Informatica Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Welcome to the Informatica Second Quarter 2023 Earnings Call. It is now my pleasure to introduce your host, Victoria Hyde Dunn, Vice President of Investor Relations.

Speaker 1

Host. Good afternoon, and thank you for joining Informatica's Q2 2023 earnings conference call. Joining me today host, Amit Walia, Chief Executive Officer and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Host.

Speaker 1

Our earnings press release and slide presentation are available on our Investor Relations website at investors. Informatica.com. Host. 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.

Speaker 1

Host. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. Host. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors host 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

Host. 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 host. Prepared in accordance with GAAP. A reconciliation of these items to the nearest U.

Speaker 1

S. GAAP measure can be found in this afternoon's press release host and our slide presentation available on Informatica's Investor Relations website. With that, it's my pleasure to turn the call over to Amit.

Speaker 2

Well, thank you, Victoria. Thank you, everyone, for joining us today. I will start today's call by summarizing 3 key points. Host. First, we exceeded Q2 guidance across top and bottom line metrics, driven by strong customer momentum from a cloud only consumption driven strategy.

Speaker 2

2nd, we are expanding our cloud native AI powered IDMC platform capabilities host. To be the enterprise standard for data management. Through our own product innovation and with the integration of our recent acquisition of Privitar, host, which is all about data access management and privacy solutions. We believe that IDMC is becoming the most comprehensive and unique platform for data management and enterprises globally. Host.

Speaker 2

This is especially important with the rise of AI driving further democratization of data and its Informatica's differentiation in the market. Host. Simply put, there is no AI without holistic data, quality data and governed data. Host. And thirdly, given our strong execution in the first half of the year, we are raising our non GAAP operating income host and adjusted unlevered free cash flow after tax guidance for the full year.

Speaker 2

We remain committed to delivering balanced, profitable growth, while driving forward with our strategic initiatives. With that, now let me discuss these topics in more detail. Turning to Q2 results. Host. Total revenue grew 1% year over year with subscription ARR growing 16% year over year and cloud subscription ARR growing 37% year over year.

Speaker 2

We delivered a record $513,000,000 in cloud subscription ARR. I'm really proud of that one because that exceeded the half a for the 1st time. We strengthened our cash position and beat the high end of guidance for non GAAP operating income. Host. The macro environment remains stable in the Q2 versus the prior quarter.

Speaker 2

The sales mix shift from the self managed host. The cloud subscription ARR is tracking as expected as cloud subscription ARR now represents 49% of subscription ARR, host, up from 42% a year ago. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansion With the remainder from on prem customer migration, which saw a nice uplift in the quarter. Our customers are adopting the IDMC platform for new users and new use cases across organizations. In the Q2, customers spending more than $1,000,000 in subscription ARR Increased by 22% year over year to over 2 13 customers.

Speaker 2

Host. Customer spending more than $100,000 in subscription ARR increased 8% year over year to 19 40 customers. Host. Now we have customized IDMC to deliver industry specific needs and recently launched IDMC for ESG Sustainability to support host. Environmental, Social and Governance Use Cases.

Speaker 2

This follows previous launches of IDMC for state and local government, financial services, host, Insurance, Life Sciences and Retail and CPG Verticals. Let me share with you a few customer stories. Host. PNM Group, represented by PNM Bank in Western Australia and BCU Bank in New South Wales and Southeast Queensland, host. Has created a digital transformation strategy that aims to deliver more personalized banking for their customers across Australia, host.

Speaker 2

While at the same time ensuring the protection and integrity of customer data. In partnership with Snowflake, we selected Informatica's IDMC platform Data ingestion, data integration, data governance and catalog and data quality solutions to complement their digital transformation strategy as they modernize their analytics to the cloud. Jaguar Land Rover is at the forefront of the rapidly changing automotive industry with a focus on electrification, digital services and data. Host. Range Rover, Discovery and Defender collections will each have a pure electric model, while Jaguar will be entirely electric.

Speaker 2

Host. The company is undergoing a digital transformation that will see its operations, including manufacturing and supply chain, strengthened by becoming more data driven. Host. We selected Informatica's IDMC platform for data discovery, curation and catalog use cases, including data quality, data and application integration, together with Master Data Management, SaaS. Holiday Inn Club Vacations Incorporated is a resort, host.

Speaker 2

Real estate, travel and vacation ownership company with a mission to be the most loved brand in family travel. We are undergoing total digital transformation, which includes Tech modernization, digital strategies for sales and marketing, tech consolidation efforts and data rationalization. Host. In a joint partnership with Deloitte, they selected Informatica's Master Data Management SaaS and Cloud Data Governance and Catalog Solutions to implement their digital transformation strategy. Host.

Speaker 2

At Informatica, we'll be working with the U. K. Ministry of Defense to provide data governance and cataloging solutions. Host. These customer success stories highlight the impressive adoption of IDMC Cloud Solutions across the globe.

Speaker 2

Next, host. We continue accelerating product innovation on IDMC's cloud native AI powered platform to improve productivity and deliver trusted data to our customers and partners. Host. We hosted thousands of global customers, prospects and partners at our Informatica World User Conference in May earlier this year. Host.

Speaker 2

It was an incredible opportunity to engage with our community and see firsthand how Informatica is helping democratize data host. As part of an organization's digital transformation journey, I had discussions with many CIOs, CDOs and CTOs looking to standardize host on IDMC. They all want fewer point solutions. They want to reduce the data complexity and simplify the operations within the data architecture host to deliver immediate ROI and lower TCO. We also unveiled many industry leading capabilities on IDMC.

Speaker 2

Host. Now let me share some thoughts on AI, which I know remains top of mind in every conversation today. Let me begin by saying, I firmly believe that there is no value in AI without holistic, host. Clean usable data that can be managed and governed at scale. Look, to get data into AI to create value, we need data management, Bringing all of the fragmented data across an enterprise in one place, making sure it's of high quality, garbage in gives us garbage out, host.

