INFA - Informatica Inc. (INFA) Q3 2023 Earnings Call Transcript

2023-11-01 21:02:10 ET

Informatica Inc. (INFA)

Q3 2023 Earnings Conference Call

November 01, 2023 05:00 PM ET

Company Participants

Victoria Hyde-Dunn - Vice President of Investor Relations

Amit Walia - Chief Executive Officer

Mike McLaughlin - Chief Financial Officer

Conference Call Participants

Alex Zukin - Wolfe Research

Matt Hedberg - RBC

Brad Zelnick - Deutsche Bank

Patrick Colville - Scotiabank

Fred Havemeyer - Macquarie

Koji Ikeda - Bank of America

Howard Ma - Guggenheim

Presentation

Operator

Hello, and welcome to the Informatica Inc. Fiscal Q3 2023 Financial Results. My name is Elliot and I will be coordinating your call today. [Operator Instructions]

I'd now like to hand over to Victoria Hyde-Dunn, Vice President of Investor Relations. The floor is yours. Please go ahead.

Victoria Hyde-Dunn

Good afternoon, and thank you for joining Informatica's third quarter 2023 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 filings for the full year 2022. 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 US GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's Investor Relations website.

It's my pleasure to turn the call over to Amit.

Amit Walia

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 third quarter. We exceeded guidance across all top and bottom line metrics, driven again by strong customer momentum and execution from a cloud-only consumption-driven strategy. In addition to exceeding guidance in, Q3 based on our strong performance we are raising non-GAAP operating income and adjusted unlevered free cash flow after tax guidance for the full year. This is in addition to the raise we did on these metrics from our previous earnings call. Second we continue to accelerate our innovation-led cloud transformation to make IDMC powered by our AI engine player, the data management platform of choice for enterprises across the globe, as they build their modern data architecture to drive their AI-driven digital transformation.

Third, as we look ahead to next year, we remain committed to delivering balanced profitable growth, while continuing to build on our successful cloud-only consumption-driven strategy. As a part of this, we announced a restructuring today, which I will discuss in more detail at the end of my remarks.

Now, let's discuss these topics in more detail. Turning to Q3 sights, we exceeded the high end of guidance for ARR and revenue metrics. Cloud subscription ARR grew 37% year-over-year to a record $550 million. Our subscription ARR grew 15% year-over-year and total revenue grew 10% year-over-year. We strengthened our cash position and beat the high end of guidance for non-GAAP operating income and adjusted unlevered free cash flow after tax as well.

The macro environment remains stable for the third quarter, consistent with the prior quarter. We continue to be encouraged by the momentum of our cloud-only consumption-driven strategy as the sales mix shifts for self-managed to cloud subscription ARR, with cloud subscription ARR now representing 51% of subscription ARR up from 43% a year ago.

Approximately, 85% of the quarter's cloud new bookings came from new cloud workloads and expansion with the remaining 15% from on-prem cloud migration.

Furthering the trend of accelerating migrations of our on-prem and maintenance Base to IDMC, at the end of Q3 we have now migrated 5% of that Base to Cloud compared to 4.5% at the end of Q2.

Customers adopting the IDMC platform with new users and use cases across organizations, in the third quarter customers are spending more than $1 million in subscription ARR increased 17% year-over-year to 224 customers.

Customers spending more than $100,000 of subscription ARR increased 7% year-over-year to 1,978 customers. Let me share a few customer stories, highlighting our best to great solutions capabilities on the IDMC platform.

Mercedes Benz France has been an Informatica customer for over two decades and has recently extended their partnership with us. IDMC will help them address evolutions of their data architecture and further enable use cases to Data Anonymization, Mass Ingestion, Data Quality and more to enhance their operations.

Holland America Line is a leading cruise line company offering cruises throughout the world. An existing Cloud Data Integration and Mass Ingestion customer they recently expanded their IDMC footprint, accelerating their power center modernization to the Cloud and adding other platform capabilities.

Whataburger is an American regional fast food restaurant chain headquartered in San Antonio Texas. As an existing Informatica customer they selected the IDMC platform to lay their cloud platform foundation as they seek to scale their number of locations, to increase revenue and improve customer experiences in their restaurants.

As the higher education industry is moving to cloud, Clemson University in South Carolina, sought to partner with us to accelerate the enterprise transformation initiatives. Recognizing our test to beat IDMC platform to selected our Cloud Data Innovation, Master Data Management and Cloud Data Governance & Catalog to create a single source of truth for the data-driven strategy.

Next, we added product innovation to IDMC's cloud-native AI-powered platform to improve productivity for our customers and partners. In our Cloud Data Governance & Catalo service we added rest APIs to extend the reach of rich Metadata for our third-party apps, expanded data classification capabilities for Databricks, Kafka and Microsoft Power BI and expanded breadth and depth of Metadata's connectivity with new scanners for Microsoft Synapse SQL script, Apache Hive, urban Data Modelur, Purview for AWS CLI and Microsoft Purview. Our focus on IDMC becoming the Metadata System of record for enterprises continues to accelerate.

In our MDM and 360 App Services, we added many innovations for Data Stewards for their productivity, including bulk edits to the change management process and dynamic modeling experience to capture context-sensitive attributes, a very important feature for them.

Our investment towards faster time to value continues, as we launched a new material master extension designed for centralized ordering and mastering of material data. This when combined with Supply360 and Product360, can manage the entire value chain of an item as it moves from raw material to finished product which you can see is critical in terms of product innovation, shipping and profitability for companies.

Turning to Privitar, we continue to make good progress integrating the technology capabilities into the IDMC platform and we should be done by the end of Q1 of 2024, including the ability to use IPUs to consume Privitar capabilities.

Next our AI CLAIRE is embedded in all our solutions, leveraging ML algorithms and NLP on Metadata to drive intelligence and productivity accessing 50,000 metadata-aware connections now leveraging 36 petabytes of active Metadata in the cloud and the platform processing over 71 trillion mission-critical out transactions as of September 30 growing 60% year-over-year.

We continue to accelerate our progress in AI with CLAIRE GPT now available in private preview as a native IDMC service. We will utilize IPUs to drive usage and help customers democratize and simplify their data.

