Informatica Inc. (INFA) Earnings Call Transcript & Summary

All right. Okay. I know there's more people coming in, like let's start already. Some old technology -- like all the questions here. I just want to make sure you don't -- you have the right company. So thanks for joining us. I'm really happy to reconnect with Informatica. As I kind of told you earlier, like I've been covering your space for like 10 years now, and it's nice to see like a public company back.

Talk a little bit about the journey, I think, started when you were privately, we're coming in now or the upper end about the cloud journey that you're on and just kind of recap maybe where we are so that we're all on the same page here.

I know it's end of the year, but thank you very much for inviting us. And I know you've covered us back in the days when we were public last and then when we went private. If I kind of do a zoom back and kind of paint the picture. First of all, the macro view, the biggest difference for us, if you look at the Informatica now and Informatica then is that we were a classic on-premise license software single product, maybe 1.5 product-centric company, more ETL, very early days of MDM back in the days when you -- that's that what we were. That's circa 2015, we went private. If you remember by the way along the way, Hadoop journey also happened, which you covered very well. Where we've come out on the other side is that we made a very fundamental decision that either we are going to just be a cash cow company or a growth company. And we made a very big decision with our investors. We're going to be a growth company. And for that, we did not tweak anything we had. We left it on the side. By the way, our product on the on-premise side called Power Center works like a charm renews at 95%, 96%. We didn't refactor it. So we said we're going to build from ground up a cloud-first platform. All of the products on this side will be cloud first. We will rebuild them from scratch, not even build them from scratch. And along the way, we also built many new products because we find in the digital transformation world, many new use cases very much like catalog, like data marketplace on top of data government, so on and so forth. So when we came out of this side of where we are today is that we, first of all, expanded our TAM. We went from one product to multiproduct. So today, it's a $44 billion, $50 billion. We went to now platform, IDMC. We have embedded AI in it, multiproduct TAM, platform; cloud native, multi-cloud, hybrid, both and to give you a sense, in this journey of 2015 -- I think 2016 and now like a start-up, we basically build this cloud platform. We went from 0 usage to today as of September 30 this year, 44 trillion transactions a month. Usage, cloud usage of our product, Global. We went from almost negligent subscription ARR to -- and I'm not using guidance numbers, rough round numbers, $1 billion in subscription ARR. So in a 7-year period, that's the startup we created. The $500 million or $550 million of maintenance is on the side. Obviously, on an average basis, it hurts our revenue, but that's why we guide on ARR. And in that, the cloud business is growing at mid 30s to 40%. So that's the startup that got created, which is fundamentally, if you take that business, basically not many businesses have gone from 0 to $1 billion in the course of 7 years. That's what we are doing today. Still, operational workloads for enterprises across the globe, large banks, large companies, whether it's a Unilever, Kroger, FDA whether it's an Uber, so on and so positive, that's the massive transformation.

And -- so if you think about it like -- how do you set up these two, like the two worlds now. Because like, take pockets -- I think we are a customer. Like if you think about it, there's a cloud journey that every customer has and there is the -- a kind of well, we have to keep the lights on the legacy side. Like so how do you deal with these customers? Do you like -- is it a cloud first? Is it like how do you sell this?

Yes. So now again, I'll take that great question. So first of all, when we began -- when we take our new product portfolio, the IDMC platform portfolio. We sell for all the new use cases for the last 7 years that all of these customers across the globe are going on. Whether it was -- and by the way, we are deeply partnered with all of the hyperscalers. And people underestimate the amount of deep partnership here, whether it's Amazon, AWS, we just won the design partner of the year. North America analytics partner of the year, whether it's Azure, deep integration whether it's Snowflake, you're going to have Mike come in after this. Basically, we were Snowflake data governance partner. So they came to our conference, whether it's GCP, whether it's Databricks. So in that context, we've been selling for the new workloads. So our cloud, by the way, and I'll come to. So 98% of our cloud business is all net new workloads. Only 2% of it is that we started the journey in the last 1.5 years, helping our customers migrate from on-prem to cloud. Legacy -- like the stuff that you guys are using. And by the way, we've talked about Charles [indiscernible] is a great example of customers moving to the cloud, very early innings. We're going to help our customers get there. But 98% of our cloud business is all net...

