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spk02: Good afternoon, everyone, and welcome to Informatica's physical Q1 2022 earnings conference call. My name is Brika, and I'll be your event specialist today. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. Thank you. I would now like to introduce our host, Victoria Hyde-Dan, Vice President, Investor Relations.
spk00: Good afternoon, and thank you for joining us to review Informatica's first quarter 2022 earnings results. Joining me on today's call are Amit Walia, Chief Executive Officer, and Eric Brown, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentations are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the Investor Relations 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 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 10Q and 10-K filing for the full year 2021. 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 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 in our slide presentation available on Informatica's Investor Relations website. It is my pleasure to turn the call over to Amit.
spk03: Thank you, Victoria. Good afternoon, everyone. I am pleased to be with you today. Before we begin with our business results, I would like to acknowledge the humanitarian crisis in Ukraine. We join our customers, partners, our employees and the global community in condemning the unprovoked invasion of Ukraine by Russia. As a company, bound together by our values and respect for all, our hearts are with the people of Ukraine and all those with friends and family in the region. Many of our employees around the world are directly helping with the refugee crisis in many ways, and I couldn't be prouder of Team Informatica for the speed and generosity of their response. As a company, we have donated to Doctors Without Borders and Save the Children for Ukraine. Informatica has a strong purpose-driven culture, and that has never been more evident than it is today. From a business perspective, Informatica has suspended all new sales in Russia in compliance with the U.S. government's actions, and the impact is not material for our Q1 results or longer-term financial outlook. Now I would like to share my perspective on first quarter business results. and then hand the call over to Eric to review our first quarter financial results. Afterward, I'll come back to share my observations on the business at large before turning the call over to Eric again to provide full year and Q2 guidance. So turning to Q2, we started fiscal 2022 strong with both subscription annual recurring revenue and cloud annual recurring revenue exceeding the high end of the guidance with growth at 32% and 43% year-over-year, respectively. During the quarter, we observed a better-than-expected sales pipeline mix shift from self-managed to cloud, and we expect this dynamic to continue given the strong demand for digital transformation. We also strengthened our operating profitability and cash flow execution and exceeded the high end of guidance for non-GAAP operating income. Now, last quarter when I spoke to you, we listed three strategic priorities and key areas of investment focus for 2022. The first is product innovation. The second is continuing to scale our go-to-market. And the third is strategic partnership expansion. I would like to use this framework for today's update. So turning to our first priority, we are working extensively to enhance our IDNC platform advantage and focusing R&D investments to drive cloud-first new workloads. We believe the breadth of our IDMC platform is unparalleled. It provides a suite of seven best-in-breed solutions powered by Clare, our AI engine, with over 50,000 metadata-aware connections. IDMC platform operates at a significant scale, processing 32.2 trillion cloud transactions per month as of March 2022, an increase of 65% year-over-year and 16% sequentially. In the first quarter, we leveraged our product innovation, rather our new product innovation, to further strengthen our customer engagement across four distinct journeys. Beginning with the first customer journey, analytics, where we added a lot of innovation last quarter, here we are democratizing and simplifying data engineering workload execution at every step of the software lifecycle. Like in design time, we are providing a simple wizard-based local interface to build very complex data pipelines. We added replication for many new sources like Google Analytics, SAP S4 HANA, NetSuite, and ServiceNow to cloud data warehouse targets with application ingestion. At runtime, we now provide an advanced serverless capability to run data engineering workloads that auto-scale without any infrastructure provisioning or tuning. And lastly, we operationalize machine learning at scale by consuming machine learning models within data engineering pipelines. Turning to the second customer journey business 360, last quarter we launched a cloud native multi-tenant master data management solution that delivers accurate, complete, and trustworthy master data across enterprise-wide business processes. With AI automation powered by our AI engine Clare, we support mastering of all key business entities such as customer, product, supplier, location, and many more to provide clean and consistent 360 views. Linking relationships across master data entities increases the simplicity and productivity of managing multiple domains across the enterprise. We also increase the openness of our platform with new APIs to integrate MDM with other applications. Moving to our third customer journey, data governance and privacy, we improved data sharing with the ability to shop for trusted data and AI models through a self-service, very simplified cloud-based data marketplace integrating data quality with business context organic expansion of the marketplace based on user requests order context selection to streamline ordering and personalization of the marketplace look and feel we also advanced automated data classification with over 50 out-of-the-box data classifiers to jumpstart automation and cataloging and improve serverless scanning for deep metadata connectivity an automated lineage of data across multi-cloud and hybrid data warehouses and data links. And next, let me talk to our fourth newly added customer journey this year that we call application integration and hyper-automation. Today, the app software landscape is extremely fragmented with apps in the cloud, on-prem, from different vendors or custom apps that are just not designed to work together. Customers are struggling to integrate and connect their apps to automate their end-to-end business processes. In this journey, we're advancing our customers' ability to seamlessly orchestrate the exchange of any kind of data across any latency through these apps, whether it's cloud, mobile, on-prem apps, used in business processes across the entire landscape of an enterprise. Our IDMC platform that is powering these journeys continues to win accolades from industry analysts which as you all know is a very important consideration for enterprise customers when they are looking to make purchasing decisions. We are proud once again to be named a 2022 Gartner Peer Insights customer's choice for data integration tools, making Informatica the only vendor to receive this accolade four consecutive times. More recently, we were named the Fast Company's annual list of world's 50 most innovative companies for 2022. And Informatica ranked number two in the very competitive enterprise category. I am really proud of this