Informatica Inc. (INFA) Earnings Call Transcript & Summary

I cover cloud software for Baird. It's my pleasure to introduce our next company, Informatica. Informatica in case you didn't know, is a leader in managing data in the cloud, providing governance tools, et cetera. We're going to hear a lot more about all those capabilities. Pleased to have Mike McLaughlin, who is the Chief Financial Officer. We're also joined by Victoria Hyde-Dunn, who heads up Investor Relations here in the audience. So Mike, thanks so much for being here. We have a number of journalists here, so I thought it would be helpful maybe just to kick it off with 60 seconds on a little background in Informatica and the journey you've been on to the cloud where you are today.

Sure. Thanks, Will, and thanks, everybody, for joining. I'm not sure I can do in 60 seconds, but I'll shoot for maybe 180. Informatica is data management for enterprise customers. If you look at a typical scale business, they've got hundreds of sources of data applications, websites, operational sensors. They've got dozens of places where that data lives where it's stored, data warehouses, data lakes, operational data stores, lake houses, both on-prem and in the cloud and they've got numerous applications and business processes that use that data to generate business insights and drive operational value. Informatica is the infrastructure software that knits all that together. We move the data between sources and targets using data pipelines, perform transformations, either in [ rigor, in situ ] with ELT or ETL. We provide data quality as the data is moving in at rest. We provide data governance, we provide data catalog, we find data marketplace to provide master data management. All of those are the different features and subsets of data management as a category. And we are the -- as I'll describe in a minute, the clear leader in that undertaking. We basically invented the category of data management in the '90s with a product called PowerCenter which is the classic ETL, extract transform, load data pipelining tool that was the killer app for on-prem data management and remain so for the following 20 years. In addition to PowerCenter, we developed data governance products called Axon. Data catalog products, MDM. But again, all on-prem sold as traditional license, maintenance, pricing model. Company went private in 2015, Permira and CPPIB were the 2 sponsors. And the thesis of that go private in 2015 wasn't go private or financial engineering or consolidation, it was reinvention. Permira -- not Permira, Informatica at that time was the undisputed leader in data management for on-prem workloads. But the world was changing. And our sponsors could see that to be successful in the next couple of decades that the company needed to be reinvented from the bottom up with brand new products that were cloud native, multi-tenant, API driven. And so under the cover of being private for the following 8 years, that's what we did. Spent more than $1 billion in R&D and created a new set of cloud products that are today what we believe are the undisputed leader in data management for the modern enterprise architecture. That's what's driving the cloud growth of our business, which is $650 million of ARR, something more than 35% of our total mix and growing at 35% this year and what we've guided to a medium-term expectation of 31% to 33% CAGR through 2026. Now because of where we came from our 30-year history, it will be our 30th anniversary this year. We have roughly 2/3 of our business that is still on prem. So 1/3 of it, 1/3 of the total business being maintenance revenue from on -- from perpetual licenses that we sold in the past and we don't sell anymore and 1/3 from self-managed subscriptions, which are also on-prem, again, which are end of sale, we don't sell anymore. So to understand our financial model, you need to realize that we have this high growth, state-of-the-art, industry-leading, cloud data management platform, and we'll talk more about that, if you like, that's going growing at 35%, growing in the 30s for years to come. And then we have 2/3 of our revenue that are on-prem customers that we don't sell anymore, and therefore, which are in gradual decline and many of which we are moving from on-prem, migrating them onto our cloud, at a healthy uplift multiple when we do that. That all adds up to the math, the puts and takes of that all adds up to a business which we're guiding to grow 6% or 7% in total this year with operating margins that are 400 basis points or so better than last year and therefore in the low 30s non-GAAP operating income margin and free cash flow margins similar to that. With a trajectory through 2026, our medium-term guidance is that as the cloud gets bigger at the growth rates that I described, our growth rate is going to accelerate from here to be double digits in terms of ARR growth in 2026 from 6% to 7% today and double-digit revenue growth going into 2027, simply because the accounting difference between ARR and revenue recognition, while at the same time, increasing our non-GAAP operating income dollars in the teens on a CAGR basis through 2026, which, therefore, implies additional operating margin improvement as we scale. So that's a quick what we do, the history of how we got here and how to, at the very highest level, understand the financial model.

