Informatica Inc. (INFA) Earnings Call Transcript & Summary

Okay. Welcome, everyone. Thank you for joining us today. I'm Andy Nowinski, I'm the software analyst [indiscernible]. It's my pleasure today to introduce you to the team from Informatica. So we have Eric Brown, the CFO of Informatica; and Victoria Dunn-Hyde is here, the Head of Investor Relations, as well. So thank you very much for attending again. Just last year, it was virtual for us, and this is the first year we've had it back in person. So great to see you again.

Great to see you, Andy. And again, thanks for hosting us here today.

Yes. So we've been covering Informatica since your IPO, your second IPO. And it was -- maybe it would be still helpful to start with, for the investors that may not be familiar with Informatica, just a quick overview of what Informatica is.

Sure. So we're one of the leaders in data management. And so broadly speaking, data management is the technology stack that allows companies to move, manage their data, move it into cloud data warehouses, interchange formats, secure governance, et cetera. So it's at the heart of all things relating to digital transformation. And Andy, as you noted, we had our second IPO this past year in October. We first IPO-ed in the late '90s. And so we've been doing nothing but data management for north of 25 years. And so unlike a lot of companies that IPO-ed last year, we have scale, $1.5 billion in revenue, 99% of which is recurring. And we've been acknowledged as the Switzerland of data. So that means that we work very, very hard to connect any and all data sources. And so we can talk more about that as we get into this further. But net-net, all we do is data management, and we have kind of the cloud platform to back that up.

Great. That was a great overview. So why don't we start with some of the just macro-type questions. How are customers thinking about the priority of spend within cloud data management, given that a lot of IT budgets may be tightening right now because of the macro backdrop?

Yes. We're definitely seeing a bit of elevated budget scrutiny. The good news is that digital transformation or cloud transformation remains one of the absolute top priorities for CIOs, irrespective of geography and industry because it provides efficiencies, better go-to-market, et cetera. And companies, frankly, cannot afford to not invest in cloud and digital transformation. We're pretty fortunate that because we're such a large established vendor, we have an installed base with thousands of customers. We've actually seen our renewal rates increase as we move through the year. And so what this underscores is that you need to be providing technology solutions that provide value or driving mission-critical work. That's indeed what we do at Informatica. Having said that, we've seen -- and a lot of other vendors have commented on this, that you're seeing the larger types of transactions get a bit more scrutiny, elevated budget review. So we've seen a bit of that, just like all other companies. We like the fact that we tend to have lower ASP, net new transactions. That's part of our cloud model. And we have a really nice mix of distribution of sales to existing versus net new logos. It's about a 50-50 mix for us. And again, because we have that proven established scale, we can go back and sell the new products, more capacity to existing customers. And equally, with the cloud selling motion, drive net new logo acquisition, so that's basically how we see the macro of the top line. At the bottom line, we have that unique scale, which allows us to optimize costs in a way that most other companies cannot. So for example, we can location shift where we do hiring. We can hire more people, say, for example, in our India-based development center to maintain capacity but do it at a much lower cost. And so we have a unique ability that comes with scale and geographic distribution to manage the cost side of the equation in combination with the topside bookings part of the equation.

Okay, great. It sounds like -- I mean, certainly, sales cycles elongating is a pretty common thing that we've heard from many different vendors, so requiring more approvals. But you're seeing also that retention rates going up throughout the course of the year. So I guess if you put those 2 together, it doesn't sound necessarily like customers have changed their budgets from what they were at the start of the year or lowered their budgets. It's just taking maybe a little bit longer to get approvals and it's still a high priority. And if you're seeing higher retention rates, what's driving that higher retention?

I think people are -- they're just looking to make sure they're getting maximum leverage from their incremental IT investments. And so when you have a platform technology as we do, what that means is that organizations who need to drive, for example, digital transformation, instead of assembling a portfolio of half a dozen or more different vendor tools, they can look to an established trusted vendor like Informatica, purchase our platform, have 7 product families that are all acknowledged as best of breed. And what you get with the platform, it's a very -- in some cases, overused term. But in our case, this organically built platform. We built this in the 5 years leading up to our second IPO. That was the big part of the go-private strategy. What it allows the customer to do is at an equivalent or lower cost, deliver more capabilities to the organization and also deal with a vendor that is -- has the kind of the proven profitability and balance sheet strength to kind of weather the environment, so kind of platform combined with best of breed combined with really high-value solutions. We noted the higher retention rates leads to kind of proportionate success here.

