker 3

And I think those are all the

Speaker 2

things that we're doing that are not necessarily we need as we think about the business. It's a lot simpler, for all the things you said and many other things. We don't need duplicate To maintain or to do, in fact, it also, as I said, makes the business a lot more nimble and fast because we just don't need Can people to go structure a deal as an example, if I may use that? And of course, in a lot of cases, cloud makes it a lot simpler and easier for customers to engage and Buy from us or even use from us. All of those things play into that.

Speaker 2

And I think I'll touch on one thing that maybe you didn't ask is that timing for us was a very important critical decision maker. Look, we thought a lot about whether it's January or now, we start our new fiscal year in January. We knew where we were And we basically wanted to have a fast start to next year. We see good traction against IDMC. So we thought, look, we're not there's a lot of quota carrying capacity.

Speaker 2

In fact, we're not touching any of that stuff. So we feel good about Q4 as you heard from our guide. We wanted to get this thing done so we can plan and have the right people in all the right roles. So we not only Finish well, but have

Speaker 3

a fast track to 2024. Mike, you can cover Ithaca, please. Sure. Hi, Alex. Let me see if I can unpack the Ithaca and buyback authorization announcements.

Speaker 3

I'll start with Ithaca. Ithaca LP was an investment vehicle that was established in 2015 in conjunction with the Informatica go private transaction. At that time, there was a group of large institutional and Ithaca was established to hold the shares of those strategic and institutional investors, and that vehicle has been controlled in terms of the votes And decisions about disposition or distribution of the shares by Premera since 2015. Ithaca was designed at the outset to terminate on the 2 year anniversary of the IPO of Informatica. That IPO, as you know, was in October of 2021, so that 2 year anniversary is upon us.

Speaker 3

In the months leading up to that planned termination, the holders of 51,400,000 of the 60,000,000 shares in the Ithaca vehicle Chose to extend the life of Ethoca for at least another year and leave it subject to the governance provisions that have been in place since 2015. The holders of 8,600,000 shares, that's 4 holders, have chosen to take the distribution of their shares and they will once that distribution happens Have control of the votes and they'll be making individual decisions about any dispositions of those shares going forward. We expect that distribution to take place sometime in the next 2 to 5 business days. Now there's 3 important pieces of context around the Ithaca distribution. First of all, The 4 entities that are receiving shares are all large institutions or strategic investors that know Informatica well and they have experience in investing in public Secondly, we have no indication from any of these holders that they have an intention to sell their shares in the near term.

Speaker 3

And then 3rd, the buyback authorization. So let me talk about that. The buyback authorization is not By any means, a signal that we're changing our capital allocation policy. Informatica continues to prioritize investment growth, Deleveraging on a net basis and strategic and tactical M and A as uses for our balance sheet cash and our free cash flow. So why are we doing the buyback?

Speaker 3

Well, the buyback authorization gives us the flexibility to engage with any potential sellers of large blocks of shares And to negotiate private off market transaction to purchase those shares if it's available on terms that are attractive to Informatica. We don't intend, although we do have the flexibility to be buying market shares in the open market, rather we're targeting the opportunity to buy large blocks of shares in private transactions. So there's no change in capital allocation policies. There's no attention to reduce our public float. Rather, it's the ability to be flexible and nimble Long explanation.

Speaker 3

Let me see if that answered your question and you have any follow ups, Alex.

Speaker 4

It sounds like the 2 are a bit linked, if I'm reading the commentary correctly.

Speaker 3

Yes, you are reading it correctly. Look, we recognize that we have relatively low liquidity And that any large sales in a short period of time can dislocate our stock for purely technical reasons. The buyback gives us the ability, if Large sellers are so willing to negotiate off market private acquisitions of those shares if they're on mutually favorable terms. They're linked in that regard.

Speaker 4

Super helpful. I appreciate it guys. Thanks again.

Operator

Our next question comes from Matt Hedberg with RBC. Your line is open.

