Informatica Inc. (INFA) Earnings Call Transcript & Summary

[ Hello ], and it's my pleasure today to introduce you to Mike McLaughlin, CFO of Informatica. We've also got Victoria Hyde-Dunn here, the Head of Investor Relations. [Operator Instructions]. Mike, thanks for joining us today.

Thanks for having us. Great location, great conference so far.

Yes. Why don't we start by just giving you thoughts on maybe the recapping some of the key takeaways from the Q3 earnings call. The Cloud ARR is really something that stood out to me. It was really strong growth again, and you gave a nice breakout of the different drivers of that Cloud ARR this quarter. I think 25% from like new customers and 50% from the new workloads and then another 25% from modernization. So that was an interesting disclosure. But I'd love to hear kind of your thoughts on some of the key takeaways from the call.

Sure. It was at a high level, another consistent quarter for Informatica that is on the path to the medium-term guidance that we offered at our Investor Day in December of 2023. The Cloud continues to grow in the mid-30s as we've expected it to, driven as you pointed out, by approximately 3/4 of the growth being from new customers, new logos, new workloads from existing customers and then 25% of that growth roughly coming from migration contributions of customers that are existing maintenance users or self-managed subscription customers of Informatica, moving their workloads to the Cloud with what has historically been a 2:1 uplift. Put another way, of the 35.5%, 36% growth we delivered in the quarter, 27 percentage points of that was from new customers and new workloads winning in the marketplace against the competition and the last 7 or 8 percentage points of that was from migrating our existing customer base from their on-prem installed base to our cloud, IDMC platform. It's consistent with the plan we've had all year, and we were pleased to deliver another step on the road to getting to our 2016 (sic) [ 2026 ] goals, which are double-digit, specifically 11% total ARR growth by the time we exit 2026 and double-digit total revenue growth in 2027 because there's a lag between those 2 metrics in a business like ours. The other components of what goes on in any quarter, of course, are the decline of our on-prem components. So the cloud is growing very nicely as we've discussed. But the on-prem business, which is maintenance from perpetual licenses sold in the past and on-prem self-managed subscriptions also sold in the past and which are end of sale. Those two buckets of revenue and ARR are in decline and will be in decline forever for Informatica because we're not selling new into those buckets, we're only selling cloud. And those declined in line with our expectations. The maintenance bit of it declined in the mid-single digits and self-managed decline was approximately 11%. The self-managed decline is higher is that's a less seasoned base than the maintenance component, and we expect that decline to accelerate in Q4, and we're guiding that to be 13%, again, according to plan. And the maintenance decline is going to be in the neighborhood of 6% to 7%. Again, very much consistent with what we've expected for the year. All of those add up to a total revenue growth rate that's in the mid-single digits. But as I described, as the cloud continues to grow and the on-prem continues to shrink, that's going to blend up to an accelerating growth rate in the years ahead. Specifically, we expect total ARR growth to be faster in '25 than '24. We expect total revenue growth to be faster in '25 than '24, and we expect that to be the same in '26. Total ARR will grow faster in '26 than '25. Total revenue will grow faster than '26 than '25. And that's because exiting this year, the cloud portion of our total revenue in ARR is going to be almost 50% and will cross that threshold early in '25. It will be circa 60% in the '25, it will be 70% at the end of '26 and so on, which will lead us to be what we think will be a sustainable double-digit grower in the years ahead.

That was a great overview. Thank you. And I do want to get into some of the drivers of each of those 3 different buckets, the cloud, of course, maintenance and self-managed. But maybe before we do that, when I think about maybe the underlying commonalities between whether it's a new customer coming to Informatica or a new workload getting deployed in Informatica or even an existing customer converting to cloud, I would imagine that they're all going through that same sort of process of modernizing their infrastructure when they come to Informatica or when they come to launch a new workload. And so -- why -- I guess, when a company undergoes this modernization of their entire infrastructure stack and they're leveraging more solutions like Databricks or a Snowflake or a MongoDB, I guess why would Informatica be part of -- or how is Informatica part of that modernization effort?

