Informatica Inc. (NYSE:INFA) Q1 2024 Earnings Call Transcript May 1, 2024

Informatica Inc. misses on earnings expectations. Reported EPS is $0.02987 EPS, expectations were $0.2. Informatica Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Thank you for joining today’s Informatica First Quarter 2024 Earnings Conference Call. My name is Sierra, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. It is now my pleasure to introduce your host, Victoria Hyde-Dunn, Vice President of Investor Relations. Please proceed.

Victoria Hyde-Dunn: Thank you. Good afternoon. And thank you for joining Informatica’s first quarter 2024 earnings conference call. Joining me today are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the IR website after the conference call concludes. During the call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company’s SEC filings, including the section titled, Risk Factors, included in our most recent 10-Q and 10-K filing for the full year 2023.

These forward-looking statements are based on information as of today and we assume no obligation to publicly update or revise our forward-looking statements, except as required by law. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon’s press release and our slide presentation available on Informatica’s Investor Relations website. With that, it’s my pleasure to turn the call over to Amit.

Amit Walia: Well, thank you, Victoria. Thank you everyone for joining us today. I will start today’s call by summarizing three key points. First, we delivered a solid first quarter, executing a cloud-only consumption-driven strategy. In line with our pre-announcement last week, we delivered all key growth and profitability metrics above our midpoint guidance and we are reaffirming full year 2024 guidance. Second, we further accelerated Informatica’s product innovation journey to deliver the best data management products on the industry’s only AI-powered data management platform, serving a multi-vendor, multi-cloud hybrid needs of modern enterprises. We launched Cloud Data Access Management, our new data access and governance solution, based on technology from our acquisition of Privitar last year.

As we head into Informatica World, we plan to launch CLAIRE GPT, our generative AI chat interface on the IDMC platform. Third, as we shared at our Investor Day, we are focused on consistently executing our cloud-only consumption-driven strategy across three growth engines, ongoing data-driven digital transformation, our on-premise to cloud migration, and GenAI to fuel cloud growth and drive long-term value creation. Now, let’s discuss these topics in more detail. Turning to first quarter results, cloud subscription ARR grew 35% year-over-year to $653 million, subscription ARR increased 13% year-over-year to $1.16 billion and total ARR rose 7% year-over-year to $1.64 billion. Total revenue grew 6% year-over-year to $389 million and non-GAAP operating income increased 29% year-over-year to $109 million.

Adjusted unlevered free cash flow after-tax was $183 million. We increased opportunities with existing customers and drove new workloads in G2K markets through our sales teams and our partners supported by a healthy cloud pipeline. Approximately 72% of our cloud net new ARR in the trailing 12 months came from new cloud workloads and expansions. Customers that spend more than $1 million in subscription ARR increased 24% year-over-year to 258 customers. We saw strong growth in average subscription ARR per customer, which now has reached to $310,000, a 15% increase year-over-year. We closed many new logos and expansion deals with great companies in the quarter that highlight our platform advantage. Let me share a few. University Hospitals of Derby and Burton, UHDB, part of the NHS Foundation Trust, a leading provider of healthcare services across the Midlands region of the U.K., is undertaking a transformational electronic patient record consolidation program.

As a part of this strategic initiative, UHDB has chosen IDMC as its platform of choice. IDMC, specifically its cloud data governance, cloud data integration and cloud data quality modules will play a critical role in connecting disparate data sources across UHDB’s hospital network. Dubai Islamic Bank is a large Islamic bank in the UAE. They recently purchased IDMC to address their data quality, data governance and data marketplace requirements, which will ensure proper reporting to the business, support compliance with central bank regulations and enhance their customer experience. Bridgestone, a global leader in premium tires and sustainable mobility solutions, is partnering with us and our MDM solutions to support them in managing and ensuring the quality of their products, suppliers, financial information and customer data to optimize the supply chain and inventory operations across the globe.

We at Informatica are the Switzerland of data and the only data management partner at scale that manages data of any type, any pattern, any complexity or any workload across any location. We’ve continued co-selling with our ecosystem partners such as Microsoft, AWS, GCP, OCI, Snowflake, Databricks, and MongoDB. We also made new announcements with Snowflake and GCP at Google Cloud Next. With Google Cloud, we announced a new MDM extension for Google BigQuery to simplify and accelerate the use of high-quality trusted data from Informatica to power GenAI workloads with Vertex AI and Google Gemini and customer data platform workloads with Google BigQuery and Looker. We also announced a global expansion with a new point of delivery on Google Cloud in Saudi Arabia.