Speaker 2

Making sure there is governance and so on and so forth. That's what IDMC is all about. In fact, our journey with AI is not new. Host. We launched our AI Clear back in 2017 at Informatica World that year.

Speaker 2

AI is already embedded in all our solutions leveraging ML algorithms host. And NLP on metadata to drive intelligence and productivity, accessing 50,000 metadata connections, now leveraging 35 terabytes of active metadata in the cloud and processing 61,000,000,000,000 mission critical cloud transactions as of June. Host. Our metadata system of record platform, IDMC, has the foundation to realize AI powered digital transformation and the exponential impact It can have on all our customers and their organizations. And now we are amplifying and taking forward our AI journey with Clear CoPilot and Clear GPT, host, allowing us to take a significant step forward with GenAI.

Speaker 2

Informatica's AI differentiation in this market comes from 3 factors. Host. First, it's an understanding of the enterprise data ecosystem. Very few vendors can claim an understanding of an enterprise's data ecosystem, which comes from being able to have a metadata inventory, but beyond that being an independent and neutral and at scale vendor in this space. Host.

Speaker 2

The second is training LLMs on metadata from thousands of data management projects. Again, only a handful of vendors, if any, host. And 3rd is comprehensive data management capabilities. When enterprises think of data management, host. They just don't think of ELT pipelines or ETL pipelines or just data catalog or just data quality in isolation.

Speaker 2

Host. An enterprise data management project requires all these capabilities working in tandem and on top of a metadata powered platform, which is host. Only available with IDMC. Clair CoPilot is available now and Clair GPT will be available in private preview this quarter host. As a native IDMC service utilizing Informatica's processing units to drive usage and help customers democratize and simplify the data management.

Speaker 2

Host. Our consistent focus and commitment to delivering product differentiation and innovation have balanced recognition from industry analysts and thought leaders. Host. In IDC's Worldwide Data Integration and Intelligence Software Market Share 2022 report, Informatica ranked number 1 for the 7th host. Our consistent performance and track record have been recognized in 5 submarkets: data ingestion and transformation, host.

Speaker 2

Data Quality, Data Intelligence, Master Data Management and Dynamic Data Movement. We are pleased to be named a leader in the Forrester Wave for Master Data Management Q2 2023 for the 5th consecutive time. Now as our product innovation capabilities increase, Our partnerships have grown and continue to grow and deepen with hyperscaler and ecosystem partners such as Microsoft, AWS, GCP, Snowflake and Databricks. Let me give you a glimpse of some of those. With Microsoft, we announced IDMC as an Azure native ISV service, host, which will provide Azure customers with advanced capabilities, seamless access and data management normally reserved for 1st party Azure services.

Speaker 2

We announced the availability of our cloud data governance and catalog native in Azure as well. We also announced a private preview of seamless integrations with Microsoft Fabric as one of the first ISV design partners for this offering. With AWS, we announced the availability of a cloud data integration free service host. Directly from Amazon Redshift user console, Informatica is the only ISV partner with this native integration. Host.

Speaker 2

We also launched Informatica's secure Asian Private Link in AWS and launched a pod in Japan to scale our market reach in that region. Host. With GCP, we announced the availability of a SaaS MDM service and the expansion of our footprint with the Ford in EMEA. Host. At the Snowflake Summit, we announced the public previews of SuperPipe and our native application for enterprise data integration, host.

Speaker 2

Our new cloud data integration free service via Snowflake Partner Connect and added support for Apache Iceberg Tables. Host. At the Databricks Data and AI Summit, we added support for Unity Catalog, Databricks Connect and Databricks SQL. We added support for Databricks Delta Lake for a power center to IDMC migration program. Turning to our GSI partners, We had record attendance levels at our Partner Summit at Informatica World Lear this year.

Speaker 2

We expanded our partnership with ZS, host, a global management consulting firm to embed IDMC with ZSS Cloud Data's data platform for life sciences. We launched a brand new partner portal to make it easier for partners to Find the critical content needed for sales enablement. We also made all our enablement boot camps free on the portal and since launch host. More than 7,000 people have become certified to our Cloud Data Integration Boot Camp and MDM SaaS Champions Boot Camp, and this will only grow from here. Host.

Speaker 2

We see enterprises moving ahead with multi additional transformation projects to improve data intelligence and achieve better business outcomes. Host. We have migrated 4.5 percent of our legacy maintenance base over to IDMC, up from 4% last quarter at a 2.1 conversion ratio. Host. We saw continued progress with our migration factory program with many of our GSI partners helping our customers to modernize and move to IDMC.

Speaker 2

Host. We're excited about our cloud modernization program, which we will make generally available this quarter. This new program gives customers the ability to accelerate host. Modernizing on prem power center assets to IDMC with significantly lower migration time, lower cost and lower risk. Host.

Speaker 2

Now let me discuss Pravitat. While we welcome the Pravitat team to Informatica family earlier in July. Pravida brings deep industry skills and expertise in security access, privacy and policy management to strengthen our cloud capabilities. Host. Our shared vision to offer customers the ability to create new mission critical workloads and use cases at IDMC across data governance, Data catalog, data privacy, data quality and MDM offerings.

Speaker 2

This will enable our customers to allow data sharing and management while maintaining host. Control and security through trusted and secure data. We're making good progress on our integration plans and once fully integrated, We believe the IDMC platform will become the most comprehensive and differentiated cloud data management platform in the market, expanding the product innovation lead over legacy and single point solution vendors because of its scalability, efficiency and unique offerings. Now as I wrap up, host. I'm thrilled and pleased to raise our non GAAP operating income and adjusted unlevered free cash flow after tax guide for the year.

Speaker 2

Host. We are managing the business for long term durable growth and continued profitability while focusing on executing on our cloud only consumption driven strategy. Host. We are building a best in class AI powered platform at scale and see a long runway ahead in displacing legacy and single point solution vendors. Host.

Speaker 2

I am excited about our future opportunities for Cloud Growth. I want to thank all of my Informatica colleagues for their hard work and continued commitment. I would also like to thank our partners, customers and shareholders for supporting us. With that, let me turn over the call to Mike to take you through more details. Mike, take it away.