In the beta, we have enabled data discovery and metadata exploration use cases. Over the next few months, we will enable data exploration ELT pipeline creation and content generation. As for CLAIRE copilot, which is already available to our customers we released CLAIRE generated pipeline capability that allows customers to utilize AI to AutoMap sources to master data management targets.

Additionally, we added CLAIRE-powered FinOps capabilities that help users set detailed runtime data management job parameters based on desired performance and cost SLAs. Our commitment to delivering product differentiation and innovation has won us a recognition from industry analysts. Dresner Advisory Services ranked us as the number one in its 2023 Dresser advisory services master data management market study.

For the third consecutive year Blue Research named us a champion in its market update for Master Data Management 2022 report. And for the fourth consecutive year Constellation Research has named Informatica to its consolation shortlist Metadata management data cataloging and data covenants.

As for our commitment to customer centricity and ensuring our customers get value from a market-leading product in IDMC that has also won us a recognition from thought leaders. Our focus on our customers and their success was recognized by JD Power for delivering an outstanding customer service experience, to customers globally, under its certified assisted technical support program.

This is the third consecutive year, Informatica earned the certification and met the current software benchmark for customers at excellence. The TSIA or Technology and Services Industry Association named Informatica a winner in the 2023 innovation in customer portals that improved digital customer experience category.

Turning to partners. In Q3, we furthered co-selling activities with our ecosystem partners and announced new partnerships with Oracle Cloud and Google Cloud above and beyond the many existing partnerships that we have. At Oracle Cloud World, we announced the launch of our North America point of delivery on Oracle Cloud which is now live and the expansion of our cloud data governance capabilities with the autonomous database and Golden Gate.

We're also a launch partner for Oracle's Cloud Marketplace private offer program. At Google Next we announced a new solution combining our SaaS MDL on Google Cloud the Google Cloud's customer data platform based on Google base.

With our GSI partners we've seen a significant increase in GSI partners doubling down with us and building their data and AI growth plans with IDMC as the standard solution. During the last quarter we launched a joint strategic growth plan with LTI Mindtree to help customers accelerate cloud monetization and bring their data and AI to life across the 12,000 strong data and AI practice employees.

We also became a launch partner for Randstad [ph] digital while building a data and AI practice consisting of informatic IDMC scale people. Cap Gemini launched an ESG solution built on IDMC to help customers define an ESG data strategy and build a data management hub.

In August, towards the middle of the month we launched Power Center Cloud Edition our new cloud modernization program that significantly lowers the migration time from on-prem power center to IDMC. In addition, it allows power center users more flexibility to manage the migration of individual workloads over time, once the initial implementation of Power Center Cloud Edition is live. In the first quarter of its availability and as I said it was middle of the quarter, we saw one-third of our migration deals using this new technology. Going forward, we expect the vast majority of our migration to use Power Center Cloud Edition which has the potential to accelerate Power Center maintenance migrations in future periods.

Now looking ahead. We continue to manage the business for long-term durable growth. And let me give you some context on the restructuring that we announced earlier today. Look, since 2016, Informatica has been on a product-led innovation focused transformation journey. We have steadily invested in supporting our new product-led self-managed and cloud businesses driving our transition to a subscription business model.

In January of this year, we transitioned to a cloud-only consumption-driven strategy as part of a multiyear plan to drive cloud-centric balanced, profitable growth as we shift from on-prem subscription to cloud data subscription. As a part of the strategy, we have been focused on simplifying our organization from hybrid to cloud creating operational efficiencies, synergies and improving our agility and speed of execution. In that context, today we announced plans to reduce our global workforce by approximately 10% or INR 545 crores and reduce our global real estate footprint. Mike will share with you the financial details later on the call.

We made this decision as a part of the final step in our cloud-only consumption-driven transformation to streamline our cost structure. The increased focus and simplicity of our cloud-only strategy will enable us to maintain our sales capacity while delivering continued best-in-class product innovation and customer satisfaction, as an AI-powered cloud company with strong cloud subscription ARR growth. You see the strong momentum in our business execution reflected throughout the year and in Q3 results that we reported today.

We executed very strongly against all top line and bottom line metrics. We continue to see the same momentum going into Q4. We are confident in delivering strong growth fueled by AI tailwinds for data management use cases, new and expanding enterprise customer relationships, strong cloud net retention rates and our economies of scale. We plan to discuss more at our Investor Day on December 5.

In close, I'm proud of our teams thankful and grateful to our customers and partners for continuing to help drive our cloud focus growth.

With that, let me now hand the call over to Mike. Mike please take it away.

Mike McLaughlin

Thank you, Amit, and good afternoon everyone. Q3 was another solid financial quarter across the board with key growth and profitability metrics exceeding our expectations. As I did last quarter, I'll begin the review of our Q3 results by reminding everyone how to best understand Informatica's ARR and GAAP revenue.

Our ARR and revenue fall into three basic categories: Cloud subscriptions which we have guided to ARR growth of 35% for the full year, self-managed subscriptions which we are no longer actively selling and which we have guided to decline year-over-year in FY 2023 and maintenance from perpetual licenses sold in the past which we also expect to decline going forward. We also earn a relatively small amount of revenue from implementation and education services which we expect to decline slightly this year as our professional services partners perform more of that work for our customers. This service revenue is not counted as ARR.

With that in mind, I'll start with our total ARR for the quarter which was $1.58 billion an increase of 7% over the prior year. This was driven by new cloud workloads and steady renewal rates. We had $108 million in net new total ARR versus the prior year. Foreign exchange negatively impacted total ARR by approximately $1.4 million, in line with expectations when we set our guidance in August.

Turning now to the three components of Informatica's ARR. Cloud subscription ARR was $550 million, a 37% increase year-over-year, which was $10 million above the midpoint of our August guidance. Cloud subscription ARR represents 35% of our total ARR, up from 27% a year ago. New workloads and strong renewal rates drove cloud subscription net new ARR of $149 million year-over-year and $37 million quarter-over-quarter.