Okay, great. Maybe just to wrap up some of this macro discussion. I'm sure a lot of investors and certainly us as well are -- will be looking to do CIO surveys toward the end of the year just to see how budgets look next year and where the priority list falls. But just curious if you've had any customer discussions yet or what your customers are saying? Are they -- on how they're thinking about budgets next year in light of the -- where we're at right now with the macro?

Yes, they haven't -- not everyone's locked in their budgets for next year. I think one should expect this ongoing level of higher scrutiny. And so I think that it's incumbent upon us and all other technology vendors to provide value, value in the form of lower cost of ownership, for example, or value in terms of better customer analytics, acquisition rates, retention rates, et cetera. I think you'll see kind of ad hoc, nice to have kind of analytics solutions that aren't kind of [ found ] on operational improvements have a bit of a competing for budget next year. And so we've organized our business, as we look to next year, under the premise that we'll have to continue to prove value as we've historically delivered. I think one can expect that the larger-ticket transactions will have elevated -- ongoing elevated levels of scrutiny as well. So one has to build that into their kind of pipeline and conversion rate modeling, et cetera. Better to have a larger number of medium-sized transactions as opposed to a smaller number of 7 or 8-digit transactions to make the quarterly numbers. So I think that, that -- as we've seen it so far in the second half of this year, that holds for next year as well. And I think that you'll continue to see trends, macro demand being favorable for things related to digital transformation or cloud transformation because, again, it provides true value and leverage to [ innovation ].

That makes sense. That's great. And so it sounds like you've got a lot of different levers for mitigating a tougher macro next year. In terms of maybe other levers, you mentioned location shift in lower-cost regions. Is that -- maybe just expand on that as well because I'm sure not only just mitigating longer sales cycles next year and higher levels of scrutiny on the top line, you also have some levers for -- on the cost side as well.

Yes, we're really mindful of our stakeholders look to us to deliver not just top line cloud growth but bottom line non-GAAP op income margins since we currently sit at about 22% non-GAAP op margin. So as we think about managing to that number and expanding it over time -- and again, we have a multiyear stated intent of expanding that non-GAAP op margin, one of the things that we can do is adjust our mix of hiring. So last earnings call, for example, we mentioned the fact that 90% or 95% of our net new hires year-over-year were in low-cost locations. In order to be able to do something like that, you have to spend years and years investing in mid- and low-cost locations. And so we've had primary product development stood up in India for 15-plus years, right? This is not something you can just do overnight or even in the course of 1 year. And so we can maintain capacity, for example, in the lower cost by location shifting the hiring, for example. The other things that we've been doing is we just completed this past year the IDMC platform on a multi-tenant basis. And so we've had our products available in cloud for the better portion of the year. But just last year, we poured our last product family to multi-tenancy. So it doesn't change the customer experience. But from a cost of goods perspective and if you look at the gross profit margin line, when you move a solution like MDM from single to multi-tenant, you can reduce in some use cases your cost by a factor of 10x. And that directly flows through to gross margin for us and then hits our non-GAAP op income line. So again, those are the types of things we're able to do with location shifting, the scale that we have internationally, as well as the engineering [ op ] we're building into our IDMC cloud platform.

All sound like benefits from just being in business for many years you've been -- this isn't your first tight macro you've been through.

Yes. I think that scale definitely matters at a time like this, and I think that unit economics really matter. There's a lot of companies -- we get lumped into the class of 2021 IPOs that are looking for a time line to get to breakeven. We've operated 20s, mid-20s margins for years and years and an 80% non-GAAP gross profit margin for 5 years, notwithstanding this significant mix shift that we've undertaken to a cloud-ratable model. And that is no easy, easy feat. So I think kind of operating discipline and scalability to optimize these different levers, whether it's R&D OpEx or embedded COGS through cloud platform engineering, are very important differentiators.

Okay, that's great. So I mean, definitely a very -- a model that's resilient to the macro. One of the other areas I want to touch on is your cloud ARR. So aside from having a highly profitable model, you've also got a high-growth cloud business that I feel like is underappreciated. You did lower, I guess, that kind of growth expectation for cloud ARR modestly, I think, down to 35%, down from 40%, but still extremely high growth. Do you feel like the cloud ARR is maybe more resilient to a tighter spending environment versus maybe an on-prem type solution?

