Informatica Inc. (INFA) Earnings Call Transcript & Summary

All right. Welcome, everybody. This is the first time, Eric, that we've been back in-person since 2019. You guys were a private company then.

Correct.

You came here as a private company. I don't recall, but yes, we're thrilled to kick off the 2022 RBC TIMT conference. Thank you, everybody, for joining us. My name is Matt Hedberg, for those that don't know me. We are excited for a really fun and hopefully, eventful 2 days here in New York City. We're fresh off of earnings, and there's a lot to talk about. And so kicking it off today is Informatica with Eric Brown, CFO. I've known Eric for -- part of more than a decade, it feels like. So -- and we're thrilled to be working with Eric, and Vic down here in the front row, IR, from Informatica. You guys went public, was it in 2022 or 2021?

2021. A year ago, actually, at end of last October.

Second time around, and so we're excited for the new Informatica. Yes. So maybe, Eric, I think when I first sort of got reintroduced to Informatica probably about 4 years ago, I guess, it was really obviously a different company in many ways. I'm going to move this mic. It was a different company in a lot of ways in terms of the subscription transition and the focus on away from license and maintenance. And now we're talking about SaaS. So maybe just -- can you start out by just kind of -- just a quick level set for those that maybe aren't dissimilar with the new Informatica, and then we'll get down to some more granular details on sort of how you're different than a lot of us remember.

Sure. So there's a couple of things that are different, but there's also a couple of things that have remained constant. So we've been in the data management space for more than 25 years. So this is all we've ever done. We're severely focused on data management. In the kind of prior iteration of Informatica, we've a traditional perpetual license model. And so if you went back and look at our P&L, say, half a dozen years ago, even the same $350 million from perpetual license, lots of maintenance and pro services and basically 0 subscription. We were privatized in 2015, and we embarked upon a 5-plus year journey to rebuild from scratch organically, not through M&A, stitching things together. But we organically built a cloud data management platform. We refer to it as IDMC. And so what we have today is the industry's only a comprehensive data management suite designed for cloud, cloud to cloud and ground to cloud use cases. And so what's really fascinating is that we used to have a number of publicly traded competitors, they've all disappeared, the last one was Talent, which was privatized, I don't know, 2.5 years ago. So we sit here today standalone, about $1.5 billion in ARR, very profitable, good growth rates being driven by our cloud line of business. We're gracefully deprecating our maintenance business. We're migrating customers, but we're focused on cloud data management at this point forward. And so our business model is very different, but we've remained, a, focus on data management; and b, we retained this notion of being partner neutral, which is really important for us. And so our ecosystem, we can get to that later is very different today versus in the prior iteration.

So we'll talk about cloud because that was a recent development from last quarter. And I know I get a lot of questions and folks about sort of what does that mean from a go-to-market perspective and all those sorts of things. But I think one of the things that impresses me, the durability of your existing customer base is unlike a lot of other companies out there. Can you talk about, when you're talking to your end customers, especially as IT budgets tighten, where does Informatica sit from a spending perspective inside of your customers' IT budget?

Sure. So most broadly, we're following the macro trend of digital transformation or cloud modernization. Different terms were basically the same thing. So at the highest level, the demand drivers are the need for corporations, large and small, to take their existing data processing and analytic activities from additional on-premise data warehouses to elastic cloud systems. So ultimately, the kind of the storage vehicle as it were ends up being a cloud database. And so I think it could be AWS, Azure. It could be GCP. It could be Snowflake built on top of those, respectively. What we do is, we intermediate and manage the data flow into those cloud systems. And so we've built up over 25-plus years, for example, library -- proprietary library of 50,000 data connectors, 50,000. And so a lot of the people we compete with would have 500 data connectors and be very proud of themselves. And so that's a huge advantage of being like in this business, longevity and the focus on data connectivity. And so there's really not a data source that we haven't seen before, and so we can map it very quickly to these cloud data warehouses. And so we are kind of the Switzerland of data management. We partner equally well with the cloud hyperscalers, with Snowflake, with Databricks, and we'll attach to any data system, mainframe relational, et cetera, that the customer might have. And so kind of the stickiness of the business is the fact that these connections are not onetime. It's not like a project people use Informatica and they're done. We're continuously piping mission-critical workloads, daily updates, updates by the minute, the second, et cetera, into these cloud data warehouse systems. And so that's where we sit in that overall digital transformation.