Speaker 3

Great. Thanks for taking my question guys and congrats from me as well on the And maybe following up on Alex's question, I

Speaker 2

think what stood out to

Speaker 3

us in addition to cloud NRR accelerating sequentially, but also It looked like large customer growth also accelerated on a sequential basis, which is great to see. I guess I'm kind of curious, Given the comments on macro and demand that you talked about, curious on the sustainability or durability of elevated cloud NRR. And I mean, is that a trend given this Increasing push to cloud that could perhaps continue into next year?

Speaker 2

Matt, thanks for the question. So Look, we don't guide to NRR, we've said that many times. And NRR is a number that can go up and down over the course of quarters in a year. We obviously look at it very carefully, thoughtfully in the context of a year. I've said many times that we look at it and we care a lot about it, but we don't 100% solve for it because when we acquire a new customer, That customer is zero value add to NRR, but incredibly important for us because we know forever that when we land a customer, given the mission critical work So that's statement number 1.

Speaker 2

But to your question on large customers, look, We solve multi use case problems through one platform that has multiple products and that serves large enterprises always very well. 2nd is large enterprises inherently have complexity. They turn to us. Large enterprises also are gravitating towards they don't want to build a pancake To solve and build a new modern data architecture. They rather have one platform and a few ancillary things around it.

Speaker 2

All of those things are benefiting us. And then last but not the least, like we've talked about migration. I mean, a good part of migration also comes from large customers that are trying to move to cloud now, taking whole power center to our cloud. All of those things are driving to the large enterprise or larger customers gravitating towards us with demand.

Speaker 3

Got it. That's super helpful. I'm curious, was there any sign of any Vertical strength that you call out, perhaps federal government or any other thing that was noteworthy on the results?

Speaker 2

Not really, we didn't. I mean, Q3, as you all know, is the fiscal Q4 of federal government. So that's naturally is built like that From their seasonality point of view, so there's nothing special to call out because that's always the case every year. No, we didn't call out any particular vertical that had An extraordinary effect on our numbers.

Speaker 3

Great. Thanks a lot, guys.

Operator

We now turn to Brad Zelnick with Deutsche Bank. Your line is

Speaker 5

open. Great.

Speaker 6

Thanks so much, and good to see the solid results and the profitability for the full year. Amit, I wanted to hone in on partnerships. Informatica has always been a partner of choice for the GSIs And other technology partners, but you really seem to be making an extra push here. And I'd be curious, actually specific to Oracle, I took note of that relationship that you called out, that you guys announced around their cloud world. And there's just so much enterprise data that sits in Oracle Database.

Speaker 6

I'd be curious, what's the initial reception to what you've announced? What kind of alignment is there in the field? Is this something that will extend as well to the relationship that they now have with Microsoft Azure?

Speaker 2

All of the above, Brad. First of all, there is a question. Look, when we think of our business, we think long term. I mean, we're not thinking of the next quarter, obviously, as you can imagine. Oracle is a Pretty established large scale infrastructure company.

Speaker 2

You know that the databases or the data warehouse has tremendous installed base That a lot of that installed base was tied to our Power Center customer also. And then they are actively going after new workloads that over a period of time they will also be aggressively moving towards their cloud and obviously their partnership Azure, which by the way is a great partner of us. So our belief is that by the way we are the only data management partner of choice with OCI. There's no one else but us. They are very well enterprise centric like we are.

Speaker 2

So there's active work that has been going on with our field teams, product teams and we're pretty bullish about what this will bear As we think about 2024 and beyond, a lot of work has to happen in the early days, and I think the team has done a lot of that work. You've seen they've come to our conference. We've got to their To talk about it,

Speaker 3

I'm pretty excited about that. And I think as

Speaker 2

you said, with Azure and OCI, Azure being a great partner, that creates an even easier way to get in front of our It reduces a lot of friction. So I'm pretty bullish about it.

Speaker 6

It's great to hear. Maybe if I could just follow-up On the acceleration that you saw on now 5% of the legacy base, having made the migration Relative to what was just 4.5% last quarter, any change in terms of incentives, carrot versus Stick or big customer cohort that came through or anything that should inform what we might think of In the quarters to come, as to how that might progress?

Speaker 2

On migrations, I think we've collected, you all of us have talked about it much. And I'll say it in full candor, it's all of those things that I'm extremely happy about. But at the same time, we look at that with, I use this word with my own team, constructive dissatisfaction, Because there's so much more to do over there and it's a captive base and we want to get them to the cloud sooner than later. And I think we've done tremendous amount of work. I always said, look, We wanted to make sure we capture the new workloads and we get to the migration.