With Snowflake, we announced comprehensive integration with and support for Snowflake Horizon, Snowflake’s native data governance and privacy controls. We were also one of Snowflake’s launch partners for Snowflake Horizon’s partner ecosystem. Our GSI partners continue to create solutions with IDMC embedded to take to market. For example, PCS recently launched an enterprise cloud data pipeline to ingest a multitude of disparate data types and process and provision the data for a range of smart data-driven business apps. Capgemini released a retail-specific version of their ESG sustainability hub built on IDMC. Our partner migration program continues to expand with 55 partners now in the PowerCenter Modernization program. The Master Data Management modernization program that is launched at the end of last year saw its first batch of six partners complete training.

10 more partners have been approved to join the program and are taking the on-demand training. Innovation remains paramount at Informatica. Let me discuss a few net new product innovations on IDMC. In the MDM and 360 Apps, we delivered a new visual experience that is modern, accessible and AI-enabled, and very important for our business users. Along with its updated user experience, data stewards are also empowered to get deeper insights with self-service reporting capabilities, enhanced survivorship options and simplified management of complex hierarchies. Cloud data governance and catalog enable deeper ecosystem support for Microsoft Fabric Data Warehouse, hosting on OCI to seamlessly govern data and new data scanners for MariaDB Server and DB2.

Additional profiling support is also included for Teradata, SAP HANA, SAP BW, and external tables for Oracle, Azure Synapse, and Athena. In February, we launched a new Cloud Data Access Management solution. CDAM enhances data security and privacy with capabilities that help organizations reduce the time it takes to safely provision data, mitigate the risk associated with data misuse and simplify compliance with laws and regulations. CDAM is based on the technology from our acquisition of Privitar in July of last year and has been integrated into IDMC to enable data use and sharing with policy-based controls that are automated using classifications and metadata in a cloud data governance catalog. Integration with IDMC means that data can be consistently protected for hybrid and cloud data platforms with cloud data integration or use in conjunction with cloud data marketplace to accelerate the delivery of trusted data products and related assets to all data consumers through self-service.

Now turning to modernization, we have close to a $1 billion of on-prem maintenance and self-managed ARR. Approximately 28% of cloud net new ARR in the trailing 12 months came from on-prem to cloud migrations, which is up 3 percentage points sequentially as cloud customer modernization deals are starting to accelerate. We closed over 30 cloud modernization deals, which grew over 100% year-over-year. We are seeing stronger customer adoption of PowerCenter Cloud Edition, which represented over 80% of all modernization deals, up from 60% last quarter. Modernization projects are all operational mission critical workloads. Once we modernize, it enables cross-selling into new workloads more easily, allowing us to upsell and cross-sell IDMC in the future.

Frontier Communications, one of the largest pure-play fiber-to-the-home providers in the U.S. is a great customer expansion and modernization story. Their recent investment with Informatica enables the modernization of their on-prem platform to IDMC, including data integration, MDM and data governance. This will accelerate their plans to improve customer experience and master address data with Informatica’s MDM solution. Another great modernization story is Sodexo, a global leader in sustainable food and valued experiences at every moment in life, learn, work, heal and play. Sodexo is leveraging IDMC in its group data platform built on Azure, as well as to prepare its upcoming migration of its supply Master Data Management platform in North America from on-prem to cloud.

We continue to hear from industry analysts that we are an innovation leader and are pleased to be recognized as the leader in the 2024 Gartner Magic Quadrant for integration platform as a service. This is the ninth time that Gartner has positioned Informatica as a leader in this report. We were also named a leader in the 2024 Gartner Magic Quadrant for augmented data quality solutions report. Gartner positioned Informatica as the furthest on the completeness of vision access, as well as the highest on the ability to execute access. We were also recognized as a leader in the Forrester Wave for Enterprise Data Fabric Q1 2024. Informatica received the highest score for current offerings. Now looking ahead, let me share some observations regarding GenAI and our strategy for executing against it.

Look, I firmly believe that the next phase of digital transformation will be fueled by GenAI, which is poised to drive outsized innovation and productivity gains for enterprises. As we enter the GenAI revolution, enterprises are realizing that developing an AI strategy actually requires creating a data strategy first. The reality is that everyone is ready for GenAI, except your data. Informatica is driving the modern data management stack for GenAI enterprise architectures as the only comprehensive and at-scale AI-led data management platform. Preparing data for GenAI project involves collecting data, cleansing data, cataloging data, ensuring quality, mastering, governing and accessing it through Informatica’s IDMC. We hear time and time again from customers and partners that the breadth of IDMC solution is mission-critical to processing their workloads.