I'll answer that by starting with a brief description of what we do for those who maybe aren't familiar with it as you, we do data management, which means moving data from your sources, essentially your applications of which modern enterprise has hundreds, moving those in an organized and orchestrated and controlled way into your target for data, and I say targets because most enterprises have more than one data warehouse or data lake that they use for reporting analytics and data science. We catalog, govern and curate that data, and we orchestrate workflows associated with data tasks. So telling the applications to give me the data, pushing it into the data warehouse, transforming it either on the way to the data warehouse or in the data warehouse itself using pushdown technology and then, in many cases, using our app integration capabilities to orchestrate the applications, the analytical or reporting applications or even operational applications that will pull that data out of the data warehouse and use it for a task. So when a company is moving their on-prem workload to a cloud -- to a cloud architecture, again, using Snowflake or Databricks or Redshift or BigQuery or any number of those types of targets for data, they need us to do all the work that I just described. Now, we target the enterprise, not the mid-market, and there's a few reasons for that. There are myriad ways to do your data management. You can do data management without Informatica, of course. There are point products that do pieces of it. There are companies that do mass ingestion, i.e., the bulk transfer of data from those applications into the data warehouse. There are companies that do the transformation piece, that the transformation of the data either in liter at the data warehouse. There are companies that do the data catalog and governance. There are companies that do the mastering of that data, which is our master data management business. And for companies that have relatively simple needs, that don't have much complexity and are willing to stitch those products together to get to the end goal, those products are fine for them. But the target audience for our services is the large global complex enterprise that needs what Informatica uniquely provides. And that is a collection of the unambiguously best products in the data management sector. So category by category, whether it's data ingestion, whether it's data quality, whether it's master data management, whether it's data governance and catalog, we have the objectively best products according to Gartner, Forrester and all the other waves. So good enough products are fine in some cases, but if you need the best products because you have the most sophisticated needs, you come to us. We offer those products on the industry's only true cloud-native, multi-tenant, single log-on, single pane of glass, single consumption-based pricing model platform. So it's not just a platform, meaning that the various products have the same suffix on them, and we call that a platform. No, this is a built from the ground up, cloud-native, single log-on, single pricing model platform that integrates all those best products together. So for companies that have -- that value having the ability to do it all on a pre-integrated basis and the ability to expand using the same pricing tokens, they come to Informatica. And the third piece -- the third leg of the stool is that we do that supporting all of your vendors, i.e., all of your applications, all of your targets, all of your clouds. So every one of the clouds that you would consider using, we support deeply. And we support your cloud and hybrid or on-prem data management needs from our cloud platform. So if you put those together, we have the best products on the industry's only platform as the -- what we call, Switzerland of data, supporting all of the sources and targets of data and on-prem, nobody else has that. And it's the enterprise customer that really values that, and that's where we win and that's where we play. And so getting back long answer to your initial question around Snowflake and Databricks, that's why we're relevant to that kind of a situation.

Yes. I think the complexity of the enterprise is largely underappreciated by many -- I was a software developer for a good portion of my life and writing interfaces to and from a lot of applications, just sending data and trying to massage the data, it worked 30 years ago but when you have -- any time you add a new application to your environment or a new workload or an application is upgraded or changed, like changing that entire workflow process would be chaotic, I think, in a large environment. I don't know how you do this without Informatica going forward.

Well, you're absolutely right. And we compete against companies that facilitate that approach that have point tools that allow folks who are -- want to be developer or engineering intense in the way that they manage and move and keep their data up to date. So it is possible to do that, but it creates a lot of complexity. It creates a lot of tech debt. It creates a lot of maintenance burden. And compared to diligent with Informatica where it's modern low-code, no-code, drag-and-drop, tightly integrated, high-level semantics and that efficiency benefit is where we shine.