Speaker 2

We came to a point where we actively worked in first Solving for getting the customer pain points very clear to us, getting it getting in behind the partners, creating all the migration utilities. The last mile was we learned a lot from our customers in doing Around 2 of Version 2 of the product. PowerCenter Cloud Edition that we launched in August came out and by the way, it was adopted very, very quickly. Think I shared a third of the deals we did in Q3 with Power Center Cloud Edition. Given that the product GA ed middle of the quarter and we expect the lion's share of this quarter to be that.

Speaker 2

I look at that as definitely one that absolutely will bend the curve and increase the slope of the curve as you're talking about next year. And all the work that we have done with partners and other things is naturally going to help us do that. So not lost on us That's an area where we're absolutely going to punch harder and expect more attention from us in that area as we think about next year.

Speaker 6

Today's opportunity at 2 to 1. Gentlemen, thank you so much, Amit. Thank you, Mike, and Victoria as well. Nice stuff.

Speaker 1

Next question please.

Operator

Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Speaker 3

Operator, is the line still open?

Speaker 5

Hi. This is Beth. Hello? Can you hear me? This is Stefan on for Andy.

Speaker 5

Can you hear me?

Operator

Ladies and gentlemen, I think we've lost connection with our speakers. Thank you Okay, ladies and gentlemen, we have our speakers back. Andrew, please continue with your question.

Speaker 5

Can you hear me okay? Yes.

Speaker 3

Now we can.

Speaker 5

Okay, great. Thanks for taking my question and congratulations on the nice results. Your cloud ARR growth was solid and similar to last quarter. Is there any color you can provide As it relates to trends going into the next year?

Speaker 2

Sure. I think philosophically, I think put the trend in 2 categories. Things that I'll put them in AI and non AI Because I think no call would be completed if you don't touch AI. Look, there is a lot of work that's happening in the world of data That is not necessarily tied to AI. Customers are still wanting to understand their entire business, whether it's Customer 360 use case to do churn, new customer acquisition, supply chain, the backend efficiencies, data governance.

Speaker 2

There is a lot of work that's happening at data, hence data management becomes incredibly important. And the trend over there that we see is that while that demand is very strong, That customers have after many years of experimenting with multiple things have also come to the point that if they have to build a modern data architecture, We cannot stitch it together with 50, 60 unique little, little, little small tools over there. The cost and the risk is very high and that's where we have Best of Breathe and our Blackstone Solve the case for them. So we see that non AI, I put purposely non AI. There's still a lot of work going on across the globe.

Speaker 2

If you go talk to a bank in the middle of nowhere, they're not necessarily running to AI tomorrow, but they still have a lot of work to do to run their business. Then we come to AI where basically tremendous amount of interest I think as we all have learned that it's the fastest slope curve right now. Everybody wants to do something. This year we had a lot of our customers figure out what use cases they want to go into. In that case, we will see the first few use cases get into test and then production next year.

Speaker 2

That's where the GSIs are working with a lot of our customers with us. And in that case, good quality data. Governance of data becomes paramount. Every enterprise customer is worried about governance of data in the context of Gen AI. We are seeing that.

Speaker 2

Now that is basically we see that walking into nature as well. So when I look at the business, those are all the things that are happening with Simplification of the tech stack and not having a 1,000 flowers bloom, all of those things are the things that we are seeing to our benefit.

Speaker 5

Great. Thank you for that. And then just one more. Is there any color that you could provide on customer interest you're seeing so far in both Pravitara and Clear GPT and Private Preview and how is that interest tracking against your internal expectations?

Speaker 2

Very good. So Pivotar, by the way, like I said, in fact, Gen AI will be even more of a use case for it. Data our customers, they want to democratize data And the leverage like our governance and our data marketplace capabilities or even when they want to take MDM and operationalize that and democratize it to a bunch of users, They need data access management. You can't have any data going to anybody. You cannot have the Wild West.

Speaker 2

So data access management, which is basically think of it just say In the data stack, it's the identity and access management use case over here.