one. We are deeply grateful for this prestigious recognition, which speaks to our ongoing commitment to delivering product-led innovation on a global scale. Now turning to our second priority, we made excellent strides in scaling our go-to-market sales motion. We had another solid quarter of sales execution with our ability to sell large multi-year deals to new and current customers. At the end of first quarter, we now have 164 customers that spend more than 1 million in subscription ARR, an increase of 50% year-over-year, and 1,732 customers that spend more than 100,000 in subscription ARR, an increase of 22% year-over-year. Last quarter, I spoke about creating new routes to market, demonstrating our strategic commitment to industry-specific vertical solutions. I'm very pleased to say we've reached an important milestone in that strategy in launching our industry-specific IDMC verticals with the launch of IDMC for Retail, a cloud-neutral, end-to-end data management solution for the retail industry. IDMC for Retail enables retail companies to deliver highly personalized, digital-first customer experiences across all channels at enterprise scale. Customers across the globe in key verticals Financial services, retail, healthcare, consumer goods, and public sector have selected our IDMC platform across all the four journeys I mentioned. Let me give you a few notable examples. Beginning with Gilead Sciences, a biopharmaceutical company with a mission to discover, develop, and deliver innovative therapeutics for people with life-threatening diseases. Gilead chose Informatica as a strategic partner for their master data management global rollout and expansion to bring enterprise data across all Gilead locations. This solution allows Gilead to process clinical trials data faster and will provide the ability to detail analysis for a global rollout across all Gilead product lines. We're also very pleased to see existing customers expand the cloud portfolio with Informatica. Burton Snowboards, a longtime customer, is adding capabilities for data mastering and governance with Informatica's cloud-native master data management, Axon data governance, and enterprise data catalog. Moving to the public sector, Ontario Health, is a government agency that is responsible for ensuring high quality health care services, serving almost 15 million citizens across Ontario, Canada. Ontario Health is now leveraging our IBM platform in partnership with Microsoft Azure to move more workloads and data from on-prem to the cloud, lowering the risk and overall cost via cloud data architecture. And lastly, a great retail customer is TaylorMade. For all the golf enthusiasts, a creator of revolutionary cloud products and is supported by a network of almost 1500 PGA professionals. TaylorMade selected Informatica to manage their customer data across multiple cloud ecosystems, helping them integrate multiple data sources to provide both the customer and customer service teams a real-time and trusted vision of order and inventory data. Moving to our third priority, which is to make Informatica the easiest to do business with and win together with strategic partners. We had another quarter of strong engagement with ecosystem and global system integrator partners in winning new deals. This reflects our Switzerland of data management position in the market that customers value. In the first quarter, the number of ecosystem co-sell wins grew over 97% year over year. Market-based transaction volume doubled year over year, including excellent transaction with key ecosystem partners. Yesterday, we announced an expanded partnership with Snowflake that will result in deeper product integrations for data governance, acceleration and scaling of joint marketing and demand gen activities, and expanded field sales collaboration. This is in addition to our already existing cloud data warehouse modernization program, which already enables some of the largest Informatica power center deployments in the world to successfully migrate to the Snowflake data cloud. We look forward to closer engagement with Snowflake. turning to our global system integrator partners. We added new partners with cloud expertise to our partner program, and we continue to make improvements to the program to attract new partners. We expanded our strategic partnership with Wipro, and we leveraged their deep industry expertise and global reach to expand customer adoption of IDNC and accelerate cloud modernization for global customers. As a part of this partnership, 2,500 of Wipro's consultants will be trained on Informatica's cloud IDNC platform and solutions. We have We also have more partners in the process of establishing centers of excellence with access to a migration factory to help customers migrate their on-prem workloads to the cloud. We're already seeing new maintenance to cloud migration deals from existing partners. These are all operational workloads and the customer drives the pace of digital transformation, which is approximately a nine to 12 month lag to convert from maintenance ARR to cloud ARR once the implementation is completed. With that context, Let me now hand the call over to Eric to discuss Q1 financial results. Eric.
spk04: Thank you, Amit, and good afternoon, everyone. We achieved strong financial results in Q1, exceeding the high end of guidance for subscription and cloud ARR and delivering a 19% beat on non-GAAP operating income guidance as well as upside of non-levered free cash flow. We delivered revenue as expected at the midpoint of guidance, notwithstanding the mixed shift from self-managed to cloud. We see strong demand for the IDMC platform from enterprises and our teams remain focused on executing key strategic priorities to capitalize on cloud and strategic partnership opportunities through the balance of the year. Given the momentum in the business, we are raising total ARR guidance and reaffirming the remaining full year 2022 guidance metrics. Let me provide commentary on Q1 results before discussing expectations for the full year 2022 and Q2 a bit later. Turning to Q1 results, total ARR increased 17% year-over-year to approximately $1.4 billion. We added over $202 million in net new total ARR in the first quarter versus the prior year, and we remain on track to deliver over $1.5 billion in expected total ARR this year. Cloud ARR performance was stronger than expected, increasing 43% year-over-year to over $343 million and exceeding the high end of guidance. Cloud ARR now represents 25% of total ARR, an increase of five percentage points year over year. We added 104 million in Net New Cloud ARR in the first quarter versus the prior year. Sequentially, we added 26 million in Net New Cloud ARR in the first quarter of 2022 versus the fourth quarter of 2021. This is double the 13 million in Net New Cloud ARR we added in the first quarter of 2021 versus the fourth quarter of 2020. As Ahmed mentioned, we had a faster-than-expected sales mix shift from self-managed to cloud during the quarter, and we expect this dynamic to continue. Turning to subscription ARR, this increased 32% year-over-year to over $849 million, above the high end of guidance and driven by new subscription customer growth and cross-sell from existing customers. Subscription ARR represents 61% of total ARR, an increase of 7 percentage points year-over-year, and 2 percentage points sequentially. We added $206 million in net new subscription ARR in the first quarter versus the prior year, and we remain on track to deliver $1 billion in subscription ARR