Informatica Inc. (INFA) Earnings Call Transcript & Summary

All right. Well, thank you, everyone, for joining us, for the 26th Annual Credit Suisse Technology Conference. My name is Phil Winslow, software analyst here. Very excited to have Informatica joining us, a long-time friend, Eric Brown. Actually, we just talked about [indiscernible] how long we've known each other [indiscernible]. So Eric, I love the fact that you come down every year. So thank you for that. And thank you for coming again this year.

Phil, it's great to be here with you and the team.

It's awesome. So let's sort of level set things, I think, sort of before we dive in. I mean, obviously, I mean, we all knew Informatica back in 2015 when go private and frankly, it's been a pretty dramatic transformation of Informatica. And for maybe those newer to the story, how is Informatica different, let's say, than the prior story that maybe we knew 7 years ago? What did you learn from this transition? And then now as you think about moving forward, how do we play that out?

Yes, there's been a tremendous amount of change that we've made in the business. The one thing that's remained constant is that before and after the transformation, we've always been focused on just data management. So we've done data management only for 25-plus years. So that's the one constant factor. Now what's changed is we went private in 2015. And the idea was to take a business which was 100% dependent upon a traditional perpetual license model and evolve that to a cloud platform geared for the next set of challenges for data management. And so we kind of forecasted the rise of cloud as a storage layer. We also forecasted this concept of a heterogeneous environment, ground-based data, ground to cloud, multi-cloud hybrid. So we spent the better part of 5, 6 years, we invested organically to build the Informatica cloud data management platform, best-of-breed in 7 product areas and a platform where we infused AI at the very, very beginning. I think this becomes much more important over time. We can get into that in a little more detail. But basically, we took the product portfolio, organically reengineered it, not through M&A, and we sit here today with a pristine multi-tenant cloud platform, which is designed for the challenges that our customers face today in terms of cloud data management.

Yes. Yes, that's the thing that struck me is that you didn't take it, call it, the easy route, which is like, oh, we're just going to host this up here, it's like, no, this is a true cloud native platform, and it's a suite now, and not just sort of the older Informatica where you think about a single product. So now it's not only cloud-native, full suite, it's pretty amazing to see the story transform. And when you came back out, how much things have changed. And so let's speak about things that are changing. So let's talk -- the question I've asked everybody, the macro environment. So obviously, lots of headwinds, crosscurrents here, macro, geopolitical, et cetera. When you're talking to customers, how are their priorities changed? What projects are maybe a little bit more on the back-burner [indiscernible] that are saying, hey, look, I need to invest in Informatica now.

I think that, look, customers across the board are putting more scrutiny to things that they do. And they're saying, what is essential to the business versus what is nice to have. And I think what we're finding kind of the nice-to-have categories are kind of single-purpose departmental ad hoc type applications where it's really not essential to running the overall business day to day. And what I like about our position is that the notion of digital transformation applies across all industries and all geos. It's absolutely essential for companies to stay closer to the customers, better optimize their supply chains by leveraging and harnessing their data assets. And the challenge today is that there's data sprawl. And so the concept of being able to kind of harness that data, kind of collate it and bring it to bear an organized fashion remains high-purchase intent. What we see is -- if we look at our sales funnel, which is the ultimate expression of kind of short and midterm demand, we see a significant shift towards business-denominated in cloud versus self-managed. And it's interesting, if we look back, say, 12, 18 months ago, we saw certain industries that were a little bit hesitant, like FinSer, for example, a little more hesitant 1.5 years ago to move into cloud for a whole host of reasons. And now we're finding even those [indiscernible] roll over and express interest in cloud solutions, cloud modernization and also cloud data management. So we think that we're in the right place at the right time with the right product, again, as we noted that we built over the last 5 to 6 years. And so we lead first with cloud, but we emphasize the fact that our customers, while they're spinning up net new workloads in cloud, still the vast majority of their data in the processes remain in on-premise systems. It could be rough and tough, a 20/80 split cloud versus like on-premise. And so our concept of -- it's a multi-cloud hybrid world is really resonating well.

Exactly. Everywhere for everyone. But let's double-click on this idea of data sprawl because I think it's super important, even just going back to your user conference, that was very clear [indiscernible] customers there. And obviously, to your point, we're seeing these migrations of back-office applications, ERP systems increasing the cloud. But it's creating that data sprawl and that's only gotten worse with these migrations. But on the flip side of it, to your point, is creating opportunities for MDM, data integration and data quality. So when you think about the momentum, just the market or the industry you're seeing it towards the migration to cloud, how is that impacting Informatica, how do we think about this as a product attach rates? And just what is the broader opportunity?