Speaker 3

Thank you, Amit, and good afternoon, everyone. Q2 was a solid financial quarter across the board with key growth and profitability metrics for exceeding our expectations. I'll begin the review of our Q2 results by reminding everyone how to best understand Informatica's ARR and GAAP revenue. Host. Our ARR and revenue fall into 3 major categories: cloud subscriptions, which we have guided to ARR growth of 35% in the full year fiscal 2023 host.

Speaker 3

Self managed or on prem subscriptions, which we no longer actively sell and which we have guided to decline year over year in fiscal 2023 host 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 vacation services, which we expect to decline slightly this year as our professional services partners perform more of that work for our customers. Service revenue is not counted as error. Host. With that in mind, I'll walk through the components of our annual recurring revenue.

Speaker 3

Total ARR was $1,550,000,000 an increase of 8% over the prior year, Driven by new cloud workloads and steady renewal rates, we added $111,000,000 in net new ARR versus the prior year. Foreign exchange negatively impacted total ARR by approximately $1,900,000 on a year over year basis, in line with expectations when we set our guidance in May. Host. Turning now to the components of ARR. Cloud subscription ARR was $513,000,000 a 37% increase year over year host and $6,000,000 above the high end of our May guidance.

Speaker 3

Cloud subscription ARR represents 49% of our total subscription ARR, host. Up from 42% a year ago. New workloads and strong renewal rates drove cloud subscription ARR growth of $139,000,000 year over year. Host. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansions, with the remainder from on premise customer migrations.

Speaker 3

Host. Cloud subscription net retention rate was 116% for the quarter, flat year over year. Self managed subscription ARR declined slightly in the quarter as expected to $530,000,000 This was down 1% sequentially and up 1% year over year. Given our focus on new cloud sales, we expect self managed Subscription ARR to continue declining throughout the year and show year over year declines starting next quarter. Subscription ARR, which is simply the sum of cloud and self managed subscription ARR, grew by 16% year over year to 1,040,000,000 Which was more than $12,000,000 above the high end of our May guidance.

Speaker 3

Subscription ARR now represents over 67% of total ARR, host, up from 62% a year ago. Foreign exchange negatively impacted subscription ARR by approximately $1,500,000 on a year over year basis, In line with expectations when we set our guidance in May. The 3rd component of total ARR is maintenance, which represents 33% of total ARR. Host. Maintenance ARR was down 7% year over year to $505,000,000 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 on perpetual licenses to continue declining gradually at a fairly constant rate. Host. In total, these three components of total ARR yielded 8% growth for the quarter, which was driven by solid growth in our cloud subscription ARR, host. Offset by gradual declines, as we expected, of self managed subscription ARR and maintenance ARR.

Speaker 3

These dynamics are the direct result of our cloud only assumption driven strategy and we expect these trends to continue in future quarters. We saw a good growth in our average Subscription ARR per customer in the 2nd quarter growing to over $275,000 a 13% increase year over year. Host. We have over 3,780 active subscription customers, an increase of 94 subscription ARR customers year over year. Host.

Speaker 3

Now I'd like to review our revenue results for the Q2. GAAP total revenues were $376,000,000 an increase of 1% year over year. This exceeded the high end of our May guidance range by $11,000,000 due to a slower than expected decline in maintenance revenue and strong renewals, host, partially offset by lower professional services revenues. Foreign exchange negatively impacted total revenues by approximately $2,200,000 on a year over year basis, host in line with May expectations. Informatica's shift to cloud subscription sales and away from self managed on prem sales is progressing as expected.

Speaker 3

As I previously described, this creates an accounting driven GAAP revenue headwind in the short term. If our mix of cloud versus self managed new bookings were the host. Same this quarter as they were in Q2 last year, total revenues would have been approximately $22,000,000 higher than we reported this quarter, Increasing our year over year revenue growth rate to approximately 7%. Subscription revenue increased 10% year over year to 220 $8,000,000 representing 61 percent of total revenue compared to 56% a year ago. Our quarterly subscription renewal rate was 92%, down 2 percentage points year over year host.

Speaker 3

Due to a decline in self managed renewal rates, maintenance and professional services revenues were $148,000,000 representing 39% of total revenue in Q2. This is due to lower than expected professional services revenues and the gradual decline of maintenance revenue. Standalone maintenance revenue represented 33% of revenue for the quarter. Implementation, consulting and education revenues comprised the remainder of this category, down $7,000,000 year over year, representing 6% of total revenue. Host.

Speaker 3

Turning to the geographic distribution of our business, U. S. Revenue declined 1.6% year over year to $239,000,000 Representing 64 percent of total revenue, while international revenue grew 6% year over year to $137,000,000 Using exchange rates from Q2 last year, international Revenue would have been approximately $2,000,000 greater in the quarter, representing international revenue growth of 8% year over year. Consumption based IPUs are a frictionless way to access the IDMC platform and are a core part of our strategy. Approximately 51% of 2nd quarter cloud new bookings were IPU based deals.

Speaker 3

IPUs now represent 43% of total cloud subscription ARR, up 2 percentage points sequentially. Host. Our new flexible IPU consumption model is also gaining traction, and we expect IPU adoption to increase during the year. Host. Now I'd like to move on to our profitability metrics.

Speaker 3

Please note that I will discuss non GAAP results unless otherwise stated. In Q2, our gross margin It was 80% consistent year over year even as our software sales mix shifts to the cloud. Operating expenses were consistent with expectations. Host. Operating income was approximately $88,000,000 for the quarter, growing 25% year over year and exceeding the high end of our May guidance range.

Speaker 3

Host. Operating margin was 23.3%, a 4.5 percentage point improvement from 18.8% a year ago. Host. Adjusted EBITDA was $92,000,000 and net income was $0.48 Net income per diluted share was 0 point 17 dollars based on approximately 291,000,000 Standing diluted shares, basic share count was approximately 287,000,000 shares. Q2 adjusted unlevered free cash flow after tax Was approximately $77,000,000 better than expectations due to higher collections and other favorable working capital dynamics.

