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spk00: Greetings and welcome to the Informatica second quarter 2023 earnings call. It is now my pleasure to introduce your host, Victoria Hyde-Dunn, Vice President of Investor Relations.
spk02: Good afternoon and thank you for joining Informatica's second 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 10Q and 10K filing 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 U.S. GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's investor relations website. With that, it's my pleasure to turn the call over to Amit.
spk12: Well, thank you, Victoria. Thank you, everyone, for joining us today. I will start today's call by summarizing three key points. First, we exceeded Q2 guidance across top and bottom line metrics driven by strong customer momentum from our cloud only consumption driven strategy. Second, we are expanding our cloud native AI powered IDMC platform capabilities to be the enterprise standard for data management. Through our own product innovation and with the integration of our recent acquisition of Privatar, which is all about data access management and privacy solutions, we believe that IDMC is becoming the most comprehensive and unique platform for data management and enterprises globally. This is especially important with the rise of AI driving further democratization of data and its informatics differentiation in the market. Simply put, there is no AI without holistic data, quality data, and governed data. and thirdly given a strong execution in the first half of the year we are raising our non-gap operating income and adjusted unlevered free cash flow after attack guidance after tax guidance for the full year we remain committed to delivering balanced profitable growth while driving forward with our strategic initiatives with that now let me discuss these topics in more detail turning to q2 results total revenue grew one percent year over year with subscription ERR growing 16% year-over-year and cloud subscription ERR growing 37% year-over-year. We delivered a record $530 million in cloud subscription ERR. I'm really proud of that one because that exceeded the half a billion dollar cloud mark for the first time. We strengthened our cash position and beat the high end of guidance for non-GAAP operating income. The macro environment remains stable in the second quarter versus the prior quarter. The sales mix shift from self-managed to cloud subscription ARR is tracking as expected, as cloud subscription ARR now represents 49% of subscription ARR, up from 42% a year ago. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansion, with the remainder from on-prem customer migration, which saw a nice uplift in the quarter. Our customers are adopting the IDMC platform for new users and new use cases across organizations. In the second quarter, customers spending more than $1 million in subscription ARR increased by 22% year-over-year to over 213 customers. Customers spending more than $100,000 in subscription ARR increased 8% year-over-year to 1,940 customers. Now we have customized IDMC to deliver industry specific needs and recently launched IDMC for ESG sustainability to support environmental, social, and governance use cases. This follows previous launches of IDMC for state and local government, financial services, insurance, life sciences, and retail and CPG verticals. Let me share with you a few customer stories. PNN Group, represented by PNN Bank in Western Australia and BCU Bank in New South Wales and Southeast Queensland, has created a digital transformation strategy that aims to deliver more personalized banking for their customers across Australia, while at the same time ensuring the protection and integrity of customer data. In partnership with Snowflake, they selected Informatica's IDMC platform for data ingestion, data integration, data governance, and catalog and data quality solutions to complement their digital transformation strategy as they modernize their analytics to the cloud. Jaguar Land Rover is at the forefront of the rapidly changing automotive industry with a focus on electrification, digital services, and data. Range Rover, Discovery, and Defender collections will each have a pure electric model, while Jaguar will be entire electric. The company is undergoing a digital transformation that will see its operations, including manufacturing and supply chain, strengthened by becoming more data driven. They selected Informatica's IDMC platform for data discovery, curation, and catalog use cases, including data quality, data and application integration, together with master data management, SAS. Holiday Inn Club Vacations Incorporated is a resort, real estate, travel, and vacation ownership company with the mission to be the most loved brand in family travel. They are undergoing total digital transformation, which includes tech modernization, digital strategies for sales and marketing, tech consolidation efforts, and data rationalization. In a joint partnership with Deloitte, they selected Informatica's master data management SaaS and cloud data governance and catalog solutions to implement their digital transformation strategy. And Informatica will be working with UK's Ministry of Defense to provide data governance and cataloging solutions. These customer success stories highlight the impressive adoption of IDMC cloud solutions across the globe. Next, We continue accelerating product innovation on IDMC's cloud-native AI-powered platform to improve productivity and deliver trusted data to our customers and partners. We hosted thousands of global customers, prospects, and partners at our Informatica World User Conference in May earlier this year. It was an incredible opportunity to engage with our community and see firsthand how Informatica is helping democratize data as part of an organization's digital transformation journey. I had discussions with many CIOs, CDOs, and CTOs looking to standardize on IDMC. They all want fewer point solutions. They want to reduce the data complexity and simplify the operations within the data architecture to deliver immediate ROI and lower TCO. We also unveiled many industry-leading capabilities on IDMC. Now, let me share some thoughts on AI, which I know remains top of mind in every conversation today. Let me begin by saying, I firmly believe that there is no value in AI without holistic, clean, usable data that can be managed and governed at scale. Look, to get data into AI to create value, we need data management. Bringing all of the fragmented data across an enterprise in one place. Making sure it's of high quality. Garbage in gives us garbage out. Making sure there is governance and so on and so forth. That's what IDMC is all about. In fact, our journey with AI is not new. We launched our AI Claire back in 2017 at Informatica World that year. AI is already 