Q1 2022 Informatica Inc Earnings Call
Good afternoon, everyone and welcome to <unk> fiscal Q1, 2022 earnings conference call.
My name is breaker and I'll be your event specialist today.
After the Speakers' 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 the hoist.
Toria high done Vice President Investor Relations.
Good afternoon, and thank you for joining us to review Informatica as first quarter 2022 earnings results.
Joining me on today's call are Aman, <unk>, Chief Executive Officer, and Eric Brown, 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 Dot Informatica dotcom or prepay.
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 10-Q and 10-K filing for the full year 2021. These forward looking statements are based on information as of today and we assume no.
Legations 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 <unk> Investor Relations website. It is my pleasure to turn the call over to Amit.
Thank you Victoria Good afternoon, everyone I'm pleased to be with you today.
Before we begin without business results I would like to acknowledge the humanitarian crisis in Ukraine.
We join up customers partners and employees.
Employees on the global community.
The unprovoked invasion of Ukraine, Russia.
As a company.
Altogether by <unk> and.
We respect all our hearts are with the people of Ukraine, and all of 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.
Couldn't be prouder of female.
The speed and generosity, you'll go to sports.
As a company we have donated to doctors without borders and save the children for Ukraine.
And provided a strong purpose driven culture and that has never been more evident than it is today.
From a business perspective, and provided guys 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 our longer term financial outlook.
Now I'd like to share my perspective on first quarter business.
And then I'll 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 <unk>.
We started fiscal 2020 due strong with both subscription annual recurring revenue.
Annual recurring revenue exceeding the high end of the guidance with growth it could be 2% and 43% year over year, respectively.
During the quarter, we observed a better than expected sales pipeline mix shift from self managed to cloud.
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.
Last quarter when I spoke to you we lifted three strategic priorities and key areas of investment focus for 2022, the fastest product innovation the.
The second is continuing to scale, our go to market and the power of a strategic partnership expansion.
We'd like to use the springbok properties object.
So turning to our first priority we are working extensively to enhance our platform advantage and focusing R&D investments to drive cloud post new workloads.
We believe the breadth of our <unk> platform is unparalleled.
It provides a suite of seven best in breed solutions powered by clear.
Jim.
With over 50000 metadata aware connections.
I'd Emt platform operated a significant scale processing could be $2 two 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 a new product innovation.
To 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.
And design time, we are providing a simple dessert based local interface to build very complex data pipelines.
We added replication for many new sources like Google analytics, if there'd be a forehand on next week and service staff to cloud data warehouse targets with application ingestion.
At one time, we now provide advanced server less capability to run beta engineering workloads that auto skills without any infrastructure provisioning or tooling and.
And lastly, we operationalize and machine learning are killed by consuming machine learning models, they didn't need engineering pipeline.
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 like business processes.
AI automation powered by our AI engine clear, we support mastering of all key business sense 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 increased the openness of our platform with new Apis to integrate with other applications.
Moving to uphold customer joining data governance and privacy.
The improvement being a sharing with the ability to shop, but trusted data and AI models to a self service very simplified cloud based beat our marketplace.
Integrating data quality with business context organic expansion of the market place based on user requests order context collection to streamline ordering and personalization of the marketplace looking for Ya.
We also advanced automated data classification with almost 50 out of the box beta classifiers to jumpstart automation and cataloging and improve server less scanning for deep meta data connectivity and automated many of the beta across multi cloud and hybrid data warehouses and data links.
And next let me talk to what fourth newly added customer journey distiller that'd be called 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 I just spoke designed to work together.
Customers are struggling to integrate and connect that apps to automate the end to end business processes.
In this journey, we're advancing our customers' ability to seamlessly orchestrate the exchange of any kind of beta across any agencies to these apps, whether it's cloud mobile on Prem apps used in business processes across the entire landscape of it enterprise.
Our identity platform that is powering these journeys.
Continues to win accolades from industry analyst, which as you. All know is a very important consideration for enterprise customers when they're looking to make purchasing decisions.
We are proud once again to be named a 2022, Gartner peer insights customers' choice for data integration tools, making informatica only window too.
To receive this accolade for consecutive times.
More recently, we were named the fast company's annual list Awards 50, most innovative companies for 2022 and Informatica ranked number two in the very competitive enterprise category.
Early part of this one.
We are deeply grateful for this prestigious recognition, which speaks to our ongoing commitment to delivering product 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 without the ability to sell large multiyear deals to new and current customers.