Speaker 3

Host. Adjusted levered free cash flow after tax margin was 20.5%. Cash paid for interest in the quarter was approximately 37,000,000 host. Keep in mind that our free cash flow from quarter to quarter can be quite volatile based on working capital fluctuations and other nonlinear cash items such as tax payments. Host.

Speaker 3

We ended the Q2 in a strong cash position with cash plus short term investments of $821,000,000 Net debt was $1,030,000,000 and Trailing 12 months of adjusted EBITDA was $388,000,000 This resulted in a net leverage ratio of 2.7 times. We expect the business to naturally delever to below 2x by the end of 2023, which is 6 to 12 months ahead of our commitment at the time of the IPO. Host. To summarize our year to date results, we are pleased to have executed at or ahead of the guidance we laid out at the beginning of the year across

Speaker 2

our business.

Speaker 3

Now I'll turn to full year guidance. We delivered better than expected bottom line results in Q1 and Q2 and are raising guidance for non GAAP operating income and adjusted unlevered free cash flow for Taks. We reaffirm previously issued guidance for revenue and ARR metrics, reflecting confidence in our cloud only consumption driven strategy host. Despite the continued uncertain macro economy, we expect the acquisition of Pribitar to be immaterial to both revenue and earnings in 2023, therefore, it does not impact our guidance. Host.

Speaker 3

With this in mind, we're raising guidance for the full year ending December 31, 2023 as follows. We now expect non GAAP operating income to be in the range of $420,000,000 to $440,000,000 representing approximately a 23% year over year increase at the midpoint. We now expect adjusted unlevered free cash flow after tax to be in the range of $370,000,000 to $390,000,000 representing approximately a 32% host. You can find the details of our full year guidance in the press release we filed this afternoon. As mentioned, we are reaffirming our previously issued revenue and ARR guidance for the full year.

Speaker 3

Next, turning to the guidance for the Q3, we expect our sales mix to continue to shift from self managed to the cloud. Therefore, in Q3, we expect cloud subscription net new ARR to grow, host. Well, self managed net new ARR is expected to decline on both the sequential and year over year basis. And as expected, maintenance revenue and ARR and will continue to decline steadily. With this in mind, we are establishing guidance for the Q3 ending September 30, 2023 as follows.

Speaker 3

We expect GAAP total revenue to be in the range of $395,000,000 to $405,000,000 representing approximately 8% year over year growth at the midpoint of the range. We expect subscription ARR to meet a range of $1,050,000,000 to $1,060,000,000 representing approximately 13% year over year growth at the midpoint of the range. We expect cloud ARR to be in the range of $537,000,000 to $543,000,000 representing approximately 35% year over year growth at the midpoint of the range. Host. We expect non GAAP operating income to be in the range of $110,000,000 to $120,000,000 representing approximately 37% year over year growth at the midpoint of the range.

Speaker 3

Host. For modeling purposes, I would like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after tax for the Q3 to be in the range of $65,000,000 to $85,000,000 2nd, we estimate cash paid for interest will be approximately $39,000,000 in the 3rd quarter and for the full year, we estimate cash paid for interest will be approximately $149,000,000 3rd, with respect to income taxes, our Q2 non GAAP tax rate was 23%, and we expect that rate to continue for the full year 2023. We estimate full year 2023 cash taxes to be approximately 100,000,000 host. On a GAAP basis, we expect the significant volatility of our income tax provision and rate to continue.

Speaker 3

For the full year 2023, we expect a GAAP tax provision in line with our cash taxes. And lastly, our share count assumptions. For the Q3 of 2023, we expect basic weighted average shares standing to be approximately 289,000,000 shares and diluted weighted average shares outstanding to be approximately 294,000,000 share. Host. For the full year 2023, we expect basic weighted average shares outstanding to be approximately 288,000,000 shares host and diluted weighted average shares outstanding to be approximately 293,000,000 shares.

Speaker 3

And finally, before starting the Q and A session, I am pleased to announce that we host. We've rescheduled our inaugural Investor Day to Tuesday, December 5 in San Francisco. We hope that many of you can join us in person. Host. Operator, you can now open the line for questions.

Speaker 3

Thanks.

Operator

Absolutely. Host. Host. Our first question comes from Matt Hedberg with RBC. Please proceed.

Speaker 3

Thanks for taking my questions. Maybe just to start from a macro perspective, it sounds like you saw fairly stable results, which is good to hear. Maybe just double clicking on that a little bit more. Could you talk about some of the trends maybe The end of the quarter and kind of the 1st month of Q3, it kind of continued stability. Is that kind of what you're seeing despite obviously some Sure.

Speaker 3

Still on some macro uncertainty.

Speaker 2

Hey, Matt, good to hear from you. Yes, I would say that as I said, Q2 was pretty stable. We didn't see anything host. To reiterate or anything like that compared to maybe when we entered the year. And I think I would say we saw July in a similar fashion.

Speaker 2

So I think admin host. It's Stable. I wouldn't say that it has significantly improved or anything. It's pretty stable. So I think we feel hence, we feel Good about where we are and where we think where the second half of the year would be.

Speaker 3

Got it. And then following your user event and obviously you talked on this call about clerical pilot and cleared GPT. Host.

Speaker 4

Could you talk a little

Speaker 3

bit more about like obviously, you probably haven't assumed much from either this year in estimates. But Do you expect that to be a monetization effort in kind of calendar 2024? Just how should we think about some of these Gen AI products flowing into growth?

Speaker 2

Host. Yes. I think when you think of enterprises, Matt, I think it's so different from consumers because I think today you can take chat GBT and go put it on the well word web and do whatever you want But that's really different from how an enterprise thinks about it. In fact, I was in I've traveled across the globe in the last few months since the conference as well. So I think I would say that this thing host.

Speaker 2

In fact, I use the phrase, Gen AI is most overhyped in the short term, tremendously undervalued in the long term. So enterprises are in that way that it's a conversation topic everywhere. Everybody is figuring out their first, second, third use case, how do you begin. And And I think the question in everybody's mind is then if I do that, then what's the governance and privacy implications around it? So I think everybody is marching down that path is figuring out the use cases, the host.

