Informatica Inc. (INFA) Earnings Call Transcript & Summary

Welcome, everybody. It's good to see everybody after lunch. Hopefully, we don't have that -- do we have coffee? Have it after lunch. There we go. All right, all right. So we'll keep you on your toes. We're going to be asking questions from the audience, so I want active participation. Mike and I are going to be questioning you guys to make sure you're paying attention. Special award for those who were paying attention. Well, thanks everybody for joining us. My name is Matt Hedberg. We're thrilled to have Informatica here. And Informatica, I've known -- I've covered you guys for years, pre going private, post going private. And it's really fun to see the company evolve into its current state. So thanks again for being here. And Victoria up in the front, she had said that -- and I think this just came out today, which is exciting news. Informatica from an [ II ] -- I mean it's not called II anymore, [ Finney ], what's it called? [ XL? It's II ]. So apparently, the rankings for most admired companies was ServiceNow, Informatica, Microsoft, from II perspective. And so -- and I think you guys won awards for CFO, CEO, IR. So you guys are doing clearly some amazing things on that side. So thanks for being with us, Mike.

Well, thanks for that callout. And it's all about Vic, who makes it happen.

So thanks again, guys, for joining us. And then by the way, just as a precursor. We'll save some time at the end for questions, I could go with him for a long time. But if there are some, and it's a good group, save them for the end, and we'll queue those up to the end.

So Mike, you guys are coming off of a really nice quarter. And I think there's a lot to unpack here. Certainly, the cloud is -- the cloud growth has been exceptional. But could you just like maybe level-set us for the demand environment? From the 3Q perspective versus the first half, what are you seeing out there? And I guess, what leaves you optimistic about the back half of the -- or the Q4 of this year?

First of all, thank you. It's been a great conference so far. Really good-quality meetings, lots of good questions. Really appreciate the...

Well, the questions are going to go down from there, I think...

All right, yes. When they get back to the audience, they'll go back up. It feels pretty normal. Matt. We're an enterprise software company with typical enterprise software linearity. Fourth quarter is the biggest quarter of the year. If you look back at history in terms of our net new ARR, tends to be 35%, 38% comes in the fourth quarter. And if you've ever been close to a software company of our nature, most of that comes in the last few weeks of the quarter, right? So we're still in some sense, even though it's the whatever it is, the 42nd week of the year or whatever, still a lot of work to do. But the demand environment feels normal. Buyers are there. We don't see a budget flush per se yet. Could happen. There was a tiny bit of it last year and we saw it in the last couple of weeks. I don't have any idea whether that's going to happen again. Buyers aren't pulling back. And we feel good about the deals that are in flight and the dashboards that we're looking at.

Hey, just because you mentioned some comments that had made me think. One of the things we heard is all the elections causing some maybe slowdown in decisions, which I candidly -- I don't know if people just use that as an excuse to like say, "Well, just give us more time." Have you noticed any change on behavior post election?

Not at all. Not at all. Our deals -- our sales cycles are long, 3 to 9 months, sometimes even longer. So that's a pretty transitory event that doesn't seem to impact us.

Okay. Looking at guidance, total ARR in Cloudera outperformed in the quarter, but you left 2024 guidance unchanged. Maybe just unpack the thought there because you guys have had a really strong kind of first 9 months of the year. But just unpack the thoughts around kind of the Q4 guidance philosophy.

Well, it starts with the fact that we are an annual business with a big Q4. So we still have a lot of software to sell in Q4 to meet or beat our guidance. And there's exceedance in Q3 and for the rest of the year. We did raise the cloud to some extent after Q2, as you may recall. And the additional exceedance from Q3 just felt to us like it was within the range of uncertainty as opposed to mechanically we should add that to the guidance.

Yes. No, that makes sense. I'm just thinking, Mike, we got a lot to cover here. I'm trying to look through my questions here. But let's talk about -- so let's stay on the cloud. If you were to -- looking back 9 months, how would you characterize cloud migrations thus far relative to sort of your thoughts going into the year?