Okay. So now there's some larger companies like a Salesforce that are trying to build out. They have more than one application. They have a suite of applications that they're offering to customers. They're trying to build out this middleware layer to keep all their applications interconnected. I guess how are -- I mean, do you see them as -- is that taking away any opportunities from Informatica? I know being the Switzerland of data, there's a lot more applications that you integrate with beyond, of course, Salesforce. But are other companies like them trying to do this and trying to become more interconnected?

Well, you are seeing them talk about that a lot in a specific way, it is the reality. It is true. But it's a way that doesn't impact us. It creates a lot of confusion and I think, misunderstanding out there about what they are trying to do and what we do. And the confusion arises this way. If you look at companies like that who are exposing data management or data access or data federation model that connect their different silos in a better way for their customers. What they're really talking about is, data federation, data sharing, data virtualization is another buzzword that gets used for it where you leave your data where it is, but through the process of certain connectors and APIs and collaboration on formats that your applications or even your data analytics apps can reach out to those silos of data when they need the data, rather than move it into a data warehouse or a data lake house and then access it for those purposes. The laws of physics make that a narrow use case for ad hoc queries, that sort of federation of data approach, can work okay. Historically, it has been very brittle because you have to maintain all those connectors and you've changed one API or format and you potentially take the whole big down. But it is something -- it is a real use case and it can be done, but it doesn't have any relevance on the main part of the market, which is what we serve, which is where you need the mass of your data from many, many applications, if not all of them, to be in a place that has a super optimized storage format, a super optimized query engine so that you can access it and use it in high-performance, cost-effective ways rather than sort of one-off ad hoc. So what you are hearing from Salesforce and others is real but it's not our core market, and it's not the value that we provide.

Got it. Okay. Another -- maybe just shifting gears over to GenAI, it's another high-level topic that I get a lot of questions on and I've always viewed Informatica as sort of this maybe more of a critical component of the GenAI stack as you build out whether you're using an LLM for inference purposes or even building more of a GenAI application. But I would love to hear your views on how do you see Informatica benefiting from this increased spend on GenAI?

Well, our tagline that we're very proud of it. Everybody is ready for Gen AI, except your data. And frankly, that's what we are hearing from customers that as CIOs and CDOs and others get serious about enterprise-grade GenAI applications, they're quickly realizing that data is the fuel and their data, in most cases, is not where it should be and the quality that needs to be or governed in the way that it would need to be effectively or even regulatorily used in GenAI applications. And that's where we fit in, is that we bring your data together, we curate and quality control it, we govern it and we orchestrate it into workflows that use LLMs, vector databases and RAG architectures.

So kind of the same use cases is what you're doing -- providing to all other applications in treating an LLM as another mission-critical application that the enterprise uses that needs the data in the same format that...

That's a good way to look at it. That it doesn't fundamentally alter the architecture of what we do. It means that in addition to the other users of data that we support, we have to support LLMs. So if you look at our demos of how we do GenAI data management, and these are real use cases that customers have in POC right now. In the drag-and-drop no-code workflow, where you're setting up your GenAI-based application, you get to the do something -- we've done all this, we've got all the data from all the different sources, we've cleansed it and transformed it. And decided what is appropriate to use and what's not based on governance rules. And now you have to do something with it. It's a drop-down menu, it says which LLM are you going to use and where is it? And before that, we've got a drop down that says, okay, which vector database do you want us to put all of that data into before that is what transformations -- what vector-based transformations like junking and so forth, do you want us to use to get it into that factor database? Fundamentally or conceptually, that's the same thing we have been doing for 30 years, but it's just new endpoints and technologies.

Got it. Okay. Well, maybe I want to go back -- we'll dig into the Cloud ARR trends that you're seeing and kind of go back to one of your earlier points on where you started this conversation that ARR -- total ARR growth is going to accelerate next year and the year after. If we look at the underlying growth drivers of Cloud ARR, I guess how are you thinking about like the digital transformation, which, over the last 2 years, I think, has largely been put on hold and GenAI taking a lot of the focus from -- of investment from organizations now, like how are you thinking about what's driving that Cloud ARR acceleration next year and the year after? Is it GenAI or is there a resumption of maybe app modernization or both?