Yes, over time, whether it's kind of term, kind of stressed macro or mid or long term, I mean cloud is a better model. Assuming that you've engineered a good platform, i.e., with COGS efficiency as I noted earlier, cloud, as we've seen, has higher natural renewals and much higher net retention rates. So in other words, the ability to up-sell and cross-sell your customers over time in cloud is something that you can do -- that you really can't do, at least you can't do as efficiently, with an on-premise solution itself. And particularly when you introduce, as we have, consumption-based pricing to your cloud model, we can come back to that in a little more detail, if you like, Andy. That's, again, a good combination of long-term growth and profitability drivers. And so our cloud business, just to kind of provide a couple of high-level numbers for the group, we just closed at this past Q3 at about $400 million in cloud ARR. It grew 39% year-over-year. And so in the very short term, we'll be running a $0.5 billion cloud business with excellent renewal and expansion and profitability characteristics.

That's great. On the cloud ARR side, so I mean, it does seem like it is certainly more resilient to a tighter spending environment. It did maybe downtick a little bit in terms of your -- the go-forward. So it's still impacted by the macro. But is that maybe a slowdown? Is that just really largely attributable to the sales cycles elongating? Or is there more to it that's pushing that down to that mid-30s range?

Yes. Like other companies, we've seen elongation of sales cycles. And again, like I said, the larger transactions are getting more scrutiny than they were a year ago, and it's taking longer to get those select larger deals across the finish line. But if we back up and say, what's the overall shape of the pipeline? And how has that changed in terms of total size and composition over the course of the year? And so we've seen steady growth in overall pipeline. So the demand for digital transformation remains robust. And the mix that we've seen in our pipeline has changed in favor of cloud versus on-premise or self-managed solutions. And so what I find particularly interesting is that, say, versus 12 to 18 months ago, we saw a couple of industries that were kind of like lagging in terms of the cloud interest and cloud adoption, specifically, I'm thinking of scale financial services institutions, which have historically operated large kind of private cloud compute environments. So we've seen more and more large financial institutions indicate an interest or a preference for cloud versus self-managed as they become more comfortable with security, compliance, et cetera, for their entire kind of vendor cloud solution stack. And so that's been an interesting thing that we've seen in the last 12 to 18 months, kind of that increase in cloud adoption. And like I said, overall, mix in our cloud pipeline, as we sit here today, roughly, I'd say 3/4 of our pipeline or customer demand expression is denominated in cloud versus on-premise self-managed solutions. And so that's a much higher percentage as we sit here today versus where we were at the start of the year.

That's great. Now you also alluded to the consumption-based pricing model in your cloud business. And you call it, I think, IPU model. I think it's a little bit different though than maybe the likes of Snowflake or an Amazon in their consumption-based models. So maybe if you could just provide an -- a little more color around your IPU model.

Sure. So the term consumption-based pricing is there's different flavors of that. So I'll just compare and contrast our model with that of AWS. So the AWS model is as follows. You would sign an enterprise agreement, typically a 3-year commit. For argument's sake, let's say it's $25 million a year times 3 years, $75 million TCV. It's a take-or-pay contract. So at the end of 3 years, if you don't consume $75 million worth of storage and compute, they'll send you a bill for the difference or they'll roll that difference, say, into a [ reel ]. But it's take-or-pay. And what they do is they bill you every month in arrears and actual consumption. And your rate, the rate card that you're charged, is a function of your initial upfront 3-year enterprise commit agreement. So that's the AWS consumption model. It's after the fact, measured monthly, but with this 3-year construct on top. We sell Informatica processing units and -- think of it as a token-based system. Someone purchases IPUs. They sign up to a monthly number of IPUs. Our contracts are typically 2 years in duration. And so for example, someone would sign up for 1,000 IPUs per month. And then every month, what we would do is we'd look at the combination of cloud services that they use. The token, the IPU, converts into different services at different rates, whether it's DI or API management or catalog, et cetera. And we would report against their usage. If they're under in a given month on what they use as an IPU, it's take or pay. So if they only use 600 IPUs versus 1,000, that's it. There's no roll forward of that 400 unused. On the other hand, if over a period of, say, 2 to 3 months, they're 10% or 15% above their 1,000 IPU monthly entitlement, in my example here, then we would charge them. We'd up-sell them to a higher level of IPUs. So it's consumption, it's after the fact, but it's a bit different than the AWS example.

Got you. Okay. Thank you. Do you feel like the -- that your model, the IPU model, is -- has any more sensitivity to the macro versus maybe the alternative method for paying for Informatica?