Approximately, 85% of the quarter's cloud new bookings came from new cloud workloads and expansion of existing cloud engagements, with the remaining approximately 15% from on-premise customer migrations. Our cloud subscription net retention rate was 118%, up 3 percentage points year-over-year and up 2 percentage points versus last quarter.

Self-managed subscription ARR declined slightly in the quarter, as expected to $528 million. This was flat sequentially and down 2% year-over-year in line with expectations. We expect self-managed subscription ARR to continue declining next year, yielding a negative year-over-year growth rate. This decline is the direct and intentional result of our cloud-only consumption-driven strategy.

Subscription ARR, which is simply the sum of cloud ARR and self-managed ARR grew by 15% year-over-year to approximately $1.08 billion, which was more than $22 million above the midpoint of our August guidance. Subscription ARR now represents over 68% of total ARR, up from 64% a year ago. Foreign exchange negatively impacted subscription ARR by approximately $1.5 million again, in line with expectations when we set our guidance in August.

The third component of total ARR is maintenance on perpetual licenses, which represents 32% of total ARR. Maintenance ARR was down 6% year-over-year to $499 million in line with expectations. As a reminder, we no longer sell a meaningful amount of perpetual licenses. As a result, we expect maintenance to continue declining gradually at a fairly constant rate. Through the third quarter of this year, we have migrated 5% of our legacy maintenance base to cloud subscription, up from 4.5% last quarter with an average 2:1 ARR uplift ratio.

In total, these three components summed to 7% total ARR growth for the quarter. Cloud subscription growth of 37% drove this increase, offset by intentional and expected gradual declines of self-managed subscription and maintenance. This financial trajectory of high cloud growth combined with the gradual decline of self-managed and maintenance is the direct result of our cloud-only consumption-driven strategy. We expect these trends to continue in the fourth quarter and beyond.

We saw good growth in our average subscription ARR per customer in the third quarter, growing to over $283,000, a 13% increase year-over-year. We have 3,799 active subscription customers, an increase of 78 subscription ARR customers year-over-year.

Now I'd like to review our revenue results for the third quarter. GAAP total revenues were $409 million, an increase of 10% year-over-year. This exceeded the midpoint of our August guidance range by $9 million, due to a slower-than-expected decline in maintenance revenue and strong renewals. Revenue from our Privitar acquisition was not material in the quarter.

Foreign exchange positively impacted total revenues by approximately $5 million on a year-over-year basis. The accounting impact of Informatica shift to cloud subscription sales and away from self-managed on-prem sales was a headwind to revenue again this quarter. If our cloud versus self-managed new bookings mix was the same this quarter as it was in Q3 last year, total revenues would have been approximately $19 million higher than we reported increasing our year-over-year revenue growth rate to approximately 15%.

Subscription revenue increased 22% year-over-year to $262 million, representing 64% of total revenue compared to 58%, a year ago. Our quarterly subscription renewal rate was approximately 94%, flat year-over-year. Maintenance and professional services revenues were $147 million, representing 36% of total revenue in Q3 in line with expectations. Stand-alone maintenance revenue represented 30% of total revenue for the quarter.

Our maintenance renewal rate in the quarter was 95%, also in line with prior periods. Implementation consulting and education revenues comprised the remainder of this category, down $7 million year-over-year representing 5% of total revenue. The decline in services revenue is due primarily to the lower attach rate of Informatica implementation services to new IDMC sales. Our implementation partners are taking on more and more of that work, free us to focus on high-value software and consulting sales.

Turning to the geographic distribution of our business. US revenues grew 8% year-over-year to $263 million, representing 64% of total revenue while international revenue grew 14% year-over-year to $145 million. Using exchange rates from Q3 last year, international revenue would have been approximately $5 million lower in the quarter, representing international revenue growth of 10% year-over-year.

Consumption-based IDUs are a frictionless way to access the IDMC platform and are a core part of our strategy. Approximately, 60% of third quarter cloud new bookings were IP-based deals IP does now represent 45% of total cloud subscription ARR, up two percentage points sequentially. The remainder of our Q3 cloud bookings were also sold under multiyear consumption-based pricing such as, customer or supplier records for our MDM products.

Now I'd like to move on to our profitability metrics. Please note, that I will discuss non-GAAP results unless otherwise stated. In Q3, our gross margin was 82% up two percentage points year-over-year even as our software sales mix shifts to the cloud. Operating expenses were consistent with expectations. Operating income was approximately $128 million for the quarter, growing 53% year-over-year and exceeding the midpoint of our August guidance range by $13 million.

Operating margin was 31.3%, an 8.8 percentage point improvement from 22.5% a year ago. Adjusted EBITDA was $132 million and net income was $81 million. Net income per diluted share was $0.27, based on approximately 297 million outstanding diluted shares the basic share count was approximately 289 million shares.

Q3 Adjusted unlevered free cash flow after-tax was $96 million, better than expectations due to higher operating income performance and collections and lower cash taxes. Adjusted unlevered free cash flow after-tax margin was 23.5%. Cash paid for interest in the quarter was $38 million.

Keep in mind that our free cash flow from quarter-to-quarter, can be quite volatile based on working capital fluctuations and other nonlinear cash items such as tax payments. We ended the third quarter in a strong cash position with cash plus short-term investments of $869 million. Total debt outstanding was $1.85 billion and net debt was $978 million, our adjusted EBITDA over the 12 months through the end of the third quarter was $431 million, yielding a net leverage ratio of 2.3 times.

Stepping back and looking at our year-to-date results, we were very pleased with our execution so far in fiscal 2023 and we feel like we have good momentum going into Q4. As Amit discussed a few minutes ago today, we announced a restructuring plan that will reduce our global workforce by about 10% and shrink our global real estate footprint. As a result, we expect to incur nonrecurring restructuring charges of approximately $35 million to $45 million, with the majority incurred by the end of the first quarter of 2024.

These charges will include cash expenditures for employee transitions, notice period and service payments, employee benefits, real estate-related charges and other costs. We estimate the cost savings benefit of these restructuring actions will be approximately $84 million on a GAAP basis or approximately $70 million on a non-GAAP basis in fiscal 2024 with only a small amount of savings this fiscal year. Importantly this restructuring does not negatively impact our full year 2023 guidance.