Speaker 2

Reference architecture and the implications around it. I think I see that as a 2024 thing in general for enterprises. Of course, things are starting to happen. We have clear GPT in preview and host. Customers are using it to figure things out at their end, but proper use cases going creating value will be for enterprises will be more 2024.

Speaker 3

Host. Got it. Thanks a lot guys. Congrats on the quarter.

Speaker 2

Thank you.

Operator

Our next question comes from Fred Haab Meyer with Macquarie. Please proceed.

Speaker 5

Hi, thank you very much. I think I wanted to follow-up a bit on that generative AI kind of topical question with something related but not directly on Clair GPT, which is A really exciting product we see coming out of the pipe here. But just generally, how are you seeing enterprises trying to adopt generative AI? Like Where are they struggling? What are the key problems they're trying to address, especially with their own data?

Speaker 5

And is there any way that perhaps like Privatar, generally your ability to hope. Governance layers over data can help enterprise adoption of generative AI?

Speaker 2

Yes, Fred, that's a great question. So I think I'll give you some examples of use cases. One example is, we have a large healthcare premium disburser. Host. And think about this way that there are 2 issues.

Speaker 2

There's a customer side issue if they reject a return or a claim and there's a revenue leakage if they actually approve a bad claim. And I think they are experimenting in that context basically improving their whole reducing the bad claims and also making sure that the right claims get approved. Host. And their efficiency rate or improvement rates have gone from low 80s to high 90s as they are playing around with that. Host.

Speaker 2

Think about that. That's a massive revenue opportunity for that customer as much as data productivity. On the other hand, basically, when customers are thinking about host. You know, a large campaign in the context of understanding churn, how quickly can you with the help of host. Jenny, can you build your underlying infrastructure and think about frameworks on top of it, whether it's good quality data so that your simple host.

Speaker 2

A brand campaign or an email campaign improvement can go from low single digits to high single digits to maybe very high single digits. Those are all the things that we are seeing customers do and that's where by the way, in case management, customer service, front office, that's where the first use cases are emerging very rapidly. We're seeing all of them across an enterprise that will happen. I see as I've talked to customers happening as we speak where they are using the first use cases. Host.

Speaker 2

Turning to Privileged Art, one of the biggest issues for enterprises is, as I looked at taking our world clear GPT, boy, I can We can privatize all the stuff and give it put it in the hands of so many users, but comes the biggest issue for Gen AI for everybody, a democratization creates a governance challenge. Host. And the right person accessing the right information and the right use case. And that's where data access management became very important. We saw to be a lot of those large customers host.

Speaker 2

Trying to help them solve that problem, embedding them on IDMC will further accelerate, allowing IDMC to use by many, many, many users across an enterprise. So access management becomes a very fundamental part of governance and privacy. So we see that as an accelerant.

Speaker 5

Host. Excellent. Thank you very much for that. And just a follow-up here regarding the So, Ryan, the transactions per month that are being processed, it was really impressive seeing that there's 58% year over year growth and you're now translating almost 61,000,000,000,000 cloud transactions per month. Host.

Speaker 5

We'd just love to get some context there around how that relates overall to your just progress in cloud. It seems that you have substantial momentum. Is this Rise in transaction volume, something related to your IPU consumption model or just generally customers doing a lot more in cloud and with the IDMC platform? Thank you.

Speaker 2

Host. All of the above. Ultimately, see, like all our net new sales are driven by IPU. Obviously, customers who are non IPU before are also using the cloud platform. So of course, that's why I said it's both.

Speaker 2

It's basically customers running all workloads in our cloud. That's what it is. And we want that number to be host. Absolutely higher and higher. In fact, continuing to see that number to be higher than even our year out growth tells you that customers are running ahead and that's a good thing.

Speaker 2

And that obviously means more IPU usage, more workload usage and more operational workload usage. Host. So that's a great indicator and we pay a lot of close attention to that.

Speaker 5

Thank you.

Operator

Host. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed.

Speaker 6

Thank you and good afternoon and congrats on the nice quarter. I wanted to go back to your comments on the macro. I I think you said a number of times in the prepared remarks, it remains stable. And you said it also looks pretty stable heading into Q3 here. Host.

Speaker 6

So what other trends concerned you enough to not roll through the beats that you saw in Q2 into your annual guidance for the year?

Speaker 2

Host. Sure, Andrew. I think I said stable. I didn't say that everybody is opening the purse string and spending as if there was no tomorrow. So I think we got to be thoughtful.

Speaker 2

Look, I think you've host. Look, I think you've probably seen from now we've been doing earnings calls for almost one and a half years. We're a very prudent and thoughtful company. Host. I don't want to get ahead of ourselves.

Speaker 2

We closed a good first half. I think on the other hand, I can expect somebody asking the question, hey, second half is bigger than the first How do you think that you have derisked the second half? And I think what we just did is basically a step in that direction of derisking the second half. We had teams performed very well. Host.

Speaker 2

First half of a big transition year. I think our strategy continues to come. We believe that the over performance on the top end allows us to actually navigate the second half, host. Assuming that the world doesn't change fundamentally in a good or bad way, but at the same time, look at this way, host. How many cloud transitions happen?

Speaker 2

And I'll repeat that. How many cloud transitions in the world have happened, but the companies have actually have accretive bottom line, host. Last I checked, it was almost now set. So us raising the bottom line actually is a show of strength That we feel very strongly about our overall business model and how we are executing.

Speaker 6

Okay. That makes sense. Thank you, Amit. Host. Just a follow-up question.

Speaker 6

I just want to get a clarification maybe on your NRR. Cloud NRR was host. Very consistent, I'd say, within the historical range that we've seen, but maybe the total subscription NRR dropped below that coveted 110% level down to 107%. So just is there any more color you can provide on maybe what drove the overall subscription NRR to drop down to 107?