Okay. There's a lot to talk about on the cloud side, but I think as a dovetail to where you sit there, the last quarter, you talked about some slowing trends that you saw in September. So the question we always get is, I guess, how did things progress through sort of through your conference call in October, but then sort of the level of conservatism in that Q4 guide? Because I think at the end of the day, the questions that a lot of us have are our numbers, are they low enough. It's hard to answer that, I think, as a CFO because there's a lot of unknowns. But maybe just help us with the constructs for your 4Q guide?

Yes. It's basically -- we think about ARR as kind of our -- kind of primary guidance metric because we do still have a mixed model. We can book deals in as a cloud contract or as a self-managed contract. We've taken perpetual license to 0, so I don't really need to forecast that. The vast majority of my GAAP revenue every quarter is already on the balance sheet, so be as deferred revenue or a maintenance or subscription renewal at 95% or 94% renewal rates, respectively. So we actually have an incredible amount of visibility into our quarter. So the real question is like what's the net new. And so in construction our guidance for Q4, we said, we had detailed commentary about what we saw in Q3. So we've assumed Q4 is as tough as month 3 of the third quarter.

All 3 months.

Correct. So we're not assuming things getting better. In fact, we expect them to get kind of slightly worse offset by -- there's always fiscal budget flush. This kind of user lose in Q4 for us and any other enterprise tech vendor is always the biggest quarter for net new, and we've been really mindful throughout the year. We have managed the cost structure. We initiated -- and we slowed our rate of hiring in the middle of the year. So we've kind of anticipated this a little bit, and we're very protective of our bottom line. We're not valued on revenue growth uniquely. We're valued on some combination of revenue growth and bottom line, deliver free cash flow, non-GAAP op income. So I manage the cost structure with that in mind, knowing what's important to our stakeholders.

So as a dovetail to that, you've been in tech for a long, long time, the entire management team. From a leadership perspective, what are some key -- like how do you approach this uncertainty as an executive here? Are there things that you can draw on from your past that help navigate -- all these recessions are different. [ CPPIB ] was different, but just was there anything that you sort of -- from a leadership perspective, how you approach this uncertainty?

Yes. I mean I've taken a tech company from minus 30% non-GAAP op margins to greater than plus 25% in over 3, 3.5-year period of time. So this is following the crash of 2000. McAfee, I doubled non-GAAP op margins from about 12% to 24% of my tenure. So -- and I've also founded my own software company and literally had to sell software to meet payroll. So actually, I know how hard it is to sell software, and I certainly know how to manage costs. So like none of this fazes me. And like I said, I enacted a playbook back in -- starting in the middle of this year. Just kind of seeing some of the early warning signs, hey, on the margin better to kind of slow and pause now to see how Q3 and Q4 unfold and unfortunately, has unfolded to the downside as opposed to the upside, but nonetheless, there's been no surprise. So yes, you've seen it, know the playbook. I'm going to exhaust some detail about what to do in terms of how you manage that in the cost structure of enterprise tech company, but like I've done it several times. So it's nothing new.

Yes. Maybe then on the flip side, you said you started to see some signs kind of earlier to this year. On the flip side, what are some things that you might look to say, well, things are getting a little bit -- is it pipeline conversion, that kind of stuff?