Turning now to guidance. In Q4, we expect the same trends we have been seeing so far this year to continue. Namely, our new sales will be predominantly cloud and we expect our cloud ARR to grow by 35% year-over-year and because we are no longer selling a significant amount of self-managed subscriptions or perpetual licenses, self-managed subscription ARR and maintenance ARR is expected to decline on both a sequential and year-over-year basis. We delivered better than expected results again in Q3 and have good momentum going into Q4.

That being said, Q4 is our biggest quarter of the year and still face a considerable amount of uncertainty in the macro environment. Therefore, we believe it is prudent to reaffirm our previously issued full year guidance for revenue and ARR.

With respect to our non-GAAP operating income and unlevered free cash flow, however, we are raising our full year guidance. We now expect non-GAAP operating income to be in the range of $430 million to $450 million, representing approximately a 25% year-over-year increase at the midpoint. We now expect adjusted unlevered free cash flow after tax to be in the range of $410 million to $430 million, representing approximately a 46% year-over-year increase at the midpoint.

At this point in the year, our fourth quarter guidance is simply a derivative of our full year guidance, so I'll just briefly give you the highlights. We expect GAAP total revenue will be in the range of $420 million to $440 million, representing approximately 8% year-over-year growth at the midpoint of the range. We expect subscription ARR to be in the range of $1.098 billion to $1.118 billion, representing approximately 11% year-over-year growth at the midpoint of the range.

We expect cloud subscription ARR to be in the range of $604 million to $614 million, representing approximately 35% year-over-year growth at the midpoint. And we expect non-GAAP operating income to be in the range of $130 million to $150 million, representing approximately 23% year-over-year growth at the midpoint.

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 fourth quarter to be in the range of $114 million to $134 million.

Second, we estimate cash paid for interest will be approximately $40 million in the fourth quarter. And for the full year, we estimate cash paid for interest will be approximately $149 million.

Third, with respect to income taxes, our Q3 non-GAAP tax rate was 23% and we expect that rate to continue for the full year of 2023. We estimate full year 2023 cash taxes to be approximately $80 million. On a GAAP basis we expect the significant volatility of our income tax provision and rate to continue. For the full year 2023, we expect a GAAP tax provision in line with our cash taxes.

And lastly our share count assumptions for the fourth quarter of 2023, we expect basic weighted average shares outstanding to be approximately 292 million shares and diluted weighted average shares outstanding to be approximately 297 million shares. For the full year 2023, we expect weighted average shares outstanding to be approximately $288 million and diluted weighted average shares outstanding to be approximately $293 million.

Yesterday, our Board of Directors approved a new share purchase authorization that enables us to buy up to $200 million of our Class A common stock through privately negotiated transactions with individual holders or in the open market. Our committee of the Board will determine the timing amount and terms of any repurchase. While we do not currently have any specific plans to purchase shares this authorization gives us the opportunity to move quickly if and when opportunities arise.

And finally at our upcoming Investor Day on Tuesday December 5, we intend to provide a deeper understanding of Informatica's business strategy, product innovation, growth drivers and financial objectives. Those interested in attending in person, please contact Victoria.

Operator, you can now open the line for questions.

Question-and-Answer Session

Operator

Operator

Thank you. [Operator Instructions] The question today comes from Alex Zukin with Wolfe Research. Your line is open.

Alex Zukin

Hey, guys. Thanks for taking my question. And congrats on a solid quarter. I guess, maybe just the first one. When you mentioned the macro conditions not really changing in the quarter. Can you maybe talk to what you're seeing the combination of impacts we've heard obviously from all the hyperscalers at this point some of whom talk about attenuating optimization trends and solid AI workloads as being a driver for consumption.

Can you maybe just talk about what you're seeing out there in the market some of these larger projects that you're attaching to? Because it does feel like you had some meaningful improvement in some of your consumption dynamics and cloud NRR actually went up. So I'm curious if you can tie that into any comment around stabilizing or bottoming trends there?

Amit Walia

Okay, Alex. Thanks for the question. Hope you are doing well? So look I think first is you have to really realize how unique we are. When you look at -- when you ask the question of hyperscalers, we basically are the Switzerland of data. So when customers are looking to whether it's an Azure or an AWS or GCP or in some cases a warehouse or a lake, we solve all of those use cases and master data management and governance use cases. So we kind of have a in-bid situation where we have basically sit in the middle of multiple different platforms. So when different demand can move from one to another it doesn't really impact us 1:1. So that's one.

Second is, look, we've always been focused on mission-critical workloads. And we've never chased what I've always said sometimes nice to have workloads that churn the fastest in a bad economy. And I think that has served us well. So when customers buy us we're always buying us with the idea that I'm in it for the long haul. [indiscernible] opportunist. Very minimal on these nice to have workloads. And that strategy has always worked very well for us.

Of course, having the best products and a single platform which also reduces the risk for our customer to go stitch together multiple products also helps them because they don't have to spend more money and create more risk in stitching things together.

And then last but not the least like what I'm hearing from customers a lot is, look customers are optimizing their spend data tied to AI is definitely amongst the top three if not the top two. And all of those things are helping us. And lastly, like I said our partnerships we've been manically focused on that. We talked about the hyperscale, but the GSI partnerships with them building practices on us, building reference architectures and us all of those things create a, kind of, snowball effect or a tailwind effect as you might like to think about it Alex.

Alex Zukin

Perfect. And then maybe just as a follow-up. You mentioned the restructuring plan. Do you just need -- because of the consumption dynamics that you're seeing in your customer base? Do you just need less people to facilitate that? It's more product-led roads and self-service? And then maybe just an update on our comment on Ithaca and the share repurchase authorization as well.

Amit Walia

I'll take the first and Mike please cover the Ithaca one. So yes, and more to the first question that you said I think look I said that even the beginning of the year that as we transition to the final version of our transformation cloud only, there's a lot of hybrid duplicative things paddle things that we were -- we had that there was just no way around it.

