Informatica Inc. (INFA) Earnings Call Transcript & Summary

Thanks, everybody, for joining. I'm Karl Keirstead on the UBS software team. Super happy to have Informatica here. Vic, thanks for arranging everybody to come. Amit and Mike, really appreciate you joining. Amit and I were exchanging thoughts about our respective shoes outside. We are wearing the identical pair of shoes, although Amit's got the slight edge with the sheen, but I admire his taste in clothing.

I wanted to start just by talking a little bit about the stickiness of Informatica. I actually covered your stock in Version 1 in the public markets a long, long time ago. And here we are. And Informatica is like here still thriving, probably UBS still using you relative to 10 years ago. So maybe this is a little bit of a layup for you, Amit, but maybe just so that those that don't know the story as well, like what's the essence of that stickiness to the story?

So I mean, to step back, as Karl said, obviously, we've been -- this is 30 years as a company. But I would say that the last -- this is a completely different company. My 11th year. So the best way to kind of look at the new Informatica and its stickiness is if you basically go back in time in 2015, we went private. And pre 2015, in that year, as we ended that year, we had become a $1 billion on-premise license software company, park that in your head. And when we went private, we had this thesis of what the growth is and basically had a 3-pronged outlook in the market. One is, if you believe the digitization that had started happening at that time, three things could come true. One is, it's not going to be around growth of data, it will be around more use cases for data, which means more products and a bigger TAM than what Informatica had done before. Number two, the world will be cloud only at one point, but it will remain forever hybrid until then, and it will become multicloud at that point. So it will be a multi hybrid. And the third was in our market, very fragmented market. The opportunity as the world is changing and cloud is going to become this new normal for whoever becomes the platform company can reap disproportionate economic benefits. Three bets we made as a company. And fast forward now, if you remember -- so this is 2015 and 2016, we started building the new Informatica, literally from scratch, started building new products in the new TAM. And where we are now is that, first of all, we broadened and we are no more just an ETL company, which is what we did on-prem, which is what UBS also uses us for. But in the new world, we are ETL, ELT integration, app integration. We also do master data management, data cataloging, data governance, data privacy, many, many more things. So our TAM has become a $62-plus billion TAM. So we broadened the Informatica in a very different way. And of course, we started building out the cloud in parallel because the world was not cloud-only. And today, we are the only -- we only sell cloud, and all of our products are cloud native, best-of-breed where we have #1 in every magic quadrant we compete in because we invested in R&D. We also bet very big on being the platform like I talked about. So IDMC is a platform. All of these products sit on one platform, intelligent data management cloud, single UI, one common pricing model of consumption-based pricing, and of course, we bet on AI way back, I'll come to that later. And that's what basically -- and again, in that world, we continue to focus on enterprise customers like yours and operational use cases. So our core thesis of going after operational use cases for enterprises did not change because we build the best products and we do this data-intensive work, we are very equally sticky in this new world. And you can see that where our cloud platform, first of all, has grown from 2016 almost nascency to last earnings call, 101 trillion transactions per month. And our NRR is around 125, 126. Our renewal rates are in the high 90s and so on and so forth. And we have scaled so well, and we have -- in the world of data, we have the Switzerland of data working with everybody. So that's kind of like a huge fast forward. And I'll pause after this. Remember, I said that in 2015 Informatica when it went private was a $1 billion revenue company. We don't sell anything on that old world anymore. We only renew it. In the new cloud world, we'll exit. In 2016, Jan, we started building the new product, so you can see how in 8, 9 years, we'll exit this year, and I'll keep myself very precise because I use directional numbers, and I get my hands slapped by Mike all the time, use precise numbers, so I'll use precise numbers. If you look at our guidance, midpoint of the guidance, we'll exit this year at $836 million of cloud ARR, Mike? I use $850 million generically, he gets very annoyed at me. So $836 million of cloud ARR in a matter of 8 years with a run rate of $1 billion next year. That's the new Informatica, equally sticky, much, much more diversified in the cloud world.

Yes. That's a great story. Let's talk a little bit about some of the mega trends you're seeing. That's not just an easy segue to talk AI. Because maybe in addition to AI, there are some other interesting trends that everybody in the audience should keep track of. So in addition to this AI revolution, in addition to this continued migration to the cloud, are there other megatrends that you're shaping Informatica to seize?