Speaker 3

Host. Yes, sure, Andrew. It's just the weighted average impact of the decline in self managed, I. E. On prem, Subscription retention.

Speaker 3

Because we're not selling anything new into the top of the funnel, at least not a meaningful amount, host. We're not selling new on prem to existing on prem customers. So our net retention rate is going to fall below 100% at some point. Host. And you can anyway, as we're trying to be very, very clear in guiding you all, our total subscription ARR is going to begin to decline next quarter, both on a Quarter over quarter basis, but also on a year over year basis on a percentage basis.

Speaker 3

Exactly as we've expected, it's totally according to plan. Host.

Speaker 7

And it's just

Speaker 3

the blended impact of that on the total rate.

Speaker 6

Yes. So you didn't lose those customers, you just didn't sell them anything new. Is that what you're saying?

Speaker 3

Well, there's some churn in there, of course, in any subscription base, in any period you have some churn. Host. But if you take normal churn without selling new on top

Speaker 7

of it, that's how you

Speaker 3

get a degrading net retention rate.

Speaker 6

Host. Okay. Thanks, guys.

Speaker 2

And Andrew, for us, I think Mike said that very well and as he broke down the 3 ARRs, Focus on the cloud number. That's the only growing number. In fact, that's a number that's a growing one. Ultimately, that's why we called out the cloud NRR earlier this year for you to basically All the dynamics of that business. The rest of the business becomes a mathematical average, weighted average of whatever cloud gives.

Speaker 2

Cloud is the cloud is the one that's giving. Rest are all Basically, Daeute. Yes.

Speaker 3

And maybe to put that in yet another way to think about it. We're not asking you to ignore everything but the cloud because host. Rest of this is part of what you own when you buy the stock. But net retention rate becomes a meaningless metric in a business you're not selling into. We don't give you net retention for maintenance because we're not selling new perpetual licenses.

Speaker 3

It just becomes about the churn rate in both maintenance and that's what's happening in the Self managed part of our subscription business. So NRR, the only meaningful metric to focus on is cloud. Does that make sense?

Speaker 6

Host. Yes, it does. Thank you.

Operator

Our next question comes from Brad Zelnick with Deutsche Bank. Host. Please proceed.

Speaker 8

Great. Thanks so much. It's good to see the stability and it's really great to see the profitability host. Progress in the business, which Mike, I wanted to ask you about on the cash flow guide. I think you talked about host.

Speaker 8

Benefits from working capital. Can you just double click for us all the various components that get you to raise the full year? And really what I guess I'm trying to better understand is things that maybe repeat and things that don't, cash taxes, for example, What should we think about as we then maybe model the out year for free cash flow? Thank you.

Speaker 3

Host. Yes. So on a yearly basis, our unlevered free cash flow, all the puts and takes that you see quarter to quarter in Working capital and taxes tend to smooth themselves out. And with that said, I wouldn't Encourage you to think about there being any different dynamics in terms of things like cash cycle days and cash tax rate and So forth when you're thinking about the out year versus this year. Host.

Speaker 3

The fluctuations are really quarterly collections, days payable, those sorts of things in a given quarter. But the year to year dynamics, host. As you can see by how we raised our unlevered free cash flow guide by more or less the same amount we raised host. Operating non GAAP operating income. No real change.

Speaker 8

Host. Okay. Appreciate that help. And maybe just for you, Amit, I know we're well into it, but host. Any comments just in terms of how reps are adjusting to the cloud only and IPU led sales motion?

Speaker 8

What's maybe tracking as you'd expect along that host. Jurney and maybe what still remains to happen as the field kind of shifts and adapts to this.

Speaker 2

Host. Yes, I think, Brad, the team has shifted very well. Obviously, first half is first half and we have full second half. I think I would say I'm host. Quite enthused and pleased by how the field teams have taken this and run with that.

Speaker 2

As I said earlier this year that This actually gives simplification, but obviously any simplification takes some time to settle down to it. But I think the teams actually, if anything, have been very thrilled with this. Host. A lot of enablement has gone in. We were ready for this.

Speaker 2

So I think so far so good results are there to be seen. And our goal is to make sure that we do all the things host. To accelerate this and make sure this year basically we go forward with it. So I feel pretty good about how the sales teams are leading with it. And And I think as Mike and I have said that before also, we continue to see this as the also the further simplification of our business model, right?

Speaker 2

I think there is host. Room over there as we think about our overall company and we continue to become more and more cloud only to continue to basically further simplify host. Other parts of the company to make sure we are we go faster and much more at a much more accelerated pace.

Speaker 8

Host. Great. Thanks so much for taking my questions.

Speaker 2

Absolutely.

Operator

Our next question is from Alex Zukin, Blisk, Wolfe Research. Please proceed.

Speaker 9

Host. Hey, guys. This is Ethan Brook on for Alex Zukin. Thank you for taking the question. I just wanted to ask Matt's question a different way.

Speaker 9

Can you just talk a little bit the shape of the quarter? And host. If you begin to saw a little bit of budget unlock towards the end of the quarter. And then a little around like the cloud migration, so like the rate of change has accelerated 2 consecutive quarters. I was just wondering if you could point to anything that's driving that migration activity, whether it's just folks wanting that IP consumption, better spend visibility, people more interested in AI.

Speaker 9

Just I'm curious how that migration activity is performing relative to your expectations.

Speaker 2

I think, look, migration, I said that host. As we have said, migration is these are operational workloads. And needless to say, we put in a lot of effort to make sure that those operational workloads can migrate at an accelerated pace. Host. Our own tech, we obviously led with our own services to create playbooks.

Speaker 2

Remember I talked about how we're enabling partners to go lead with it, so partner enablement has happened, Further simplification of the migration process, all of those things take time. And I think they are gradually bearing fruit. And you can see that host. All of that starts it's a snowball effect. It starts compounding over a period of time.

Speaker 2

I feel very good about it. In fact, what we launched the next migration host. Technology innovation that will come out later this fall is another step in that direction. So we continue to see that. Look, the reality is at the end of the day, our customers are running host.