for the full year. 55% of subscription customers are net new, and our average subscription annual recurring revenue per customer in the first quarter grew to approximately $231,000, a 19% increase year-over-year on an active base of more than 3,600 subscription customers. The subscription net retention rate was 113%, down one percentage point sequentially. As I mentioned last quarter, we expect to see fluctuations in this metric due to the mix of new bookings from new customers versus existing customers and the timing of large initial deal sizes expanding in the first year. Maintenance ARR performed better than expected at $548 million due to stronger performance on renewal rates. As a result, we now expect a full year improvement in maintenance ARR. Turning to revenue, we delivered $362 million in total gap revenue, an increase of 9% year-over-year. The as-expected revenue performance with higher quarter-ending subscription ARR is a function of a mixed shift from self-managed to cloud. Subscription revenue increased 26% year-over-year to $198 million. Subscription revenue represented 55% of total revenue as compared to 47% a year ago and reflects strong customer demand for cloud solutions in the mix shift from self-managed to cloud. Maintenance and professional services revenue were in line with expectations of 162 million and represented 45% of total revenue of the quarter. Stand-alone maintenance revenue represented 37% of total revenue. Consulting and education revenue make up the difference and fluctuates based on customer requirements representing 8% of total revenue. And at this point, perpetual license is immaterial at less than 1% of Q1 revenue. Revenue from the US grew 8% year-over-year to $230 million, representing 63% of total revenue. International revenue grew 10% year-over-year to $132 million, representing 37% of total revenue. As Ahmet mentioned earlier, our revenue exposure in Russia and Ukraine is immaterial. Before moving to our profitability metrics, I'd like to point out that I will be discussing non-GAAP results for the first quarter unless otherwise stated. Gross margin was 81% and we continue to maintain a stable level of 80 plus percent, notwithstanding the mixed shift from self-managed to cloud. We observed approximately 10 million in operating expense savings driven by a slower return to the office lower event, travel, and entertainment expenses, and backend-loaded hiring in the quarter. We expect a sequential increase in travel and event expenses next quarter, and higher attendance and costs for Informatica World. Operating income was approximately $83 million, 19% above our expectations of $70 million. Adjusted EBITDA was $89 million, and net income was $58 million, each above our expectations. Net income per diluted share was 20 cents above expectations based on 285 million diluted shares outstanding. The basic share count was 279 million shares. We ended the first quarter in a strong cash position with cash plus short-term investments of 578 million. Net debt was 1.3 billion with a trailing 12-month adjusted EBITDA of 377 million. This resulted in a net leverage ratio of 3.4 times down from 3.7 times last quarter. Looking ahead, we expect the business to naturally delever to just under three times by the end of this year, and then to two times by the end of 2024. Unlevered free cash flow after tax was 87.5 million, better than our expectations, resulting in a 24% after tax margin. The overperformance in cash flow this quarter, as well as last quarter, indicates the strength and health of a ratable and predictable enterprise business. GAAP operating cash flow was 70 million compared to 65 million in Q1 last year. This summarizes Q1 financial results. Let me turn the call back over to Ahmed.
spk03: Thank you, Eric. So as you heard, we're off to a great start in fiscal 2022. These results highlight the continued customer adoption of ID&C and the execution of a three-pronged strategy. Looking ahead at the second quarter and balance of the year, let me touch on a few observations. and share what I see has changed or not changed since our IPO last fall. First, our cloud momentum has increased faster than what we expected. The pipeline makes shift from self-managed to the cloud is accelerating, and it's driven by new workloads from existing and new enterprise customers. You see this reflected in the cloud ARR growth of 43%. and the 104 million in net new cloud ARR that we added in the first quarter versus the prior year. You can also observe this from the migration of maintenance to the cloud use cases. And to reiterate, there is approximately a nine to 12-month lag to convert from maintenance ARR to cloud ARR once the implementation is done. As such, in this context of cloud momentum, we continue to prioritize R&D investments, supporting accelerating the cloud roadmap and strategic cloud partnerships. Products on the multi-tenant cloud are getting adopted faster globally, and IDMC continues to stand out in the market as new workloads from new and existing customers come to the platform. We are a very mission-critical data management platform, ensuring data flows, data transactions, and data interactions, working seamlessly across a variety of SaaS apps, cloud storage repositories, databases, data lakes, and data warehouses. To deliver the IDMC platform to our customers, we're accelerating product and go-to-market investments with strategic partners. hyperscalers, cloud ecosystems, and global SIs. And we partner with some of the world's leading cloud brands, including Microsoft Azure, GCP, Amazon, Snowflake, Databricks, and Accenture, to name a few. Second, the operational health of our business remains very strong. Though we are a recent IPO, we are a very unique company because we have 25 years of experience navigating various macro environments and IT demand cycles. We have predictable subscription revenue business model, very strong unlevered free cash flow that has continued to grow with proven profitability. Our renewal rates continue to be best in class in the mid-90s, and our enterprise-grade solutions are driving operational workloads that are critical to helping enterprises run their business. With over 3,600 subscription enterprise customers growing at a healthy clip and subscription ARR per customer growing at a healthy clip, We believe this continues to position us well for durable, consistent, and future growth with strong cash flows and profitability. Lastly, given what we are seeing and the customer adoption of the IDNC platform, we are comfortable raising the full-year guidance for total ARR and retrade the remaining full-year 2022 guidance metrics. Combined with profitability and strong cash flows, we believe this positions us well for the months ahead. Importantly, we remain focused on executing our three-pronged strategy, driving product innovation, go-to-market, and strengthening partnerships. We expected cloud growth to outpace self-management in the second half of the year, but we are now seeing this dynamic play out faster in the first half of the year, and that is a good positive surprise to us because it's all headed towards cloud faster than what we thought. Although we have seen the acceleration to the cloud as a positive driver of growth, This makes shift to the cloud grid fluxes in quarterly timing and the accounting treatment of revenue and non-GAAP op-inc. Lastly, we're taking a prudent view on guidance for the balance of the year. With that, let me hand over to Eric to give you full year and Q2 guidance. Eric.