No. We've seen -- we launched IPUs a little less than 2 years ago. And we've gone from 0% of our net new cloud business mix to 54% of it being denominated in IPUs, so 0% to 54% less than 2 years. And so the uptake has been really positive. And what it has done is it's enabled our customers to start with a single use case, say, data integration, but then expand and sample, for example, data quality and data governance. Because kind of a classic use case is you start with one solution, you realize it has high value, you want to expand it to different users, but you want to govern it and curate the quality of the data. And so they can purchase IPUs and then use those products seamlessly. It's part of the entitlement without running a different sales and contracting cycle. And so customers really like that capability. We've seen really good attach rates for data quality to our sales cycles for just the reason that I've outlined there. And so IPUs, in general for us, have taken what used to be a pretty complex product portfolio, 7 different products, different pricing scalers -- there could be dozens of pricing scalers and collapsed it to one. And it gives customers the highest degree of flexibility. And so it's removed kind of the last kind of objection or knock you could have had against us as a vendor, say, 2 years ago. Gartner loves us, you all can read the reports. But they gave us less than an A grade on pricing because our pricing is too complex. We had too many products, too many different pricing scalers. And so for us, we -- not only have we moved to consumption, which is great, we've achieved pricing simplification, which is very, very important for an infrastructure vendor.

Okay. So you have a simplified pricing model, it's more flexible. I just want to go back to the -- maybe that example where a customer that buys 1,000 units and they only use or consume 600 units in a month. What percentage of those customers actually do that, where they don't consume as much as they buy? Is it a small percentage or a high percentage?

It is typical in the first several months for people to consume less than their overall entitlement. That's understood and expected going in. So we have an IPU calculator. We look at their use cases. We look at the ramp curve, and the idea is that we're looking at 2 years out with them being at or slightly above the initial entitlement. We and they fully expect that as you bring products online, you move from dev test to production to bring on work stream 1, work stream 2. That's how you scale the business. And so that's all kind of understood and modeled upfront directly with the customer. So you don't go from 0% to 100% usage 1 week after you sign the initial contract. It doesn't work that way.

Got you. That's good to know. Okay. Let's shift gears a little bit. Maybe -- about a few minutes left here. I want to talk about your partner in your go-to-market. So how important are hyperscalers and GSIs to your cloud strategy?

So the hyperscalers are really key ecosystem partners for us. So first, as a backup, our cloud platform solution today runs on top of AWS or GCP and coming soon, Oracle as well. And so we are their customers. That's kind of one side of the equation as it were. And what we do is we have go-to-market -- product-led kind of go-to-market strategies with all the hyperscalers. And so what we do is, as we've done historically over the years, is optimize our platform to work with their new capabilities. And so for example, this week, for example, we're running concurrently with AWS re:Invent. And just yesterday, AWS announced Informatica as partner of the year in the data analytics category and design partner of the year. So why is that? Well, we, for example, have just rolled out, again, in conjunction with AWS, a Data Loader tool. It's a free tool, which allows companies to trial at no cost data movement from a source, an on-premise source, into AWS Redshift, leveraging all the power of [indiscernible]. And so from a hyperscaler, this is great because as I noted earlier, how do they get paid? They get paid on data resigning in their, in this case, Redshift taking advantage of their storage and compute capabilities. That's their revenue model. And so we can actually [ switch ] the rate at which data moves from on-premise systems to AWS in this example. And so we have that type of partnership approach with the other hyperscalers as well. Like earlier this year, we announced a similar embedded Data Loader in connection with GCP. And so a lot of our partnerships are not just marketing partnerships. They tend to be technology integration partnerships where we, with the hyperscaler, look at what the customer really needs, which is a combined solution. I can give you another example, like Snowflake. We worked together to partner on a data governance solution, where we maintain the data lineage going from on-premise through Informatica to Snowflake. And so it's like an end-to-end chain of custody view of the data and the fields and how exactly they're transformed as they move from on-premise to ultimately Snowflake in this example. And so those are deep, embedded technology partnerships. We've continued to invest in those, and you'd see similar kind of awards and recognitions bestowed upon us by the other hyperscalers.

It sounds like Informatica is the on-ramp to a lot of these cloud environments. I'm wondering, is the recently announced Oracle partnership that you have, is it going to work in the same manner where you have a Data Loader for Oracle environments and pushing more into Oracle?