The end of first quarter, we now have 164 customers that spend more than 1 million in subscription Iraq and increased 50% year over year and.
And 1732 customers that spent more than 100000 in subscription ALR and.
An increase of 22% if you go to William.
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 reached an important milestone in that strategy and lodging REIT industry specific idea and see where it goes with the launch of <unk> for retail.
Cloud neutral end to end data management solution for the retail industry.
Ibm's people retail enables retail companies to deliver highly personalized digital supposed to customer experiences across all channels.
Enterprise scale.
Customers across the globe in key verticals.
Financial services retail and health care consumer goods and public sector has selected ideal platform across all the four Geneva Convention, 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 chosen for magic as a strategic partner for them after beta 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 does adding capabilities for data mastering and governance with Informatica cloud need to master data management excellent data governance and enterprise data catalog.
Moving to the public sector.
Ontario Hook is a government agency that is responsible for ensuring high quality healthcare services, serving almost 15 million citizens across Ontario, Canada, Australia Health is now leveraging our IBM Z platform in partnership with Microsoft Azure to move more workloads out and beat up from on Prem to the cloud lowering the risk and overall cost we are cloud native.
Sure.
And lastly, a great retail customer is still with me, but all the golf staff and Tcs.
Later, there will be studied golf products and are supported by a network of almost 1500 professionals.
<unk> collected informatica to manage their customer data across multiple cloud ecosystems, helping them integrate multiple data sources to provide both the customer and cost.
Our service teams are really time and trusted vision of border and inventory data.
Moving to a third priority, which is to make it for America, the easiest to do business with and win together with strategic partners.
We had another quarter of strong engagement with the ecosystem and global system integrator partners and winning new deals. This reflect a switzerland of data management position in the market that customers value.
In the first quarter, the number of ecosystem cross sell wins grew over 97% year over year.
Market based transaction volume doubled year over year, including excellent traction with key ecosystem partners yes.
Yesterday, we announced an expanded partnership with Snowflake that will result in deeper product integrations for good 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 enabled some of the largest informatica power centric deployments in the world.
<unk> fully migrate to the snowflake data cloud.
Look forward to close that 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.
Spaniard, our strategic partnership with Diplo and leverage their deep industry expertise and global reach to expand customer adoption of D&C and accelerate cloud modernization for global customers as a part of this partnership 2500 of the consultants will be trained on and somebody because cloud IBM Z 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 ultra workloads to the cloud.
We're already seeing new maintenance to cloud migration deals from existing partners.
Is that all operational workloads and the customer drives the pace of digital transformation.
Approximately a nine month lag to convert from maintenance thereof.
Claudia once the implementation of competing with.
With that context, let me now hand, the call over to Eric to discuss Q1 financial results Eric.
Thank you Amit and good afternoon, everyone. We achieved strong financial results in Q1 exceeding the high end of guidance for subscription and cloud <unk> and delivered a 19% beat on non-GAAP operating income guidance as well as upside of an unlevered free cash flow, we delivered revenue as expected at the midpoint of guidance.
Withstanding the mix shift from self managed to cloud, we see strong demand for the items. He 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 AOR guidance and reaffirming the remaining full year 2022 guidance metrics. Let me provide commentary on Q1 results before discussing our expectations for the full year of 2022 in Q2 a bit later.
Turning to Q1 results totally our our increased 17% year over year to approximately $1 4 billion, we added over $202 million and net new total air or the first quarter versus the prior year and we remain on track to deliver over $1 5 billion in expected total air are this year cloud.
Cloud are our performance was stronger than expected, increasing 43% year over year to over $343 million and exceeding the high end of guidance cloud era now represents 25% of total air or an increase of five percentage points year over year, we added $104 million and net new cloudy or on the first quarter versus.
The prior year sequentially, we added 26 million in net new cloud <unk> in the first quarter of 2022 versus the fourth quarter of 2021. This is double the $13 million in that new cloudy or are we added in the first quarter of 2021 versus the fourth quarter of 2020.
As Amit 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 IRR 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 <unk> represents 61% of total air or an increase of seven percentage points year over year and two percentage points sequentially.
Actually we added $206 million and net new subscription <unk> in the first quarter versus the prior year and we remain on track to deliver $1 billion in subscription <unk> 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 231000, a 19% increase year over year on an active base of more than 3600 subscription customers.