We took one round of simplification earlier this year, and certain other things were there and I've been saying that in every earnings call that there is more operating leverage that we feel we will be. And I think those are all the things that we are doing that are not necessarily needed as we think about the business. It's a lot simpler for all the things you said and many other things we don't need duplicative things to maintain or to do.

In fact, it also as I said makes the business a lot more nimble and fast, because we just don't need ten people to go structure a deal as an example if I may use that. And of course, in a lot of cases cloud makes it a lot simpler and easier for customers to engage and buy from us or even use for us.

All of those things play into that. And I think I'll touch on one thing that maybe you didn't ask is that timing for us was a very important critical decision maker. Look, we talked a lot about whether it's January or now. We start our new fiscal year in January. We knew where we were and we basically wanted to have a fast start to next year. We see good traction against IDMC. So we thought look we're not -- there's a lot of quota-carrying capacity. In fact they're not touching any of that stuff.

So we feel good about Q4 as you heard from our guide. We wanted to get this thing done so we can plan and have the right people in all the right roles. So we not only finish well but have a fast start to 2024. Mike, you can cover Ithaca please.

Mike McLaughlin

Sure. Alex, let me see, if I can unpack the Ithaca and buyback authorization announcement. So I'll start with Ithaca. I think LP was an investment vehicle that was established in 2015 in conjunction with the Informatica go-private transaction. At that time there was a group of large institutional and strategic shareholders who wanted to invest in the deal alongside our lead investors Permira and CPPIB.

Ithaca was established to hold the shares of those strategic and institutional investors and that vehicle has been controlled in terms of the boats and decisions about disposition or distribution of the shares by Permira since 2015. Ithaca was designed at the outset to terminate on the two-year anniversary of the IPO of Informatica. That IPO as you know was in October of 2021, so that two-year anniversary is upon us. In the months leading up to that planned termination the holders of 51.4 million of the 60 million shares in the Ithaca vehicle chose to extend the life of Ithaca for at least another year and leave it subject to the governance provisions that have been in place since 2015.

The holders of 8.6 million shares that's four holders have chosen to take the distribution of their shares and they will once that distribution happens have control of the votes and they'll be making individual decisions about any dispositions of those shares going forward.

We expect that distribution to take place sometime in the next two to five business days. Now there's three important pieces of context around the Ithaca distribution. First of all, the four entities that are receiving shares are all large institutions or strategic investors that know Informatica well and they have experience in investing in public equities.

Secondly, we have no indication from any of these holders that they have an intention to sell their shares in the near term.

And then third the buyback authorization. So let me talk about that. The buyback authorization is not by any means a signal that we're changing our capital allocation policy. Informatics continues to prioritize investment growth, deleveraging on a net basis and strategic and tactical M&A as uses for our balance sheet cash and our free cash flow.

So why are we doing the buyback? Well, the buyback authorization gives us the flexibility to engage with any potential sellers of large blocks of shares and to negotiate private off-market transaction to purchase those shares if it's available on terms that are attractive to Informatica.

We don't intend -- although we do have the flexibility to be buying shares in the open market rather we're targeting the opportunity to buy large blocks of shares in private transactions. So there's no change in capital allocation policies. There's no attention to reduce our public float rather it's the ability to be flexible and nimble if the opportunities to buy shares in large blocks becomes available. Long explanation let me see if that answers your question and do you have any follow-up talks.

Alex Zukin

It sounds like the two are a bit linked, if I'm reading the commentary correctly.

Mike McLaughlin

Yes. You are reading it correctly. Look. we recognize that we have relatively low liquidity and that any large sales in a short period of time can dislocate our stock for purely technical reasons. The buyback gives us the ability if large sellers are so willing to negotiate off-market private acquisitions of those shares if they're on mutually favorable terms. They're linked in that regard.

Alex Zukin

Super helpful. I appreciate it guys, thanks again.

Operator

Our next question comes from Matt Hedberg with RBC. Your line is open.

Matt Hedberg

Great. Thanks for taking my question guys and congrats from me as well on the results. Maybe following up on Alex’s question. I think what stood out to us in addition to cloud NRR accelerating sequentially but also it looks like large customer growth also accelerated on a sequential basis, which is great to see. I guess I'm kind of curious given the comments on macro and demand that you talked about curious on the sustainability or durability of elevated cloud NRR. And I mean is that a trend given this increasing push to cloud that could perhaps continue into next year?

Amit Walia

Matt, thanks for the question. So look we don't guide to NRR. We've said that many times. And ARR is a number that can go up and down over the course of quarters in a year. We obviously look at it very carefully thoughtfully in the full context of a year. I've said many times that we look at it and we care a lot about it but we don't 100% solve for it, because when we acquire a new customer that customer is zero value add to NRR, but incredibly important for us because we know forever that when we land a customer given the mission-critical workload that we saw we get a customer for life. So that's statement number one.

But to your question on large customers, look, we solve multi-use case problems through one platform that has multiple products. And that serves large enterprises always very well. Second is, large enterprises inherently have complexity. They turn to us. Large enterprises also are gravitating towards. They don't want to build a pancake to solve and build a new modern data architecture. They rather have one platform and a few ancillary teams around it. All of those things are benefiting us.

And then last but not the least like we've talked about migration. I mean a good part of migration also comes from large customers that are trying to move to cloud now taking old power center to our cloud. All of those things are driving to the large enterprise or larger customers fabricating towards us with the bank.

Matt Hedberg

Got it. That’s super helpful. I'm curious, was there any sign of -- any vertical strength that you call out perhaps federal government or any other thing that was noteworthy on the results?

Amit Walia

Not really. We didn't. I mean Q3 as you all know is the fiscal Q4 of Federal government, so that naturally is built like that from their seasonality point of view. So, there's nothing special to call out because that's always the case every year. No we didn't call out any particular vertical that had an extraordinary effect on our numbers.

Matt Hedberg

All right. Thanks a lot guys.

Operator

We now turn to Brad Zelnick with Deutsche Bank. Your line is open.

Brad Zelnick

Great. Thanks so much and good to see the solid results and some profitability for the full year. Amit I wanted to hone in on partnerships. Informatica has always been a partner of choice for the GSIs and other technology partners, but you really seem to be making a an extra push here.