For us, it's not really a change in the environment. It's a continuation of what we've been feeling and selling into for the last 2 years. There was clearly a shift in the environment in 2022, following a shift in the environment in 2020 due to COVID and then the lack of COVID. But 2023 and 2024 felt pretty stable and the demand that we've benefited from, we think, is going to be essentially the same flavor of demand in 2025. There's hopefully going to be more appetite and demand for digital/cloud transformation, but it doesn't need to be more than what we've had in the past. And we hope there's genuine revenue generating AI demand, which -- GenAI demand, which has all been sort of POC demand so far. But again, it doesn't have to be. We just need to have an environment that is equally robust and equally distributed in terms of the nature of the demand that we've seen in the last couple of years.

Okay. So stable environment, and you still get the acceleration......

And the reason why we have that acceleration. Cloud revenue growth is -- this isn't guidance yet, but it will be lower in our guidance in '25 and '24. It's just a matter of scale. We're going to exit this year with $836 million that ARR, according to guidance, Cloud ARR, and that's still going to grow in the '30s. I'm confident in '25 but it's going to be lower than this year. But the shrinking parts are going to get smaller and smaller -- and by the way, the shrinking parts are going to shrink even faster in '25 than they did in '24 for reasons mostly related to migration. But because the shrinking part is getting smaller and the growing part is getting larger, it's going to blend that total growth rate up. It doesn't require a change in the end market. It doesn't require a change in demand on the macro.

I think you already touched on this, but in terms of fighting for those new workloads, or new customers, is there any competition that you're seeing other than point product vendors trying to capture a piece of that puzzle? Or is it -- is there anyone out there that you compete against regularly?

Well, there are 3 categories of competitors that we see are those point products, which I talked about before that you have to stitch together yourself and many of those are good products, but they're narrow. We have the cloud service provider, the hyperscalers, the cloud data warehouse providers themselves. So those folks have a certain amount of proprietary tools that they can use -- that you can use with their cloud data warehouse inside their walled garden. And for simple single cloud use cases, those are sometimes sufficient. And then there's the role in your own crowd that you also mentioned. Those 3 categories competitors have always been there, they always will be there. But when there's a situation, for example, where a customer has a simple use case with one cloud and the good enough tools provided by the cloud provider do the trick. We don't compete there. But when it has a level of complexity that requires the level of sophistication that we provide, that's where we compete, and that's where we win. And that's why we partner so well with those cloud data warehouse providers and cloud service providers that on paper look like they're competitors to us because Azure Data Factory has tools that look a lot like ours on paper. So does AWS Glue, look a lot like ours on paper, but they work within their walled garden, and they're not as sophisticated nor as connective as ours are. And so in a situation where those tools work well enough, we don't compete there and the business goes to those partners, and that works great. And where our solutions are the best solution, we partner tightly with those folks shoulder-to-shoulder and win the business together.

Got it. Okay. On the other 2 segments, I want to talk about the maintenance and the self-managed piece. We'll start with the maintenance first. That's been a surprisingly, I would say, consistent segment of your business that's declining like over the last 2 years in the -- 6%...

Yes. It's about 6%.

Yes. How are you able to keep that so stable? I mean, are customers migrating over at a very stable pace? Or are you...