That's a great overview. Thanks, Mike, for that. So maybe if we now kind of fast forward, you've made a lot of progress already shifting to the cloud. What are kind of your key priorities then if you look over the next 2, 3 years, what's next on the horizon? And what kind of gives you confidence in getting to that 10% total revenue growth?

I guess I'd start the answer to that by, again, going back to the history of how we got here. When the company went private in 2015, the vision to transform the company to the leader in cloud data management, led by, as a product leader back then, Amit Walia, now our CEO, was based on 3 things. One, we had to have the best products, not just warmed over containerized versions of PowerCenter in the existing on-prem products, built from ground up using the latest technologies and the latest architecture, product by product. Data management is a broad category, it's ingestion, it's governance, it's quality, it's MDM. We needed to have the best products built from scratch for the cloud across all the categories of data management. We needed to deliver it on a platform. History of software has shown that the platform vendors that generally create the most value and have the most durable stories year in, year out. So we needed to knit all those best products together onto a cloud-native, multi-tenant API-driven platform. And we had to be the Switzerland of data. We had to serve the multi vendor, multi cloud and hybrid needs of the modern enterprise without vendor lock in, without undue or excessive attachment to one particular cloud or particular application. We needed to serve the entirety of the enterprise data management needs. So that was the priority in the repositioning, the reinvention of the company stage. And today, we're very proud that we have achieved those goals. We do have, if you look at the third-party vendor ratings by folks like Gartner and IDC and Forrester, the best products across each of the categories in data management. You're not compromising and getting B+ products by using Informatica just because we've got the breadth. We have the only platform that delivers them all on one single pane of glass with a simple, customer friendly consumption base pricing model, only one. And we do that all in a Switzerland of data way serving the multivendor, multicloud and hybrid needs. So we have today, well, when you talk about priorities, we have what we need to deliver on the -- what we think is a very attractive financial profile that we've guided to over the medium term. We will continue to innovate. GenAI is a perfect example. At Informatica World 2 weeks ago, we announced numerous innovations and enhancements to our products so that we can support all of the GenAI data management needs of our customers like supporting unstructured data types like supporting all the vector databases, supporting the LLMs, like doing embedding and chunking like doing application integration to bring your AI into your data workflow. So we continue to innovate and build on what we have but we've got the building blocks to do it without having to pursue aggressive M&A or consolidate.

Let me ask you something about Informatica World, it was pretty recent. I mean, as you think about the conversations you and other senior members of management have with customers and whatnot, what's your sense in where their priorities are in getting their data to the cloud, right? Because that's one of the big opportunities for you all as you think about the cloud business. Is there -- is Generative AI providing that catalyst yet? Or when do we -- can we start to see more accelerated push to get that data in the cloud?

The drive to modernize to the cloud has been a priority at some ranking in the list for enterprise for a long time. Not nearly the top priority, but up there, and everybody understands that we've got to do it at some point. And companies have chosen to move at different rates of speed. And you'll hear from other software company that hybrid is going to be here for a long, long time. We agree with that. Of course, we manage your hybrid data state from our cloud platform, want to be clear about that. But hybrid is going to be here and the imperative to modernize has been important and it will continue to be important, but GenAI has definitely provided a push to a lot of companies. At Informatica World, which you attended 2 weeks ago, we organized many of our presentations on our main stage around the theme, everyone is ready for GenAI, except your data. I've been around tech for a long time and do a lot of customer conferences for software companies. And I'll tell you, I've never seen as violent agreement between what the company was saying on stage and what the people in the audience were nodding and agreeing to. Every customer we talk to, every partner we talk to agreed that the data is not ready for GenAI in large enterprises for enterprise consequential use cases that are just writing marketing copy or summarizing a performance review. Our customers are using our products today in pilots for GenAI enterprise scale workloads, but they're pilots. And so the revenue contribution from those will be coming in future periods once those workloads are proven out and once they're ready for prime time, but it's coming. And it is acting as a catalyst for companies to accelerate their migration journey in addition to replatform their infrastructure.