spk04: Thank you, Ahmed. I will start with the full year 2022 outlook. As the mix shift from self-managed to cloud ARR continues, we remain confident in achieving approximately 40% cloud ARR growth for the full year, which corresponds to approximately 125 million of net new cloud ARR. While we did see better than expected cloud results in Q1, we are taking a prudent approach in maintaining full-year cloud ARR guidance, given that we are early in the year during a time of macroeconomic uncertainty. We are also maintaining full-year non-GAAP operating income and unlimited free cash flow guidance as the near-term higher cloud mix progressively evens out over the course of the year. Looking at full-year guidance, we are reiterating guidance for the year ended December 31st, 2022 as follows. We expect total GAAP revenues in the range of $1.585 billion to $1.605 billion, representing approximately 10% year-over-year growth at the midpoint of the range. We expect subscription ARR range of 990 million to 1 billion 10 million, representing approximately 25% year-over-year growth at the midpoint of the range. We expect cloud ARR in the range of 438 to 448 million, representing approximately 40% year-over-year growth at the midpoint of the range. We expect non-GAAP operating income in the range of 325 to 345 million, And we expect unlever-free cash flow after tax in the range of 323 to 343 million. And we are raising the total ARR for year 2022 guidance. We expect total ARR to be in the range of 1.52 billion to 1.55 billion, representing approximately 13% year-over-year growth at the midpoint of the range. This is an increase of 10 million at the midpoint of the range, driven by strength and maintenance renewal rates as our install base relies on Informatica for mission-critical workloads. Now, as a preface for our Q2 guidance, we are experiencing a more rapid-than-expected mix shift from self-managed to cloud in the first half of this year. This has a near-term impact on Q2 revenue and non-GAAP operating income due to the accounting mechanics of ASC 606. For Q2, we estimate the more rapid mix shift from self-managed to cloud has an impact of approximately 15 to 20 million on Q2 gap revenue and non-gap operating income. As a reminder, the new cloud annual contract value has very minimal in-quarter revenue and profit impact, whereas self-managed has accelerated AFC 606 revenue and profit treatments. This expected Q2 mix shift does not impact Q2 ARR or unlever-free cash flow metrics. In fact, we just observed this in our Q1 actuals with strong cloud ARR and strong cash flow results. Our midpoint guidance for Q2 ARR and cash flow confirms this fact, and our estimates for both Q2 ARR and unlever-free cash flow is consistent with expectations heading into this call. With that as a background, we are establishing Q2 guidance for the quarter ending June 30th, 2022 as follows. We expect GAAP total revenues in the range of 358 to 368 million, representing approximately 6% year-over-year growth at the midpoint of the range. We expect subscription ARR in the range of 875 to 885 million, representing approximately 28% year-over-year growth at the midpoint of the range. We expect cloud ARR in the range of 365 to 371 million, representing approximately 40% year-over-year growth at the midpoint of the range. And we expect non-GAAP operating income in the range of 44 to 51 million. Now, for modeling purposes, I would like to provide additional information. First, we expect the second half of the year's GAAP revenue non-GAAP operating income to be higher than the first half of the year, as higher cloud and maintenance ARR builds revenue over the balance of the year. We estimate GAAP total revenue to be approximately $405 million at the midpoint in the third quarter and approximately $465 million at the midpoint in the fourth quarter. We estimate non-GAAP operating income to be approximately $90 million at the midpoint in the third quarter and approximately $115 million at the midpoint in the fourth quarter. Notwithstanding the Q2 outlook for revenue and non-GAAP operating income, which reflects a higher cloud mix, our Q2 estimate for unlever-free cash flow implies the first half of the year's cash flow is about $20 million higher. We estimate Q2 unlever-free cash flow to be approximately $65 million. This allows us to de-risk the second half of the year as we hold unlever-free cash flow full-year guidance unchanged. Third, as mentioned earlier, maintenance ARR performed better than expected. We are raising our estimates for full-year maintenance ARR to approximately $535 million, a $10 million increase from the prior estimate. The fourth item is tax rate. We reported Q1 2022 non-GAAP net income at a non-GAAP tax rate of 23%. For the full year, we estimate a 23% non-GAAP tax rate. Looking at fiscal 2023 and beyond, We continue to expect a long-term steady-state non-GAAP tax rate of 24%, which reflects where we expect cash taxes to settle based on our structure and geographic distribution of operational activity. Fifth is our share count assumptions. For the second quarter, we expect basic weighted average shares outstanding to be approximately 280 million shares and diluted weighted average shares outstanding to be approximately 283 million shares. For the full year, we expect basic weighted average shares outstanding to be approximately 281 million shares and diluted weighted average shares outstanding to be approximately 288 million shares. Lastly, we remain on track to further the leverage to under three times on our net debt to adjusted EBITDA ratio by the end of the full year. Thank you very much to our employees, shareholders, customers, and partners for your continued support. Operator, you can now open the line for questions.
spk02: Thank you. If you would like to ask a question, please press star 1 on your telephone keypads. If you change your mind at any time, please press star 2 to remove the question. We have our first question on the phone lines from Matt Hedberg of RBC Capital Markets. So please go ahead when you're ready, Matt.
spk08: Great, thank you. And Amit, nice Q1 and really the upside to the cloud ARR was great to see. I know a lot of your customers have been with you for many, many years, if not decades, but given the success on that mix shift to cloud, are there some things that you can do internally or incrementally to maybe even push that migration even faster? Just sort of curious on that perspective.