The way to think about that decline is in 2 pieces. The decline of both maintenance and our on-prem self-managed subscription business has a component of what we call natural churn. So that's the business churn that goes away because of normal enterprise software reasons. The use case went away, the company went out of business. There were some other fundamental change or we lost to a competitor. It's not very common, but not 0, of course, where we lose the business to competitor. We call that natural turn. And then on top of that is the migration-related churn. So it's folks who have made the decision with us to move that workload, that on-prem workload, whether it's maintenance workload or a self-made subscription-based engagement to the IDMC, our cloud platform, and they do so, historically, as I've talked about it, typically, on average, a 2:1 uplift from what they were paying is either maintenance or self-managed, they pay us on average twice that amount for the cloud solution. So there's 2 components, the natural churn and the migration churn. In the maintenance bucket, the natural churn is very stable. We've been in business for 30 years. We've been selling perpetual licenses -- we were selling perpetual licenses with maintenance for 25. The average tenure of our existing maintenance customer is 12 or 13 years. So it's very season-based. And if you've already renewed your maintenance for 12 or 13 years, the chance to be renewing at the 14th year, pretty darn high. So the natural churn in that bucket is low and consistent. And then it's the migration churn on top of that. I'll maybe anticipate your next question, which is let's have the same conversation about the self-managed subscription because it's also in decline, also has the same 2 components. The natural churn in the self-managed piece is higher than the maintenance churn because it's a less seasoned business. We only had been selling that for the last 8 or 9 years. And it's end of sale now as of the beginning of 2023 because now we only sell cloud. And so it's a less season base, and therefore, it has more potential churn. And so the natural churn in that business where it's -- we find that it's in the sort of 5-ish -- 5% to 6% range for maintenance is in the high single digits now for self-management, it's probably going to be in the low double digits next year. But again, it's what we expect, it's all embedded in our medium-term guidance. There's no surprise there. And then on top of that is the migration churn, that migration churn is what is the difference between 5%, 5.5% natural churn in maintenance and the 7% maintenance decline that we have so far this year. It's the difference between the, call it, 9% natural churn in self-managed and the 13% that we're going to report in terms of total decline in fiscal 2024. Both of those are fiscal 2024 numbers. Looking ahead to 2025, we expect the natural churn in the maintenance base to be consistent. We expect the natural churn in self-managed to be higher. Again, it's a product that we would end of sale on only 7 quarters ago. And it's just a less sticky base as there's more shelf were out there as there is in any company and so forth. And then the migration churn is going to be higher also as the dollars of migrations that move from both of those buckets to the cloud accelerates.

So the migration churn sounds like it's probably a lot of it is in your control there where you can influence them to move to your cloud solution. But if they're the natural churn if they're just moving off the platform, is there anything...

That churn is just like any other churn in any other type of business right? So at the end of the contract term, you talk about whether you want to renew it, right? And we have really great team that does that, and we have good telemetry ahead of the renewals, so we know whether it's a risk and all that sort of stuff. That's all blocking and tackling. The migration churn, sort of yet no. It is a proactive decision by the customer to make that move. And we do have the ability to sell the customer on the solution and the value of moving. But we don't have, frankly, a lot of leverage on forcing them to move. They move when they're good and ready. Making a digital transformation move like that for a mission-critical or operational workload is not a casual decision. You have to move the whole thing, Informatica is just a bit of it. You have to pick a cloud service provider, you have to use the right cloud-based apps. You've got to make a lot of architectural decisions and investments. It's going to take a lot of professional services and systems integration in a lot of cases. And so it's a consequential big dollar, time-consuming decision, and they do it when they're ready. So we don't have a lot of control in that sense over it.

Your visibility, I would imagine, you know when these customers are coming up for renewal and their contracts are coming to an end. So when you think about the visibility you have on that churn, especially some of the natural trend as they come due for renewal is probably something that's easier to maybe, it helps you....

Yes. And we don't just wait around for renewal to have the migration conversation. I mean we are in front of -- we have thousands, not 10,000, but more than 1,000 on-prem customers. And we know exactly when those renew, but we don't wait for that to have the migration conversation. We are actively in front of that base. We have a special team that does nothing but that. We have special architects and presales that focus on it. So yes, we're very active about that. But at the end of the day, there's only so much we can do to force people to make the move. They do it when the rest of their organization is ready and whether they have the budget and the time and the bandwidth for it.

I suppose the only risk that you see here is really the churn element of not hitting your ARR guidance in the coming year. And if you can -- maybe if you look at 2024 on your expectations at the start of the year for churn, how did that -- how is that playing out relative to what you're expecting at the start of the year?