IDMC processed 92 trillion mission-critical cloud transactions in March, growing 69% year-over-year. CLAIRE, our AI engine, is embedded in all our solutions, leveraging ML algorithms and NLP on metadata to drive intelligence and productivity, accessing over 50,000 metadata-aware connections and now leveraging over 48 terabytes of active metadata in the cloud. Our efforts to assist customers with their AI strategy or GenAI strategy is divided into two categories, Informatica for GenAI and GenAI from Informatica, both available from the IDMC platform. In the area of Informatica for GenAI, we are already well underway with our new API and AMP integration services where customers can use services for a simple no-code way to add advanced GenAI capabilities to existing IDMC implementation.

This makes it easier for developers to use different GenAI models, us being now the Switzerland of models, and let customers update their apps with GenAI capabilities without changing any code. Our GenAI solution with built-in software development lifecycle and API governance drives better control, performance and scalability, ensuring GenAI is ready for complex business needs. This is a fast-moving space as we innovate and our customers use IDMC capabilities for their GenAI use cases. Now, in the area of GenAI from Informatica, we believe this is a game-changer. To support our customers’ AI journey, we have developed CLAIRE GPT, a transformational chat interface to do all of the complex data management tasks through NLP in a user-friendly format that will revolutionize and democratize data management throughout the enterprise.

Users will now be able to easily find relevant data assets, tables, columns, PII-sensitive data and more using NLP queries. They will be able to explore data assets with, again, natural language questions to understand trends, KPIs, top customers or any important insight. Additionally, CLAIRE GPT will allow users to quickly understand the lineage of that data, dependence of data assets and search and explore business terms, definitions, data quality scores, which are the data owners and stakeholders associated with these data assets. Users will then be able to generate new data products with ELT pipelines using NLP on data warehouses like Snowflake, AWS Redshift, Azure Synapse, Google BigQuery and Databricks Delta Lake. While the operationalization of GenAI workload is in its early stages, we are extensively engaged with customers from various industries such as healthcare, financial services, manufacturing and technology that are participating in a wide range of use cases as part of the CLAIRE GPT private preview.

As we head into Informatica World later this month, we are pleased to announce that the CLAIRE GPT will be available to IDMC customers using our IPU consumption model. We believe this will be a tailwind for us for the many years to come. As I wrap up, we are focused on consistently executing our commitments that we laid out on our Investor Day and driving ongoing data-driven digital transformation, on-prem to cloud migration and GenAI to fuel cloud growth and drive long-term value creation. The operational health of our business remains very strong, as evidenced by a predictable subscription revenue business model, strong customer base, healthy cloud pipeline and retention rates and strong unlevered free cash flow that has only continued to grow.

We believe this continues to position us well for durable, consistent future growth and profitability. Thank you to all my Informatica colleagues for their hard work and continued commitment. I would also like to thank our customers, our partners and our shareholders for supporting us. We look forward to sharing more product innovation announcements and some pretty cool demos at Informatica World 2024 later this month. With that, let me turn the call over to Mike. Mike, please take it away.

Mike McLaughlin: Thank you, Amit, and good afternoon, everyone. Q1 was another solid financial quarter across the Board, with all key growth and profitability metrics above the midpoint of our guidance, delivering a great start to the year. I’ll begin the review of our Q1 results by reminding everyone how to best understand Informatica’s ARR and GAAP revenues. Our ARR and revenue fall into three categories, cloud subscriptions, which delivered 35% ARR growth year-over-year, self-managed subscriptions, which we no longer actively sell and are therefore gradually declining, and maintenance on on-premise perpetual licenses, which is also in gradual decline. The trajectories of these three categories of ARR and revenue are the direct result of our cloud-only strategy and we expect this to continue going forward.

With that in mind, let’s start with total ARR, which was $1.64 billion, an increase of 6.7% over the prior year. This was driven primarily by new cloud workloads, strong cloud net expansion with existing customers and stable subscription and maintenance real rates. We added $103 million in net new total ARR versus the prior year. Foreign exchange negatively impacted total ARR by $1.2 million. Cloud subscription ARR was $653 million, a 35% increase year-over-year and $2.5 million above the midpoint of our February guidance. New cloud workloads and strong net expansion with existing customers drove cloud subscription net new ARR of $169 million year-over-year and $36 million sequentially. Cloud subscription ARR now represents 40% of our total ARR, up from 32% a year ago.