Well, look, obviously, we'll keep AI on the side because AI is such a mega trend that I don't think anything will capture that mind shift in today's discussion. I think this is also a tech and AI conference. I saw that. Look, step back, remember, I said, digital transformation is not done yet. We tend to think that, oh my gosh, that's such an old school thing. And of course, it's no more as sexy as AI, because AI is going to be the next 10 years. But in all honesty, every organization is still becoming an end-to-end digital organization. By the way, that is a pre-requirement or a prerequisite to get to AI. It's kind of like to do the AP course. I have a high schooler, so I live that world. To do that AP course, you have to do some foundational course. So no organization can just become an AI company without being a digital company. And I think that journey is still happening, and it actually is getting accelerated because of AI. Because people are realizing, I cannot get there if I have not digitized everything. And the other one that has happened under the covers is that every company has more and more as they become digital, they realize they become a data company. And how do I use my data better? A great example of that are look at even during COVID when the supply chain got appended. Companies had to go through digging deep into the data to see how can I move my freight, where it's coming from? And today, 8 out of the 10 semiconductor companies are basically standardized on Informatica around their supply chains, including the #1 GPU company that basically runs their GPU supply chain on Informatica or so on and so forth. When Katrina happened, and you had to move all the drug -- after Katrina happened, sorry, when you have to move that -- you have to derisk your supply chain for drugs. It happened through understanding where the atoms, molecules come for in a factory. So what is happening is that long story short is that, that revolution of digital and data first is still happening, and that is extremely, extremely important for every company. And we all -- I live in Silicon Valley, where we feel like that, that curve is over. But you go to the middle of Midwest, companies are still not done yet. When I go to Brazil, companies are still working on that. When I go to, for example, some countries in Asia, they're still working on that. That's a massive trend. And then, of course, AI. And migration by the way, modernization is happening in that because people are realizing that, hey, I better modernize to then get to the benefit of AI. Those are all things happening right now. And amongst things like governance and privacy not because of regulation but also for the sake of data democratization. To make sure data is available to many people, I want to do it in the right way for an enterprise, and that's where governance comes into play. Less on compliance more for democratization purposes. So there are many of things like that, that we see that are happening in terms of trends.

So before moving to AI, one question I have about some of those more non-AI or traditional tailwinds for Informatica, is that the transition of sort of trapped corporate data on-prem to the cloud has been building for years, obviously. It feels to me as if that pace of migration activity moderated somewhat in the last 18 months given we've been in a very tight budget environment. I'm curious whether the two of you are seeing any evidence that on-prem to cloud migration activity for the data, apps as well, is starting to percolate up a little bit or too soon to tell?

I think it's going to be -- for anything, I think too soon to tell. I think it will happen, no doubt about that one. I think we all end up sometimes simplifying things a lot easily. When you go -- if you talk to your IT organization and I talk to the CIOs or the CDOs, the reality is that this -- they live in a, what I call, finite capacity. Finite dollar capacity to spend and finite human capacity to execute against projects. And they can only do so much at a certain time. And that's the trade-off they have to make. So they make -- in that, they make trade-off to doing one maximum, two transformational projects and -- forget running -- and some of what I call our medium value transformation projects. And it's there that they have to make trade-offs. And everybody makes trade-off at a different point. A great example would be SAP migration is happening. For some companies, that's like, geez, everybody just gets sucked into that, and then you do 2 or 3 other projects. I'm taking that as an example. So I think it will pick up, but we all have to be careful because it will be different for different customers because we live in a finite capacity model that the law of physics or the law of dollars of -- enterprises don't have unlimited money to keep spending at the problem. So they'll pick and choose. But that pace will increase for sure over a period.

So now let's talk AI a little bit. And I think one disappointment that investors have is that one could have maybe 2 years ago had this thesis that AI would serve as a key catalyst for organizations to modernize their data stack, get their data state in order. And here we are, and you have to squint pretty hard in my judgment to see any obvious AI lift across all the independent data software firms. Amit, why is that? Why aren't we seeing it yet if data is such a close cousin of AI?