Yes. Now I'm sure why there's more questions back on Generative AI. I want to just kind of switch back from a broader standpoint, Generative AI as part of it. But when you think about the cloud growth you've had mid-30s, it's been an impressive growth rate. And the guidance is to maintain that 30% plus. Part of that is that NRR has been, I think, 100 -- the cloud NRR is around 119%. What's the visibility on that? What's the kind of the driver that can enable you to kind of sustain that level to help push that overall cloud ARR growth? What does the product uptake look like and what are the opportunities to maintain that kind of level?

Yes, we are very happy with that net retention rate, and it starts with having a collection of the best products that's delivered on the industry's only platform that serves the multivendor, multicloud and hybrid needs of the enterprise. Once you buy the Informatica IDMC, Intelligent Data Management Cloud, for your first use case, you have the platform and you have access to all of the 34 different services that it provides using the IPU, Informatica Processing Unit, pricing token that you've already purchased on a use-it-or-lose-it basis. So your ability to experiment around the platform to use other capabilities like quality, like catalog, like marketplace is frictionless. And that's what our customers do, is that they land with us. And after 6 months, on average, they're using 3 services on the platform. After 18 months, they're using almost 7 services on the platform in turn without a new -- without an expiration or renewal because our contracts are typically 2 to 3 years, sometimes longer. The strength of the products, the breadth of the products, the ease of use on the platform, expansion of the products and the pricing model all add up to that very healthy expansion rate, which put another way is really, frankly, quite beautiful land and expand model.

It feels like the other tailwind there is this IPU pricing. I think that could be worth talking about a little bit. I think close to 60%, maybe just under your Q1 cloud bookings were based on this Informatica, this IPU pricing methodology. How is that impacting usage of the platform and revenue? Where are you in terms of penetrating the base, I guess, with that pricing model?

So the IPU, the Informatica Pricing Unit is a fungible consumption token that you buy on a use-it-or-lose-it basis, it's monthly use-it-or-lose-it except for a flex IPU, which is a different style, which is an annual use-it-or-lose-. But importantly, you buy 100 IPUs or whatever quantity on a multiyear basis, we bill you annually upfront like most subscription software businesses do and your bill is predictable. It's the same every year until renewal. So there's no upside or downside. It doesn't fluctuate with consumption. And you have extra IPUs lying around because we size you for peak usage. And so you -- in any particular period, you'll have some extra IPUs that you can use to consume other products and expand yourself. Of our cloud sales, we sell everything today, everything, as either IPUs or MDM records. So one of the pieces of the data management landscape is Master Data Management, and that is the single source of truth about a customer, product or supplier. And that's a business that's sold on records basis. Folks are used to paying a certain number, certain fraction of a cent per MDM record, per customer record, per supplier record, et cetera. So we have decided not to upset that Apple card and sell that product of ours on records. Everything else we sell is IPUs, every other data management task that you execute with Informatica is IPU based. So that 59% statistic is pretty steady state. That just is now in the cloud, how much is MDM records and how much is everything else. So it's not about that IPU penetration growing because everything we sell now is IPU. Of the on-prem, maintenance and subscription, it's not IPUs. Maintenance is maintenance. But for the subscription, some of it is subscription to on-prem MDM records, some of it is subscription to on-prem data quality products and so forth.

Okay. Well, I guess the other big story and opportunity is the migrations, right? And trying to understand what the pace of that is going to look like. And I know there's a lot of guesswork as to how that ultimately transpires. Maybe just an update as to how the PowerCenter cloud addition is faring in terms of accelerating that? And should we expect some sort of acceleration and activity just given the need to get data to the cloud, right, to take advantage of Generative AI? How are you all -- what are you seeing from customers? And what do you expect?