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 35 terabytes of active metadata in the cloud, and processing 61 trillion mission-critical cloud transactions as of June. Our metadata system of record platform IDMC has the foundation to realize AI-powered digital transformation. and the exponential impact it can have on all our customers and their organizations. And now we are amplifying and taking forward our AI journey with Clare Copilot and Clare GPT, allowing us to take a significant step forward with GenAI. Informatica's AI differentiation in this market comes from three factors. First, it's an understanding of the enterprise data ecosystem. Very few vendors can claim an understanding of an enterprise's data ecosystem, which comes from being able to have a metadata inventory. But beyond that, being an independent and neutral and at scale vendor in this space. The second is training LLMs on metadata from thousands of data management projects. Again, only a handful of vendors, if any, can do that at scale. And third is comprehensive data management capabilities. When enterprises think of data management, they just don't think of ELT pipelines, or ETL pipelines, or just data catalogs, or just data quality in isolation. An enterprise data management project requires all these capabilities working in tandem and on top of a metadata-powered platform, which is only available with IDMC. Clare Copilot is available now, and Clare GPT will be available in private preview this quarter. as a native IDMC service utilizing Informatica's processing units to drive usage and help customers democratize and simplify the data management. Our consistent focus and commitment to delivering product differentiation and innovation have won us recognition from industry analysts and thought leaders. In IDC's worldwide data integration and intelligence software market share 2022 report, Informatica ranked number one for the seventh consecutive year. Our consistent performance and track record has been recognized in five sub-markets. Data ingestion and transformation, data quality, data intelligence, master data management, and dynamic data movement. We are pleased to be named a leader in the Forrester Wave for Master Data Management Q2 2023 for the fifth consecutive time. Now, as our product innovation capabilities increase, our partnerships have grown and continue to grow and deepen with hyperscaler and ecosystem partners such as Microsoft, AWS, GCP, Snowflake, and Databricks. Let me give you a glimpse of some of those. With Microsoft, we announced IDMC as an Azure native ISV service, which will provide Azure customers with advanced capabilities, seamless access, and data management normally reserved for first-party Azure services. We announced the availability of a cloud data governance and catalog native in Azure as well. We also announced a private preview of seamless integrations with Microsoft Fabric as one of the first ISV design partners for this offering. With AWS, we announced the availability of a cloud data integration free service directly from Amazon Redshift user console. Informatica is the only ISV partner with this native integration. We also launched Informatica Secure Agent Private Link in AWS and launched a pod in Japan to scale our market reach in that region. With GCP, we announced the availability of a SaaS MDM service and the expansion of our footprint with a pod in EMEA. At the Snowflake Summit, we announced the public previews of SuperPy and a native application for enterprise data integration. Our new cloud data integration free service via Snowflake Partner Connect and added support for Apache Iceberg Tables. At the Databricks Data and AI Summit, we added support for Unity Catalog, Databricks Connect, and Databricks SQL. We added support for Databricks Delta Lake for a power center to IDMC migration program. Turning to our GSI partners, we had record attendance levels at our partner summit at Informatica World earlier this year. We expanded our partnership with ZS, a global management consulting firm, to embed IDMC with ZS's cloud-native Zedon platform for life sciences. We launched a brand new partner portal to make it easier for partners to find the critical content needed for sales enablement. We also made all our enablement bootcamps free on the portal and since launch, more than 7,000 people have become certified to our cloud data integration bootcamp and MDM SaaS champions bootcamp. And this will only grow from here. We see enterprises moving ahead with multi additional transformation projects to improve data intelligence and achieve better business outcomes. We have migrated 4.5% of our legacy maintenance base over to IDMC, up from 4% last quarter at a 2.1 conversion ratio. We saw continued progress with our migration factory program, with many of our GSI partners helping our customers to modernize and move to IDMC. We're excited about a cloud modernization program, which we will make generally available this quarter. This new program gives customers the ability to accelerate modernizing on-prem power center assets to IDMC with significantly lower migration time, lower cost, and lower risk. Now let me discuss Privatar. Well, we welcome the Privatar team to Informatica family earlier in July. Privatar brings deep industry skills and expertise in security, access, privacy, and policy management to strengthen our cloud capabilities. Our shared vision to offer customers the ability to create new mission-critical workloads and use cases in IDMC across data governance, data catalog, data privacy, data quality, and MDM offerings. This will enable customers to allow data sharing and management while maintaining control and security through trusted and secure data. We're making good progress on our integration plans, and once fully integrated, we believe the IDMC platform will become the most comprehensive and differentiated cloud data management platform in the market, expanding the product innovation lead over legacy and single point solution vendors because of its scalability, efficiency, and unique offerings. Now, as I wrap up, I'm thrilled and pleased to raise our non-GAAP operating income and adjusted unlevered free cash flow after tax guide for the year. We are managing the business for long-term, durable growth and continued profitability while focusing on executing on a cloud-only, consumption-driven strategy. We are building a best-in-class, AI-powered platform at scale and see a long runway ahead in displacing legacy and single-point solution vendors. I am excited about our future opportunities for cloud growth. I want to thank all of my Informatica colleagues for their hard work and continued commitment. I would also like to thank our partners customers, and shareholders are supporting us. With that, let me turn over the call to Mike to take you through more details. Mike, take it away.