Foreign exchange negatively impacted cloud subscription ARR by $791,000. Our cloud subscription net retention rate at the end-user level was 119% up 1 percentage point year-over-year and flat versus last quarter. Cloud subscription net retention rate at the global parent level was 124% flat year-over-year. Self-managed subscription ARR declined in the quarter, as expected, to $505 million. This was down 2% sequentially and down 6% year-over-year. This was a slightly slower decline than we forecast in February. Subscription ARR, which is simply the sum of cloud ARR and self-managed ARR, grew over 13% year-over-year to $1.16 billion, which was $13 million above the midpoint of our February guidance. Foreign exchange negatively impacted subscription ARR by approximately $1.1 million.

The third component of total ARR is maintenance from on-premise perpetual licenses sold in the past, which now represents 29% of total ARR. Maintenance ARR was down approximately 7% year-over-year to $479 million. The migration of our on-premise customer base to IDMC in the cloud continues to be a large opportunity for us. The introduction of PowerCenter Cloud Edition in Q3 of last year has helped accelerate the volume of signed migrations of our PowerCenter Maintenance base, and we are seeing early momentum from our self-managed base migrating to our cloud platform. As of the end of Q1, we have migrated 5.5% of our maintenance and self-managed ARR base to cloud, up from 4.8% last quarter. We have a life-to-date average 2-to-1 ARR uplift ratio on these migrations, including PowerCenter and MDM.

These three ARR components summed to 6.7% total ARR growth year-over-year. Cloud subscription ARR growth of 35% drove this increase, offset by gradual declines in self-managed subscription and maintenance ARR. We expect similar trends to continue throughout 2024 as a direct and intentional result of our cloud-only consumption-driven strategy. And, as we noted on our Investor Day, we expect total ARR and total revenue growth to begin accelerating this year as the fast-growing cloud subscription portion of our ARR becomes a larger portion of our total business. Now, I’d like to review our revenue results for the first quarter. GAAP total revenue is worth $389 million, an increase of 6.3% year-over-year. This exceeds the midpoint of our February guidance by approximately $4 million due to strong cloud growth and a somewhat slower-than-expected decline in self-managed revenue.

Foreign exchange positively impacted total revenues by approximately $1.7 million on a year-over-year basis. Subscription revenue, which includes cloud subscriptions and self-managed subscriptions, increased 18% year-over-year to $252 million, representing 65% of total revenue, compared to 59% a year ago. Our quarterly subscription renewal rate was approximately 91%, down 2 percentage points year-over-year due to lower self-managed subscription renewal rates offset by higher cloud subscription renewal rates. Revenues falling into our maintenance and professional services category were $137 million. Maintenance revenue represented 30% of total revenue for the quarter and our maintenance renewal rate was 94%, down 2 percentage points year-over-year.

Almost half of our maintenance gross churn came from maintenance to cloud migrations this quarter. Professional services, which includes implementation, consulting and education, make up the remainder of this category and were down $6 million year-over-year, consistent with last quarter. As we have seen in prior quarters, our implementation services revenue has been declining year-over-year as our implementation partners assume a greater share of that work for our customers. We are pleased with this trend. Cloud subscription revenue was $151 million or 60% of subscription revenues, growing 35% year-over-year. As a reminder, due to the timing difference between revenue and ARR recognition, the relative growth rates of these two metrics may differ from period to period.

Turning to the geographic distribution of our business, U.S. revenue grew 4% year-over-year to $242 million, representing 62% of total revenue, while international revenue grew 11% to $147 million. Using exchange rates from Q1 last year, international revenue would have been approximately $1.7 million lower in the quarter, representing international revenue growth of 10% year-over-year. Turning to consumption-based IPUs, approximately 59% of first quarter cloud new bookings were IPU-based deals. The remainder of our Q1 cloud bookings were primarily for customer or supplier records for our MDM products, which is also a multiyear committed consumption-based pricing model. Now I’d like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated.

In Q1, our gross margin was 81%, up 1 percentage point year-over-year. We are focused on maintaining healthy gross margins as our business transitions to the cloud. Operating expenses were consistent with expectations. As part of our November 2023 restructuring plan, we incurred non-recurring restructuring charges of approximately $4.4 million. We expect to incur approximately $4 million in additional restructuring charges for the remainder of full year 2024. Operating income was approximately $109 million, growing 29% year-over-year and exceeding the midpoint of our February guidance by over $2 million. Operating margin was 28.1%, a 4.9-percentage-point improvement from a year ago. Adjusted EBITDA was $111 million and net income was $69 million.