So migration of our on-premise base, both maintenance and self-managed is a really important part of the financial model going forward. But before I talk about migration at all, I want to make sure that you understand that, it's the minority of our growth. Of our 35% cloud growth this year, probably 70% of it is going to be net new customers and workloads to the cloud, not migrations of our base. So 25 percentage points, plus or minus of growth this year is going to be net new customers and workflows, winning in the marketplace, not harvesting our base. The rest is going to be migrations. And that's going to be a source of continued cloud growth for a long time. We have $1 billion of that, only less than 6% of that has been migrated to date. So it's a good opportunity, but it's by far not the whole story for Informatica. We really have the best products and the only platform source of data. We're winning net new in the marketplace. Now migrations. So moving your existing data management workload that's on-prem to the cloud has historically been daunting. PowerCenter customer who's been running their workload for 20 years on us, could have hundreds, if not thousands of individual pipelines with custom transformations and scripts that have been written to support targets and sources that aren't supported by their vendors anymore. And so lifting and shifting that to the cloud is complicated, has technical risk and could take 18 months to 2 years. Now many of our customers did that and are in the final innings of doing that. But in August of last year, we introduced an entirely new way to migrate called PowerCenter Cloud Edition. And what PowerCenter Cloud Edition does is it takes IDMC or Cloud Data Management Platform and puts it on top, almost like a control plane on top of your existing PowerCenter on-prem infrastructure. So you put it on top in a efficient way that you can do in 3 to 6 months. And folks have been doing that. I'll tell you about some of the results. And then from day 1, you are managing all of your data state from the IDMC platform. You have all the capabilities of the IDMC platform available to you. It's all based upon IPU pricing, but you don't need to move your existing on-prem data pipeline to tell you you're ready. So you can move your data pipelines one by one, group by group, incrementally, while getting all the benefits of the cloud without having to do a 2-year lift and shift, which was the prior mode. What that has led to has been a doubling of the number of migrations that we have signed up every quarter, year-over-year since we introduced that in August, and we expect that to continue. It reduces the technical risk. It reduces the time to value, great land. It opens up the opportunity for the customer to be on the platform, to be IPU based and therefore, to be subject to the net expansion rate that we've experienced with all of our cloud customers that is the result of having the products, having the frictionless pricing model, et cetera.

Okay. Actually got a couple of questions from the audience. And if there are other questions, you can submit them via the instructions in front of you and I'll try to get to them. I got a bunch of others, I'll try to get to. So a question here is, in what stage are we in for Generative AI, data migration of only 30% of the Fortune 500 are cloud enabled, where you see an inflection in data restructuring into LLMs, I guess just trying to figure out how Generative AI is going to...

Yes, I'm looking to hold myself out as being the world's biggest expert on GenAI, traditionally. But I can tell you what we see. AI has been out there for a long time. Machine learning, predictive, prescriptive AI using structured data is known science. And we have customers doing that with Informatica tools all the time. What's new about GenAI from a data management perspective is you need to support different data types, unstructured data, you need to do different transformations. You need to connect to different endpoint sources and targets. And we do that now, and we're fully ready for that move as well. As I said, it is, I think, an increasing -- a bit of a catalyst for companies to move faster in their cloud transition than they may have otherwise because they want to get themselves including their data ready for GenAI. But in terms of moving from traditional on-prem to cloud is GenAI itself going to be the thing that's going to accelerate that overall by 2x. I'm not the expert, but I think it's going to be more incremental than that.

Yes. Okay. I got another question here is it's more, if you can't talk about Salesforce rumor, are you able to talk about partnerships with Salesforce, Snowflake, Databricks, et cetera, and what those mean to the business?

One of the great things about where we sit today is that third leg of the stool, which is the Switzerland of data. We handle every vendor, whether it's a source or a target, an application or a data warehouse or a data lake or a cloud hyperscaler. We handle all of the clouds, and we do on-prem, hybrid and pure cloud, all day long. So that makes us a great partner for all the folks that you mentioned. At Informatica World 2 weeks ago, we had, it's got AWS on the main stage, talking about how important we are to each other and the strength of that partnership. We had Snowflake CEO on our main stage talking about the importance of our partnership with them. We will be -- we're participants in Snowflake World or whatever it's called this week, and you'll see additional announcements from us about deepening that partnership, same with Databricks next week. There are areas where we overlap in terms of the capabilities that they provide to do data management within their walled garden, within the walls of Snowflake, within the walls of Azure and in some use cases, that's sufficient. But for customers who actually need the best products value having a platform that can do all the data management tasks in a unified way as opposed to having this together and that don't want to have the vendor lock-in that using proprietary tools. That's our customer. And that's where we compete, and that's where we win.