spk03: Thanks for the question, Matt. The answer is we are doing the, yeah. But I think I'd like to step back and remind of two things. One is these are operational workloads. So when a customer is moving something to the cloud, it has to literally work as is. You can't just say, okay, just move around. Even if it's 75% good, good enough, we'll be able to live out there. And then there is a lag, which I've explained. And that's the lag that we're trying to reduce by automating as much of that migration map And that's where a lot of R&D work has happened, and that's a lot of clear innovation happening under the covers so that we can, you know, it's like a supply chain problem. The team's done a great job looking at it end-to-end. You know, how do you bring business logic in? How do you test it? How do you create it? How do you make it better? How do you train everybody? And that's where a lot of work is going on. And I think, like I said, we are having this conversation with every customer around migration, and that's where a fair bit of work is happening both in product, migration utilities, And you should expect for us to continue to work on that one. That is a big focus for us internally.
spk08: That's really good to hear. Thanks for that. And then Eric, obviously strong quarter and ARR guide and obviously taking into consideration the mix shift. You did talk about a prudent approach to guidance with the mix shift and some macro uncertainty. I'm curious, it doesn't look like it necessarily impacted EMEA results, but I'm wondering if you could talk maybe more about that region and Is it more just sort of reading the headlines out there, or is there anything you're seeing in maybe that European theater at this point?
spk04: No, I mean, as of the end of Q1, both North America and EMEA closed well, as expected, and we didn't see any disruptions. The comment about taking a prudent approach for the year, again, we're only one quarter in. There are indeed some macro uncertainties out there, and what we've effectively done is, as I noted, de-risk the four-year numbers by posting up a good Q1 here out of the gate, and that's basically our perspective at this point in time. Got it. Makes a ton of sense. Thanks, guys.
spk02: Thank you. We now have the next question from Mark Murphy of JP Morgan. So please go ahead. I have opened your line.
spk06: Yes, thank you very much and I'll add my congrats on a very nice ARR number. So Eric, a question on the Q2 margin guidance. It does call for some compression. I think we understand the top line equation. When it comes to the cost and expense side of it, can you separate out how much of that is one-time discretionary investment versus how much, if there is anything, is stemming from external factors? Maybe there's some wage inflation in India or the U.S. or data center costs or any other factors. input costs or is it, and I guess the other part of it is that you said the hiring was back-end loaded in Q1. Is that basically kind of flowing forward into Q2 to some extent as well?
spk04: Yeah, I would definitely characterize the Q1 operating expense savings as one-time non-recurring. We open the year, you know, assuming, you know, for example, you know, an immediate or more rapid return to the office, elevated T&E, you know, et cetera. And interestingly enough, we originally budgeted our main Q2 event of the year Informatica World, we'll touch on that in just a second, as a virtual event. We're now moving it to a combination in-person and virtual event and, you know, so that's a bigger Q2 marketing spend for an event that we didn't have in our original plan when we put together our OpEx profile. So, you know, that's a little bit of a, you know, kind of a Q1 effect. The comment on, you know, back-end loaded hiring, I think, you know, we optimistically assumed lots of, you know, month one, month two hiring at the start of the year. And, you know, it's just, you know, typical phasing of the budgeting. You know, we're on track to hire. There's, you know, no slope in our investment in go-to-marketing, sales hiring, R&D hiring. Your question about wage inflation, we had assumed in our original 2022 plan for higher wages across all the GOs, and that is playing out as expected thus far. So we'd anticipated that, and so we're not surprised by anything year-to-date on that front there. Okay.
spk06: My other question, I guess for Amit, When you think through the Snowflake relationship, I believe you've had a pretty solid technical and go-to-market partnership with Snowflake for a while. It's now been expanded incrementally. Could you just walk us through how ambitious are your plans with Snowflake and maybe how to think through the mix of that business there? How much do you think will be data warehouse ingestion? versus, you know, you're mentioning governance and maybe there's a role for data quality or other areas as well.
spk03: So I think, as I've always said, we do a lot more than ingestion. That probably is one-twentieth of maybe what Informatica's IDMC platform has. And the relationship has grown a lot. In fact, last year we talked about what we did with them around power center modernization to the cloud. And now we're expanding it to governance, exactly as you said. Lots of government governance requirements and that includes quality that includes, you know the axon Governance on top of the data warehouses that customers want and customers also want the last mile data marketplace Which is sits on top of our governance platform Those are the kind of things to what what I call create more value added capabilities on top of the snowflake data platform That's what we're expanding this to you obviously And both and I said that even earlier in the year that we're going to invest in these strategic partnerships both from a technology point of view and go-to-market and this is a great example of what we said and what we are delivering now. By the way, at Informatica World, we're going to talk about the end. Obviously, it's coming up in person as Eric mentioned. I'll talk about it now, May 23rd for that week. We're going to have, by the way, we're the Switzerland for data management. Scott Guthrie, you all know, runs Microsoft Azure. He's going to be there in person. You're going to have Thomas Kurian, GCP speak. You're going to have Christian, who's the chief product officer of Snowflake, speak, as well as Matt Garman, head of go-to-market at AWS. We're having all of them speak at Informatica World.
spk06: Okay, amazing. Thank you very much. Thank you.
spk02: Thank you, Mark. We now have the next question from Andrew Nowinski from Wells Fargo. So please go ahead when you're ready, Andrew.
spk10: Great, thank you. And congrats on the next quarter. Just want to start with a question. Maybe it relates to your subscription ARR. Given what you saw in Q1 with cloud ARR coming in a little bit higher than expected, and you now have these expanded partnerships with Snowflake and I presume it sounds like ramping traction with hyperscalers as well. It seems like the momentum should potentially continue or at least get stronger in that cloud ARR segment. So what gives you concern with regard to the total subscription ARR to not raise that outlook for the year?