Yes. It's an important topic and it gets a lot of focus. But before I answer that question, I want to back up a little bit and remind everybody that the growth of our cloud ARR, which is all we sell now, all of our on-prem stuff is end-of-sale and is in decline intentionally. The cloud is the only thing we actively sell. And we're guiding for it to grow 35.5% this year. It grew 37% last year. Of that growth, only 1/4 of that growth comes from migration. It gets an outsized amount of attention from the investor community because it's potentially nonlinear, it could be an upside surprise or whatever. But don't forget that 75% of our growth...

Is not migration.

Net new customers, net new workloads, winning in the marketplace against all of our point product competitors, against the hyperscalers and the cloud data warehouse guys who have their own point products that compete against us. So the real value creation story is about the net new. But I'll answer your question, because -- and migration is not [indiscernible]. So over the last 12 months, as I said, it's been about 25% of our growth. We saw a rapid acceleration and inflection of the growth curve in the migration bid itself at the end of last year because we introduced a new set of tooling basically called PowerCenter Cloud Edition that makes migrating from your on-prem PowerCenter Informatica to the cloud, IDMC Informatica, much easier. You can get it done in 6 months rather than what was often 2 years. Technical risk is lower. It takes less SI intervention. That drove a lot of increased demand. And so Q4 was really big. Q1 was really big. Q2 was a little less big. And Q3 was kind of back to normal in terms of growth. So if you look at the quarters, it's been actually declining. But on a full year basis, it's entirely consistent with what it would be for the full year. But it was more front-end loaded than what you'd expect.

Why do you think that was the case? Was it just timing of when some deals were coming up for the potential?

It's hard to know for sure. But look, PowerCenter Cloud Edition, I think, clearly tipped some folks who were on the cusp of being ready to do it, and this made it so much more easier, so I'm going to pull the trigger now. But it didn't change the fact that customers move from on-prem to the cloud when they're ready. We're infrastructure software. You don't just by the IDMC cloud and turn off PowerCenter because PowerCenter is running a mission-critical workload that's connected to apps and databases and analytical engines and the data warehouse. So you're moving that whole thing. And so you do it when you're ready, not just when Informatica wants you to, right? And so I think there was a pent-up demand of people who were ready but were intimidated by the 2-year process. This was really effective and we're really happy with it. And I think it still will be easier and I think the growth is still going to be very good and it's going to continue to contribute to our growth. But fundamentally, investors move when they're ready, and we can't dictate that, regardless of how good our tooling is.

Well I guess -- but then back to the point you made a couple of minutes ago, is that the new business engine is just net new sales into the existing base on cloud, is still robust, and really is the engine that is driving the...

And of that net new, the 75% of the NARR, roughly 1/3 of that is brand new customers, new logos, right? And some people would say that doesn't sound like that much. But remember, we're a 30-year-old company and we've got close to 50% market share in terms of logos of the Global 2000, and that's our customer base. And so getting new logos out of the next 1,000 isn't that easy. So 1/3 of our net new coming from new logos, we're actually very happy with it, particularly because the land-and-expand success we have with them, once we land them, so repeatable and so easy to observe with our net retention rate. And then 75% -- or 2/3 of that 75% is from existing customers, but it's a new workload. So it could be an existing on-prem customer that's not moving their on-prem, but they start setting up a new workload with us in the cloud. Or it's an existing cloud customer that's standing up a new workload with us.

The new business piece, one of the questions that I'm sure you guys get and I get all the time is like, Informatica is a 30-year-old technology. Like can't we just do this through just APIs or can't we just do like direct connects? Like why do we need Informatica? So -- and clearly, the new business, the new customers, attached to new cloud workloads, customers are saying a different thing. Like why do we keep getting asked that question? And I guess, what is the relevancy of Informatica into the future?

Look, we definitely have a legacy perception out there amongst some. It's less so than it was a year ago, it's less so than it was 2 years ago. It's getting better. And there's all kinds of evidence that we can bring to bear to disprove that. We, in 2015 or shortly thereafter after going private, we started from scratch. A billion dollars of cloud R&D later, we have a cloud-native, built from scratch, the latest technology, cutting-edge cloud data management platform that is verifiably, ask Gartner, Forrester, IDC, Chartis, upper right quadrant of every MQ you can find in all those individual categories, against all the folks who were born 5 years ago, and they started with the new stuff, too. So what we're selling today is state of the art. It is brand new. It is cloud-native. It's all those good things. So we -- that's just going to take time to dissuade that. But the other thing that I think is out there that I'll maybe take -- try to take a minute to talk about, is that there's also this perception that so much has changed in the data world that the whole architecture of where Informatica fits in is different and that we're not as relevant. But we actually are.