Speaker 5

It's not the same, but

Speaker 2

I'm just kind of driving an analogy. Very important And especially for the large customers, regulated industries, it is significantly important. So we saw that and hence we accelerated our roadmap by buying Privatar, Pretty excited about it. I think I've met a bunch of customers who've all been very complementary of what we have and I have as I said, our goal has been to get that on the IDMC platform, so it can be The cloud native service with IPOs and I expect that to obviously naturally be scaling from there and be attached to those use cases first. In terms of cloud GPT, look, I think hopefully everybody first of all knows that we launched Clear in 2018.

Speaker 2

We've been driving a lot of AI workloads, AI productivity within our products, embedded in our products for the last many years. We've taken the chat interface and put it on top of IDMC with Care's GPT. Care Copilot is already GA. We put it in the hands of our customers, private preview, give us feedback, play with it. By the way, our customers, including our partners also, the GSI partners, their practices are Giving us feedback on that one.

Speaker 2

Very good early reception. We're also learning from customers where they get productivity, where they want to take it. Get tons of feature requests and all that stuff. So we're loving it right now. Expect to hear more from us and that will be the one of those things as we come towards Informatica world next year.

Speaker 2

We're going to have a lion's share of attention at the conference.

Speaker 5

Great. Thank you so much. Absolutely.

Operator

We now turn to Patrick Colville with Scotiabank. Your line is open.

Speaker 7

Hey Amit, Michael, Victoria, great to hear from you guys. So I mean when I look at numbers, cloud AR growth has Barely decelerated at all. It's been incredibly impressive what you guys have done, especially in the face of kind of tight IT budgets And public cloud vendors, their growth momentum slowing. So I guess if IT spending is better next year than it was this year And AI momentum continues. I mean is there a world where we could expect Informatica's cloud ARR growth to like reaccelerate?

Speaker 2

Patrick, great question. Look, you know what, I will just replay that back to my exec team also. That's what I keep telling them, I want more. So we all want that of course, right? I think look, in all fairness right now we are being we're looking at We've been very resilient for a reason, right?

Speaker 2

And I've always said that we focus on critical workloads, mission critical workloads for enterprise customers. Hence, we We'll never go belly up or belly down. So that has served us very well, resilient customers and we care I keep repeating customer side. It matters a lot for enterprise customers. You don't just throw a product over there and then let 1,000 flowers bloom and then the world blows up, you're not there.

Speaker 2

We don't do that. So innovation and customer centricity is reason I repeat those all the time because it matters to those customers. Well, we come to Investor Day and share a lot about next year, so I can't do that right now. But we always weigh everything on the positive side of the ledger and all the things that can be on the negative side of the ledger and think through it. Investor Day will give you a lot more color about next year and the medium term as well.

Speaker 7

Okay. Thank you. And then I guess just one more on the restructuring. Are there specific areas that you can share that were I mean, is it more is it kind of deemphasizing, for example, the self managed domain within Informatica, both in terms of go to And product dev and emphasizing cloud or is there any kind of way you can double click as to which areas are being, I guess, Be emphasized and then as a result maybe with shares are being more emphasized.

Speaker 2

So all of the above Patrick, all of the above including things like that look For me, this has been as you think about the company and if and I almost thought about it, if you were a cloud only company and started today at this scale, what would you be? We also looked at that as to where do we simplify our organization structures, because I firmly believe in certain areas we basically were Probably not as nimble and as fast paced as I would like it to be. So we looked at those things, where are the right investments, Where are the investments that we don't really need? And where can we also accelerate decision making, execution? I said that a couple of times even internally to my own teams.

Speaker 2

If we were I'll give you an example, if there are 5 people or 10 people to make a decision on a deal, why do we we need to slow down from a custom point of view. So all of those things we looked at end to end and came to these decisions, difficult decisions that we just announced today.

Speaker 7

All right. Thank you so much for taking my questions.

Operator

Our next question comes from Jaden Patel with Pichai Laboura. Your line is open.

Speaker 3

Hey guys, thanks for taking the question. My question is, are you starting to see higher expansion rates among IPU based customers and what should we expect looking forward?