It must be exciting.

Super exciting, and that's why I think we've talked about even on our earnings calls with investors people like, so how much is migration. Actually, we are like a startup. We've been selling to all the new workloads. We have this massive tailwind of migration sitting for us. absolutely, we are working on it, but that to me is the untapped opportunity for the next 5 years.

I mean is it even 5 years? Or is it 10 like ...

Great question. Nothing ever goes down to 0. I mean the main frame still runs. So the way I look at it is that a good portion of that maintenance will go to cloud in the 5 years. But not all of it will go to cloud. I mean, like whether it's a number it's 50, 60, 70, we can all speculate. I don't think it will ever go down to 0.

Yes, yes, yes. And then -- so then where are we on that on that setup for your organization. So like sales is fully kind of compensated driven cloud, like and remind me how you how you sell the cloud as well? Like we talked about Snowflake obviously, that's a consumption element that they can of...

Great question. We don't sell anything old anymore. Like so let me -- we don't sell -- my sales team does not -- the old products that are there that are maintenance, they renew like a charm. The only maintenance, the [indiscernible] we lose in the old if somebody gets acquired or something like that, 95%, 96%. So that's -- all of the net new business that we sell is on the IDMC new products, period, 100%. Now in that, the question that you asked is that when we basically started 6, 7 years ago on the new product portfolio, not everything was in the cloud, data catalog, indexing all of Metadata, if I went to a Barclays and said, "I will index all your Metadata in the cloud in 2016," you'd say no way in hell you're doing that. So even today, you will say, okay, you know what, you can index this in the cloud here. So that same product is available in multi-tenant cloud or it can run at your existing database. But they're all net new products. So we had this, you can sell self-manage or cloud the same product, where we are increasing -- so it's a same product. Where we are now walking into next year, and I've used the word from cloud-first to cloud-only, pretty much for our top geographies are only selling cloud now because customers are now very comfortable -- By the way, all of our products at scale are available on the multi-tenant platform. So customers have become there -- but there will be a portion that can be sold in a self-managed way, but that pivot has -- we saw this year very, very -- a lot more aggressive.

Yes, yes, yes. Okay. And then the other question of that is pricing. Like how do you charge for it? Like because that was -- if I look at some of the vendors, and I have like who who's coming later this afternoon, I think C3, who just went initially subscription and now they're realizing, well, consumption is the world to go. Like where are you on that thinking on that journey?

Yes. So I'll touch on that, too. And I think Eric should talk about how we recognize on that -- because a very important one because you listen to -- consumption is a very broad word. First of all, in the world of cloud, so in the world of new products when we started, obviously, not everything was consumption-based because self-managed is hard to do consumption. The world of cloud, basically, when we started 6, 7 years ago it was not consumption. But we started the consumption journey, rough and tough about 2 years ago, we said okay, we have to go consumption. And I would say a year ago, we went like all-in in consumption. As we exit this year, and Eric keep you on 50%. Rough and tough half of our cloud business is consumption dominated now.

Well, last quarter, about 54% of our net new cloud bookings was denominated in IPUs. We had gone from 0 to ’over 50 and...

So our consumption unit is called IPU, [indiscernible] processing unit. So what we've done is that our entire platform, everything is available are using ETL, ELT, quality, governance, doesn't matter, so customer buys a certain amount of processing units [ on ] it down. The beauty of that is actively threefold. First of all, as we've gone away from wasting cycles, the customer this many seeds this Second is customers also like you like, oh, I began this journey, I'm putting ETL on Snowflake. But you know what, I suddenly want to do some governance on top of Snowflake. You don't have to back to me and ask me for another sales cycle. My sales team can go sell something else, use it. So we've lowered the barriers to usage by that process, by that consumption. And to Eric's point, last quarter, we crossed a milestone. More than half of our net new cloud bookings were denominated in consumption. We are going basically more and more and more towards that in this. The slight difference in our consumption is how we recognize revenue. It's ratable, and I'll have Eric comment on that one. But we are all in with consumption. Customers love it. It reduces the barriers to using, reduces the barriers to wasting time and selling. We are more focused on adopt and consume. And by the way, a great example of that one is our renewal rates on cloud have reached the same as our old maintenance, mid-90s. I can tell you how sticky it is. And by the way, we just came out, Gartner covers us for [ MQs ]. We are the only platform vendor in our space, data management. Gartner has something called a vendor rating, if you look it up. They cover only 32 companies across the globe by the way, only 32 companies. And the likes of Adobes or Salesforces or AWSs, they cover us in our space. We're the only company and if you see the -- I mean they have ratings -- or the highest rating we get for this product and account management, which is where, hey, driving value for our customers because we want to -- so you can see the two just came out, we just today morning. But that's how we think about it. Eric, do you want to comment on how we recognize?