spk04: Yeah, we're not concerned about the balance of the year. One of the things we have experienced in the first half, Q1 actuals and implied by Q2 guide, is indeed this mix shift. So there's a little bit of unpredictability. We're doing more cloud relative to self-managed. And the thing that we're watching closely, and we took some extra time to detail in the prepared remarks, is the fact that less than expected self-managed relative to cloud reduces GAAP revenue and reduces non-GAAP op income, you know, dollar for dollar. It's this whole 606 phenomenon, whereas cloud, you know, is indeed, you know, ratable. So I just want to emphasize again that our Q2 guide on, you know, the ARR front, up and down, cloud, subtotal, et cetera, and on lever-free cash flow is entirely consistent. with expectations going in. And ARR and cash flow is the true determinant of what's the overall book of business that normalizes out for this self-managed versus cloud 606 gap effect here. And so if there's anything that we're mindful of in regards to the overall guidance, and we just want to explain a little more detail here, is that and the impact that has very near term, from our perspective, it's non-recurring. because we had assumed in our internal plan that in the back half of the year, a much higher mix of new business coming from cloud versus self-managed. So I think that we've calibrated it correctly in our initial operating plan for H2, but cloud has outpaced our internal plan in the first half. And that's a very, very good thing. Number one, we want to emphasize that. And the proof point there is in the strong Q1 print on unlever-free cash flow and the strong guide on Q2 on liver free cash flow as well as ARR.
spk10: That's great. Thank you. That makes sense. And maybe just a follow-up question as it relates to OPEX. You know, total offering profit came in certainly a lot higher than expected in Q1 for a number of reasons you had mentioned earlier. I know you talked about having some lower travel costs, et cetera. But I think if we look back on the last earnings call, when you raised the operating expense outlook, you talked about seeing more traction from hyperscalers and investing in R&D to support and optimize for that growth. I'm wondering, aside from the travel expenses, have you made those R&D investments that you had talked about last quarter, or are those yet to come? Thanks.
spk04: Yeah, we're making them. I think that we are a little more ambitious in terms of the hiring we do in month one, month two of the year. And we will absolutely catch up over the course of the year. It's a very high long-term return for us. Again, these hyperscaler product-oriented investments, you've just seen evidence of that yesterday with the announcement of the expanded partnership with Snowflake. And there will be more to come when we get to Informatica World later this quarter in regards to where we're moving as far as tighter R&D-oriented partnerships with the key ecosystem partners.
spk10: Great. Thank you.
spk02: Thank you. We now have the next question from Koji Aikida of Bank of America. So please go ahead. Your line is open.
spk07: Hey, guys. Thanks for taking my questions. I wanted to double-click on this faster pace of cloud migrations that we kind of keep asking about here. And we're really trying to understand how does this play out over the next couple years? How do we think about maybe the mix of cloud versus self-managed exiting this year or maybe over the next 36 months? And how should we be thinking about, you know, a faster pace to the shift to cloud, you know, really start to becoming a meaningful issue or potential issue, I guess, for gap revenue, given the rev rec policies of cloud versus self-managed. You kind of laid out on the second quarter kind of a 15 to 20 million impact because of this, you know, positive shift to cloud. But when we start to annualize that, you know, and even think about a faster pace, you know, how should we be thinking about you know, potential lower gap revenues, maybe out in 23 or 24?
spk03: Koji, great to talk to you. Let me take the first few and hand Eric to kind of comment on the revenue part of it. So first of all, I think I've always said, as we started our journey to cloud, we would never be holding just to migrate our customers. In fact, the majority of our customers, 97.8% of our cloud workload and business comes from net new workloads that have gone to the cloud, tied to Snowflake, Azure, GCP, AWS, and now Databricks and the world. And we'll never take our eye off the ball in capturing net new workloads because they expand. We know our product renewal rates are in mid-90s, very sticky products. We serve operational workloads. Once we land, we always go. Now coming to migrations, I think it is definitely one of those things that I said will start slowly, will have a lag, and then snowball. And the reality for that is these are all operational workloads. They are serving an existing business outcome, and I think I've used my favorite example all the time, like maybe delivering 10K, 10Q reports for a CFO. Nobody's going to just say, okay, have it be 95% accurate in the cloud. No, it has to be the same. I'm taking that example as an extreme. And in that, we are having, our reps are having a conversation with every customer on migration deals. And we book the deals, but there's going to be a lag between that maintenance ARR retiring and cloud ARR being recognized until we complete the migration. Then it's like I said, nine to 12 months lag, and it all snowballs. This is the year where you're going to have us keep saying that because I think over the course of 12, 18 months, that snowball effect then slowly catches up. And we are fully committed to driving the migration. Migration is ours. Nobody can touch it because it's very operational. And we automate the whole migration, which could be otherwise, it cannot be done or takes $10, $20 million to do. So, Koji, we are absolutely tied to doing the migrations. Now, your question tied to cloud self-managed. Look, I think cloud is growing, and as we exit this year, we are already seeing that in the first half. We thought we'd be more second half. We're going to be massively a cloud-first versus self-managed business. And as we go into next year, it will be cloud-first and self-managed in terms of the incoming business. And that's what we have already started seeing much, much faster, which is causing the Q2 revenue, RevRec-related impact that Eric talked about. Let me kind of hand it over to Eric to kind of take it from there and give you a sense of how revenue can play out. Obviously, we'll talk about that as we get into the second half with you all, but that's how I see the business. Eric?