Speaker 2

So, Benjamin, the answer Yes, we obviously we've talked about IPOs quite a bit and we care a lot about IPO expansion, all of those things. We definitely have a team that focuses on IPO expansion and I think that team has done an incredible job and we saw Pretty good IPO expansion. So that happened of course, which obviously naturally flows into NRR that we shared. So yes, the answer to that is yes. And we're both focused on IPO adoption and expansion.

Speaker 2

And both of them are The maniacal focuses and the expansion part has worked out well and we'll continue to be heavily invested in that. And by the way, one of the things NRR, I think Got it. I think that our NRR, we stated one way, I think we are By definition, a bit of a conservative company, I guess. But if looked at the other way that other companies also report, it would be going to what 124? 124.

Speaker 2

124. So 6 points higher. So cloud NRR, I mean cloud NRR, the 118 that we reported could be equivalent to 124 like bunch of other companies also report. So we feel very good about

Speaker 3

Got it. Thank you. And then as a follow-up, can you help us understand the general puts and takes around 2024 revenue growth? Thanks.

Speaker 2

I think that'll be an incredibly good discussion at the Investor Day, Pajal. 4 weeks, right? I guess, I'll be 4 weeks a few days away. I'd love to share that with you and I think you will see you will get a ton of detail from us as to how we think about it. I think I'll let Mike cover that, but 4 weeks and we'll be talking about it.

Speaker 3

But in general though, as you've probably heard me say before, it's More or less a 3 line Excel spreadsheet. It's how fast is cloud going to grow and how fast our self managed and maintenance going to decline. There's a 4 factor which is how much of that self managed decline and maintenance decline is actually migration from those 2 buckets Into the cloud bucket, but it's a pretty simple model. You can see historically how maintenance has declined. We think that's going to continue.

Speaker 3

Self managed is starting to decline as we deemphasize selling self managed at the beginning of this year. We'll be able to give you some Better guidance about what to expect in that bucket when we meet you in December. And then we have good momentum on cloud growth. And again, we'll give you more sets for our expectation in about a month. Got it.

Speaker 3

Thanks for taking the questions.

Operator

Our next question comes from Fred Haivmayer with Macquarie. Your line is open.

Speaker 8

Hi. Thank you very much. Congratulations also on cloud growth in the quarter. I think it's one of those things that continues to be impressive to see within I want to focus on a topic I hope is not a little too tired at least for me at the moment, but just generative AI related use cases and more specifically efficiencies perhaps that you can find within your own business and within your clients. We've seen a lot of use cases around generative AI for data labeling and more efficient perhaps like data transformation capabilities.

Speaker 8

So I'm curious Just big picture here, how might you see your strategy around utilization of generative AI evolve? And do you think that there are additional areas you can gain efficiencies

Speaker 2

Great question Fred. And I think I'll put 3 categories. 1 is Informatica for AI use cases, which is like forget even if you did not have Clear, to do AI, customers need to have holistic data, Good quality data, govern their data, things like that and I can go on and on and data labeling is one of those examples. So that's called Informatica for AI. So if companies want to do AI, they need data management, they need IDMC and we are part of that workflow.

Speaker 2

2nd is, AI within Informatica, which is clear and how And more automation for their customers so they can do more with less and they can do things that they could never do, which so that 2nd benefit that we get from so because our products become a lot more valuable for them. 3rd is, I think where you probably were also asking How we use Jeneye internally within the company for a variety of our own running the company, right? And so we are doing all three. All three, we are participating in the first two in the context of driving our business and the third one is basically making ourselves a lot more Martered, nimbler, productive, internally as a company. So all of those 3 are focused on, Brett.

Speaker 5

Thank you very much.

Operator

Our next question comes from Koji Ikeda with Bank of America. Your line is open.

Speaker 9

Hey guys, thanks for taking the question. Just one for me here. I wanted to ask you a question on IPUs and Curious to hear what the overall end market's perception of the IPU pricing model shaping up today, now that it's been out for some time. I mean, you did mention in your prepared remarks, 60% of new cloud bookings is coming from IPO, so that's a pretty good indication, but maybe some Qualitative commentary could be helpful. And then also, you mentioned that 15% of cloud bookings is coming from transitions from power centers.