Net income for diluted share was $0.22 based on approximately 312 million outstanding diluted shares. Basic share count was approximately 297 million shares. Adjusted unlevered free cash flow after-tax was $183 million, significantly better than expectations due to faster cash collections and other working capital dynamics. We expect these favorable working capital factors to reverse in Q2 and therefore Q2 free cash flow will be significantly lower than Q2 2023. As we’ve emphasized in the past, free cash flow can be highly volatile from quarter-to-quarter, which is why we only formally guide free cash flow on a full year basis. When we get to the discussion of Q2 expectations later in my remarks, you’ll see that while Q1 free cash flow was significantly higher than expected and Q2 free cash flow is expected to be much lower, our free cash flow for the first half of 2024 should be in line with the historic linearity of that metric and we are on track to deliver full year free cash flow that is in line with our full year guidance.

Cash paid per interest in the quarter was $38 million in line with expectations. We ended the first quarter in a strong cash position with cash plus short-term investments of $1.1 billion, an increase of $315 million year-over-year. Net debt was $725 million and trailing 12 months of adjusted EBITDA was $502 million. This resulted in a net leverage ratio of 1.4 times at the end of March. Now I’ll turn to guidance starting with the full year 2024. We delivered solid results in Q1 and are comfortable reaffirming all previously issued guidance for the year, reflecting confidence in our cloud-only consumption-driven strategy. It’s worth noting the recent strengthening of the U.S. dollar against the euro, pound and yen have resulted in FX-related revenue headwinds for fiscal 2024 compared to our previous assumptions.

Despite this, we’re maintaining full year guidance for total revenues and ARR metrics as we are comfortable that we can offset the incremental headwinds from FX. You can find the details of our full year guidance and FX assumptions in the press release we filed this afternoon. Next, turning to guidance for the second quarter, similar to the first quarter, we expect cloud subscription ARR to grow while self-managed and maintenance ARR is expected to decline on both a sequential and year-over-year basis. With this in mind, we’re establishing guidance for the second quarter ending June 30, 2024 as follows. We expect GAAP total revenues to be in the range of $394 million to $410 million, representing approximately 6.9% year-over-year growth.

We expect subscription ARR to be in the range of $1.168 billion to $1.188 billion, representing approximately 13% year-over-year growth. We expect cloud subscription ARR to be in the range of $687 million to $697 million, representing approximately 35% year-over-year growth. And we expect non-GAAP operating income to be in the range of $107 million to $119 million, representing approximately 29.1% year-over-year growth. For modeling purposes, I’d like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after-tax for the second quarter to be in the range of $37 million to $57 million. Now, I want to draw particular attention to the quarter-to-quarter volatility of our free cash flow so this expectation for Q2 is put in the right context.

As I mentioned earlier, the working capital favorability that we experienced in Q1 was due to timing and other balance sheet dynamics. These factors should reverse in Q2, which is why Q2 adjusted unlevered free cash flow after-tax will be down quarter-over-quarter and year-over-year. However, when you look at our free cash flow expectations for the first half of 2024, which is $230 million at midpoint, you’ll see that our first half cash flow generation is in line with our typical linearity and in line with our full year guidance. Furthermore, our expectation at the midpoint represents 103% of our non-GAAP operating income midpoint guidance, which is in line with the medium-term expectations we laid out at our investor day. Moving on, we estimate cash paid for interest will be approximately $39 million in the second quarter and approximately $152 million for the full year using forward interest rates based on one-month SOFR.

Third, with respect to taxes, our Q1 non-GAAP tax rate was 23% and we expect that rate to continue for the full year 2024. And lastly, our share count assumptions. For the second quarter of 2024, we expect basic weighted average shares outstanding to be approximately 300 million shares and diluted weighted average shares outstanding to be approximately 313 million shares. For the full year of 2024, we expect basic weighted average shares outstanding to be approximately 302 million shares and diluted weighted average shares outstanding to be approximately 315 million shares. In summary, we are pleased with our Q1 performance and we’re off to a great start in 2024. We are focused on consistently executing our cloud-only consumption-driven strategy by delivering the best data management products on the industry’s only cloud-native consumption-based platform, serving the multi-vendor, multi-cloud and hybrid needs of the modern enterprise.

Operator, you can now open the line for questions.

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