Yes. It's a combination of -- its pipeline builds. It's the ability to convert the pipeline as you know that's super important. But between those 2, it's -- is the sales team actually able to accurately put opportunities in the right category because like a typical pipeline management, you have like your gross, your different categories, you assume kind of conversion ratios from one category versus the other. So right now, there seems -- it seems to be a bit trickier to get things in the right category. And one of the things we talked about in -- on our Q3 call is, like for the first time, we saw a deal we had it commit. 2 days ago in the quarter, talk to the CIO, the budget holder. They said, yes. And then unexpectedly, the CFO dropped and say, hey, I'm reviewing this. I'm changing the threshold of review approvals. Like this used to be delegated to you. I'm inserting myself. We have to go through another review cycle. So that's net new in the environment. And so I can commit deal, which you can count on it, 90-plus percent conversion at that stage, turn into a push. And so that's kind of where we are right now. The pipeline is there. We have to sort out exactly what the correct stage identification is. And so that's kind of what we saw in Q3.

So as you're building your '23 forecast, you're talking to your sales reps from a bottoms-up perspective. What kind of skepticism do you think the reps are putting into their own pipeline kind of build and quality perspective? And is that a fair amount, like you're pushing back on this and saying, you got to double check these things and...

Yes, you have to double check everything. As we sit here today in November, like we don't have the totality of the 2023 pipe, right? What's going to happen is, we'll create pipes throughout the entire year. Marketing is going to generate pipe on their own over the course of the year. Yes, we have opening pipe for deals identified in 2023, but that's just not the full picture. And so what we have to do is drill down and look at sales force capacity, ramp capacity, performance by geo. And then we also have to step back and say, how has the performance been on this line of business mix, cloud versus self-managed because that's a really important feature of our P&L. For those that are interested, if you look at our investor deck, this page is 34 and 35, I believe. We do a side-by-side comparison. What happens if we book a deal's cloud versus self-managed. The self-managed outcome looks great from a 606 perspective. Cloud deal looks like it's not as profitable from a cash flow perspective and an AR perspective, they're identical. And so we're spending a lot of time also identifying what we expect for mix in 2023. And we're expecting much more of a cloud mix referred to this concept as cloud-only starting in January. We can talk about that.

It's a good dovetail.

That concept of mix is also really important as we inspect the pipeline.

So it's a great segue because there's a lot of -- whether it's Salesforce incentives, whether it's just customer education to some extent. I mean how do you kind of think about the levers to drive that cloud mix in 2023? And I guess, so what's the opportunity? What's the risk then from that perspective?

Yes. I [indiscernible] the opportunity is three or fourfold. Number one, 2023 marks the first year we actually have every single one of our products on the cloud platform in multi-tenant format and multi-tenant formats important because we've had some products -- actually #2 product family, MDM, as single-tenant cloud for a number of years. When you switch it to multi-tenant, like our cost of goods drops by like 90%. You just get that cost efficiency from the architecture. And so we're focused on profitability and things like that. So they're the R&D team by completing the multi-tenant cloud roadmap, delivers some product with superior bottom line characteristics. So one, it's -- the opportunity is for the first year, we talked about cloud only. We can now lead with everything multi-tenant cloud and price to beat anyone and still have great bottom line margins because we have like significant economies of scale. The second thing is, the focus of the sales team as opposed to historically, we had to manage through a mixed business model. So like 2, 3 years ago, you've got half the products on cloud. The rest is self-managed. You have to sign quota to the sales team and say, okay, 3 out of 7 product families are cloud-only. Great, go after that. 4 out of 7 are self-managed, go after that. And again, the margin characteristics and the revenue characteristics of one versus the other very different. So you have to like manage that through different quota multipliers and you also have to augment it with a different combination of sales specialists and overlays. And so you build a, by definition, a less than optimal efficient sales organization. When you're leading with cloud, again, the MantraCloud only, well, we'll still sell some self-managed products, some perpetual licenses to government and slay that kind of thing. But the focus is going to be on cloud. The primary quota [indiscernible] in cloud, and we'll be able to eliminate and simplify layers of specialization we had to have in this mixed mode model. And so we're expecting go-to-market efficiencies in that regard. And then again, we expect just traditional economies of scale. We're growing at a good clip. We get better and more efficient every year. So by definition, we'll get R&D leverage, et cetera. So those are the opportunities. I mean the risks are really on the net new side. Ironically, as we move through the year and things have gotten worse, actually, our renewal rates have gotten better. Maintenance renewal rates, subscription renewal rates, which is counterintuitive, but we kind of -- we went through this in '08, '09 as a company. Still, we were in the data management space so some things never change, right? But we actually go back and see kind of like what happened. And what we found is that our tech because it was powering enabling mission-critical workloads back then as it does today, our renewal rates held fast. And the fact, to the extent there was any vendor consolidation accounts, we were the net beneficiaries because back then, we were also like -- even though we had more competition, we were the largest scale player. Today, we're much larger. We're cloud. We have no publicly traded head-to-head competitors. We're competing against public companies or private companies that were funded at growth at any cost over the last, whatever, several years. And those private companies as they think about what they have to do in this market, they got to figure out how to go from minus 30% bottom line margins to breakeven as soon as possible. Like I mentioned, the discussions, those private company boards are having right now was like, hey, topline growth of 40% and sub-$100 million ARR minus 40% bottom line is fine. And they have to pivot on a diamond and figure how to get to breakeven, and that's brutal.