I think we are mixing the time lag. I think what has happened is that just because ChatGPT came, what, 24 months ago -- 24 months ago, actually around this time 2 years ago. And I think we've all felt like, well, that's the start of the AI -- GenAI revolution. And that is just such a simplistic way to look at it. And I think we all get very, very -- because today at home, all of us can rip up ChatGPT, free available data on the Internet, run it through that, get an answer. And like, of course, GenAI is available everywhere. But let me ask you, if you are on the ChatGPT answer, and it comes back and it's wrong, do you end up getting angry? Like you kind of like I was never going to believe this 100%. It gives me enough of an answer. It gives directional sense to go. But if you are like us serving -- a not that -- I'm going to tell you what we're doing for UBS, and I'll pick you as an example. If you're printing 10-K, 10-Q reporting for UBS, or for any company for that matter, and we're like, we got it 1% wrong. Somebody will go to jail for that. Somebody will get sued for that. That's not how enterprises work. So I think we oversimplified GenAI in the context that started over there. So tomorrow it can happen over there. That's not the way it goes. The other one is that people look at, oh, look at the semiconductor wave that's happening. And so hence, the wave have started. But look, the reality over there is that 4 or 5 companies are the data centers of the world, and one company has the GPUs, it's a trade happening between 4, 5 of them. We are looking left, we're looking right. If the world was not in these 4, 5 data centers and all of us were supposed to buy GPUs, I'm not sure our companies will be spending it, build it and it will come. It will be like, okay, I see the demand, I'll see how it does. So I think we're seeing 2 very unique things, and we are taking that in the enterprise world and hence it should happen. Enterprises work differently. They're like, okay, first they're trying to figure out what exactly should I do with GenAI? What is the -- there's a strategy project that happens, think through that. Then it's kind of like, okay, let's do a POC over there. Let's do a pilot over there. A lot of pilots are happening over there. And before I operationalize, how do I open it up? There's a governance compliance issue. If I get sued over there, all of those things have to be checked before I can put something into production. Security is a huge issue for some of the large companies, right, so on and so forth. And the answers cannot just be -- if you give the chatbot GenAI and move on, it cannot be directionally correct. It better be precisely correct. We just have to give it the law of physics and some time for it to happen. And lastly, if you remember, when cloud came, infrastructure went to cloud first. Data went later because it takes some time for that to happen. And I think we're going to see that over here. I am seeing that over here. We are just seeing -- we just want it to happen sooner. It's I think the laws of emotion are taking over the laws of physics. And we just cannot -- it's science.

Okay. We'll stay patient, Amit. When it does come, where are we going to see it in Informatica's business? Will it be on the core data migration side? Will it be -- will your data governance offering start to perk up? Like where are you looking for early evidence of an AI pull-through? What part of the suite?

It's going to be in multiple different areas. We're seeing it already, for example. For example, our customers like there's a large insurance company that is using our app integration, our data quality and data catalog for them to basically take and they're running a pilot right now to take what used to take them 15 days for a claim processing to happen to convert that to 56 minutes. That's -- we've shared that publicly. That shows up in the integration layer because you have to bring data together to feed it into models and the transformation layer to support the transformation of the new RAG models, supporting vector databases, supporting LLM, that part of the stack. And then as they go to production, governance will come into play. Right now in pilot governance doesn't come into play, they are like testing this all out, laying out their data pipes. So we will see it over here, you'll see it in governance. And then at some point later -- and then of course, migrations will happen at some point because you will say, okay, I better migrate my production work. So we will see it in these different pockets for sure. I'm seeing that in terms of the current POCs because we see them in the cloud, where the POC is happening, where the data is going, which vector data is being used, we see all of that stuff. We have those examples, that's where we expect it to show up.

Amit, one idea I have, I'll bounce this off you that could be a potential catalyst for Informatica and the other data software firms. You're hearing all kinds of buzz about scaling laws. So the incremental improvement in models is perhaps starting to diminish. When I think about what that means, it probably means that the last remaining set of data that has yet to be exposed to the models to make them more intelligent is all the extraordinarily valuable data that companies like UBS are sitting on. So I wonder if the rate of improvement with these general purpose model slows, it could serve as a catalyst for organizations to spend more money fine-tuning those models on their corporate data as kind of the next leg up in those model performance. And if that were to happen, it would seem to me that there's a bigger role for data software firms to play in that trend. Crazy or not?

Nothing directionally, you're thinking about it the right way. I think that right now, what is happening on training of the models that companies are actually not even training it on full data. They take a subset of the data. They basically make sure it's not mission-critical data or they'll kind of clean up their data or they'll mask it, so on and so forth because when it goes into the model line, customers are very nervous about data is going into the model, whether regulators are -- and what if the model learns from some of their data, they don't want that. So there's a lot of stuff. So it's not even all of the data is going into the model.

We're even early on that?

Forget even mission-critical data. So I think both have to happen. And that's where as more and more comfort comes in and we help customers will unlock definitely value for, in general, the data stack. Data stack is a sensitive stack for large companies, and they end up being more risk averse before they basically end up being on the wrong side of anything that will hurt them.

Okay. Maybe we'll bring Mike into the conversation. I'd like to switch subjects and talk about this extraordinary mix shift that's happening inside Informatica that Amit talked about. So when I used to cover the company, it was 100% on-premise, way, way back, Version 1. Now, I think latest quarter, 44% of your total ARR is coming from cloud, extraordinary shift. So maybe the first question for you is where is that cloud growth coming from? I presume there's some new logos. Is it expansion of existing clients that are still running Informatica on-prem? What's the source of that extraordinary cloud ARR growth if it's not pure migration, which I don't think it is.