Yes, the IPU is, think of it as a token-based system. So we'll sell a customer, typically, it's a 2-year contract. They'll purchase a number of IPUs per month, let's say, 100 IPUs per month and they can draw down and use the IPUs for any combination of cloud services. They can serve on U.K., DI, bolt-on data governments, data quality, seamlessly, you don't have to call us. And should they exceed their allocated consumption mid-contract, it's an automatic upsell for us and so it's a little bit different than like the AWS model, which is 100% after the measured consumption. So it's a variation on that.

Yes, yes. And are you doing -- like what happens at the end if it doesn't consume? Do you kind of roll it over.

Every month is use it to lose it. So it's perfectly -- from a RevRec point of view, it's perfectly linear.

Yes, yes, yes. And then for you, like more as the CFO as a practical thing, like has it changed your visibility? Like do you sleep less at night now because you have to worry more about like consumption patterns? Or like how does...

Well, the beauty is when everything is operating in your cloud, again, this applies your store cloud products not self-managed. So we have day-to-day visibility and everything every customer is doing. So it allows us to be much more knowledgeable about how to help the customer engage, help them realize value, and you don't get that with a self-managed subscription necessarily. So like the telemetry bit is just absolutely valuable.

Yes, yes, yes. Okay. Perfect. And then I wanted to stay on the kind of more the two kind of words the cloud world on-premise world like in terms of getting excited about the cloud journey, like maybe we should start like where is data residing, like you have a much better view in terms of where the data sits these days. And yes, all the roads probably going to be in the cloud, but where are we in the kind of those two worlds?

Great question. I think, first of all, I'll zoom out and say so much noise in this space and people always gravitate towards oversimplifying everything like data is all going to cloud or data is just going into that particular database. None of that is true. I worked with large enterprises like yours, other big banks, insurance companies, pharmaceutical companies, retail companies. Nobody has ever come to me and said, you know what, we made a decision that we're only going to just put it in all one place, no. I mean I just looked at the lineup you have outside were going to talk today. And because we have the Switzerland of data, we have a very unique perspective. I see customers saying, "I'm on AWS for this. I'm on Azure for this. I'm using Snowflake on running on AWS. I'm going to go around and use MongoDB over there, and I'm going to use a Databricks on this AI workload." They're doing all of it. They're doing all of it, which is why the biggest problem is not of data gravity or data -- data gravity has moved to cloud. Net new workloads are on cloud, that's true. But the bigger issue for our customers and customers are doing it fragmentation actually is even worse than it was on-prem. It's actually pretty bad. And some amount of on-prem will never go away. People like large institutions may still have a non-mainframe running behind for transactions. They're not going to give up on that one. I just came up second biggest insurer that in the country and they use us in the cloud and on on-prem, and they're like, "I'm not getting off Db2 for the next 5 years as much as I'm on AWS and this and this and this so manage the two." So data residence will be -- although data residence has moved to cloud going forward, fragmentation has quintupled, I can say. And that is the bigger problem for every enterprise. Fragmentation, everything is in many, many, many places. But do people think of a database and -- think of applications. Each of them have a database under it. How much of that fragmentation has already happened. So fragmentation is a bigger issue. And when you ask when you ask a customer, how -- do you have data quality to make a decision on your business today? Good lord, there are 30 places my customer data sits. And to bring it together, that's the problem we solve as one example.

And the -- on that note, like that kind of should answer also probably then competition. It should be like -- you've seen it over the last few years, and you have these new shiny toy cloud competitors, and they're like "oh we're so cool" and whatever. But if you kind of look at this properly, and look at -- as you said, the data fragmentation, you cannot meet someone like more that is a bigger Switzerland than just someone doing cloud? Like what do you see in terms of like your competitive situation and the evolution there?