The subscription net retention rate was 113% down one percentage points 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 <unk> 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 <unk>.
Turning to revenue, we delivered $362 million in total GAAP revenue, an increase of 9% year over year.
As expected revenue performance with higher quarter, ending subscription IRR is a function of a mix 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 our cloud solutions and 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 in the quarter Standalone maintenance revenue represented 37% of total revenue consulting and education revenue make up the difference and fluctuate based on customer requirements, representing 8% of total revenue.
And at this point perpetual licenses immaterial at Westwood, 1% of Q1 revenue.
Revenue from the U S 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 Amit 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 mix 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 in cost 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 and net income per diluted share was 20 above expectations based on 285 million diluted shares outstanding.
The basic share count was 279 million shares.
We ended the first quarter and 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 three four times down from three seven 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 the two times by the end of 2020 for Unlevered free cash flow after tax was $87 5 million better than our expectations, resulting in a 24% after tax margin the over performance in cash flow this quarter.
As well as last quarter indicates the strength and health of our 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 Amit.
Thank you Eric.
These results highlight the continued customer adoption of IBM Z and the execution of our three pronged strategy.
Looking ahead to 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 mix shift from self managed to the cloud is accelerating.
And it's driven by new workloads from existing and new enterprise customers, you'll see this reflected in the cloud <unk> grew to 43% and 104 million and net new cloudy out object to be added in the first quarter versus the prior year.
You can also observe this from the migration of the cloud use cases.
To reiterate there is approximately a nine to 12 month lag to convert from maintenance to.
Claudia once implementation is done.
As such in this context, our cloud will make them, we continue to prioritize R&D investments supporting accelerating the cloud roadmap strategic cloud partnerships.
Products on the multi tenant cloud are getting adopted faster globally.
Our D&C continues to stand out in the market as new workloads from new and existing customers come to the platform.
We had a very mission critical data management platform and children get up close.
<unk> actual and data interactions working seamlessly across the variety of SaaS apps cloud storage repository database data lakes and data and how this.
To deliver the IBM Z platform to our customers and accelerating product and go to market investments in strategic partners hyperscale or cloud ecosystem globally.
And we partner with some of the world's leading cloud brands, including Microsoft Azure DCP, Amazon Snowflake data breaks in Accenture to name a few.
Second.
The operational health of our business remains very strong.
Well, we had a recent IPO, we had a very unique company.
Because we have 25 years of experience navigating various macro and vitamins and IP demand cycles.
Do you have a predictable subscription revenue business model very strong unlevered free cash flow that has continued to grow.
Proven profitability.
Renewal rates continued to be best in class in the mid nineties are not enterprise grade solutions that driving operational workloads that are critical to helping enterprises on their business.
With over 3600 subscription enterprise customers growing at a healthy clip.
And subsequently.
Customer growing at a healthy clip. We believe this continues to position us well for durable consistent future growth with strong cash flows and profitability.
Lastly, give.
Given what PFS tool and the customer adoption of the IBM Z platform, we are comfortable raising the full year guidance, what I'll take the IRR.
To reiterate the remaining full year 2020 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 managed in second half of the year.
But we're now seeing this dynamic play out faster than the first half of it yet and that is a good positive suffice to us because it's all tied into what's called faster than what we thought.
Although we have seen the acceleration to the cloud as a positive driver of growth. This mixed shift to the cloud fluxes in quarterly timing and the accounting treatment of revenue and non-GAAP Opex.
Lastly, we are taking a prudent view on guidance for the balance of the year.
Let me hand, it over to Eric to give you full year and Q2 guidance Eric.
Okay. Thank you Amit.
I will start with our full year 2022 outlook is the mix shift from self managed to cloud AOR continues we remain confident in achieving approximately 40% cloud era of growth for the full year, which corresponds to approximately $125 million of net new cloud <unk>, while we did see better than expected cloud results in Q1, we.
We're taking a prudent approach and maintaining full year cloud <unk> guidance given that we're early in the year during the time of macroeconomic uncertainty.
We're also maintaining our full year non-GAAP operating income and Unlevered 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 31, 2022 as follows we expect total GAAP revenues in the range of $1 $5 5 billion to 1.605 billion, representing approximately 10% year over year growth at the midpoint of the range, we expect subscription <unk> range.
$990 million to $1 billion $10 million, representing approximately 25% year over year growth at the midpoint of the range. We expect cloud here are in the range of $438 million 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 million to $345 million, and we expect Unlevered free cash flow after tax in the range of $323 million to $343 million and.