Speaker 2

Operational on prem workloads on PowerCenter. They know that work like a charm. They know that these are industrial grade workloads. Host. When they look at our cloud, they basically see those capabilities and more and they're very excited to go over there.

Speaker 2

We just have to continue to make this host. Journey from 2, a lot more faster, lower risk and cheaper, and we've been maniacally focused on that one. So all of those efforts are bearing fruit. And look, once the customers land there, I've always said, if you run mission critical workload in the cloud, other nice to have workloads all get subsumed over there. Host.

Speaker 2

If you begin with nice to have workloads, you get wiped out over a period of time. So I think we land deals, we have tremendous runway to then Consolidate many other things that are running across an enterprise.

Speaker 9

I got you. That makes sense. And then just a quick follow-up. I can appreciate the The prudence in the cloud ARR guidance. I guess, I just to think about like what you're factoring in the guide in terms of macro trends, I know you said 2Q has been very stable versus Basically, what you've seen throughout the beginning and through 2023, I'm just curious if you're embedding for things to get a little worse, a down click, just Here's how we think about that and if there's any directional way to think about where Cloud NRR can trend in the back half of the year.

Speaker 2

Host. I think on the guide, our simple assumption is that the world will neither get better nor worse. I think if you remember when we were all here talking a couple of months ago, When we started, we gave a guide. And then I remember when we were talking a couple of months ago, the whole banking mini banking crisis happened and where people thought, would it get worse, would it get better? And we said, look, we're just holding it.

Speaker 2

So I think when I say stable, I say stable in the context of nothing has gotten worse, while nothing has gotten materially better also. Enterprises still remain thoughtful and cautious in enterprise spend. I think us executing better is what is showing up here. And I don't think that I think it will be very non prudent of me to get ahead of myself and assume something's turning around and making it a lot better walking into the second half. I think that's not what we're assuming.

Speaker 2

And in that context, guessing, let's take the first half over achievement and host. Derisk the second half for now and continue to watch things carefully and keep executing. When we meet here in a few months later, We'll share more, but I feel very good about where we are and how we are thoughtfully guided for the top line. And the NRR question, sorry if I forgot. NRR, as you know, right, NRR is always up and down.

Speaker 2

We kind of you can never guide to NRR every quarter. You all know, right? NRR can be host. Flagged although under the covers our cloud grew because we could have been acquiring a lot of first time new cloud customers that are not accretive to NRR. Host.

Speaker 2

So when we think of NRR, we said we share with you this number, we look at it in a holistic 1 year basis. On a quarter to quarter basis, we don't get too caught up in it because remember, host. I take a cloud customer as long as the cloud ARR is going. If I'm getting a new customer, it's 0 addicted to cloud NRR, still an invaluable customer for me. Host.

Speaker 2

So I look at it that way. So I wouldn't get on the caught up on the cloud NRR on a quarter to quarter basis that much.

Speaker 9

Host. Got you. Congrats again.

Speaker 2

Thank you.

Operator

Our next question is from Pinjal Mura with JPMorgan. Host. Please proceed.

Speaker 4

Great. Hey, guys. Thanks for taking the question. One more philosophical question for you On AI, one of your customers we spoke to said Informatica is putting itself in a place of power with open APIs, host. Which is an interesting comment, but when I talk to investors, a lot of people kind of bring about companies like Databricks, which Which are doing a lot of things.

Speaker 4

And it seems like there is a tussle between also when I talk to customers, right, there is a tussle between the IT people who wants to use Informatica host. And the data science developers want to write Python scripts on top of Databricks. Like host. How do you think of that puzzle kind of plays out over time?

Speaker 2

So, Pajjal, I think host. You talked to the customer obviously and they rightfully said that we put ourselves in a position of power because what we are doing with our platform is very unique. I actually never look at anything like that as a tussle. Look, you ask me a philosophical question, I'll give you a philosophical answer. We all live in a very big town.

Speaker 2

Host. We all have tremendous amount of opportunity. There is in the world of tech, there is always a slight overlap somewhere or the other with anything and everything. Host. I think the entire security industry has an overlap with Microsoft, but they all exist, right?

Speaker 2

So I would just say that I look at it this way that there is always in some area you'll find some overlap. Databricks is a great partner. You saw what I shared about integrating with Unity, the SQL, Delta Lake. We are doing a lot of migration workload, host. Moving where IDMC is leveraging IDMC, the customer is going to Delta Lake, the Lakehouse.

Speaker 2

Host. So I look at the world as such a big TAM and we have so much to do that such also when I look at our TAM, host. There is that part of workload being written, but then I have MDM, I have governance, I have cataloging, I have so much more. I got tremendous host. Stuff to do.

Speaker 2

There's always going to be a corner case where it may feel like somebody is competitive, but that's not technically true. Host. Arguably, Databricks is super competitive to Microsoft Azure because the lakehouse competes with Azure Databricks. So look at the world they live in So I would just say that's how I see the world, a philosophical answer back to a much broad question you asked, but they're a great partner.

Speaker 4

Host. Yes, understood. I think that's a thoughtful answer. One question on ARR. Obviously, You came in ahead of what people were expecting.

Speaker 4

But when I was looking at kind of net new, it seems like it's on cloud ARR, Seems like you added kind of the same amount versus a year ago. Maybe I'm thinking this wrong, but as you are kind of leaning in on cloud, You're no longer selling self managed. Should you be adding more cloud versus a year ago on a net new basis?

Speaker 3

Host. Yes. On a yearly basis, that's how we're looking at it. Quarter to quarter volatility makes that a little dicey to Well, extrapolations from 1 quarter's performance. And as you can see from our guide, host.

Speaker 3

Q3 versus Q4, this will be another back end loaded year as 'twenty two was and as 'twenty one was. Host. In fact, on a NAR basis, a little bit more back end loaded than it was last year even then. So host. Yes, we expect NAR to grow on a cloud basis for the full year for sure.

