INFA - Informatica Ups Guidance But Valuation Looks Full

2023-10-27 15:02:29 ET

Summary

• Informatica Inc. provides software and services for data integration and management in companies worldwide.
• The company has transformed into a cloud-based SaaS company, offering various data management solutions.
• While revenue growth may improve, Informatica stock appears overvalued, and the transition to a cloud-based model is challenging.
• I remain on Hold for Informatica Inc.

A Quick Take On Informatica

Informatica Inc. ( INFA ) provides software and related services for data integration and management functions in companies worldwide.

I previously wrote about INFA with a Hold outlook on uncertain macroeconomic conditions.

While revenue growth may perk up a little, Informatica Inc. stock appears overvalued, and it is difficult and time-consuming to make the shift from an on-premises perpetual license revenue model to a cloud-based subscription model.

I retain a Hold rating for INFA for the near term.

Informatica Overview And Market

California-based Informatica originally provided on-premises data integration and management solutions and has since completed a transformation into a cloud-based SaaS company.

The company is led by Chief Executive Officer Amit Walia, who has been with INFA since October 2013 and was previously an executive at Symantec and at McKinsey & Company.

The firm’s main offerings include:

• Data integration

• API & Application integration

• Data quality

• Master data management

• Customer & Business 360

• Data catalog

• Governance and privacy.

Informatica markets its offerings through its direct sales and marketing efforts and via strategic partners, which include cloud hyperscalers, global system integrators, resellers and cloud data platforms.

According to a 2022 market research report by Grand View Research, the global market for enterprise data management was an estimated $89.3 billion in 2022 and is forecast to reach $222.7 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 12.1% from 2023 to 2030.

The primary reasons for this forecasted growth are the outbreak of the global pandemic, increasing demand for off-premise solutions and a growing demand for real-time information across the enterprise.

The chart below shows the historical and projected future market trajectory for the U.S. enterprise data management market:

Major competitive or other industry participants include:

• Talend

• Collibra

• AWS

• Microsoft

• Google

• IBM

• Oracle

• Cloudera

• SAP

• Broadcom

• Teradata

• Micro Focus

• MindTree

• Others.

Informatica’s Recent Financial Trends

Total revenue by quarter has effectively plateaued; Operating income by quarter has improved year-over-year but remains negative.

Gross profit margin by quarter has trended lower in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have also moved lower more recently:

Earnings per share (Diluted) have turned sharply lower, further into heavily negative territory:

(All data in the above charts is GAAP.)

In the past 12 months, INFA’s stock price has risen 0.47% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 25.26%:

For balance sheet results, the firm ended the quarter with $821.5 million in cash, equivalents and short-term investments and $1.83 billion in total debt, of which $18.8 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was an impressive $213.0 million, during which capital expenditures were only $7.6 million. The company paid a hefty $177.6 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Informatica

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $15.55 versus the current price of $19.32, indicating they are potentially currently fully valued.

INFA’s most recent unadjusted Rule of 40 calculation was negative (0.7%) as of Q2 2023’s results, so the firm’s results have worsened markedly primarily due to a swing to negative operating margin, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

I prepared the chart below to illustrate the frequency of various keywords in management’s most recent earnings conference call with analysts.

The chart suggests that the company and its clients are experiencing macroeconomic challenges and uncertainties in the current environment.

Analysts asked about the macro environment and business trends, new AI products and the firm’s cloud transition.

Management replied that its forward guidance increase assumed a stable macro environment for the second half of 2023.

On new AI products, leadership said that enterprises are proving to be more cautious about adopting new AI and that its Privitar acquisition should help address AI data access concerns.

The company's salesforce has apparently adapted well to its cloud-only sales focus, and management is focused on simplifying its related processes.

Commentary On Informatica

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted exceeding previous guidance for revenue due to ‘strong customer momentum from a cloud-only consumption-driven strategy.’

The macroeconomic environment remained stable during the quarter while cloud subscription ARR (Annual Recurring Revenue) rose to 49% of total subscription revenue, an increase from 42% a year prior.

Customers spending more than $100K ARR increased by 8% YoY to 1,940 customers by quarter end.

Total revenue for Q2 2023 rose by 1.1% year-over-year while gross profit margin slid by 1.2%.

The firm’s cloud net retention rate was 116%, the same as the year prior, indicating reasonably good product market fit and sales & marketing efficiency.

Selling and G&A expenses as a percentage of revenue fell by 1.0% YoY, but operating losses were reduced by an impressive 59.5% to $4.9 million for the quarter.

The company's financial position is reasonably good, with ample liquidity and very strong free cash flow.

INFA’s Rule of 40 performance has deteriorated into negative territory, a poor result.

Looking ahead, management raised its non-GAAP operating income guidance for the full year to $430 million at the midpoint.

Topline revenue is expected to grow at 5.0% over 2022.

If achieved, this would represent a slightly higher revenue growth rate versus 2022’s growth rate of 4.23% over 2021.

While this revenue growth, if it occurs, is welcome, the stock appears fully valued per my discounted cash flow calculation, which assumes a much higher top line growth rate.

The firm is still navigating the transition to a cloud-centric company.

Based on what I’ve seen with other companies making the transition from on-premises to cloud, it can take a very long time to do so, and growth typically suffers in the process.

My outlook on INFA in the near term is Hold.

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