Sure. I think -- and so the way to think about the competition for us so our competition is we have a platform. There are 7 product market categories: data integration, application integration, data quality, master data management, data catalog, data governance to the marketplace. There is no competitor that is beyond one box, like one market category. In that, there are multiple. By the way, when I say the about data integration, there are five things that go into it, ETL, ELT, blah, blah, blah. I don't want to get into [indiscernible]. By the way, the world is a strange way, and by the way, I use this slide with a customer event. We've been around 19 -- early 2000s to now, 20 years, 25 years. I've seen the world go from COBOL to Python. Many companies have come and gone, and we've kept innovating and kept innovating and kept innovating. If you remember, you covered the world of Hadoop and it came, Hadoop is going to kill everybody. Well, look, we came out of it bigger and stronger out of that world than anybody else did and many a companies died. So our competitors are -- look in the data integration space, I can say there are 50 running around like [indiscernible], this inc, that inc, .ai, .io, I can keep counting then there is data quality, a little, little, little. There's MDM little, little, little. And that's fine. I -- the way I always look at -- I'm a product guy. I love competition because it keeps us honest. Why? Because the customer is going to look at one more. We have a very unique value proposition. We are best-of-breed We are best-of-breed because every magic quadrant, nobody has been able to get ahead of us. Why? We spent $300 million in R&D every year. And we are the only platform, 44 trillion transactions a month is nothing to sneeze at, and that doubled year-over-year. And I can tell you it will double when I come next year, it will be doubled. And then the embedded AI, which is running at almost 15 petabytes of data, it's all real time. Nobody has that. And people get caught up in the sum of averages because, oh my gosh, let's look at the revenue growth rate of this company, $1.5 billion growing at "Oh, it's not double digit or not triple digit." Look at my subscription growth. How many companies in the last 7 years have been able to go from 0 to $1 billion of subscription. Again, I'm using round numbers, count on my fingers. There's a great company called Snowflake. They are a great partners to us, but count me many more. that gets lost in transition -- in translation. That's the way I look at competition. Customers are going to look at who can serve me at scale, who can serve me -- who's been around, who can solve real-world problems. So -- and that's what -- that has served well for us.

You're setting up my next question because the next question I had was that we play Devil's advocate. So if I'm listening to you, it sounds really good. But then if I just do a Bloomberg thing and then just look at revenue, like revenue growth is like, okay, Maybe, Eric, you talked a little bit about like underneath the hood, about the stuff that what's kind of -- how does that number come together? And how will that evolve?

Well, first of all, I'll start with -- and we have really good, proven profitability resiliency reflected in renewal rates and gross profit margins. So notwithstanding this incredible transition we've gone through from 100% perpetual license to cloud and subscription. We've maintained 80% gross profit margin, plus or minus 1 point or 2 over that duration. So that's pretty hard thing to do. I think harder it has to do with the fact that we did it gradually as opposed to 1 to 2 years, but also we're just pretty good operators. Yes, to the point about revenue growth, look, we have maintenance. It's over $0.5 billion of ARR, renews at a high mid-90s rate, incredibly profitable because we don't sell any more perpetual license, we expect that to decline.

Yes. So that's the...

Yes. And so when you mix that into the overall GAAP revenue stat, it's 1/3 or so of the business growing to minus 5%. To Amit's point, look at subscription, it's growing at 27% year-over-year in the most recent quarter. And pretty soon, half of that ARR inside of subscription will be denominated in cloud. So that's the other thing that's happening. So step 1 is you eliminate perpetual license. We've managed margins through that. We introduced subscription. Now we're introducing cloud only. So the vast majority of our net new bookings will be dominated in the cloud. There will be a lag effect. But over time, the majority of our sub ARR will ultimately be cloud denominated, consumption denominated. Meanwhile, we continue to post great results, not just renewal metrics, but bottom line, profitability margins, cash flow margins, et cetera. So it's actually a very good financial profile. The 1 thing you have to do step 1 is put maintenance to the side. and then kind of rerun the numbers, but a very different perspective on the company.