And I'd be curious actually specific to Oracle. I took note of that relationship that you called out that you guys announced around their cloud world. And there's just so much enterprise data that sits in Oracle database.

I'd be curious what's the initial reception to what you've announced? What kind of alignment is there in the field? And is this something that will extend this well to the relationships that they now have with Microsoft Azure?

Amit Walia

All of the above Brad, first of all, terrific question. Look when we think of our business we think long-term, I mean we are not thinking of the next quarter obviously as you can imagine. Oracle is a pretty established large-scale infrastructure company. So, you know that the databases or the data warehouse has tremendous installed base. That allow that installed base was tied to a power center customer also.

And then they are actively going after new workloads that over a period of time they will also be aggressively moving towards their cloud and obviously the partnership with Azure, which by the way is a great part for us.

So, our belief is that we are the only data management partner of choice with OCI, there's no one else but us. They are very well enterprise centric like we are. So, there's active war that has been going on with our field teams, product teams, and we're pretty bullish about what this will bear fruit or as we think about 2024 and beyond.

A lot of work has to happen in the early days and I think the team has done a lot of that work. You've seen they've come to our conference, we've got to their conference to talk about it. I'm pretty excited about that. And I think as you said with Azure and OCI, Azure being a great partner that creates an even easier way to get in front of our customers and reduces a lot of friction. So, I'm pretty bullish about it.

Brad Zelnick

It's great to hear. Maybe if I could just follow up on the acceleration that you saw on now 5% of the legacy base having made the migration relative to what was just 4.5% last quarter. Any change in terms of incentives carrot versus stick or big customer cohort that came through? Or anything that should inform what we might think of in the quarters to come as to how that might progress?

Amit Walia

No, on migrations, I think we've collectively all talked about it so much. And I now say it in full candor it's one of those things that I'm extremely happy about. But at the same time, we look at that with I use this word on my own team constructive dissatisfaction because there's so much more to do over there and it's a captive base and we want to get them to the cloud sooner than later.

And I think we've done a tremendous amount of work out. I always said look we wanted to make sure we capture the new workloads and we get to the migration we came to a point where we actively worked in first solving for getting the customer pain points very clear to us getting it behind the partners waiting on the migration utilities.

The last-mile was we learned a lot from our customers in doing a round two or version two of the product. Powers in the cloud addition that we launched in August came out and by the way it was adopted very, very quickly. I think I shared a third of the deals we did in Q3 with Power Center Cloud Edition.

Given that the product GA middle of the quarter and we expect the lion's share of this quarter to be that. I look at that definitely one that absolutely will bend the curve and increase the slope of the curve as we think about next year. And all the work that we have done with partners and other things is naturally going to help us do that. So not a lot on us. That's an area where we've absolutely got a much harder and expect more attention from us in that area as we can call it next year.

Brad Zelnick

It's a big opportunity at 2 to 1. Thank you so much, Amit, and thank you Mike and Victoria as well. Nice stuff.

Victoria Hyde-Dunn

Next question, please.

Operator

Our next question comes from Andrew Nowinski with Wells Fargo. Your line is open.

Mike McLaughlin

Operator is the line still open?

Unidentified Analyst

This is -- hello can you hear me? This is Stephen on for Andy. Can you hear me?

Operator

Ladies and gentlemen, I think we've lost connection with our speakers. Thank you for your patience as we reconnect them. [Technical Difficulties] Okay. Ladies and gentlemen, we have our speakers back. Andrew, please continue with your question.

Unidentified Analyst

Can you hear me okay?

Mike McLaughlin

Yeah. Now we can.

Unidentified Analyst

Okay, great. Thanks for taking my question and congratulations on the nice results. our cloud ARR growth was solid and similar to last quarter. Is there any color you can provide as it relates to trends going into the next year?

Amit Walia

Sure. I think philosophically, I think put the trends in two categories things that -- I'll put them in AI and non-AI categories because I think no call would be complete if we don't touch AI. Look, there is a lot of work that's happening in the world of data that is not necessarily tied to AI. Customers are still wanting to understand their entire business, whether it's a Customer 360 use case to do churn, new customer acquisition, supply chain, back-end efficiencies, data governance there is a lot of work that's happening at data hence data management becomes incredibly important.

And the trend over there that we see is that while that demand is very strong, that customers have, after many years of experimenting with multiple things, have also come to the point that, if they have to build the modern data architecture, they cannot stitch it together with 50, 60 unique little, little, little small tools over there the cost and the risk is very high. And that's where we have best of breed and our platform solves the case for them. So we see that non-AI, I put purposely on AI that's still a lot of work going on across the globe. If you go talk to a bank in the middle of nowhere, they're not necessarily running to AI tomorrow, but they still have a lot of work to do to run that business. Then we come to AI, where basically a tremendous amount of interest. And I think as we all have learned that it's the fastest slope curve right now. Everybody wants to do something. This year we had a lot of our customers figure out what use cases they want to go into. And in that case we will see the first few use cases get into test and then production next year that's where the GSIs are working with a lot of our customers with us.

And in that case, good quality data, governance of data becomes paramount. Every enterprise customer is worried about governance of data in the context of Gen AI. We are seeing that. Now that is – basically we see that working into next year as well. So when I look at the business, those are all the things that are happening with simplification of the tech stack and not having a 1000-plus boom, all of those things are the things that you are seeing to our benefit.

Unidentified Analyst

Great. Thank you for that. And then just one more. Is there any color that you could provide on the customer interest you're seeing so far in both Privitar and Clear GPT and Private Preview. And has that interest tracking against your internal expectations?

Amit Walia

Very good. So Privitar by the way like I said, in fact Gen AI be even more of a use case for it. And data our customers that they want to democratize data and they leverage like our governance and our data marketplace capabilities or even when they want to take MDM [ph] and operationalize that and democratize it to a bunch of users they needed access management.

You can't have any data going to anybody you cannot have the Wild West. So data access management, which you basically think it what to say in the data stack it's the identity and access management use case over here. It's not the same but I'm just kind of driving an analogy.