spk09: Thank you, Amit, and good afternoon, everyone. Q2 was a solid financial quarter across the board with key growth and profitability metrics exceeding our expectations. I'll begin the review of our Q2 results by reminding everyone how to best understand Informatica's ARR and GAAP revenue. Our ARR and revenue fall into three major categories. cloud subscriptions, which we have guided to ARR growth of 35% in the full year, fiscal 23, self-managed or on-prem subscriptions, which we no longer actively sell and which we have guided to decline year over year in fiscal 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. Service revenue is not counted as ARR. With that in mind, I'll walk through the components of our annual recurring revenue. Total ARR was 1.55 billion, an increase of 8% over the prior year, driven by new cloud workloads and steady renewal rates. We added 111 million in net new ARR versus the prior year. Foreign exchange negatively impacted total ARR by approximately 1.9 million on a year-over-year basis, in line with expectations when we set our guidance in May. Turning now to the components of ARR, cloud subscription ARR was 513 million, a 37% increase year-over-year, and 6 million above the high end of our May guidance. Cloud subscription ARR represents 49% of our total subscription ARR, up from 42% a year ago. New workloads and strong renewal rates drove cloud subscription ARR growth of 139 million year over year. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansions, with the remainder from on-premise customer migrations. Cloud subscription net retention rate was 116% for the quarter, flat year over year. Self-managed subscription ARR declined slightly in the quarter, as expected, to 530 million. This was down 1% sequentially and up 1% year-over-year. Given our focus on new cloud sales, we expect self-managed subscription ARR to continue declining throughout the year and show year-over-year declines starting next quarter. Subscription ARR, which is simply the sum of cloud and self-managed subscription ARR, grew by 16% year-over-year to $1.04 billion, which was more than $12 million above the high end of our May guidance. Subscription ARR now represents over 67% of total ARR, up from 62% a year ago. Foreign exchange negatively impacted subscription ARR by approximately 1.5 million on a year-over-year basis, in line with expectations when we set our guidance in May. The third component of total ARR is maintenance, which represents 33% of total ARR. Maintenance ARR was down 7% year-over-year to 505 million, in line with expectations. As a reminder, we no longer sell a meaningful amount of perpetual licenses. As a result, we expect maintenance on perpetual licenses to continue declining gradually at a fairly constant rate. In total, these three components of total ARR yielded 8% growth for the quarter, which was driven by solid growth in our cloud subscription ARR, offset by gradual declines, as we expected, of self-managed subscription ARR and maintenance ARR. These dynamics are the direct result of our cloud-only consumption-driven strategy, and we expect these trends to continue in future quarters. We saw a good growth in our average subscription ARR per customer in the second quarter, growing to over $275,000, a 13% increase year over year. We have over 3,780 active subscription customers, an increase of 94 subscription ARR customers year over year. Now I'd like to review our revenue results for the second quarter. GAAP total revenues were $376 million, an increase of 1% year-over-year. This exceeded the high end of our May guidance range by $11 million due to a slower than expected decline in maintenance revenue and strong renewals, partially offset by lower professional services revenues. Foreign exchange negatively impacted total revenues by approximately $2.2 million on a year-over-year basis in line with May expectations. Informatica's shift to cloud subscription sales and away from self-managed on-prem sales is progressing as expected. As I've previously described, this creates an accounting-driven gap revenue headwind in the short term. If our mix of cloud versus self-managed new bookings were the same this quarter as they were in Q2 last year, total revenues would have been approximately $22 million higher than we reported this quarter, increasing our year-over-year revenue growth rate to approximately 7%. Subscription revenue increased 10% year-over-year to $228 million, representing 61% of total revenue compared to 56% a year ago. Our quarterly subscription renewal rate was 92%, down two percentage points year-over-year, due to a decline in self-managed renewal rates. Maintenance and professional services revenues were $148 million, representing 39% of total revenue in Q2. This is due to lower than expected professional services revenues and the gradual decline of maintenance revenue. Standalone maintenance revenue represented 33% of revenue for the quarter. Implementation consulting and education revenues comprised the remainder of this category, down $7 million year-over-year, representing 6% of total revenue. Turning to the geographic distribution of our business, U.S. revenue declined 1.6% year-over-year to $239 million, representing 64% of total revenue, while international revenue grew 6% year-over-year to $137 million. Using exchange rates from Q2 last year, international revenue would have been approximately $2 million greater in the quarter, representing international revenue growth of 8% year over year. Consumption-based IPUs are a frictionless way to access the IDMC platform and are a core part of our strategy. Approximately 51% of second quarter cloud-based bookings were IPU-based deals. IPUs now represent 43% of total cloud subscription ARR, up two percentage points sequentially. Our new flexible IPU consumption model is also gaining traction, and we expect IPU adoption to increase during the year. Now I'd like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated. In Q2, our gross margin was 80% consistent year over year, even as our software sales mix shifts to the cloud. Operating expenses were consistent with expectations. Operating income was approximately $88 million for the quarter, growing 25% year over year and exceeding the high end of our May guidance range. Operating margin was 23.3%, a four and one half percentage point improvement from 18.8% a year ago. Adjusted EBITDA was 92 million and net income was 48 million. Net income for diluted share was 17 cents based on approximately 291 million outstanding diluted shares. Basic share count was approximately 287 million shares. Q2 adjusted unlevered free cash flow after tax was approximately 77 million. better than expectations due to higher collections and other favorable working capital dynamics. Adjusted leverage free cash flow after tax margin was 20.5%. Cash paid for interest in the quarter was approximately $37 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 