Yes. I mean -- and so basically, like simplified, it's a mix effect. Like over time, that mix effect will change and the numbers will be -- yes, yes. And actually, kind of it's terrible to say like the current situation, current market situation where that focuses back on cash and profitability might actually help you because then you're going to -- the cash flow will help you to deliver like reallly good cash flows.

Yes, I think in the 18 months, we're much more focused on growth. And now people are paying a lot more attention to the bottom line because we're a scale operator. We're able to do things like location shifts where we hire, for example, we can decide to hire low-cost locations versus high-cost locations. So there's a lot of things we can do within our operating footprint to deliver on the bottom line. Actually, this year not withstand everything that's going on, it's been a pretty volatile year in all dimensions. We're still holding our non-GAAP op income guide that we gave at the outset despite FX, macro headwinds, et cetera, et cetera. So that tells you how we can deliver in terms of profit.

That is such an important point. That is such an important point that this year, the top line has just moved FX, this, that or the other, and we had mixed change that accelerated that caused us to go from ISC 606 back. The drama on the top line has been just not for the faint of heart. But look at the bottom line, non-GAAP [indiscernible] and cash flow, we kept it constant throughout the year. We haven't -- we've said we're going to deliver on that. That's like -- that's what I say like that is the resilience and the skill that we have. And by the way, in this whole transition, the gross profit has not budged a bit, that's hard to find in a transitioning companies and growing and this and that or the other.

As we talk about the year, I might just kind of throw in the hedge fund questions. Like if you look at when you reported last quarter, you said there was a little bit of heavies coming up in September. We had the off-cycle guys like last week, and there was -- it sounded like October got a little bit worse. Like what are you seeing at the moment in terms of your customer conversations.

Well, I can tell you that nothing has changed from what we said in the last earnings call. Nothing has changed. I think we're obviously towards the tail under this year. I think -- by the way, we had said the same thing in midyear also, I said, "Look, guys, we do see stressed environment or whatever word you want to use." We reiterated that in Q3, became the Q3 earnings call. We see the same thing. We see all flavors of customers, careful, cautious, thoughtful. But the fundamental thing that has not changed, and I just came around in the last 3 months, I've been around the globe. We had many customer events, I was in Singapore, D.C., New York, London, Paris, have been all around talking to customers. The intent and the budgets for data-driven digital transformation is not going to going away. Very important thing. First is, is it a nice-to-have or a must-have It's in a must-have. Then becomes, okay, now how do I do it? If I was going to do X, should I do 75% of X. Should I do in the -- that's the decision making customers have to do. All of us have to do in a time like this. But boy oh boy, if anything, it becomes even more important in a time like this to make sure you can -- so you can I give one example to everybody. In April of 2020, peak of COVID. I don't think anyone in this room was flying. American Airlines closed to deal with us. I fell off my chair. I called the customer, why. We asked the customer, why? I want to really know. And they said, "Look, we know that we're going to be a company that will exist coming out of this. I need to understand my customer portfolio better. So they use -- they bought a platform". Long story short, they bought them. In fact, this year in May, we have a user conference in Informatica World. We always give some innovation awards. They won the innovation award of implementing and using it to drive that business in the last 2 years. That's how customers make decisions.

Yes, Okay. Yes. I mean -- and so then yes, we all have to live in the new world, but I say -- okay. Yes, makes sense. Last -- I want to change gear a little bit, like we are very nicely profitable, there's cash flow coming out. How do you think about cash, usage of cash?

Yes, we've been really consistent. When we did the IPO, we took all the proceeds we delevered. It's under 4x. And we stated to look our use of cash will be principally to delever to 2x over the next 18 to 24 months now. So we'll end this year probably a little bit above 3x, 3.2x was what we said back in October. We produce a lot of non-GAAP income and unlevered free cash flow. We have a stated policy. We're not going to have dividends, for example. We've never done scale M&A. So you can expect us to take the majority of cash and use it to delever by the just holding on the balance sheet. And of course, we can always go and retire our debt in the open market as well. And so we had a really thoughtful programmatic plan at the time of the IPO, and we're sticking to that.

Yes. And then the -- I mean what's the -- like the debt market has obviously changed. The interest rates are different? Like where are you kind of sitting on like your commitments?