It's definitely not pure migration, Karl. Most of it, 3/4 of it, and we disclose this every quarter, is winning in the marketplace. Winning net new...

New workloads?

New workloads and new logos, customers that aren't migrating on-prem to the cloud, 75%. So of our 35 percentage points of cloud growth that we expect to deliver this year, whatever 75% is of 35, call it, 27 percentage points is winning in the marketplace head-to-head with the point providers, the cloud service providers who have tools that compete against us all year round. And that's the core part of the Informatica growth story is that we have the best products category by category in data management on the industry's only true cloud data platform with a consumption-driven pricing model that serves the multi-cloud, multi-hybrid, multi-vendor needs of modern enterprise as the Switzerland of data. And so we're just winning in the marketplace. 25% of that NARR is from migrating on-premise power center or other subscription products to our cloud. And that's an important piece of the story, but it's not the story.

Got it. Makes sense. But on that 25%, Mike, how is that likely to trend over the next year or so? Are we coming out of a period maybe where there was significant migration activity that might cool? Or is it the opposite where perhaps due to end market changes or even Informatica pushing clients somewhat. You could actually see an acceleration of that migration activity. How do you think it will look over the next year?

So on a longer trend line basis, I think it's going to be continued on trend, which is that the growth of the migration piece, the 25% of the 100, is going to grow more or less at the same rate as the 75%, the winning net new in the market. Now more locally, we did see a blip and acceleration of the migration growth rate for Informatica in Q4 of '23 and Q1 of '24. That was the result of a new migration mode, if you will, called PowerCenter Cloud Edition, that made it quicker, easier, less technical risk. Two, begin the migration journey to the IDMC.

So we're about to lap that?

Well, we saw -- I don't want to really call it a bubble, but we saw a surge in migration sign-ups because of the benefits of that tooling and it has since in Q3, and we expect Q4 of this year and beyond to go sort of back to trend where the migration part of our growth is relatively growing at the same rate as the net new part of our growth. So that mix of 75, 25 or maybe as much as 70-30 to be the medium-term expectation for that. Now is there anything we can do to push it? The customers who -- migration is not a casual decision. You're doing it when you're moving an entire workload and all of the applications and the infrastructure to the cloud. It's not just about deciding I want to move my Informatica. It's about moving the entire workload, which, in most cases, as workloads has been there for a long time, has a lot of tentacles into things. It probably works really well. And so you need the budget and the time and the bandwidth to do it. And so there's not much Informatica can do to push on that string. It's when the customers are ready and when they are, we're there and we win the business. But we frankly have no more ability to accelerate that, then we do accelerate someone who's buying net new.

Okay. And Mike, on the way in which that mix shift translates to your reported revenue growth rate, not ARR. We've been waiting for that mix shift to essentially serve as an accelerant to the reported revenue growth. It's taking a little while. The growth rate is kind of sticky in that single-digit range. When are we going to hit the point where enough is cloud growing at a much faster clip that the mix starts to take Informatica past the double-digit point? Maybe that's venturing a little bit too much into guidance. So maybe you want to...

No, it's not at all. And it's going to be next year. I'm happy to answer that question. It's going to be next year. And -- which put in other way, we expect 2024 to be the bottom of that curve in terms of total revenue growth and total ARR growth. We expect total revenue growth and total ARR growth to be faster in '25 than in '24. We expect it to be faster in '26 than in '25. And simple math, by that time, we'll mean we'll have the cloud business is circa 70% of the total versus almost 50% now. That's still going to be growing at a very attractive rate, we believe. The shrink piece is going to be smaller and only 30%. So simple math shows you that there should be continued acceleration from there into the teens.

That's great news. Amit back to you on the competitive front. And I won't ask you about traditional smaller Informatica rivals, the 5 trends of the world. But rather we all follow the Snowflake and Databricks a lot. And they've been -- I don't think, earnestly so far, gently been stepping into what they're calling a ETL business. Do you view them as overlapping with you guys a little bit more than a year ago or what they're doing so different than what Informatica is known for that you wouldn't really consider them to be a direct rival? Because I know you're actually an extraordinarily important partner to at least Snowflake, I think Databricks as well.

Equally. Databricks is growing fastest. And together, we've talked a lot about it. We won the Data Integration Partner of the Year with them.

Congrats.