Very important and especially for the large customers, the regulated industries, it is significantly important. So we saw that and hence we accelerated our road map by buying Privitar. Pretty excited about it. I think I've met a bunch of customers who have all been very complementary of what we have and I – as I said, our goal has been to get that on the IDMC platform so it can be the cloud data service with IPOs and I expect that to obviously naturally be scaling from there and be attached to those use cases first.

In terms of CLAIRE GPT, look, I think hopefully, everybody first of all know that we launched CLAIRE in 2018. We've been driving a lot of AI workloads AI productivity within our products, embedded in our products for the last many years. We have taken the chat interface and put it on top of IBM through CLAIRE GPT, CLAIRE co-pilot is already GA. We put it in hands of our customers, private preview give us feedback, play with it. By the way, our customers including our partners also, the GSI partners, their practices are giving us feedback on that one. It's a very good early reception. We are also learning from customers where they get productivity, where they want to take it. We get tons of future requests and all that stuff. So we are loving it right now. Expect to hear more from us and that will be one of those things as we come towards Informatica world next year is going to have a lion's share of attention at the conference.

Unidentified Analyst

Great. Thank you so much.

Amit Walia

Absolutely.

Operator

We now turn to Patrick Colville with Scotiabank. Your line is open.

Patrick Colville

Hey, Amit, Michael, Victoria. Good to hear from you guys. So I mean when I look at numbers, cloud ARR growth has barely decelerated at all. It's been incredibly impressive what you guys have done, especially in the face of kind of tight IT budgets and public cloud vendors, their growth momentum is slowing. So I guess, if IT spending is better next year than it was this year and AI momentum continues. I mean is there a world where we could expect Informatica's cloud ARR growth to like reaccelerate?

Amit Walia

Patrick, great question. Look, you know what, I will just replay that back to my exec team also. That's what I keep telling them. I want more. So we all want that of course, right? I think -- look in all fairness right now we have been we're looking at -- we've been very resilient for a reason, right? And I've always said that we focus on critical workloads mission-critical workloads for enterprise customers. Hence we will never go belly up or be down.

So that has served us very well the resilient customers. And we care -- I keep repeating customer sat it matters a lot for enterprise customers. You don't just throw a product over there and then lend 1,000s plus bloom and then the world blows up you're not there. We don't do that. So innovation and customer centricity is the reason I repeat those all the time because it matters to those customers.

Well, we come to Investor Day and share a lot about next year, so I can do that right now. But we always weigh everything on the positive side of the ledger and all the things that can be on negative side of the later and think through it. But Investor Day will give you a lot more color about next year and medium term as well.

Patrick Colville

Okay. And then I guess just one more on the restructuring. Are there specific areas that you can share that were impacted? I mean, is it more -- is it kind of deemphasizing for example a self-managed domain within Informatica both in terms of go-to-market and product development and emphasizing cloud? Or is there any kind of way you can double-click is the -- which areas are being I guess deemphasize? And then as a result maybe which shares are being more emphasized?

Amit Walia

So all of the above Patrick all of the above including things like that look -- for me this has been -- as you think about the company and if -- and I almost thought about it if you were a cloud-only company has started today at this case what would you be? So we also looked at that as to where do we simplify our organization structures, because I firmly believe in certain areas we basically were probably not as nimble and as fast paced as I would like it to be.

So we looked at those things we are the right investments. Where are the investment that we don't really need? And where can we also accelerate decision-making execution. I said that a couple of times even internally to my own teams if we were I'll give you an example if there are five people or 10 people to make a decision on a deal we need slows down from a customer point of view. So all of those things we looked at end-to-end and came to these decisions. Difficult decisions that we just announced today.

Patrick Colville

All right. Thank you so much for taking my questions.

Operator

Our next question comes from Jayden Patel [ph] with [indiscernible]. Your line is open.

Unidentified Analyst

Hey, guys. Thanks for taking the question. My question is are you starting to see higher expansion rates among IP-based customers? And what should we expect looking forward?

Amit Walia

Thanks. So the answer to that is yes. We obviously we've talked about IPOs quite a bit and we care a lot about IP adoption, IP expansion, all of those things. We definitely have a team that focuses on IP expansion and I think that team has done an incredible job and we saw pretty good IP expansion. So that happened, of course, which obviously naturally flows into NRR that we shared. So yes, the answer to that is, yes. And we both focus on IPO adoption and expansion and both of them are maniacal focuses and the expansion part has worked out well and we'll continue to be heavily invested in that.

And by the way one of the things that I might add I think I keep reminding you that our NRR we stated one way. I think we are by definition a bit of a conservative company I guess. But if looked at the other way that other companies also report it would be coming to at 124?

Mike McLaughlin

124.

Amit Walia

So six points higher so cloud and cloud NRR the 118 that we reported could be equivalent to 124 like a bunch of other companies also report. So we feel very good about it.

Unidentified Analyst

Got it. Thank you. And then as a follow-up can you help us understand the general puts and takes around 2024 revenue growth? Thanks.

Amit Walia

I think that will be an incredibly good discussion at the Investor Day four weeks, right? I guess the four weeks and a few days away, I would love to share that with you and I think you will get a ton of details from us as to we think about it. I think I'll let Mike cover that but four weeks and we'll be talking about it.

Michael McLaughlin

In general, though, as you've probably heard me say before it's more or less a free line excel spreadsheet. It's how fast is cloud going to grow and how fast our self-managed and maintenance going to decline. There's a four factor which is how much of that self-managed decline and maintenance decline is actually migration from those two buckets into the cloud bucket but it's a pretty simple model.

You can see historically how maintenance has declined. We think that's going to continue self-manage is starting to decline as we've deemphasized selling self-managed at the beginning of this year we'll be able to give you some better guidance about what to expect in that bucket when we meet you in December. And then we have good momentum on cloud growth. And again, we'll give you more sense for our expectation in about a month.

Unidentified Analyst

Got it. Thanks for taking my question.

Operator

Our next question comes from Fred Havemeyer with Macquarie. Your line is open.