Let me talk a little bit, just about what you're seeing in the competitive environment. On the one hand, you have companies that have been in the data integration space, data management, whether it's, I don't know, IBM or SAPs and bigger entities. Then you've got bunch of smaller private entities that target different parts of, whether it's data quality or privacy. Kind of how do you assess the competitive landscape and how you differentiate yourself, I guess?

We think of competition in 3 categories: the first, which is common to a lot of enterprise software companies, particularly infrastructure, which is roll your own. I've got a big IT budget and big IT staff or I'm a small, born in the cloud company, and I've got hot shot engineers that want to use open source and create their own spaghetti that frequently they end up regretting later. That's always been there. It always will be there. I think that's done, I think that competitive intensity from roll your own is going down a little bit these days as folks realize that data and data management is just getting more and more complex. The number of sources and targets you have to integrate is only growing. But that's always going to be there. Second one is the -- is either point products or legacy vendors. So in each of the individual product categories of data management that we serve, there are point product providers in integration, in catalog, in MDM. And they're good companies, typically private. And we have just as good a product as they do, but we have a platform with the full breadth of services that they don't. So we compete effectively against those folks. There's also legacy vendors like IBM and SAP who have tools of theirs. But frankly, they're not investing in them the way that we are and the competitive intensity from those folks is not high. And then the third category is the hyperscalers and the cloud data warehouse providers themselves that we talked about. And as I mentioned, they do have some services that overlap with us and makes sense for them to do that to make it easier for customers to bring data into their walled garden. And while it's in there to do some of the simpler data management tasks. But again, we live happily side-by-side with those guys and where use case with their internal product is the right solution. We support that, and we don't fuss about that. We focus on the customers that value what we have to offer, and that's what makes those partnerships so productive.

Okay. Let me ask you just about M&A from another side. What are you evaluating? You've got a bunch of cash on the balance sheet. How do you think about uses of cash and capital allocation from here?

We do -- we have a lot of financial flexibility where we sit today. We're a little more than 3x gross levered and less than 2 on a net basis. We're BB rated. We're cash generative, strongly cash generative and will be as far as the eye can see. But we're not maintaining that flexibility because we have the desire or the need to swing for the fences with M&A. We have what we need in the portfolio to execute to our medium-term guidance today. We don't have a big product hole. We don't have an inferior market position in any of the product categories. Sure, there are opportunities to tuck in some capabilities here and there like last year, we bought a small company called Privitar in data access management, and that product is now GA and it's working really, really well. There could be other areas like that. Sure, there could be some consolidation opportunities in some of the categories. But we would only do that if it makes compelling financial sense because we don't have a burning need because we have good market shares everywhere we play, and we have the best products everywhere we play. I do think that the opportunities for M&A like that will only grow. We're seeing the number of inbounds we're getting from companies among the point provider crowd that are willing to sell themselves at somewhat more reasonable valuations is going up. So we may do that, but it's going to be tactical, it's going to be tuck-in and it's going to make financial sense.

Yes. Okay. We're down to our last few seconds. Maybe just quickly touch on the importance of the Global System Integrator relationships. I mean just having been in Informatica, well, it seems like you have some really good relationships there. Those are kind of key go-to-market partners. Where does that sit, how important are those? How much does that differentiate you in the market, I guess?

Yes, it's really important, and it's really hard to build. So we're really fortunate to have it because building it from scratch, if you don't, is a huge lift. Almost 30% of our closed bookings in any given quarter, anywhere between 25% to 30% are sourced by our GSI and regional integrator partners, sourced. That is incredibly value. In any given quarter, 2/3 is 75% of our new bookings are co-sold with GSI and hyperscaler partners, which means that we're side-by-side at the deal table with Deloitte and an Azure, and Informatica to solve the customer's problem. The depth and the strength of that partnership is really important and it's really valuable and it's really, frankly, unique in data management space.

Okay. That's great. I guess, we're at time. We're going to have to wrap there. Mike, please join me in thanking Mike for being here on stage. Thank you.