So no, we don't look at them as a competitor. And I think, of course, the world of tech can be an area of grace, so the words can be very equally liberally used. So I'll give you how it works out. First of all, one thing for sake of clarity is that I think -- we're a very, very diversified business. I mean if you look at our business today, 50% of our cloud ARR is integration, which is data integration and application integration, application connecting the apps and all that stuff. And by the way, when we say integration it is not about moving data. It's about logical activity with that data. Moving to me is commodity, which is what Fivetran and Matillion do. And the other 50% is MDM and data governance. So we are a very diversified business. Now coming to this, look, we are in a $62 billion TAM. And when we look at -- in some way, some things have not changed. Databricks, Snowflake have to have certain very basic rudimentary capabilities of connectivity or ETL links just like Microsoft has with ADF or Amazon or AWS has with Glue for so many years. By the way, in the old days, it was similar with the Teradata or an Oracle or a Netezza. They would have their individual toolings too when you covered Informatica back in the day, they had their own ETL back in the days. The reality is that they're always meant for a very, very, very narrow use cases, simple use cases confined only to that particular ecosystem. The reality is that when you step back and look at it from an enterprise perspective, like a UBS, the world is very different. The world is multi-platform, multi-app, multi-- it's a very fragmented world and the use cases are complex. So we're very happy where somebody can just begin with some simple basic tooling. And they have to have it, I totally get it, fine with it. We are okay. We don't want that. But the moment it gets a little complex for its multi-technology we win all the time. So that's why words can be the same, but we don't really compete more often than we don't, we partner a lot together.

Yes, got it. I'll ask one financial question, Mike. So maybe back to you, Mike. When we look at Informatica's fourth quarter ARR guide, and we run the simple math on what sequential ARR growth that implies in the quarter. It's actually very, very healthy and up nicely actually from 4Q last year. What is it that's happening in the fourth quarter that leads us to that numerical conclusion?

It is the linearity of enterprise software at Informatica. We're a big fourth quarter business and we expect it all year long. And at the beginning of the year, everybody was saying, well, it looks like you're really back-end loaded. Yes, we are. And that was the narrative beginning of '23, and we've plotted through and we delivered the year...

Becoming a little bit more of a -- this year anyway, a little bit more of a 4Q skew?

In terms of what you can see is NARR, right, what we start with is bookings, which we don't disclose because NARR is the net of bookings and renewal rates and some other cats and dogs. On a bookings basis, the linearity is almost exactly to the dollar, what it was in '23. So it's a typical year for us in that regard. It's a big quarter for sure. And December is the biggest month of the biggest quarter. So there's a lot of software to sell, but it's not unusual, and it's -- we still feel comfortable with our guide.

It's true for all 30 years. I think we are an annual fiscal. Q1 is the smallest, Q4 is the biggest. Q2, Q3 are same. It has never changed for us. And I think it looks big. Like Mike said -- by the way, our NARR for Q4 this year as a portion of the NARR for this year is exactly the same as last year. And second is that, remember, because we are -- that's how we have sold for 30 years, we have a lot of renewals this quarter as much as net new business to be sold. So it looks big to the outside, but this is how it's been for 30 years as a company. So that's just how we plan every year, reps have an annual quota, and that's how it goes.

Okay. Let's close with a question around your margin performance. That's been one of the bright spots for Informatica since you went public in the second incarnation. You've just consistently beaten your EBIT margin guidance. So looking forward, I can see puts and takes. On the positive side, for a company at your maturity, I can actually -- I'll be honest, imagine you running at margins considerably higher than what you're at now. It seems very conceivable to me if I just comp you against other mature software companies. On the other hand, you're investing heavily in a lot of new features, and you've got some growth initiatives. So I'd love to ask you how you're balancing those two and thinking about margins over the next couple of years?

We do expect margins to continue to expand, not by leaps and downs, which is how I would describe '24 versus '23. We had two restructuring actions in '23 to take advantage of the cloud-only strategy that we've launched at the beginning of '23 in terms of go-to-market efficiencies only selling cloud versus two sets of products. R&D efficiency in terms of only developing to the cloud as opposed to two sets of platforms. So it will be over 400 basis points of margin improvement in '24 over '23. It's not going to be anywhere near that. But it is our expectation, our commitment that we're going to grow non-GAAP op inc and EBITDA faster than revenue, which means that we're going to have expanding margins to some degree. But it's going to be linear and I would say modest, but we will continue to find opportunities for operating leverage.

Okay. Makes sense. We've got one more minute, but that means we have one minute for a question from the audience, if anybody has one? No. Okay. Well, we can end at 56 seconds early. Amit, Mike, thank you for joining us today. Thanks, Vic for making it all happen.

Thank you, Karl. My pleasure.

Yeah, you got it.