Right. That's where I was going with that.

And I'll try to make this brief. In the old world, the data warehouse emerged because it could do something that you couldn't do otherwise. It put data from a whole bunch of different sources into one place with highly optimized, specialized storage; and a highly optimized, specialized query engine that sat on the same piece of hardware; with the data in this specialized storage format, so it was already groomed and curated so that the query engine could hit it really, really effectively. And you could then query it at scale, at volume, and solve your analytical reporting and data analysis needs. The on-prem data warehouse, at that time, they had their own native tools that could do some data management. There were point providers back then that could do the stuff we do, but not as well or as broadly. And we grew into a very big company in that on-prem world. Roll the clock forward to today, it's not as different as you think. But instead of Teradata or Exadata in the middle as the on-prem data warehouse, you have Synapse or Snowpark, or BigQuery. You still need to move the data from the many sources of data into the data warehouse. You still need to build the pipelines, the transformations. You still need to govern it. And you still need to repopulate that data from your analytical app back into the [ lake. ] So we're doing structurally, in terms of market structure, the same thing, and we're making money the same way. And what's even better about today than it was in the on-prem world is that there's far more complexity than there was. There's more sources of data in the cloud. There's more places to put it in terms of cloud data warehouses, data lakes, data lake houses. And all of that complexity is to our benefit because, the enterprise customer, they need to manage that complexity of their data, and we're the only folks that can do it.

So some of what you're saying, and I agree with this, is that the complexities are even higher than what they were a decade ago. And it doesn't diminish the need for an Informatica as that kind of that data migration, data privacy, governance layer. That's just -- it only intensifies. And so the question I get is like, well, I'll just do this all in Databricks. Like I don't -- and that -- but that's not what you're seeing out there either.

So look, we do see it in cases where the customer is happy with a Databricks-only environment. They have tools that, if you're doing a relatively simple isolated workload, and it's all going to be in data bricks, you can use their native tools for ingestion, you can use their catalog, you can use their governance. And that's fine. We don't compete there. And that -- and we partner really well with Databricks. And one of the reasons why it works is because, for that kind of a deal, that's not our market. That's not where our value is created. Our value is created is, once that customer has experimented with Databricks and they kind of like it, and they want 2 new use cases and they want to use Snowflake as well, and they want to use OCI. And one of these use cases has geographic complaints -- constraints where there's U.S. users hitting the same data as the European users are hitting, and there's different data privacy requirements. Yes, you can do it all on Databricks, but that's very limiting, and that's not the way customers behave. That's not the way customers behaved in the on-prem world either. Vendor lock-in was a bad thing. It's even less appealing now. You look at what some of the consolidating software vendors are doing with some of these assets that have high customer control and they're jacking up the price because they're legacy. Customers have seen that movie, they want to avoid it. Not only can't they handle the complexity, but the vendor risk of spending all your money with one cloud data warehouse provider is just not how they behave.

How does -- this sort of Iceberg tables, how does that come up in conversation with customers when they think about storage?

So it's early. We love Iceberg tables. We support it natively and we're promoting it with our customers. It's another place to store data. And the way I think of it as a relatively lay person on this topic is that it's a way to, instead of putting all your data inside your cloud data warehouse, which frankly is more expensive than it could be because it's a specialized storage and it's in their environment and so forth, Iceberg is a way to have a robust table-based data format that supports things like rollback and asset transactions outside of your expensive cloud data warehouse or cloud data lake. But it's there in a way that the query engine from Databricks can hit it, the Snowflake query engine can hit it. So you get the benefit of the optimized storage, but it's not captive to any one of those ecosystems. So it saves money for the customer. And that's why we support it and our customers want it. And it's good for us because it's more complexity. If you're using Iceberg tables instead of sitting inside Databricks, you still need to get the data in there, you still need to quality-control it, you still need to access-control it. All this sort of stuff doesn't change, it's just a different place.