Fred Havemeyer

Hi. Thank you very much. Congratulations also on cloud growth in the quarter. I think it's one of those things that continues to be impressive to see within the tumultuous model. I want to focus on a topic I hope it's not a little too tired at least for me at the moment but just generative AI-related use cases and more specifically efficiencies perhaps you can find within your own business and with your clients. We've seen a lot of use cases around generative AI for data labeling and more efficient perhaps like data transformation capabilities. So I'm curious just big picture here. How might you see your strategy around utilization of generative AI evolve? And do you think that there are additional areas you can gain efficiencies through using this technology?

Amit Walia

Great question Fred. And I think I'll put two three categories. One is Informatica for AI use cases, which is like forget even if you did not don't have CLAIRE. To do AI customers need to have holistic data good quality data, governed data things like that and I can go on and on and data labeling is one of those examples. So that's informatic for AI. So if companies want to do AI they need data management they need IDMC and we are part of that workflow.

Second is AI within Informatica which is clear and how clear GPT and clear copilot are embedded within our products and they naturally make our products the AI coming out of products to drive more intelligence and more automation for their customers so they can do more with less and they can do things that they could never do which -- so that's second benefit that we get from -- so because our products become a lot more valuable for them.

Third is I think where you probably were also asking how we use Gen internally within the company for a variety of our own running the company, right? And so we're doing all three we are participating in the first two in the context of driving our business. And the third one is basically making ourselves a lot more smarter nimbler productive and totally as a company. So all of those three are focused on right now.

Fred Havemeyer

Thank you very much.

Operator

Our next question comes from Koji Ikeda with Bank of America. Your line is open.

Koji Ikeda

Hey, guys. Thanks for taking the question. Just one for me here. I wanted to ask you a question on IPUs and curious to hear what the overall end markets perception of the IPU pricing model shaping up today now that it's been off for some time. I mean, you did mention in your prepared remarks 60% of new cloud bookings is coming from IPO. So that's a pretty good indication. But maybe some qualitative commentary could be helpful.

And then also you mentioned that 15% of cloud bookings is coming from transitions from power centers. So do you believe that the IPU unit could have a potential to accelerate the migration of legacy power center users out there? Thanks for the time.

Amit Walia

The answer to the second part is, yes. So the first part is by the way like you said, all new bookings are consumption. IPO and non-IP, the non-IPO with MDM, which is a record space. Now, we don't have it on IPO because customers like to buy by records. So and customers love it, because look what's not to like? It's statically simple and customers have to just figure out what they want to do and they can start small and grow a base, like I said we -- because we solve mission-critical workloads, typically customers want to buy a good price bar game so they want to invest in the future.

So I think customers have -- I have not met one customer who has not liked it. If anything, our job is to keep telling customers because sometimes they buy, they forget that they have the IP to do anything. So we keep driving that rationale. But I think right now, I think there are three words that our customer base have learned and our goal is to make sure that they all memorize it. IDMC, CLAIRE, IPO these are three words that we want everybody in the world to learn, so pretty good about it. And I think yes migration, obviously, they get IPU so they can also start a small migration will start up, full migration, give them all that nibbled.

Operator

Our final question today comes from Howard Ma with Guggenheim. Your line is open.

Howard Ma

Great. Thank you for taking the question. I wanted to ask about the expense side, or I should say the profit side. I was surprised to see gross margin tick up sequentially, because I thought given the higher cloud mix that it said would decline. So can you -- I guess for Mike, can you comment on I guess on gross margin. And also as you -- I don't want to steal away any thunder from the Analyst Day. But on the expense side as you deemphasize investments in self-managed and I guess power center too, although I'm pretty sure you've already deemphasized a lot of R&D investments there. How should we think about margins I guess both on gross margin and the OpEx line as time plays out? Thank you.

Mike McLaughlin

Thanks for the question Howard. So I'll start with gross margin. You should continue to expect some volatility in our gross margin from quarter-to-quarter. It's for a couple of reasons this quarter; one is despite what I'd like to happen our cloud COGS don't grow completely linearly with cloud ARR revenue. We put up new pods in certain geographies and that creates a lumpy expense in a particular quarter when we spool it up and then as that pod gets filled up the marginal cost which is lower than the average cost follows behind. And so in earlier quarters this year we saw more of that lumpy onetime spool up cost than we did in Q4, where we benefited from new revenue for the most part going into existing pads and therefore had lower marginal cost per dollar of revenue.

The other thing going on in our gross margin this quarter and has been throughout the year which is a reduction in the amount of professional services that we're doing as a percent of our total revenues. In professional services I'm sure you know are a low gross margin business. So, if we lose and again lose is not necessarily a bad thing because it means that our partners are doing it for us allowing us to focus on software. If we lose $1 of professional services revenue we also lose $0.80 of COGS or some number in that range. So those are the tailwinds to our gross margin this quarter.

Our target as we've said before is to maintain 80% plus gross margins going forward as far as I can see, as we continue our transition and we'll talk more about that at Investor Day. Now with respect to overall operating expenses, I guess all I can point you to now is that savings that we've estimated in '24 on a GAAP and non-GAAP basis that will result from the structure. Those savings are spread across the various categories of our spend our non-COGS spend of course. And you can add those dollar for dollar to your model today in terms of exactly what part of the business they'll hit we'll give you more of that in December.

Howard Ma

Okay. Fair enough. Thank you, Mike.

Operator

This concludes our Q&A. I'll now hand back to the management team for closing remarks.

Amit Walia

Thank you. Well look I appreciate you all joining today. In closure, I'd like to just say that, as we continue accelerating our innovation-led cloud-only consumption-driven transformation, I couldn't be proud of our success, couldn't be prouder. Transformations are not easy and we've been very thoughtful in our actions while delivering cloud growth operating leverage and profitability. This is all due to a long-term strategic focus on building best-of-breed solutions on the IDMC platform and working tirelessly to make it powered by AI CLAIRE the data management platform with choice for enterprises across the globe. And we're excited about where we are excited on how we're going to close the year and look forward to seeing you all at Investor Day in December. Thank you.

Operator

Ladies and gentlemen today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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Informatica Inc. (INFA) Q3 2023 Earnings Call Transcript