Speaker 3

And we have host. High confidence in how it's going to unfold for the rest of the year based upon what we see in the pipeline, based upon what we see in the products in the go to market So maturing and hitting our stride now that we've announced it. We're in sort of the Q3 of our cloud only journey.

Speaker 4

Host. Understood. Thank you.

Speaker 6

Thanks, Vincent.

Operator

Our next question comes from Koji Ikeda with Bank of America. Please proceed.

Speaker 1

Hey, this is Natalie Howe on for Koji. Thanks for taking my question. Host. Looks like sales execution was pretty good in the quarter. We wanted to ask, have you made any adjustments in the go to market strategy?

Speaker 1

Or Can you provide more color on what efforts have helped increase close rates and what will help sustain that through the end of the year? Thanks.

Speaker 2

Host. Natalie, I think appreciate that. Obviously, a lot of work going on to make sure that we transition to this new model effectively. Host. I would say that it all goes down to our focus on the right use cases for the enterprise and above host.

Speaker 2

Commercial customers where IDMC generally plays a tremendous value creation for them. And obviously making sure that these other things the team has done a good job of is orienting towards use cases a lot. And obviously that's one area that customers obviously resonate a lot. And our focus on the CDOs, the value prop going towards the CDOs because in some cases CDOs have direct budget, in some cases even if they don't have, they have a big influence. So all of those things between our in our go to market organization and a maniacal focus on operational execution.

Speaker 2

I think Mike mentioned Pipeline create, we see pretty healthy pipeline create. So I think all of those things are bearing fruit, and I think we obviously have a big second half in front of us and the team's right Heads down focused on that right now.

Speaker 1

Awesome. Thank you.

Operator

Our next question comes from Howard Ma with Guggenheim. Please proceed.

Speaker 7

Thank you. And great to see the team executing According to plan. Amit, building on some of your previous responses, so on my question is on GenAI as well. Host. Given the importance of data quality, data governance, data privacy to building and training AI and ML models, including GenAI, host.

Speaker 7

Are you starting to see a ramp in pipeline conversions for these product for these specific product SKUs or are they still in the host. And a related question is, are there barriers to adoption near term? I can't help but wonder if there are, because such as And barriers might not be some of them might be out of your control, right? So it could be budget constraints, not accommodating the demand or, I guess, in other words, You're not being able to justify that the business case or maybe on your end, maybe you needed to make additional investments in sales enablement. It's hard to argue against Informatica's unique position in data integration and intelligence, but I guess we're all just really trying to figure out host.

Speaker 7

How does the realization happen, right? What the cadence is? Thank you.

Speaker 2

Absolutely, Howard. No. So Howard, I think obviously no barriers for us. I would say that absolutely, it's been I was like literally Informatica World Post after that. I was in Europe and I was traveling across multiple cities in the U.

Speaker 2

S. As well. And I think all the way when customers have a dialogue with us is that, hey, host. Absolutely, they want 2 things with GenAI. As I said, all enterprise customers are right now, feverishly working on how do they get there, what's The first use case, what's the second use case, what's the reference architecture?

Speaker 2

And they get comfort from the fact that they can actually do it on one platform. Host. So in fact, when our sales teams, it opens up the door for them because those are all conversation starters for us. Host. And second is, no customer wants to invest in a technology where they feel like it's a dead end and has nothing in AI.

Speaker 2

So that makes a great Entry point for us that even if in the short term, let's say, they're trying to do a lake house project, which may be nothing to do with AI as an example, but they know that as they do all the work on us, on our platform. They can leverage it into their next first GenAI project. That's how it becomes a conversation starter, host. Creates pipeline, has deal closures, even if the customer is in the month of August not going to go to a Jenny add project, but they know that they've been there investing in us, host. Come generally when they want to do something, it's not a dead end.

Speaker 2

All of those things are happening, and that's how I see the opportunity shaping us for that. The point I just made on Genia is that look, as I said, take out the individual user use cases, enterprise wide use cases end up being complex and those are host. All in the grunt mode of forming and shipping, and you will see a lot of them happening in 2024.

Speaker 7

Host. So I guess just a super quick follow-up because I asked a really long question. Can you comment on are you seeing increased pipeline conversion host. For your data quality, data governance and privacy, like for those specific SKUs that I think we established in this call that it and I think Through all of our research, you do need good data quality and governance and privacy, right, for these AI models. But is it manifesting today or is it maybe more back half event or 2024?

Speaker 2

Oh, absolutely. So data quality or data governance and data privacy was host. A very, very fast growing capability for us in the second half and even for the full first half, to be very honest to that specific question. And I think and then when you think of Privatar, that acquisition lends us in that journey also because in the AI world, in Gen AI, democratization is happening. Host.

Speaker 2

Enterprise is getting very nervous about data access management. So that acquisition was very much centered in that context.

Speaker 4

Host. Okay. Thank you.

Operator

Thank you for your questions. Host. There are no longer questions waiting in queue. So I will pass the management team for any closing remarks.

Speaker 2

Host. Well, thank you. Well, look, I appreciate everybody joining today. And I just want to wrap up today's call by sharing my perspective on where we are. Host.

Speaker 2

Look, as we Informatica continue to accelerate our innovation led cloud business model transformation, which as many of you know, is not necessarily the easiest host. It takes a lot of hard work. I couldn't be more proud of our success. Transformations are not easy, but we have been unique host. In doing that, while not only growing our cloud business, but also growing our profitability and cash flow.

Speaker 2

That's what I was mentioning when Andrew asked the question that a very, very, very few companies are able to do both. And that is all because we've had a long term strategic focus of building our host. IDMC platform and working tirelessly to make IDMC be powered by our AI Clear, which we launched back in 2017. Host. Today, IDMC powered by our AI Clear has become the data management platform of choice for enterprises across the globe And I couldn't be more thrilled for that.

Speaker 2

We have a lot of work ahead of us, but I couldn't be more proud and thankful to the Informatica team for bringing us here middle of the year. Thank you, everyone.

Operator

Host. That will conclude today's conference call. Thank you all for your participation. You may now disconnect your

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Earnings Conference Call
Informatica Q2 2023
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