Yes. Absolutely. It's the same idea. Oracle will be the fourth hyperscaler cloud platform that we build and deploy our solution on top of. And what's interesting is that Informatica and Oracle have partnered over the years, back to the on-prem world. In fact, if you look at our installed base of on-premise customers, people paying maintenance on long-standing products like PowerCenter, the majority of the installed base is running on an Oracle database. And so what we and Oracle see together is an opportunity to migrate our joint customers, so Informatica customer running on Oracle on-premise to IDMC platform running on OCI. So there's great, again, synergies there to take our collective on-premise installed base and move it to next-generation cloud. The other component of the ecosystem I just want to mention here is the global SIs. Their revenue model is to pitch big transformative ideas to corporations. And over the years, we've seen them pitch -- for example, years ago, there's a big shift for ERP systems, global ERP. Well, we're past that. We're now in cloud ERP. What they're positioning, this is the Deloittes and the Accentures of the world, are our scale, digital transformation initiatives. And again, the common denominator here is the movement and the management of data assets. And so here, kind of a proven 25-plus-year enterprise-grade solution, now 100% cloud native. Informatica's key partners, the Deloittes and the Accentures of the world, we'll go in and pitch business together. We're a smaller component of their overall project cost and bill of materials but a trusted partner because time and time again, we can take the most complex set of kind of data challenges and get that customer to the finish line. That's very important, obviously, to an SI partner in this context as well. So SIs are definitely part of our global ecosystem partners.

Great. That's a good overview. Just a few more for you, Eric. So I want to ask about competition. I mean you're really the only vendor in the space that has really a complete data management platform. And there's certainly -- if you look through Gartner, there's a lot of point product solutions among the 7-plus major product families you guys have. So how do you think about competition in the space? Is there really any -- if customers are looking to deploy the complete platform, do you see any, like, competition that would be -- have a similar sort of -- or is taking a similar platform approach?

Yes. We have no direct head-to-head competition. So I mean, our competition consists of kind of internal teams looking to do custom code and scripts to do data transformation. And as you noted, Andy, the other competition that we have, they're point solution vendors. They'll do one thing, they'll do DI, or they'll do just data catalog, or they'll do just data governance. They're all private companies. We have no direct public company competitor. All these other companies are of limited scale. They're at 50 -- maybe $150 million in revenue, and they're part of the vintage of growth-at-all-cost companies that are now kind of scratching their heads, how to get profitable. And I think that what plays out here is as companies look to consolidate and optimize their spend on high-value platforms that lower the overall total cost of ownership and simplify their IT management, it's going to become a bit harder for point solution vendors, particularly those that are struggling to get to profitability or breakeven, for that matter, to compete with an established cloud platform vendor like Informatica. That's one of the things that makes me so kind of excited about the future because notwithstanding current macro headwinds, at the end of the day, proven platforms tend to do better in these situations against point solution competitors.

Seems like your partnerships with the hyperscalers and GSIs also give you that advantage over the point product vendors that don't have all that integration work completed with these big partners.

Yes. And again, we have that established track record. We're a proven high-value partner to the Deloittes and the Accentures of the world. We don't let them down, right? What's important for them is they're maintaining their blue-chip customer roster. They need a proven vendor that can handle everything. We'll invest the resources as necessary to make the whole project successful. And it's -- would you want to bet your best Fortune 500 account on a vendor with $50 million in ARR that's losing $25 million a year? I'd ask the question, are they getting -- how are they going to do in their next round of funding? How can they make a commitment over a multiyear basis to a global company like Deloitte or Accenture? So they're in a very, very tough spot trying to have those types of dialogues with the Deloittes and the Accentures of the world, vis-a-vis our proven track record over the years with those SIs.

That's great. As we close it out here, maybe just give us something like what are you most excited about as we look forward to the next 12 months?

I think that the -- we're definitely -- it's a long-wave demand driver for all things related to digital transformation. So again, it could be called cloud transformation, digital transformation, et cetera. It's all about leveraging data assets existing on-premise or net new being stood up in the cloud. And bringing it together, combining the data to provide high-value business applications. And so the demand there continues unabated. You look at the hyperscalers, tens of billions of revenue growing at 30%, 35%, 40% per year. I mean, that tells you what the latent demand and interest is for all things related to digital transformation. And data management is an essential part of any kind of successful digital transformation initiative. And we sit here today as the only stand-alone, cloud-native platform vendor in the space. Over the years, we've built 50,000 data connectors, 50,000, so not 500 or 1,000 like some of our point solution vendors would trumpet. This is all we've ever done. And we've infused in the platform AI. And this is a really important point because as data sets -- there's 2 things that happen. There's more of them and they grow in size. And so it's like an exponential increase in complexity, and you have to have AI embedded in your platform to tackle this. Otherwise, kind of regular technology just won't keep up with this exponential growth in demand and complexity for digital transformation. And we built AI into our platform from the very beginning as a design tenet. And we think that this becomes much more important in the years to come.

Well, that's great. On behalf of everyone at Wells Fargo, thank you so much for your time and coming to the conference.

Thank you, Andy.