Yes. So we have a great asset to the company. We have a large installed base. It's a maintenance installed base relating to the professional licenses as we sold under our prior model. It's about $530 million of ARR as we sit here today, very high, 95% renewal customer satisfaction like highest decile. We're starting to see customers with these existing -- some of these workloads have been running for 8, 9, 10 years. They're super happy with us. They just mail us the maintenance check every year. They're saying, you know what, we're interested in moving to cloud because we think that if we take on your cloud DI solution, for example, we'll be able to jettison our own infrastructure, personnel, security, data, power storage, the whole thing. And in fact, we're willing to pay you 2x what we're paying you today. So in other words, what we're seeing is customers that would pay us, say, $100,000 a year of maintenance, pay us $200,000 a year in cloud. Now in between, we have to work with them to migrate their workloads, and it's a relatively time-intensive process because, again, these are mission-critical workloads, not kind of random ad hoc kind of department level applications. And so we like that 2:1 ratio, but it gets even more interesting from there because once a customer, whether they're an existing migrated customer or net new customer is on our cloud, we have a dollar-based net retention rate overall, it's about 112% today, that's total sub. Inside that cloud is actually higher. We introduced 1.5 years ago a consumption-based pricing scaler for cloud called an IPU and that lends itself to natural midterm upsell. And so our ultimate objective is to get as many customers, either existing through migrations or net new into cloud for those reasons.

Yes. And then actually, let's double-click on a few things in there. Actually, first, IPU, we don't -- we skip forward to that. And I do want to come back to the competition side in the broad portfolio. But obviously, a key part of your cloud-only strategy is consumption base at your point or IPU. And just to give people some numbers here, IPU base is 54% of new cloud bookings, 33% of cloud ARR. So obviously, a good traction there. But how do you see this just, I guess, impacting the trajectory of this IPU-based ARR in terms of sort of the cloud mix and total cloud ARR, just put it through sort of puts and takes there.

Yes, there's some kind of like leading and lagging metrics. So the leading indicator you mentioned, Phil, is, what percent of our net new cloud business is denominated in IPU. So it's at 54% today, 1.5 years ago, it was effectively zero. That's when we launched it. So we've gone from 0 to 54% in about 1.5 years. If we fast forward to say another 1.5 years, it will obviously be way above that. It will be won 70%, 80%. Our objective is to drive it long term to 90% or better. The customer uptake and interest in the IPU has been really significant for us because we have a very broad product portfolio, by far the broadest in the industry. And what the IPU allows us to do is that people can start out with a use case, simple cloud DI and then spin it up, spin it down within their IPU entitlement, so it gives them that kind of flexibility or they can start to apply our data quality products to it. And we're increasingly seeing more data quality attach because as the applications become more mainstream, curating the data through data quality and governing it through data governance, controlling access, et cetera, becomes a natural extension. So the IPU allows them to say, I start with this use case, but I can use my IPU entitlement now for data quality, data governance, and it happens in real time the back end of the cloud, and we just kind of deduct that usage of their standard monthly IPU balance. And so customers really like that flexibility. And what it does is it shows that we're way beyond to stay where simple DI is sufficient. It's necessary, but isn't sufficient. This concept of data quality, data governance, data security is increasingly important in this world. The IPU allows them to seamlessly transition to them. For us, it represents more consumption, which then leads to sale of more IPUs and higher ARR mechanics.

Yes, yes. Exactly. And I figure in this also this macroeconomic climate, consumption base is pretty good for your customers, too. So it gives some flexibility, too. Now I do want to talk about the competitive environment, too, because as you were mentioning, it's sort of like the portfolio you have and the breadth of it. Because if you think about the past couple of years, we've seen some smaller private companies come in with sort of a niche product in a certain area targeting that. What are you hearing from customers now, especially as maybe IT budgets get tight is a little more scrutiny about the opportunity to Informatica has to sell that portfolio versus going up against multiple sort of individual players?