It's hard.

What happens there? R&D gets cut, sales going cut, morale goes down, 488 values go down, talented traits. It's a tough ride. So for us, that's a relative, I think, tailwind as we think about the competitive landscape in 2023 and beyond. So like the risk kind of reduced to basically macro on the net new. We feel quite good about the installed base, the mission-critical nature of our workloads. We feel quite good about our abilities to control margins, both at the gross line and also at the bottom line. We have a playbook for optimization and ironically, this is like a good time for us to optimize because if we simplify the business like focusing, first and foremost, on cloud and not maintaining kind of multiple lines of business and overlays and things like that, we think we can be a bit more efficient.

So I know you've talked about when you convert a maintenance customer to cloud, it's almost like a 2x uplift on -- is that from an ACV perspective?

That's correct. You're right, Matt. Before we had $100,000 maintenance and they'll be converted to cloud, we end up with about $200,000 of cloud.

Do you think is that -- I mean on sort of net new cloud, not conversion. I mean is that kind of the right way that we should think about sort of the what a deal might look like in a cloud-only world relative to if it was signed as a maintenance contract?

Yes. Our maintenance base is captive. It's exceptionally difficult and cost prohibitive for a customer to migrate from our on-premise maintenance product for DI to someone else's cloud DI product. Like we know this. Customers have actually bid it out, and they've come to us and said, the bid was 5x as much. No guarantee that it could be completed within 3 years kind of thing. It's really -- it's an enormous task. So I think people are rightfully initially concerned that hey, we've seen transitions before. The maintenance space is like a whatever, it kind of melts away very quickly. That's just not the chaos, embedded mission-critical workloads. Average tenure of our maintenance customers probably 7, 8 years plus, not 1 to 2 years. And again, if they unplug it like their systems like break down, they can't close their books or calculate their trading balances, and that's the type of mission-critical workload we're talking about. So we have the ability to migrate at a pace where the customers are ready. Because just remember, the migration is not just what we do, it's what the customer does. And so we're continuing to plug away on maintenance migrations. We get better over time because we create tools and tech to automate script, et cetera. We're bringing down the average time to migrate, and it's part of our playbook. So we're going to look to increase year-over-year that activity, but it's not necessary for us to succeed. Net new workloads is what we're going after. So the flip side of this, I'd say, is that the vast majority of our cloud growth has been from all net new as opposed to converting existing. I think it's actually healthier that the bulk of our cloud growth coming from net new because it kind of proves that the new products are resonating.

Is that the kind of the spend? I don't want to say uplift because it's not conversion. But like are you seeing more dollars, more wallet share when you're selling cloud-only on net new than you would if you would like sold $100,000 including the maintenance?