The other topic, we haven't talked about GenAI in the first 15 minutes, but you guys have been early in terms of productizing CLAIRE GPT. Talk about how customers are leveraging that. And how do you think about expressing success in the future to investors that, hey, Informatica is -- we're thinking about it and we're able to monetize it and it's driving ARR for us.

CLAIRE is the trade name we have for our AI capabilities and the product. And it's been around since something like 2018 with good old-fashioned AI, not GenAI. So you've been able to use CLAIRE in the product for a long time. And it will do predictive things like where do I think there's a quality issue? I'm looking at a big -- CLAIRE will look at a big set of data and it'll say, "This looks like this column has some quality issues in it." Or I can ask the old-fashioned CLAIRE, "I'm looking for data that looks like this data elsewhere in my data estate." And it will come back and it'll say, "You've got data that I think is going to be consistent with this in these other 3 places." That's been there for a long time. It's one of the many things we do that the point providers that we compete against can't do. It's one of the many things that the captive tools of Microsoft and Databricks don't do, or don't do as well as we do. The GenAI piece is called CLAIRE GPT. And it starts with just a natural language interface, right? So you can ask it questions in natural language and it'll come back with results. But what it does is it, by being able to understand your intent and using some regular AI and GenAI in the backend, it allows you to explore your data in a way that you -- to discover and explore your data in a way that you couldn't before. And it allows you to, just like in a way that you can use GenAI to write first drafts of code, you can use CLAIRE GPT to write you a first draft of a data pipeline. And then the data scientists will want to check it and edit it and that sort of stuff. And it's getting better every day and we're adding more and more capabilities. Now we don't charge extra for that. It's a part -- it's IPU consumption. Our pricing model is a single consumption unit called the Informatica Processing Unit, IPU. And CLAIRE GPT is just another service of the 36 services that you can use your IPUs for. You can use it for data integration, you use it for push-down transformation, you can use it for serverless, and you can use it for CLAIRE GPT. And we've got hundreds of customers that are using it, and we've put a very low price on it to drive adoption. Because we're not going to make our money off CLAIRE GPT. We're going to make it off the additional things that our customers can do with the platform and services because they're so much quicker to insight and value because of CLAIRE GPT.

Got it. Let's pivot to Ithaca and the secondary distribution that you guys had. There was a -- Rick and I shared a number of e-mails and conversations about it at the time, and I get a ton of inbounds on it because I think there was just a lot of confusion. Like is this the same thing? Is it different? Walk us through what -- was it 2 weeks ago now? Or a week ago? I don't even remember.

Yes. So let me just walk you through a short history of time. So Informatica went private in 2015. There were 2 investors at that time that split the deal 50-50, Canadian Public Pension Plan Investment Board, CPPIB, and Permira. At that time, Permira put half of their half, so 25% of the total, into a sidecar vehicle called Ithaca, Ithaca LP. And there's a certain number of limited partners in that sidecar vehicle called Ithaca controlled by Permira. So the votes and disposition and everything else are controlled by Permira. Those individual LPs in Ithaca are not insiders, they're not on the Board, but they're in that vehicle. Okay. Roll the clock forward, we went public in 2021. 15% of the shares were floated. So we were 15% floated, 85% still owned by Ithaca -- by Permira/Ithaca and CPPIB. The Ithaca owners had the right in the docs dating way back to 2015 that on the second anniversary of the IPO, they'd have the opportunity to take a distribution of their shares and get out of the vehicle, the Ithaca LPs. So that was last October. Of the roughly 60 million that was in that vehicle, 8 million chose to take it out in October. There's another option for 1 big holder to take some out in June, which they did. And you can see it in the 13Fs who that was, if you want to look at it. And then again, in October, the next anniversary, there's another anniversary, and there was about 9 million shares that came out. All of those people are not insiders. They can take their distributions at any time. Doesn't have to be in an open window. That was independent of the secondary follow-on that was executed on November 8, whenever that Thursday was. That was Permira and CPPIB. Now you also see Ithaca in the selling shareholders because that's members that stayed in Ithaca, did not take a distribution, participating in that secondary. So hard, long explanation, I apologize for the complexity, but it's an important part of understanding Informatica because there's this overhang. Now the good news is, when Informatica went public in 2021, only 15% of the float was out there in public hands. It's now 37%, right? So it was 68% in the hands of Permira/CPPIB prior to the offering. It's now 63%. And we're now trading, versus $5 million to $8 million a day when I started in January of 2023, we're now trading typically $35 million a day. So the liquidity is getting better, the overhang is coming down, but it's something that everybody needs to understand.