spk04: Sure. Yeah. So, Koji, one other thing I would add is, you know, what drives cloud momentum, you know, in addition to the migrations. You know, we talked last quarter about IPUs. This quarter we saw, on a relative basis, an even stronger contribution in our new cloud business denominated in IPUs versus kind of conventional licensing. So the IPU interest, which is consumption-based, is stepping up not just year over year, but also sequentially. So that helps us in this long-term drive to cloud. In regards to impact gap revenue, non-gap op income, margins, short and then longer term, You know, kind of as an exception today in the script, you know, I basically gave our best point estimates for Q3 and Q4 gap revenue and non-gap op income. And that's, you know, based on what we see happening with, you know, Q2 and, you know, longer range look into the pipeline, et cetera. So that gives you some additional new detail there. on those quarters that we wouldn't typically provide. And I think if you look at that, you add up, you know, the GAAP revenue and the non-GAAP income at H2, based on those numbers versus, you know, what we had before, you'll see that there's more profitability in, you know, in the second half. Cloud deals eventually catch up, you know, at the one-year, you know, anniversary mark. You know, they're fully amortized and, you know, they've caught up relative to their, you know, self-managed counterparts. It just takes a bit more time. And again, There's no change, though, in the cash flow margin or in the ARR metrics because we cash collect the cloud deals just like we cash collect the self-managed. If there's more cloud mix, say, in the mid to long term versus what we thought initially, you know, a little last year when we were going through the IPO process, you know, you'll have a little more of that, you know, kind of like lagged effect. So there may be some deferred gains in, you know, op income margin over time. with higher relative cloud mix. Cash flow won't be impacted. ARR won't be impacted, again, for the reasons I noted, you know, earlier on. And there could be, you know, some slight, you know, kind of deviations on the gross profit margin line. Again, cloud carries COGS, whereas self-manage really does not. To date, we've been able to manage that really, really well, you know, consistent 80-plus percent non-GAAP gross profit margins. And so I think that for those two metrics, which are ASC 606-dependent upfront gap rev rec has flowed through to op income. There could be a bit more of a lag if we drive more cloud year to year relative to our long-range model. But the cash flows, the fundamentals of the business, everything else remains completely unchanged. And we do believe, as do most others, that more cloud is generally better given higher renewal rates and higher opportunity for dollar-based net expansion, et cetera.
spk07: Thanks, Matt. Thanks, Eric. Thanks so much for the call. That's all from me. Thank you.
spk01: Thanks, Koji.
spk02: Thank you, Koji. We now have the next question from Patrick Colville of Deutsche Bank. So please go ahead when you're ready.
spk05: Hey, thank you for taking my question. I guess if you want to double click on the guide for 2Q operating margin, just can you help us, like, model this out you know which you give us a lot of kind of qualities color as to you know the factors behind the you know the guide but you know is most this cost going to fall in the sales and marketing line as a result of the informatica world so is that the line we should expect to kind of jump up pretty materially or should we expect some pretty big jumps in R&D you know as a result of the investments you've articulated and then I guess how should we think about kind of you know G&A and then and then the GMs as well. Can you just kind of help us pick it apart?
spk04: Sure. Yeah, so to kind of recap, yeah, we think that there's, you know, like we said, it's a $15 to $20 million overall, you know, gap revenue income impact. If we look at the impact is a little bit lower on revenue, you know, we see kind of like a $10 to $15 million delta from consensus based on the mix shift. The non-GAAP operating income, we see about a $20 million delta there. So what you're going to see is higher sales and marketing expense, Informatica event-driven. You're also going to see, given the higher mix of cloud, not just for Q2, but bear in mind, ever since we went public, if you go back to the IPO model, we've consistently trended well ahead on cloud ARR. Cloud ARR carries with it COGS. And so another part of that delta in terms of Q2 op income guide versus current consensus is going to fall in the cost of goods line, which reflects more cloud revenue in the mix. And so that's part of the delta as well. And so I kind of roughly distribute the delta there between kind of the gross margin and COGS line versus, you know, OPEX, and specifically in OPEX, it's going to be more in the sales and marketing line. We don't see any significant trend line changes, for example, on GNA.
spk05: Great. That's helpful. And then, you know, we've talked about cloud a few times. I mean, in regards to cloud adoption and, you know, What are you seeing with your customers in terms of the kind of tools they're using? Is it data integration? Is it MDM? Can you provide some color there in terms of which is the initial landing point and is there an upsell, kind of cross-sell adoption motion that is fairly typical at this kind of early stage in cloud that you might see repeated more broadly as your customers adopt your cloud tools?
spk03: Sure, Patrick. I think this is where the breadth and the resilience of the platform comes in. I think last year when we were talking about going public, we talked about three journeys. We added the fourth journey this year. For us, every journey is a multi-product journey, whether it's analytics, which is about data warehouses or data lakes, or it's MDM in the context of business 360, or it's data governance or privacy or application integration or hyper-automation. Customers use multiple products in all of them. And they can land in any one and expand there or land in any one journey and expand to other journeys. I've said that during the IPO time and I'll keep repeating. That's how it goes. There is no one landing motion for us. It has to land in analytics and from there it goes. We are very well hedged across the critical journey. So customer can actually begin with MDM. And from there they can go to analytics and go to a data maker or data warehouse use case. Or they can go to a data lake and then have governance on top of your stuff. See, we talk about the snowflake partnership. It could be any of the, any of those journeys. And that's where we have strong resiliency and hedge against not having just one road into a customer's data driven digital transformation.
spk05: Right. That's very clear. Thank you so much for taking my questions.
spk04: Yeah, if I could maybe just to add on, in terms of responding to your first question, you asked about G&A sales and marketing R&D costs in terms of the Q2 guide. There's both an increased expectation for sales and marketing spend as well as R&D spend. As we ramp up R&D efforts, as we noted earlier, we're really doubling down on product-led innovation integration with our key ecosystem partners. Operator, next question, please.
spk02: We now have a question from Tyler Raddick of Citi. So please go ahead when you're ready.
spk11: Yes, thank you for taking my question. So I just wanted to better understand kind of what you're seeing in the business as we think about, you know, the moving pieces in the guide. You know, so it seems like you're clearly seeing more cloud demand. Obviously, cloud ARR accelerated. Net new was up double versus a year ago. Yet, if I look at your guidance, it seemed like the only thing that was raised for the full year was maintenance. And maintenance actually declined. And I saw the steepest decline we've seen to date. So I just wanted to make sure I understood that right. And was there an unusual dynamic in maintenance ARR for Q1? that is expected to change as we go up throughout the year. Just help us understand kind of the moving pieces there. Thank you.