second quarter in a strong cash position with cash plus short-term investments of $821 million. Net debt was $1.03 billion and trailing 12 months of adjusted EBITDA was $388 million. This resulted in a net leverage ratio of 2.7 times. We expected this to naturally deleverage to below two times by the end of 2023, which is six to 12 months ahead of our commitment at the time of the IPO. To summarize our year-to-date results, we are pleased to have executed at or ahead of the guidance we laid out at the beginning of the year across our business. Now we'll turn to full-year guidance. We delivered better than expected bottom line results in Q1 and Q2 and are raising guidance for non-GAAP operating income and adjusted unlevered free cash flow after tax. We reaffirm previously issued guidance for revenue and ARR metrics, reflecting confidence in our cloud-only consumption-driven strategy, despite the continued uncertain macroeconomy. We expect the acquisition of Privatar to be immaterial to both revenue and earnings in 2023. Therefore, it does not impact our guidance. With this in mind, we're raising guidance for the full year ending December 31st, 2023 as follows. We now expect non-GAAP operating income to be in the range of $420 to $440 million, representing approximately a 23% year-over-year increase at the midpoint. We now expect adjusted unlevered free cash flow after tax to be in the range of $370 to $390 million, representing approximately a 32% year-over-year increase at the midpoint. You can find the details of our full year guidance in the press release we filed this afternoon. As mentioned, we are reaffirming our previously issued revenue and ARR guidance for the full year. Next, turning to the guidance for the third quarter, we expect our sales mix to continue to shift from self-managed to the cloud. Therefore, in Q3, we expect cloud subscription net new ARR to grow, while self-managed net new ARR is expected to decline on both a sequential and year-over-year basis. And as expected, maintenance revenue and ARR will continue to decline steadily. With this in mind, we're establishing guidance for the third quarter ending September 30th, 2023 as follows. We expect GAAP total revenue to be in the range of 395 million to 405 million, representing approximately 8% year-over-year growth at the midpoint of the range. We expect subscription ARR to meet a range of 1.05 billion to 1.06 billion, representing approximately 13% year-over-year growth at the midpoint of the range. We expect cloud ARR to be in the range of 537 million to 543 million, representing approximately 35% year-over-year growth at the midpoint of the range. We expect non-GAAP operating income to be in the range of 110 million to 120 million, representing approximately 37% year-over-year growth at the midpoint of the range. For modeling purposes, I would like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after tax for the third quarter to be in the range of $65 million to $85 million. Second, we estimate cash paid for interest will be approximately $39 million in the third quarter, and for the full year, we estimate cash paid for interest will be approximately $149 million. Third, with respect to income taxes, our Q2 non-GAAP tax rate was 23%, and we expect that rate to continue for the full year 2023. We estimate full year 2023 cash taxes to be approximately $100 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 third quarter of 2023, we expect basic weighted average shares outstanding to be approximately 289 million shares and diluted weighted average shares outstanding to be approximately 294 million shares. For the full year 2023, we expect basic weighted average shares outstanding to be approximately 288 million shares and diluted weighted average shares outstanding to be approximately 293 million shares. And finally, before starting the Q&A session, I am pleased to announce that we have rescheduled our inaugural Investor Day to Tuesday, December 5th in San Francisco. We hope that many of you can join us in person. Operator, you can now open the line for questions. Thanks.
spk00: Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. And as a reminder, if you're using a speakerphone, Please remember to pick up your handset before asking your question. Our first question comes from Matt Hedberg with RBC. Please proceed.
spk10: Thanks for taking my questions. Maybe just to start from a macro perspective, it sounds like you saw fairly stable results, which is good to hear. Maybe just a double-clicking on that a little bit more. Could you talk about some of the trends maybe towards the end of the quarter and kind of the first month
spk12: uh of q3 you know it kind of continued stability is that is that kind of what you're seeing despite you know obviously some sort of stolen macro uncertainty hey matt good to hear from you yeah i would say that as i said that q2 was pretty stable we didn't see anything uh uh deteriorate or anything like that compared to maybe when we entered the year and i think i would say we saw july in a similar fashion so i think you know i haven't It's stable. I wouldn't say that it has significantly improved or anything. It's pretty stable. So I think we feel, hence we feel good about where we are and where we think the second half of the year would be.
spk10: Got it. And then, you know, following your user event, and obviously you talked on this call about Clerical Pilot and Cleric GPT, Could you talk a little bit more about, like, you know, obviously you probably haven't assumed much from either this year in estimates, but, you know, do you expect that to be a monetization effort in kind of calendar 24? How should we think about some of these Gen AI products flowing into growth?
spk12: I think when you think of enterprises, Matt, and I think so different from consumers, because I think today you can take chat GBT and go put it on the web and do whatever you want to do. But that's really different from how an enterprise thinks about it. In fact, I've traveled across the globe in the last few months since the conference as well. And I think I would say that this thing, in fact, I use the phrase, Gen AI is most overhyped in the short term, tremendously undervalued in the long term. So enterprises are in that veil that it's a conversation topic everywhere. Everybody's figuring out Their first, second, third use case, how do you begin? And I think the question in everybody's mind is then if I do that, then what's the governance and privacy implications around it? So I think everybody's marching down that path is figuring out the use cases, the reference architecture and the implications around it. I think I see that as a 2024 thing in general for enterprises. Of course, things are starting to happen. We have clear GPT and preview and customers are using it to figure things out at their end. But proper use cases going, creating value for enterprises will be more 2024.