And we are raising the total air our full year 2022 guidance, we expect total <unk> to be in the range of 152 billion to 155 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 in maintenance renewal.
As our installed base relies and 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 is 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.
Self managed to cloud has an impact of approximately $15 million to $20 million on Q2, GAAP revenue and non-GAAP 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 ASC 606 revenue and profit treatment.
This expected Q2 mix shift does not impact Q2, <unk> or unlevered free cash flow metrics. In fact, we just observe this in our Q1 actuals with strong cloud <unk> and strong cash flow results, our midpoint guidance for Q2, <unk> and cash flow confirms this fact.
Our estimates for both Q2 and Unlevered 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 <unk> 2022 as follows we expect GAAP total revenues in the range of $358 million to $368 million representing.
<unk>, 6% year over year growth at the midpoint of the range, we expect subscription <unk> in the range of $875 million to $885 million, representing approximately 28% year over year growth at the midpoint of the range, we expect cloud <unk> in the range of $365 million 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 million 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 <unk> 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 Unlevered free cash flow implies the first half of the year's cash flow is about $20 million higher we estimate Q2, unlevered free cash flow to be approximately $65 million. This allows us to DRAM.
Risk the second half of the year as we hold Unlevered free cash flow full year guidance unchanged third as I mentioned earlier maintenance <unk> performed better than expected. We are raising our estimates for full year maintenance IRR to approximately $535 million a $10 million increase from the prior estimate.
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.
<unk> and diluted weighted average shares outstanding to be approximately 288 million shares lastly, we remain on track to further deleverage to under three times on a 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.
Thank you.
If you would like to ask a question.
Press Star one on your telephone keypad.
If you change your mind any time, please press star Jeremy for the question.
Yeah.
We have a first question on the phone lines from.
Matt Hedberg with RBC capital markets. Please go ahead, when you're ready Matt.
Great. Thank you and nice Q1, and really the upside to the cloud. They are 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 or there are some things that you can do.
Internally or incrementally to maybe even push that migration, even faster just sort of curious on that perspective.
Thanks for the question, Matt the answer that we are doing up yes, but I think I'd like to step back and remind us two things.
One is these are operational workloads, so when a customer is moving something to the cloud there. It has to literally work as you kind of 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 right I mean, and that's the lag that we're trying to reduce by automating as much of that migration.
And that's where a lot of R&D work can happen and Thats a lot of that innovation is 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 how.
How do you bring business logic, and how do you test it how Canadian how do we make it better how do you train everybody and that's what a lot of work is going on and I think expect like I said, yes.
Having this conversation with every customer I don't know migration and Thats bad faith.
But that work is happening both in product migration utilities, and you should expect us to continue to work on that one.
Big focus on hospitality.
That's really good to hear thanks for that and then Eric obviously strong quarter in the archive 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's necessarily impacted EMEA results, but I wonder if you could talk maybe more about that region.
Or is it more just sort of reading the headlines out there or is there anything youre seeing and maybe that European theater.
At this point.
No I mean as of as of.
At the end of Q1, both North America and EMEA.
Closed closed well as expected.
We didn't see any.
Any disruptions.
The comment about taking a prudent approach for the year again, we're only one quarter in.
The R&D some macro uncertainties out there.
And what we've effectively done is as I noted derisked the full year numbers by pushing up a good Q1 here out of the gate.
And that's basically our perspective at this point point in time.
Got it it makes a ton of sense. Thanks, guys.
Thank you.
We now have the next question from Mark Murphy with J P. Morgan. Please go ahead I have I seen your lines.
Yes, Thank you very much and I'll add my congrats on a very nice number.
So Eric a question on the Q2 margin guidance that it does call for some compression.
And I think we understand.
The top line.
Equation.
When it comes to the cost.
The expense side of it can.
Can you separate out how much of that is onetime disc.
Discretionary investment versus how much if there is anything.
You know is stemming from external factors, maybe there is some wage inflation and you know in India, or the U S or datacenter cost or any other.
Input costs or is it and I guess the other part of it as I said, you said that the hiring was backend loaded in Q1 is there is that basically kind of.
Flowing forward into into Q2 to some extent as well.
Yes, I would definitely characterize the Q1 operating expense savings as onetime nonrecurring.
We opened the year, assuming for example, intermediate or more rapid return to the office elevated TNT etcetera, 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.