Yes. I think what you tend to see when the more budget scrutiny is applied, people are going to look to get more out of their respective vendors. And it becomes increasingly difficult for point solution vendors to say, look, I'm a point solution vendor number 6 or 7, you should spend the time and effort to create your own internal team and learning curve of my technology, whereas we can come along with a 7-year product family, each of which is basically best-in-class, backed up by this cloud-native AI-infused platform and say, look, we're as good as any of them head-to-head. And we can provide you a compelling total cost of ownership advantage. And plus, by the way, it's powered by AI. It just gets smarter and more efficient over time. And so that becomes more compelling, I'd argue in this environment than in an environment we're in, say, 18 months ago. And it's a time for us to really kind of emphasize our competitive strengths, not just on the platform side, but on the utility. I referenced the earlier comment that we've done one thing for 25-plus years, which is just data management. So what have we done over those 25 years. We've built up a library of 50,000 meta data aware data connectors. And so odds are, there's really no permutation of ground-based data sources, connecting to cloud or cloud to cloud or the inverse that we haven't solved for. And so again, this concept of companies looking to get higher utility out of their vendors, their vendor spend. I think that's where our advantage has really become more pronounced.

Awesome. I want to remind a little bit back to the installed base because to your point, incredibly high customer satisfaction and very high renewal rates of that on-premise base. The thing that struck me just how much of your growth in the cloud was just new business. It wasn't migration yet, but you do have this massive installed base. I mean you obviously walked us through some of the economics of it. But one of the questions I get is that sort of when do you think that on-premise base starts to move? Is there something that's sort of Informatica can do to help clients get to the cloud?

There's -- I think there's like 3 things that we can do: one, and this has been kind of the initial kind of phase, phase -- an initial phase of approaches; two, create a library of utilities and scripts that automate and simplify the migration process. So we've done that. And we've done that basically with all Informatica badged employees to date in those migration engagements. So then the second way to accelerate it is to certify SI partners and enable them with the aforementioned translation tools and scripts. And we're starting to bring more partner capacity online. And what they do is they say, look, we're going to pitch an overall cloud modernization project. Part of that, we're going to migrate your 8-year-old power center on-premise solution to Informatica Cloud DI, and you wrapped it around to kind of a broader overall initiative. And we're able to give them those tools in the tech training certification. And so that's basically a way to augment our capacity to go after more of our installed base. And the third, I think, is just that like over time, there's going to be more -- it's going to become more and more obvious to companies that moving to cloud, is one of the sure-fire ways to lower their overall cost of ownership. And I think that different companies will come to that realization at different points in time. They'll have like a stack rank list of applications on-prem that they want to migrate, and they'll get to that in different order. And the one thing we're not going to do, Phil, is like force people to migrate by end up supporting the products. It'd be akin to -- you're calling up a CFO and say, I'm [indiscernible] ERP system, 3 months from now. You have to transfer maybe like -- it's just not good for vendor relationships overall. So we're not going to take that approach, but we think that TCO argument is the third factor that just builds over time.

Yes. Exactly. Now let's focus a little bit on just your go-to-market strategy. And obviously, you talked about in the last call, pivoting to a cloud-only selling motion next year. But if you think right now about sort of cloud capacity that you have, productivity. Obviously, you've got a mix of cloud and self-managed land and expand. Maybe take us through sort of the puts and takes there. How you think about the go-to-market?

Yes. I think to date, we talked about -- we kind of prefaced our thinking for 2023, saying it's going to be a cloud-only year. It's the first year where we go to market with the cloud platform, every single product available in multi-tenant hosted format. And that last bit multi-tenant is really important because we have one product line MDM, a single-tenant hosted for several years. It's now available in multi-tenant. The customer experience doesn't change. But from a cost of goods perspective, in some cases, it's like 1/10 the cost for us to operate. So we can be that much more competitive in terms of pricing and so it maintains our healthy kind of 80-ish percent non-GAAP gross profit margins. So it's the kind of the product portfolio that enables this cloud-only approach. And -- what then means is that like in the past, we've had to maintain kind of multiple go-to-market motions like a cloud selling and support motion is different from a self-managed and it's very different from a perpetual license motion. We're now -- we kind of purge the P&L largely of a professional license where we did like $1 million in perpetual license revenue in Q3, for example. So it's less than 1%. So we're past that, and we're now moving into a space where we want the majority of our net new bookings to be nominated in cloud versus self-managed. And so we'll be able to kind of simplify the go-to-market [indiscernible] structure of teams, how we focus marketing dollars, et cetera. And so we think that we can generate some optimization by doing that as supporting kind of one primary motion as opposed to 3.