It's been pretty consistent. The one thing that did surprise us was the duration of our on-prem renewal. Not in the maintenance base because those are almost all 12-month renewals. It's just the standard for maintenance as you renew on an annual basis. But for the self-managed subscriptions, those are multiyear deals. And because they're on-prem, they're subject to ASC 606. So we have to accelerate a significant portion, most of the TCV of the deal and recognize the day we sign it. And so if it's a 3-year renewal, that TCV is a lot higher than if it's a 2-year renewal. And so we're accelerating more revenue on the day we signed the renewal, if it's a 3-year renewal versus a 2-year renewal due to ASC 606. I wish we didn't have to do that. We have found in '24 that the average term of the renewals, so customers who aren't ready to migrate yet, they're not churning, but they appear to be setting themselves up so they have the flexibility to migrate sooner. So they're, instead of signing a 3-year old or signing a 2-year signing with 2 years, they're signing a 1 year...

Buying themselves more time.

Buying themselves more flexibility. And so that brings in the average duration, which reduces the ASC 606 revenue that we realized on the renewal date. And so that's why we -- that's 1 of the 2 reasons why we brought down our revenue guidance at the end of Q2 for fiscal '24, we didn't touch our ARR guidance because the dynamic I just described does not impact ARR. It's a revenue impact only, but we did see that and that has surprised us.

Okay. That's helpful. If there is any other questions out there now, happy to weave them in, otherwise we're going to use the remaining minutes to kind of talk about next year and some higher level macro. Okay. So 2025, I guess, now that we're past the election, a lot of -- maybe a lot of organizations probably had some uncertainty going into it. And what are you hearing from customers in terms of -- not necessarily Q4 budget flush, but how they're thinking about the spending environment next year relative to what it is this year?

I wouldn't say we have a meaningful signal on that, yes. Certainly not a consistent one. We serve financial services, health care, retail, manufacturing. We serve geographies all around the world. But nothing has bubbled up. That's a consistent theme. There's obviously puts and takes, potentially more linear regulatory environment could be a positive in some industries, potentially higher tariff regime could be a big negative in some industry. So we don't have a great pulse on that yet.

I would say that's pretty consistent. And we did about half a dozen fireside chats yesterday at the conference here. And the same question was asked of course. And I think a lot of the CFOs that were on stage also said the same thing in that it's -- they're expecting more of a flat to similar spending environment next year is what -- and that's from a customer perspective, not a guidance perspective, but....

Yes, that's what we're anticipating. That's our sort of base assumption for sure.

Okay. Got it. And I guess in terms of -- if the market spending environment stays flat, it sounds like and doesn't get worse, doesn't get better. You still have the opportunity with GenAI as being a bigger growth driver for you next year. We can still get that acceleration in growth, independent of a change in the macro or change in spending environments?

It will be potential upside. I don't want to oversell it. I don't want to overhype it, everybody's done a better job at that than I could. We have numerous customers that are using Informatica or GenAI-based proof-of-concept workloads at enterprise scale. None of those are meaningfully in production yet, none of them are generating a material amount of revenue. We would hope to see that at some point in '25. But it's a lot harder than maybe the average [indiscernible] would think. And at enterprise scale, standing up a chatbot or writing marketing copy or summarizing a meeting is different than revolutionizing an insurance claim processing workflow to use GenAI to interpret the pictures that the agents send in as to whether how much that damage is really going to cost, which is one of the use cases that customers that a customer of ours is using Informatica for as the backbone for that process. And to do that, there's not only accuracy issues, but there's governance issues and regulatory issues that just take time to work through. So potential for upside of '25 for sure, but it's not that our year rides on it or that the acceleration of the revenue and ARR growth rates in '25 depend on it.

All right. Well, thank you very much for coming to our conference today. We certainly appreciate it. It has been really helpful.

Of course. Thank you, Andy.

All right.