I'm not sure if we see more wallet share initially because as expected, our land ASPs are a little bit lower versus perpetual license world. But what happens is, again, we've all seen this, it's a classic cloud model. They renew at a higher rate, and then there's a positive adder for dollar-based net retention. Our composite net retention sits at 112% for sub and several points higher for cloud-only. If you look inside that 1.5 years ago, we introduced consumption-based pricing, and we're now seeing kind of mid-contract upsells. And the beauty of these mid-contract upsells on cloud is that it's not a heavy-duty sales cycle that has to be replicated with half a dozen people and presales kind of like dropping in to sell something that new. So we love the efficiency of the upsell and cloud.

On the IPU, the consumption piece, I know there's a lot of concern from investors on the durability of consumption models, and we've seen hyperscalers and things like that. Just remind us again about sort of what consumption means to you and how it might be different than others?

Yes. And I think the scenario is very different than the hyperscalers because I'll share with this group. We ourselves, like 3.5 years ago, embarked upon a cloud consumption optimization project because we're consumers of AWS, GCP and Azure. I'll just stick with AWS for the purpose of this example. What we found is that we were being unbelievably inefficient with our internal use of AWS. Like a very specific example, we would stand up our demo environments for presales in AWS. So PCLs team have been in an environment. It would be high availability, most expensive database attach called [ dogs and whistles ]. They standed up for like a demo and then instead of taking it down, they like leave it up. It would just like run in some cases for months. And the analogy here is like walk out of your house with all the lights on and all the faucets running. It's like you just don't need to do that. So it is incredibly wasteful. And so we optimize by using third-party products like cloud ability and others to like just really ratchet down our internal use of those cloud services because we're paying on a classic consumption basis. Our consumption model is a little bit different. We sell Informatica processing units for IPUs. So think of these as tokens. They're interchangeable in different ratios for all of our cloud products. So a customer buys whatever 1,000 IPUs per month, they commit to a tier contract. And at any point in time, they can spin up or spin down their cloud services and the rate at which it draws against their overall IPU balance would change based on the services. So it's not 100% after the fat consumption only. The IPUs are use it or lose it every month. And customers know that going in and we size it. We're very careful not to oversell. So we don't allow the sales team to size the IPUs. We have a customer adoption services seeing come in and size the IPUs. Sales team natural gravity be probably oversell a bit. It's just kind of human nature. The adoption team is accountable for customer sat utilization and renewals is the one basically sizing it. So that's our approach to consumption. Again, it's only 1.5 years old. It represents about 1/3 of our cloud ARR, but the take rate, we're now -- we've gone from 0% mix in our new business for IPUs. Last quarter, I think we had 54% of our new cloud business was denominated IPUs. So from 0% to 54% mix in about 1.5 years. So the take rate, the reception for our customers has been great. And if you study this really carefully, read all the Gartner reports, you'll see we're extreme upper right, every single quadrant, and we've been so far like depending on the category 5 as much as 10 years. The [ one NOC ] you would see against us as a vendor, the [ one NOC ] against us is that 2.5 years ago before this consumption-based model, they would say that our pricing construct was too complicated. Too many products, too many license scalers really kind of complex. The beauty of the IPU, other then having consumption is massive price solidification, I mean it always a one fell swoop, all the cumulative pricing complexity we accumulated over the last 25 years. If you think about a product catalog company or products we have, how many scalers, it's daunting. It dramatically simplifies with the IPU. And that's one of the things that makes me really excited about them. Again, it's a concept of process simplification, et cetera.

So I'm going to stop for a question, if there's somebody here -- but if there's a question here. But just one more on the cash flow side. From a cloud-only, your cloud-first perspective IPUs, what impact is that going to have on cash flow?