Definitely. And the other benefit of having more cloud ARR, ASC 606, let's get past that.

Correct. Correct.

The fund -- the joys of ASC 606. And so I do -- I'm going to ask this question because I get this question a lot of sort of the competitive landscape because you've seen the transactional database players, MongoDB, push to incorporate some in-app analytics and their analytics peers in database. I always get the question because they close the gap where sort of data is created to data ingestion, in other words, like ETL versus ELT. How do you think about what you call it the platform vendors, whether it be transactional database, analytical databases? How do you cohabitate? Do you compete? What can you do well that they can't do?

Yes, I think the -- it's always healthy competition. I think that we've kind of seen this scenario before the old on-premise RDB world where you saw those players start to build kind of ETL tools and tech. And we're seeing something similar here in terms of cloud DI. And if you take the perspective of the hyperscaler, how do they make money, they want to make it extremely easy to get data into their platform. They don't necessarily want to make it easy to export it to like another cloud platform and they're going to charge you a lot to do it. We're not going to optimize utilities to do that. And one thing that is an absolute kind of constant enterprise in IT world, it is and will remain a heterogeneous environment, meaning that not all the data in the world is going to end up at just in AWS or just in Snowflake. It's going to be a heterogeneous landscape. And every single corporation has a multi-cloud strategy. It's not just one of the hyperscalers, it's multiple for a variety of reasons, price discovery, et cetera. And so in this heterogeneous world, it's -- we hear repeated from customers, they need us as a data management vendor to handle all those use cases. I come back again to the earlier comment about ground to cloud, multi-cloud world. That's indeed what we're talking about here. Now if you are a point solution vendor specializing in just Cloud DI and a lot of your business was like just moving data from like simple system source A to point B, which is just say, Snowflake, for example. And Snowflake works on optimization of that kind of one way in. Yes, you're in trouble, right? Because we're going to kind of commoditize and drive down the price of that simple one-way connection, right? We're not dependent upon that. We're not just DI. We are 7 product families, MDM, data quality, data governance, security, et cetera. And so we are, I think, really kind of largely insulated from that. And again, we've kind of lived through that same phenomenon kind of a prior generation of on-premise RDB. So this doesn't surprise us or intimidate us in any way. In fact, we continue to invest heavily in our ecosystem partnerships. Number one, our IDMC platform itself is on top of both AWS, GCP and Azure and coming next year, Oracle, right? And if you look at how we go to market with hyperscalers, this week, for example, AWS re:Invent. We were just named AWS' data analytics partner of the year and data modeling partner of the year. And so plus we announced additional integration with our catalog products, provide kind of customer seamless end-to-end experience as well as integration in what we call Infocore, which is like the developer toolkit, where you collectively expose more APIs, provide more flexibility in terms of constructing these work pipelines. And so when you're like a partner -- and there's like numerous other examples like Snowflake partnered in various categories, Azure, et cetera. And so we partner very closely with them, and it's not kind of just a marchitecture partnership. It's core product innovation. It's really like it's our R&D dollars aligning our road map with their road map to provide a better collective outcome for the customer. So we're always looking at this from the customer's perspective. They live in a heterogeneous world. They need to have all these multifaceted data flows. And that's what puts us in a unique position versus any of the other point competitors because they have one thing to fall back on. If it's just like DI one way and that gets commoditized via a feature enhancement by one of the hyperscalers, and that's a problem for them, not for us.

Yes, whenever it's AWS re:Invent, Microsoft Build, Google Cloud, I always assume that there's going to be a press release coming out that you're the partner of the year for some of it, I was like, I'm pretty sure Informatica is going to be partner of the year for one of these because to your point, you help them get data in their clouds. And so there's a reason that the press release comes out every conference. So the -- let's spend a minute in terms of your partnerships and also about the GSIs. Obviously, your ecosystem includes them. How do you think about the partnership that you have with these GSIs relative to your success?