spk10: Got it. Thanks a lot, guys. Congrats on the quarter. Thank you.
spk00: Our next question comes from Fred Havemeyer with McGuire. Please proceed.
spk06: Thank you very much. Thank you. I wanted to follow up a bit on that generative AI topical question with something related, but not directly on ClareGPT, which is a really exciting product we see coming out of the pipe here. But just generally, how are you seeing enterprises trying to adopt generative AI? Where are they struggling? What are the key problems they're trying to address, especially with their own data? And is there any way that perhaps like Privatar, generally your ability to add governance layers over data can help enterprise adoption of generative AI?
spk12: Yeah, Fred, that's a great question. So I think I'll give you some examples of use cases. One example is, you know, we have a large healthcare premium disperser. And think about this way that there are two issues. There's a customer side issue if they reject a return or a claim, and there's a revenue leakage if they actually approve a bad claim. And I think they're experimenting in that context, basically improving their whole, you know, reducing the bad claims and also making sure that the right claims get approved. And then their efficiency rate or improvement rates have gone from low 80s to high 90s as they're playing around with that. Think about that. That's a massive revenue opportunity for that customer as much as data productivity. On the other hand, basically, when customers are thinking about a large campaign in the context of understanding churn, how quickly can you, with the help of GenAI, can you build your underlying infrastructure and think about frameworks on top of it, whether it's good quality data so that your simple brand campaign or an email campaign improvement can go from low single digits to high single digits to maybe very high single digits. Those are all the things that we are seeing customers do. And that's where, by the way, in case management, customer service, front office, that's where the first use cases are emerging very rapidly. We're seeing all of them across an enterprise that will happen. I see as I've talked to customers happening as we speak where they are using the first use cases. Turning to PrivatArt, one of the biggest issues for enterprises is, you know, as they looked at taking out WorldCare GPT, boy, I can democratize all this stuff and give it, put it in the hands of so many users, but comes the biggest issue for Gen AI for everybody, hey, democratization creates a governance challenge. And the right person accessing the right information and the right use case. And that's where data access management became very important. We saw Privatar and a lot of those large customers trying to help them solve that problem. Embedding them in IDMC will further accelerate, allowing IDMC to be used by many, many, many users across an enterprise. So access management becomes a very fundamental part of governance and privacy. So we see that as an accelerant.
spk06: Excellent. Thank you very much for that. And a follow up here regarding the rise in the transactions per month that are being processed. It was really impressive seeing that there's 58% year over year growth and you're now translating almost 61 trillion cloud transactions per month. We'd just love to get some context there around how that relates overall to your Progress in cloud, it seems that you have substantial momentum. Is this rising transaction volume something related to your IPU consumption model, or just generally customers doing a lot more in cloud and with the IBM C platform? Thank you.
spk12: All of the above. Ultimately, see, like all our net new sales are driven by IPU. Obviously, customers who are non-IPU before are also using the cloud platform. So, of course, that's why I said it's both. It's basically customers running more workloads in our cloud. That's what it is. And we want that number to be absolutely higher and higher. In fact, continuing to see that number to be higher than even our ERR growth tells you that customers are running ahead, and that's a good thing. And that obviously means more IPU usage, more workload usage, and more operational workload usage. So that's a great indicator, and we pay a lot of close attention to that. Thank you.
spk00: Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed.
spk01: Thank you, and good afternoon, and congrats on the nice quarter. I wanted to go back to your comments on the macro. I think you said a number of times in the prepared remarks it remains stable, and you said it also looks pretty stable heading into Q3 here. So what other trends concerned you enough to not roll through the beats that you saw in Q2 into your annual guidance for the year?
spk12: Sure, Andrew. I think I said stable. I didn't say that everybody's opening the purse string and spending as if there was no tomorrow. So I think we got to be thoughtful. Look, I think you've probably seen from now We've been doing earnings calls for almost one and a half years. We're very prudent and thoughtful company. I don't want to get ahead of ourselves. We closed a good first half. I think on the other hand, I can expect somebody asking the question, hey, second half is bigger than the first half. How do you think that you'll be risked the second half? And I think what we just did is basically a step in that direction of be risking the second half. We had teams performed very well. First half of a big transition year. I think we've, our, our strategy continues to hum. We believe that the overperformance on the top end allows us to actually navigate the second half, assuming that the world doesn't change fundamentally in a, in a, in a, in a good or bad way. But at the same time, look at this way, how many cloud transition happen? And I repeat that how many cloud transitions in the world have happened, but the companies that actually have a creative bottom line, right? Last I checked, it was almost a null set. So us raising the bottom line actually is a show of strength that we feel very strongly about our overall business model and how we're executing.
spk01: Okay, that makes sense. Thank you, Amit. Just a follow-up question. I just want to get a clarification maybe on your NRR. Cloud NRR was very consistent, I'd say, within the historical range that we've seen, but maybe the total subscription NRR dropped below that coveted 110% level down to 107. So just, is there any more color you can provide on maybe what drove the overall subscription NIR to drop down to 107?