So then I guess some of this is out of your control, it's just executing and delivering, and the rest of the liquidity takes care of itself. But just remind people, how much is left with Ithaca? And yes, I mean, obviously, 65% is going to probably keep going lower. But just what's left with that piece? And then just so that people are square on kind of the sponsors plus Ithaca.

So you can do the math from public information that there is approximately 29 million shares left in -- I'm looking at Vic to make sure I get the number right. But it's -- more than half of it has been distributed. Twenty two? Okay. 22 million shares left in Ithaca. And you can look at our filings to see when the next potential distribution dates will be. And unless there's something that I'm forgetting, the next opportunity will be next October, the next anniversary of the IPO.

Okay. The other thing that we talked about was your opportunity for buyback. And I just saw, was it yesterday, a $400 million authorization?

Not quite. Let me just interrupt you. So we had a $200 million authorization dating back to a year ago. The intent of the authorization back then was not to buy in the open market because, back then, pretty low liquidity. The last thing we wanted to do was to make it harder to buy and sell our stock by taking shares out of the market, regardless of how attractive we thought the valuation was, which we did, I think, back then. We doubled -- so the purpose of that authorization was to be authorized to participate in block trades or secondary sales by the sponsors if we like the price. We doubled the size of that authorization from $200 million to $400 million going into this quarter with the exact same purpose. No intention to be in the public market, but standing at the ready. And we had also hoped to be able to participate on a concurrent basis in the offering that happened 2 weeks ago. There was a last-minute structural technical issue that came up, which made it -- made the sponsors unable to offer shares to us in that secondary offering. So we did not participate as we had expected and hoped to because I would have loved to take hundreds of millions of dollars of shares out of market at that price if I could. I would do it tomorrow if I could. But we can't. So what we did instead is we have, actually as of yesterday, launched an open market buyback program. First ever for the company. $400 million just went into the market in liquidity. And we think at current pace, we're going to spend roughly $100 million between now and the year-end. So we don't think we're doing damage to the liquidity, and we like the price, and I want to get shares out of circulation at this price. So we're in the market buying at a reasonable level. We don't want to support the stock. We don't want to beat the market. We don't want to, when we stop buying back, the stock goes down. We want to be there in size and take advantage of this pricing.

Great. No, that's super helpful. I think -- and I'm going to ask you one other question and we'll see if there's -- this is a good group, we'll see if there's a question. We'll keep people awake. Thinking about 2025, are there any high-level guardrails? I mean, cloud continues to grow at -- and I don't know if there's another cloud business growing that fast at that scale organically, north of 35%. Are there any guardrails you'd give us? Because you had some midterm targets out there. But any way -- sort of like guideposts for 2025?

Yes, there are. And it's entirely consistent with the medium-term guidance that we offered in December of '23, so roughly a year ago. And to remind everybody of what that was is we, at that time, called for exiting 2026 of our calendar year with cloud ARR having grown 31% to 33% CAGR over the '24 to '26 period inclusive. So year-end '23 to year-end '26 is going to be 31% to 33% CAGR. Cloud will be 70%, plus or minus, of total ARR exiting 2026. And total ARR, which is ultimately what you all care about, because you can't just buy the cloud, you have to buy the stock, which is total, will be growing at 11% exiting...

Yes. An acceleration from there. Yes.