Yes. I think that all of the things being equal, if I look at whatever a dollar of ACV self-managed versus a dollar of AVC could, the difference is effectively the COGS, right? So it's probably 20 points more or less. That's basically what we have to pay for AWS underlying hosting COGS or GCP or Azure and exterior Oracle as will be in the mix and our cloud ops team. And so that's the difference. The -- so that's the negative in terms of bottom line cash impact as we initially booked the contract in year 1. But over the fullness of time, we know that the renewal rates and the net retention characteristics on cloud are much better than self-managed.

Self-managed is pretty good.

Self-managed is pretty good by itself, right? And so we make it up in the mid- to long term. That kind of -- that COGS delta, we make it up in terms of just raw renewal rates and then also a higher net retention.

Is duration change though, I mean, from a deal duration perspective?

No. I mean our deal duration on net new for cloud versus self-managed has been around 2 years. Let's remind like 1.2 years, yes.

Are there any questions for Eric?

For market share versus [indiscernible].

Yes, for -- I'll use round numbers. Some rough and tough $1.5 billion. Our closest competitor right now, I'd say, it's probably still Talent, they are privatized. And so they were like 1/4 of our size, more or less when they're privatized. I'm not sure where they are right now. And then below that, there's just not that many competitors over $100 million in revenue or ARR. There's maybe a handful of private companies, but there's no other like head-to-head data management company. If we look at larger tech companies like IBM has this ancient product called DataStage dating back to their acquisition of essential like nearly 20 years ago. It's kind of like they just keep selling it with minimal investment. That's probably a couple of hundred million run rate. So that's basically the competitive landscape. It's a series of smaller companies that only do one thing in the overall data management landscape. We do 7 things, our 7 product families all in one integrated platform. And that's kind of helps explain not just our relative size, but it actually explains how we position versus any 1 of these individual companies.

We only have 2 minutes left. And I think an important thing that I want to come out of these meetings with is, with uncertainty there's also opportunity for companies to control what they control. Clearly, on the cost side, I think you're thinking about that. But if I were to say, Eric, what are the 2 or 3 things that you're most excited about next year that are company specific that could cut through some macro headwinds?

Yes. I think, look, the unfortunate reality of where we are in enterprise tech is, it's a more challenging kind of purchasing environment. Like every company, pretty much every vertical and now even large cap, they've all blanked, just take a look at their cost structure. So what does that mean? They're going through their list of vendors, their tech stack internally like what it takes to run their business. They're saying, what I need to keep? What I need to downsize? What I need to cancel completely? And so it's a question of prioritization. And what I love about our position, we saw this in circa '08, '09 is that we power mission-critical like workloads. We're not like a nice optional ad hoc analytic tool that was purchased by just the marketing department. That kind of stuff is going to get cut first, right? I can just guarantee that's what's going to happen in this -- over the coming like 12 months here. So I'm excited about the opportunity to do a bit of consolidation. I think about the smaller competition you referred to a moment ago, these private companies, we put yourselves in their shoes. It used to be worth like 40x revenue in your last round. Like who's going to buy a 40x revenue company these days. So they're going to have to go and do another funding round. They're going to get crammed down, and they're going to have to like take out 1/3 or more of their workforce. And so they're going to become less effective as point solution competitors. We're in the market with the only scale cost optimized because it's multi-tenant now across the board, cloud data management platform with a great installed base. What I love is the durability of our business. We have 3,700 active subscription customers across all industries, Worldwide, the average ASP is $252,000 per sub customer as of end of Q3. You add that up, you do the math, it's like rough and tough, it's a $1 billion. That's our sub ARR. It gives you a sense of like the breadth and the diversification of our installed base, and that's what really matters in kind of the coming 12 months here.

Yes. Great perspective, Eric. Yes, I think the durability of these models certainly shine. I think it's the net new piece, I think, that you sort of alluded to that could be a bit of a challenge. But the durability of the cash flow, the deleveraging, which I know you're focused on as well, I think are all super interesting. So from all of us at RBC, thanks Eric and Vic, for coming here, and hopefully, you have some good one-on-ones today, but I appreciate your time.

Thank you very much, Matt.