spk09: Yeah, sure, Andrew. It's just the weighted average impact of the decline in self-managed, i.e. on-prem, subscription retention. Because we're not selling anything new into the top of the funnel, at least not a meaningful amount, we're not selling new on-prem, to existing on-prem customers. So our net retention rate is going to fall below 100% at some point. And as we've tried to be very, very clear in guiding you all, our total subscription ARR is going to begin to decline next quarter, both on a quarter-over-quarter basis, but also on a year-over-year basis or percentage basis. Exactly as we've expected, it's totally according to plan. And it's just the blended impact of that on the total rate.
spk01: Yeah, so you didn't lose those customers, you just didn't sell them anything new? Is that what you're saying?
spk09: Well, there's some churn in there, of course. In any subscription base, in any period, you have some churn. But if you take normal churn without selling new on top of it, that's how you get a degrading net retention rate.
spk01: Okay, thanks, guys.
spk12: And Andrew, for us, I think Mike said that very well as he broke down the three ARRs. Focus on the cloud number. That's the only growing number. In fact, that's the number that's the growing one. Ultimately, that's why we called out the cloud NRR earlier this year for you to basically see all the dynamics of that business. The rest of the business becomes a mathematical average, weighted average of
spk09: whatever cloud gives cloud is the cloud is the one that's given rest are all basically diluted yeah and maybe maybe to put that in yet another way to think about it we're not asking you to ignore everything but the cloud because the rest of this is part of what you own when you buy the stock but net retention rate becomes a meaningless metric in a business you're not selling into we don't give you net retention for maintenance because we're not selling these perpetual licenses it just becomes about the churn rate in both maintenance and that's what's happening in the self-managed part of our subscription business. So NRR, the only meaningful metric to focus on is cloud.
spk05: Does that make sense?
spk01: Yes, it does. Thank you.
spk00: Our next question comes from Brad Zelnick with Delta Bank. Please proceed.
spk07: Great. Thanks so much. It's good to see the stability, and it's really great to see the profitability progress in the business, which, Mike, I wanted to ask you about. On the cash flow guide, I think you talked about benefits from working capital. Can you just double-click for us all the various components that get you to raise the full year? And really what I guess I'm trying to better understand is things that maybe repeat and things that don't, cash taxes, for example. What should we think about as we then maybe model the out year for free cash flow? Thank you.
spk09: Yeah, so on a yearly basis are another free cash flow All the puts and takes that you see quarter to quarter and working capital and taxes tend to smooth themselves out and with that said I wouldn't encourage you to think about there being any different dynamics in terms of things like cash cycle days and Cash tax rate and so forth when you're thinking about the out year versus this year the the The fluctuations are really quarterly collections, you know, days payable, those sorts of things in a given quarter. But the year-to-year dynamics, as you can see by how we raised our 11 free cash flow guide by, you know, more or less the same amount we raised operating, non-GAAP operating income, are, you know, no real change.
spk07: Okay. Appreciate that help. And maybe just for you, Amit, I know we're well into it, but any comments just in terms of how reps are adjusting to the cloud only and IPU-led sales motion? What's maybe tracking as you'd expect along that journey and maybe what still remains to happen as the field kind of shifts and adapts to this?
spk12: I think, Brad, the team has shifted very well. Obviously, first half is first half and we have full second half. I think I would say I'm quite enthused and pleased by how the field teams have taken this and run with that as I said earlier this year that this actually gives simplification but obviously any simplification takes some time to settle down to it but I think the teams actually if anything have been very thrilled with this a lot of enablement has gone in we were ready for this so I think so far so good results are there to be seen and our goal is to make sure that we do all the things to accelerate this and make sure this year basically we go forward with it. So I feel pretty good about how the sales teams are leading with it. And I think as Mike and I have said that before also, we continue to see this as the, also the further simplification of our business model, right? I think there is room over there as we think about our overall company and we continue to become more and more cloud only to continue to basically further simplify other parts of the company to make sure we are you go faster and at a much more accelerated pace.
spk07: Great. Thanks so much for taking my questions. Absolutely.
spk00: Our next question is from Alex Zukin, Bliss Wolf Research. Please proceed.
spk11: Hey, guys. This is Ethan Brock on for Alex Zukin. Thank you for taking the question. I just wanted to ask Matt's question a different way. Can you just talk a little about the shape of the quarter and just If you begin to begin to saw a little bit of budget on lock towards the end of the quarter and then a little around like the cloud migration. So like the rate of change is accelerated for two consecutive quarters. I was just wondering if you could point to anything that you're driving that migration activity, whether it's just folks wanting that IQ consumption and better spend visibility, people weren't interested in AI, just in curious how that migration activity is performing relative to your expectations.
spk12: I think look migration. I said that, uh, as we have that migration is, these are operations workloads. And needless to say, we put in a lot of effort to make sure that those operational workloads can migrate at an accelerated pace. Our own tech, we obviously led with our own services to create playbooks. Remember I talked about how we're enabling partners to go lead with it. So partner enablement has happened. Further simplification of the migration process. All of those things, you know, take time. And I think they are gradually bearing fruit. And you can see that all of that starts, you know, it's a snowball effect. It starts, starts compounding over a period of time. I feel very good about it. In fact, the, the, what we launched the next migration technology innovation that will come out later this fall is another step in that direction. So we continue to see that. So the reality is at the end of the day, our customers are running operational on-prem workloads on power center. They know that worked like a charm. they know that these are industrial grade workloads. When they look at our cloud, they basically see those capabilities and more, and they're very excited to go over there. We just have to continue to make this journey from two a lot more faster, lower risk and cheaper, and we've been maniacally focused on that one. So all of those efforts are bearing fruit. And look, once the customers land there, I've always said, if you run mission critical workload in the cloud, other nice to have workloads all get subsumed over there. If you begin with nice to have workloads, you get wiped out over a period of time. So I think we land these, we have tremendous runway to then consolidate many other things that are running across an enterprise.