An acceleration from there. And total revenue, whose growth lags ARR growth, will be double-digit in 2027, okay? In the meantime, we've been very clear and repeating it everywhere I can, that we expect 2024 to be the bottom of the growth decline curve for both total ARR and total revenue. As the shift has been happening as we end of sale all the on-prem stuff, cloud growing really well but still a minority of the total, so that the decline is outweighing the growth, it's going to be almost 50-50 this -- at this time, coming out of the year. It'll cross 50% in '26 pretty early in the year, that the blend of the 2 decline pieces, maintenance and on-prem term license, we call self-managed, will cause ARR to be faster-growing in '25 than '24, and total revenue to be growing faster in '25 than 2024. And just because of the math, as cloud gets to be a bigger piece and the decline parts get to be a smaller piece, we expect that total revenue and ARR growth to continue to accelerate in '26.

With ARR leading the way and...

With ARR leading the way. Now embedded in that though is maintenance and self-managed are going to continue to decline. They're end of sale, it's not the future for our customers, and so it's not surprising they're going to decline. And because it declines for 2 reasons, one is just natural churn, like the company going out of business or the use case going away, but also because we're migrating it, the total decline in those buckets is going to get larger in '25 than it was in 2024 because we have more migration primarily. So expect maintenance decline to be larger in '25 than it was in '24 on a year-over-year percentage basis. Expect self-managed decline to be larger on a percentage basis year-over-year than it was in 2024. That's totally expected. It all blends up though to the total inflecting and growing.

Because of cloud being more than 50% of the mix at that point?

Right.

Is there a question out in the group here or in the audience? I know you guys are all dying to ask Mike a question. Because I get a lot of e-mails. All right. Well, wave a hand if you do have one in the last couple of minutes. One of the questions -- just -- I'm sorry, curious, one of the big inbounds we've had post election is with DOGE and with government efficiencies. And you guys have a fairly good-sized federal business, public sector. I'm of the opinion I think software can be an enabler. I think it could help the government become even more efficient. I mean, do you see any opportunities for the theoretical more efficient government to lean into technology, maybe Informatica, even more than they did historically?

Yes. On paper, theoretically or conceptually, absolutely. But one of the things that I see -- I haven't been a CFO forever, but what I have seen is it just moves slowly. And I don't think it matters that much who's at the helm.

In the short term. So you don't see any real change...

Or I don't see an inflection point or -- I don't see a material change in '25 from that alone.

Yes. It's -- I think we're all just trying to figure out. We just had a panel, and one of the predictions was Elon would leave the DOGE before the next 12 months. And so we'll see what happens with that. But yes. Maybe -- we've got about a minute left. Just to wrap it up. I mean, there's -- I really like the mechanics of Informatica. I like the valuation. I like the opportunity for acceleration and margin expansion. There's a lot to consider, and the fact that the float is a lot higher than it was a year ago, that will continue to, I think, benefit the stock as well. What are you most excited about for the next 12 months? And when we're sitting next November, what are you going to look back at like, wow, that was maybe better than I thought or...

Well, thanks for the softball. Let me see if I can hit it. There's a lot of things to be excited about to me. One is the pace of innovation and the leading products that are only getting further ahead as we go. There's the AI tailwind, I think, is going to be real. It's not yet. And we're not going to lead particularly the overall spend. But we've got customers who are using it for what you think they should be. And as that scales, I think that's going to be exciting. But what I'm most excited about, frankly, is, going back to what I was talking about a little bit, is Informatica's place in what is, I think, unambiguously one of the most exciting megatrends in tech. And that is data, that we are at the center of it. And I'm hearing every day from customers at an increasing pace, from CIOs, CEOs, that their data estate is not in order, that in order to get value from AI and just the cloud architecture in general, they need to get their data estate in order, and they need Informatica to do that. That we have a really, really privileged and fortunate position in the way that architecture of the market, as I described, like we did in the on-prem world. And that we exploited that to be the clear leader in that wave of it, and we're in the similar, if not better, position in the cloud data world to be the value creator in data.

Yes, I couldn't agree -- and then just from my perspective, people are saying like, give me an idea that you think has got some idiosyncratic elements, maybe it's not 15x revenue. I think Informatica, especially from an accelerating model, margin expansion, it just feels like you're in the sweet spot for I think what people are going to be looking for. So we're excited for 2025, and for -- yes, you close out 2024 first. But best of luck from all of us at RBC. Thanks for coming, Mike, and...

Thanks for having us.

Yes.