Yes. I think that -- again, one of the things that really makes us optimistic here is the fact that, again, digital transformation in general remains a -- not just a corporate priority. It's becoming like an imperative. Yes, we saw instances like in 2020 in the midst of COVID, where we saw airline companies purchasing our tech for cloud modernization. They're literally living [indiscernible] life support. And it's just kind of really kind of revealing like how important digital transformation is. In this case, it's like a CRM type application was to like just keeping their business flow. So digital transformation is supremely important. And if you take the perspective of an SI, you want to pitch like a big project. Something has got to be a huge impact on the company's P&L. It's going to be a heavy lift going to require a lot of business process transformation and bring you to set a lot of kind of leading-edge technology. That's what the SIs, the great SIs do. And so if it's an Accenture or Deloitte, for example, is they pitch these digital transformation, and they have all of them more or less have practices built around that, they routinely recommend Informatica as part of the solution set because number one, we've worked with them for years. Again, I go back to it, this is all we've done for 25-plus years. We have a proven track record of delivering success at the end of the day because, again, just given our vast library of connectors and things we've seen, we can always solve the user specifications. And ESI is they need to make their customers successful and happy because at the end of the day [indiscernible] then they're in a big, big, big trouble, that's a scenario they need to avoid. And why a scale, proven trusted vendor like Informatica has an inherent advantage versus a small private start-up? Like how do you convince the Deloitte to build a business around a thinly capitalized start-up. It's a tough proposition. So we're able to help them and their customers realize digital transformation value, and that's why they spec us into the project.

Interesting. Interesting. And let's rewind back to your conference because you had numerous product announcements and partnerships announced and frankly, even some of the products you could say, could even sort of change some of the go-to-market motion [indiscernible] we're a few months -- actually multiple months, time flies [indiscernible] the conference. What is some feedback then? What are some of the things that have sort of surprised you about some of those announcements?

Yes. I think that all the hyperscalers have stood up marketplaces. And again, why it's important to stay close to them as key ecosystem partners, is that they have like 3-year enterprise license agreements, minimum commits and their take or pay. If you don't spend the full amount, you just cut them a check for the delta, and it's kind of like lost dollars. The beauty of the marketplace is that like certified products like Informatica can be procured through the marketplaces like an AWS marketplace, for example, the customer can get $0.25, $0.50 credit in the dollar that they paid Informatica in terms of meeting their minimum drawdown. So there's this kind of -- there's this real economic incentive to purchase product certified in the marketplace to meet those minimum commit. So we like that in the business through the marketplace is up significantly year-over-year. Again, we started basically 0, 2 years ago, but year-over-year, the growth rates are actually pretty interesting. Hence, our continued heavy ongoing investment with the hyperscalers. So that's been really important. And we've developed a variety of go-to-market programs with them. And so in some cases, they'll invest dollars with us and POCs and provide free hosting capacity, right, which is unusual for them. That's the case of Microsoft Azure. We go and join POCs. We stand up demo test environments. We provide the software, they provide the cloud infrastructure and we get a better collective outcome. And so we stayed very, very close to them for these reasons.

Interesting. All right. So let's fast forward. Let's say, we're sitting back up here in 2, 3 years and by the way, I hope you don't just come in 2, 3 years, it's going to be every year. But it's well, we revisited in 2, 3 years, this question. But what do you think we're going to look back on and say, hey, whether it's sort of technology, this product, this trend was more transformative for Informatica's customers than maybe people were giving a credit for back in 2022?

Yes. I think in hindsight, we'll look back to today and say the importance of a true product suite founded on a cloud data platform infused with AI, is more important in hindsight than what we think today because I do believe that, again, I come back to this TCO argument, particularly in kind of a macro stressed period of time, platform, a capable platform, I think, tends to get kind of a relative share advantage over time. And I think also this concept of AI infused at the very, very beginning because one thing is for sure is when we sit here 2 years from now, there's just going to be more heterogeneity, more data sprawl and more permutations of data connections. And so just to manage that, the importance of like embedded AI to like recognize data structures and the concept of our data catalog products, right, which actually can look at and inspect an enterprise's total data storage estate and figure out like what types of data are everywhere. What is duplicative, what is unique and how can you meld it together to create high-value applications to optimize supply chain customer, et cetera. So the concept of platform and TCO, combined with AI built into that to kind of scale to where we're going to be collectively in 2 years, I think we'll appreciate that more than we do today.

Awesome. Cool. Eric, like I said, thank you for coming down. We really appreciate your attendance every year. I'm sure everybody in the audience does well. Great conversation. So look forward to doing again next year, too.

Excellent. Look forward to coming back. Thanks, Phil.

Exactly. Cool. Thank you, Eric.