spk11: I got you. That makes sense. And just a quick follow-up. I can appreciate the prudence and the Cloud AR guidance. I guess, to think about what you're factoring in the guide in terms of macro trends, I know you said 2Q has been very stable versus... basically what you've seen throughout the beginning in 2023. I'm just curious if you're embedding for things to get a little worse, a down click, just curious how we think about that and if there's any directional way to think about where cloud NRR can trend in the back half. Thank you.
spk12: I think on the guide, our simple assumption is that the world will neither get better nor worse. I think if you remember when we were all here talking a couple of months ago, when we started there, we gave a guide. And then I remember when we were talking a couple of months ago, the whole banking, mini banking crisis that happened and everybody thought, would it get worse? Would it get better? And we said, look, we're just holding it. So I think when I say stable, I say stable in the context of nothing has gotten worse, while nothing has gotten materially better also. Enterprises still remain thoughtful and cautious in enterprise spend. I think us executing better is what is showing up here. And I don't think that, I think it'll be, very non-prudent of me to get ahead of myself and assume something's turning around and making it a lot better walking into the second half. I think that's not what we're assuming. And in that context, they're saying, let's take the first half over achievement and de-risk the second half for now and continue to watch things carefully and keep executing. When we meet here a few months later, we'll share more. But I feel very good about where we are and how we have thoughtfully guided for the top line. And the NRR question, sorry if I forgot. NRR, as you know, right, NRR is always up and down. You can never guide to NRR every quarter. You all know, right, NRR can be flat, although under the cover of the cloud group because we could have been acquiring a lot of first-time new cloud customers that are not accretive to NRR. So, when we think of NRR, we've said, we share with you this number, we look at it in a holistic one-year basis. On a quarter-to-quarter basis, we don't get too caught up in it because, remember, I take a cloud customer as long as the cloud AR is going. If I'm getting a new customer with zero additive to cloud NRR, it's still an invaluable customer for me. So, I look at it that way. So, I wouldn't get caught up on the cloud NRR on a quarter-to-quarter basis that much.
spk11: Patrick, congrats again. Thank you.
spk00: Our next question is from Pendulum Bora with JP Morgan. Please proceed.
spk05: Great. Hey, guys. Thanks for taking the question. One more philosophical question for you on AI. One of your customers we spoke to said Informatica is putting itself in a place of power with open APIs, which is an interesting comment. But when I talk to investors, a lot of people kind of bring about companies like Databricks, which are doing a lot of things. And it seems like there is a tussle between, also when I talk to customers, like there's a tussle between the IT people who wants to use Informatica and the data science developers who want to write Python scripts on top of Databricks. Like, how do you think of that tussle kind of plays out over time?
spk12: So, I think, You talked to the customer, obviously, and they actually said that we put ourselves in a position of power because what we are doing with our platform is very unique. I actually never look at anything like that as a tussle. Look, you ask me a philosophical question, I'll give you a philosophical answer. We all live in a very big time. We all have tremendous amount of opportunity. There is, in the world of tech, there is always a slight overlap somewhere or the other with anything and everything. I think the entire security industry has an overlap with Microsoft, but they all exist, right? So I would just say that I look at it this way, that there is always in some area you'll find some overlap. Databricks is a great partner. You saw what I shared about integrating with Unity, the SQL, Delta Lake. We are doing a lot of migration workload, moving into the IDNCs, leveraging IDNC. The customer is going to Delta Lake, the lake house. So I look at the world as such a big TAM and we have so much to do that such also when I look at our TAM, there is that part of workload being written, but then I have MDM, I have governance, I have cataloging, I have so much more. I got tremendous stuff to do. There is always going to be a corner case where it may feel like somebody is competitive. But that's not technically true. Arguably, Databricks is super competitive to Microsoft Azure because the Lakehouse competes with Azure Data Lake. So look at the world they live in over there, right? So I would just say that's how I see the world, a philosophical answer back to a much broad question you asked, but they're a great partner.
spk05: Yep, yep, understood. I think that's a thoughtful answer. One question on ARR. Obviously, you came in ahead of what people were expecting, but when I was looking at kind of net new, it seems like it's on cloud ARR. It seems like you added kind of the same amount versus a year ago. Maybe I'm thinking this wrong, but as you are kind of leaning in on cloud, you're no longer selling self-managed. Should you be adding more cloud versus a year ago on a net new basis?
spk09: Well, yes, on a yearly basis, that's how we're looking at it. Quarter to quarter volatility makes that a little dicey to draw extrapolation from one quarters of performance. And as you can see from our guide, third quarter versus Q4, this will be another back-end loaded year, as 22 was and as 21 was. In fact, on a NAR basis, a little bit more back-end loaded than it was last year, even then. So yes, we expect NAR to grow on a cloud basis for the full year, for sure. And we have high confidence in how it's going to unfold for the rest of the year based upon what we see in the pipeline, based upon what we see in the products in the go-to-market sort of maturing and hitting their stride. now that we've announced that we're in sort of the third quarter of our cloud-only journey.