Yes. What we did is immediately or concur with the IPO, we refied all of our debt, so our maturities are all July '26. It's floating rate term loan. So we would expect rates float up with Fed rates going up or LIBOR-based. It's a little higher cash interest costs as a result. But then what we do is we partially offset it. We're elongating our internal treasury portfolio. And as we accumulate hundreds of millions of cash per year, it's a partial offset or a natural offset to that to the temporary higher rate environment.

And can you retire that earlier? Or you kind of -- are you kind of stuck in...

We could buy in the open market.

Corporate fund. Okay, that's worth thinking about. Okay. The last couple of minutes, I wanted to kind of ask more like since you've mentioned we have like with Snowflake and everyone coming in. Like how do you think about this new world? I remember like a few years ago, it was like ETL, but ETL in this classic sense doesn't work or ETL is probably not going to work. Now it's ELT and all the other permutations around that. Like if you think about your position and where the market is going, like at the moment, what I'm hearing from a lot of the other vendors is like there's going to be this concept of this big data lake. Everyone is dumping all the data into one. There's going to be a boathouse on top of the later lake and that's kind of sorting out all later. Like how do you see this, well, playing out? And I'm coming from PwC and for me it's like, it's going to be too complex, but like maybe you have a...

So I'll give you a three part answer. First is to understand our business. And I'll give you one funny incident. So ETL is a word Informatica coined. It's an albatross around our neck. So when we went private, everybody -- is the ETL company. ETL is legacy. So I remember I made this decision inside that we do not erase the word ETL from our website. We took it off for a year and I have founded social areas that a bunch of starters that got started in the cloud-only world, their website as cloud like, wow, PM never went away. But if I talk about ETL like "Ben, that's like, how can you talk about ETL?" But somebody else like cloud ETL. So that's a little bit of a -- it's what do you do with that stuff, take that aside for a minute. First of all, our business is not just ETL anymore. When you think about our business, think of it as three macro categories, analytics, MDM-centric business, we call it Business 360 and data governance and privacy. Remember, we've gone from a $7 billion TAM to a $44 billion. So -- and we -- and the business of subscription that went from 0 to $1 billion roughly is not ETL only. So ETL is a subset of analytics. My MDM and governance business is on it here. So we don't disclose it like that, but think of this that 40% of the business is analytics only, which is very ETL use to all this it versus it was 100% the years before. So first of all, we're not just tied to ETL. ETL is never going to go are in the world of cloud. Now in that, that's why I said in the data integration category, that is ETL, ELT and many other things, many form factors, we support all of it. So that's one way to think of us first of all. Second is none of that goes away. See, ETL, ELT, whether it's Snowflake, Databricks, Redshift, BigQuery, Synaps, and I go on and on, push down on that one, this data that all of it is supported. When you think of a customer, I think that you have to almost step back and think of it as a customer, if I'm a customer, I have many of such things. I need a one place where I can create one data pipe, one data format that I can use it in many, many places. And by the way, today, I'm using X kind of an infrastructure under the covers, and I want to add something else. I don't have to start from scratch. And that's what I have conversations with every customer. So that's how they invest in us. By the way, the same was true when we were a tiny company of $200 million of revenue. Well, Oracle is there, Oracle has some in-built ETL capabilities. Why would a customer need you. I mean we were $200 million then we are $1.5 billion, and I think we have out-survived that. By the way, the same thing happened in the world of Hadoop, I don't remember. But open source is there. Why do we need this? Well, guys, this is not [indiscernible] may change the whole world, but this is not like you go and give some commands and everything will work out. It takes some serious heavy lifting, managing it and people forget the scale and security and governance, all of that stuff. Third one is, look, many layers like take a Snowflake, we partner with them so deeply. It's not just putting data into Snowflake. It's then taking it out and putting it into a Tableau or a Power BI and then governance on top of it. And then governance across the entire landscape of an enterprise. So the breadth of stuff is very broad. And that's where we partner very closely with them and others because customers need it. So the world is in a 50 shades of grey, not just a very Black and white board, it's not.

Yes, it's not. Good. I think that's a good closing statement. I mean, Eric, that was really helpful. Thank you.

Thank you very much.

Thank you.