spk04: Sure. As you may recall, when we talked about our Q4 results, I referred to our maintenance ARR at that point as peak maintenance or peak maintenance ARR. We have fully expected a decline from Q4 to Q1. In fact, our initial opening guide had a steady but graceful decline in maintenance over the course of 2022. That had a built-in set of assumptions for, you know, a renewal rate and a certain rate of called 5 to 6 percent, you know, non-renewals over the course of the year. What we saw in Q1 was, you know, a slightly better than expected rate of renewals and, you know, a small improvement sustained throughout the year when you're operating on, you know, half a billion plus you know, adds up. And so that is indeed the reason why we raised the maintenance ARR guide by 10 million and the overall total ARR guide by 10 million. We have enough data and telemetry on these installed base accounts to, you know, flow that higher renewal rate through the balance of the year and into an updated and increased total ARR guide.
spk11: Okay. Maybe for me on the R&D investment, so with customers, it sounds like what you're saying is as customers are moving quicker to the cloud, you have to invest more in R&D to support that. Is that just in terms of building out more scalability and functionality to handle some of these larger workflows? Is this this new features, you know, clearly you've talked about Informatica Cloud and had a good roadmap there for a number of years. So I guess, you know, what's kind of catching you off guard and what do you need to build that you don't have? Thanks.
spk03: So let me clarify. Nothing is catching us off guard. Let's kind of step back for a minute. What Eric mentioned was we had a certain amount of hiring that was, we thought we'd do in Q1, especially for R&D, related to these roadmap items that we had talked about beginning of the year, related to this year's roadmap and the partnerships like Snowflake that we just announced, that tripled into Q2. So there is nothing that has caught us off guard. All that had happened was stuff that we thought ambitiously we'd hire in Q1 has now just moved to Q2. We will be hiring against the plan that we had shared beginning of the year with you all. So I want to just repeat it There's nothing that has gotten us off guard. We said we'll be investing in the cloud roadmap. We said we'll be doing more partnership related investments. You heard this snowflake announcement. Informatica world is coming up. You'll hear many, many more over there. So the only thing that has gotten us off guard in a positive way is that we've had a bigger mixture towards cloud in Q1 and we see that happening in Q2 as well, which we will take that any given day. That is causing a WREC-related revenue delta. Nothing else has gotten us off guard.
spk01: Okay, thank you.
spk02: Thank you, Tyler. We now have another question on the line from Alex Zuckin from Wolf Research. So please go ahead, Alex. Your line is open.
spk09: Hi, this is Ethan Brock on for Alex. Thank you for taking my question, and congrats on the strong quarter. Ahmed and Eric, can you tell us more about the quality of your pipeline, specifically around the comments on larger and more strategic deals? And then on the cloud side, what was the main driver of the strength there and how much, if any, came from conversions? Thank you.
spk03: I mean, our quality of pipe is, you heard me talk about some of the customers across the globe, across all verticals, operational workloads, across the four journeys we talked about. So we feel pretty good about it. And, you know, these are whether it's analytics, data lakes, data warehouses, whether it's business 360, whether it's a customer 360 or a supplier 360 driving digital transformation over there or governance and privacy or as I said, app integration. So those are all the elements of the pipe. We talked about also earlier this year investing in FedRAMP and all of those things are all building up in the pipe. What is happening is clearly our cloud multi-tenant products have gained a faster traction with our customers versus to self-managed. I mean, we've talked about the fact that we are innovating more in that roadmap. It's much more easier to use. Newer features and functionalities are there. And that's where the natural tailwind is in terms of digital transformation. So that's what we see, and that's what is giving us the increased movement towards cloud, and also that's coming from the pipe that we are creating across the globe.
spk01: Thank you.
spk02: Thank you. We have no further questions. So I would like to hand the call back to Annette and Victoria for some closing remarks.
spk04: Yeah, this is Eric. I'll go first. I think you want to go first? Absolutely. So thank you, operator, and thanks to everyone on the call today. To recap what we covered today, Informatica delivered a strong first quarter exceeding expectations driven by cloud performance, and good operational leverage allowing us to drive upside in earnings and cash flow. The mixed shift to cloud is tracking ahead of our expectations in the first half of the year. We have detailed the limited near-term impact on Q2 revenue and operating income and confirmed that there is no Q2 impact on ARR or cash flow. We expect improved cash flow performance in the first half of this year, and that de-risks the second half of the year as we hold full-year guidance unchanged. For the full year, we are raising total ARR guidance and reaffirming all the remaining full-year 2022 guidance metrics. Amit, over to you.
spk03: And as we wrap up, I'll build on what Eric said. Let me reemphasize. We are a very robust cash flow generating business with strong ARR growth. We have completed our business model transition from license to subscription before we went IPO. We completed that transition successfully without impacting our margins and free cash flow. So we know a thing or two about doing business model transition successfully. We are seeing a slightly faster than expected self-managed to cloud migration mix shift, which is a very good thing for the long term. We are confident in our ability to manage this mixed trip successfully. as evidenced by our strong results on ARR and unlevered free cash flow. Our customers are continuing to invest in digital transformation and data management in the thick of it. Hence, we continue to invest in our cloud product innovation roadmap and strategic cloud partnerships. I mentioned that earlier, and I'll repeat it. We are hosting our customers at Informatica World in person in Las Vegas from May 24th to May 26th. We are also going to be live-streaming. We will be sharing a lot of product innovation and hosting customers and key cloud partners there. I'll give you some names. Scott Guthrie from Microsoft will be there in person, and others like Thomas Cullen from GCP, Christian, SVP of product at Snowflake, and Matt Cardman, head of Go-To-Market AWS. Thank you once again for your continued support, and have a good rest of the evening.
spk02: Thank you. That does conclude today's call. You may now disconnect your lines.
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