spk05: Understood. Thank you. Thanks, Vincent.
spk00: Our next question comes from Koji Akita with Bank of America. Please proceed.
spk03: Hey, this is Natalie Howell. I'm for Koji. Thanks for taking my question. Looks like sales execution was pretty good in the quarter. We wanted to ask, have you made any adjustments in the go-to-market strategy, or can you provide more color on what efforts have helped increase close rates and what will help sustain that through the end of the year? Thanks.
spk12: Natalie, I think, appreciate that. Obviously, a lot of work going on to make sure that we transition to this new model effectively. I would say that it all goes down to our focus on the right use cases. for the enterprise and above commercial customers where IDMC genuinely plays a tremendous value creation for them. And obviously making sure that, you know, these other things the team has done a good job of, this is orienting towards use cases a lot. And obviously that's an area that customers obviously resonate a lot. And our focus on the CDOs, the value prop going towards the CDOs, because in some cases, CDOs have direct budget. In some cases, even if they don't have, they have a big influence. So all of those things between our, in our go-to-market organization and a maniacal focus on operational execution. I think Mike mentioned pipeline create, we see pretty healthy pipeline create. So I think all of those things are bearing fruit, and I think we obviously have a big second half in front of us, and the team's heads down focused on that right now.
spk03: Awesome. Thank you.
spk00: Our next question comes from Howard Ma with Guggenheim. Please proceed.
spk08: Thank you, and great to see the team executing according to plan. Amit, building on some of your previous responses, my question is on Gen AI as well. Given the importance of data quality, data governance, data privacy to building and training AI and ML models, including Gen AI, are you starting to see a ramp in pipeline conversions for these specific product SKUs, or are they still on the come? And a related question is, are there barriers to adoption in your term? I can't help but wonder if there are, because, you know, such as, and barriers might not be, some of them might be out of your control, right? So it could be budget constraints, not accommodating the demand, or I guess, in other words, you know, not being able to justify the business case, or maybe on your end, maybe you need to make additional investments in sales enablement. It's hard to argue against Informatica's unique position in data integration and intelligence, but I guess we're all just really trying to figure out how does the realization happen, right? What the cadence is. Thank you.
spk12: Absolutely, Howard. No, so Howard, I think obviously no barriers for us. I would say that absolutely, I was like literally in Somatica World Post after that. I was in Europe and I was traveling across multiple cities in the U.S. as well. And I think all the way when customers have a dialogue with us is that, hey, Absolutely. They want to do things with Gen AI. As I said, all enterprise customers are right now feverishly working on how do they get there? What's the first use case? What's the second use case with the reference architecture? And they get comfort from the fact that they can actually do it on one platform. So, in fact, then our sales teams, it opens up the door for them because those are all conversation starters for us. And second is no customer wants to invest in a technology where they feel like it's a dead end and has nothing in AI. So that makes a great entry point for us that even if in the short term, let's say they're trying to do a lake house project, which may be nothing to do with AI as an example, but they know that as they do all the work on us, on our platform, they can leverage it into their next first Gen AI project. That's how it becomes a conversation starter, creates pipeline, has deal closures. Even if the customer is in the month of August, not going to go to a Gen AI project, but they know that when they're investing in us, come January when they want to do something, it's not a dead end. All of those things are happening, and that's how I see the opportunity shaping us for us. The point I just made on JNI is that, look, as I said, take out the individual user use cases. Enterprise-wide use cases end up being complex, and those are all in the grunt mode of forming and shaping, and you will see a lot of them happening in 2024.
spk08: So I guess just a super quick follow-up because I asked a really long question. Can you comment on are you seeing increased pipeline conversion for know for your data quality data governance and privacy like for for those specific skews that that you know i think we established in this call that it uh you know and i think through all of our research that it that you do you do need good data quality and governance and privacy right for for these AI models but is it is it manifesting today or is it you know maybe more back half event or 2024. oh absolutely so data quality or data governance and data privacy was a very very fast going uh
spk12: capability for us in the second half and even for the full first half, to be very honest, to that specific question. And I think, and then when you think of Privatar, that acquisition lends us in that journey also because in the AI world and gen AI democratization is happening, enterprises are getting very nervous about data access management. So that acquisition was very much centered in that context.
spk08: Okay, thank you.
spk00: Thank you for your questions. There are no longer questions waiting in queue, so I will pass the management team for any closing remarks.
spk12: Well, thank you. Well, look, I appreciate everybody joining today, and I just want to wrap up today's call by sharing my thoughts My perspective on where we are. Look, as we Informatica continue to accelerate our innovation-led cloud business model transformation, which, you know, as many of you know, is not necessarily the easiest and takes a lot of hard work, I couldn't be more proud of our success. Transformations are not easy, but we have been unique in doing that while not only growing our cloud business, but also growing up profitability and cash flow. That's what I was mentioning when Andrew asked the question that a very, very, very few companies are able to do both. And that is all because we've had a long-term strategic focus of building our IDMC platform and working tirelessly to make IDMC be powered by our AI Clare, which we launched back in 2017. Today, IDMC powered by AI Claire has become the data management platform of choice for enterprises across the globe, and I couldn't be more thrilled for that. We have a lot of work ahead of us, but I couldn't be more proud and thankful to the Informatica team for bringing us here in the middle of the year. Thank you, everyone.
spk00: That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.
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