Speaker 9

So Do you believe that the IPU unit could have a potential to accelerate the migration of legacy power center users out there? Thanks guys.

Speaker 2

The answer to the second part is yes. So to the first part first, by the way, like you said, all new bookings are consumption, IPU and non IPU. The non IPU is MDM which is records based. Now we don't have it on IPU because customers like to buy it by records. So and customers Love it because look what's not to like, it's dramatically simple and customers have to just figure out what they want to do and they can start small and grow big or Like I said, because we solve mission critical workloads, typically customers want to buy a good price bargain, so they want to invest in the future.

Speaker 2

So I think customers have I have not met one customer who has not liked it. If anything, our job is to keep telling customers because sometimes they buy, they forget that they have the IP to do anything. So we keep driving that Rashaan. But I think right now, I think there are 3 words that our customer base has learned and our goal is to make sure that they all memorize it, IDMC, Clear, IPU. These are 3 words that we want everybody in the world to learn.

Speaker 2

So pretty good about it. And I think, yes, migration, obviously, they get IPU, so they can also start a

Operator

Our final question today comes from Howard Manna with Guggenheim. Your line is open.

Speaker 10

Great. Thank you for taking the question. I wanted to ask about the expense side or I should say the profit side. I was surprised to see gross margin tick up sequentially because I thought given the higher cloud mix that it would decline. So can you I guess for Mike, Can you comment on, I guess, on gross margin?

Speaker 10

And also as you and I don't want to steal away any thunder from the Analyst Day, but On the expense side, as you deemphasize investments in self managed and I guess in power center too, although Pretty sure you've already deemphasized a lot of R and D investments there. How should we think about margins, I guess, both on gross margin And at the OpEx line as time plays out. Thank you.

Speaker 3

Thanks for the question, Howard. So I'll start with gross margin. You should continue to expect some volatility in our gross margin from quarter to quarter. It's for a couple of reasons this quarter. One is, Despite what I'd like to happen, our cloud COGS don't grow completely linearly with cloud ARR revenue.

Speaker 3

We Put up new pods in certain geographies and that creates a lumpy expense in the particular quarter when we spool it up. And then as that pod gets filled up, The marginal cost which is lower than the average cost follows behind. And so in earlier quarters this year, we saw more of that lumpy one And pods spool up costs than we did in Q4 where we benefited from new revenue for the most part going into existing pods and therefore had lower Marshall cost per dollar revenue. The other thing going on in our gross margin this quarter and it has been throughout the year, which is a reduction in the amount of professional services that we're doing as a And professional services, I'm sure you know, are a low gross margin business. So If we lose and again lose is not necessarily a bad thing because it means our partners are doing it for us allowing us to focus on software.

Speaker 3

If we lose a dollar of professional services revenue, we also lose $0.80 of COGS or some number in that So those are the tailwinds to our gross margin this quarter. Our target as we've said to maintain 80% plus gross margins going forward as far as the eye can see as we continue our transition, And we'll talk more about that at Investor Day. Now with respect to overall operating expenses, I guess all I can point you to now is the Savings that we've estimated in 2024 on a GAAP and non GAAP basis that will result from the restructuring. Those savings are spread across The various categories of our spend, our non COGS spend, of course, and you can add those dollar for dollar to your model today In terms of exactly what part of the business they'll hit, we'll give you more of that in December.

Speaker 10

Okay, fair enough. Thank you, Mike.

Operator

This concludes our Q and A. I'll now hand back to the management team for closing remarks.

Speaker 2

Well, thank you. Well, look, I appreciate you all joining today. As in closure, I'd like to just say that as we continue accelerating our Innovation led cloud only consumption driven transformation. I couldn't be proud of our success. Couldn't be prouder rather.

Speaker 2

Transformations are not easy And we've been very thoughtful in our actions while delivering cloud growth, operating leverage and profitability. This is all due to our long term strategic focus on building best of breed solutions on the IDMC platform and working tirelessly to

Speaker 3

make it powered by AI

Speaker 2

CLIP, the data management platform of choice for enterprises across the globe. And we're excited about where we are, excited about how we want to close the year and look forward to seeing you all at Investor Day in December. Thank you.

Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Informatica Q3 2023
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