Now moving to two a combination in person and virtual event and 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 that's a little bit above kind of a Q1 effect the comment on backend loaded hiring I think you. We optimistically assumed lots of month, one month two hiring at the start of the year and it's just typical phasing of the budgeting we're on track to hire.
No slope in our investment and 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 geos and that is playing out as expected. Thus far so we do anticipate of that and so we're not surprised by anything year to date.
On that front there.
Okay.
And my other question I guess for for Amit.
When do you when do you when do you think through the Snowflake relationship I believe you've had a pretty solid technical and go to market partnership with Snowflake for awhile now.
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.
First as you mentioned in governance, and maybe there is a role for data quality or other areas as well.
So I think as I've always said, we do a lot more than ingestion that probably has widened and pay it.
Maybe one thing for me because IBM Z platform has and the neutrals that has grown a lot in fact last year, we talked about what you did with them.
Power Center modernization to the cloud and now we're expanding it to governance exactly to say lots of government governance requirement and that includes quality that includes.
The axon governance on top of the detail that houses that customers want and customers also want the loft might data marketplace, which is sits on top of our governance platform. Those are the kind of things to what I call create more value added capabilities on top of the Snowflake data platform. That's why we are expanding this obviously.
And Bob and I said that even though the end of the year and we're going to invest in these strategic partnerships. Both from a technology point of view and go to market and this isn't a great example of what we said and what we are a believer.
No I mean I think.
For medical World will.
We're going to talk about the and obviously, it's coming up in person Eidetic mentioned I'll talk about it now mid 'twenty.
For the for that week.
Week, we're going to have by the way.
Data management Scott Guthrie.
You all know runs Microsoft Azure is going to be there in person youre going to have Thomas Kurian, DCP speed, you're going to have Chris Christian who is the chief product officer at a snowflake speak as well as my environment at our go to market at AWS, we're having all of them.
I don't know Michael Ward.
Okay Amazing thank you very much.
Thank you.
Thank you Mark you now have the next question from Angie <unk> from Wells Fargo. Please go ahead, when you're ready.
Great. Thank you and congrats on a nice quarter.
Just want to start with a question.
Maybe it relates to your subscription <unk>.
But given what you saw in Q1 with cloud are are coming in a little bit higher than expected.
And now have these expanded partnerships with snowflake and I presume some it sounds like ramping traction with the hyperscale ours as well.
It seems like the momentum should potentially.
Continue or at least get stronger and the quality of our segments. So what gives you concern.
With regard to the total subscription <unk>.
Raised that outlook for the year.
Yeah.
We're not concerned about the balance of the year.
One of the things we have experienced in the first half.
Q1, actuals than implied by Q2 guide is indeed as this mix shifts so theres 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 dollar per.
This whole <unk> phenomenon, whereas cloud is indeed ratable so.
I just want to emphasize again that.
Our Q2 guide on the <unk>.
Front up and down cloud sub total etcetera, and Unlevered free cash flow is entirely consistent with expectations going in and <unk> and cash flow as the true determinant of what's the overall book of business that normalizes out for this self managed versus <unk>.
Howard.
606, GAAP effect here and so if there is anything that we're mindful of in regards to the overall guidance and we just wanted to explain a little more detail here is that and the impact that it has very near term from our perspective. It is nonrecurring because we had assumed in our internal plan that in the back half.
Half of the year, a much higher mix of new business coming from cloud versus self managed so we think that we've calibrated correctly in our initial operating plan for <unk>, but cloud has.
Paced, our internal plan and.
In the first half and that's a very very good thing number one we want to emphasize that.
And the proof point, there isn't a strong Q1 print.
On Unlevered free cash flow and a strong guide on Q2 and lever free cash flow as well as error.
That's great. Thank you that makes sense and maybe just a follow up question as it relates to.
Opex.
Total total operating profit.
Came in certainly a lot higher than expected in Q1 is 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 raise the operating expense outlook you talked about.
Seeing more traction from Hyperscale 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.
Yes, we are.
We're making them I think that we are a little more ambitious in terms of the hiring that we do in month, one month two of the year.
And we will we will absolutely catch up over the course of the year, it's a very high.
Long term return for US again, these hyperscale or 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 key ecosystem partners.
Great. Thank you.
Yeah.
Thank you we now have the next question from.
Kg Ikea of Bank of America. Please go ahead your line is open.
Hey, guys. Thanks for taking my questions.
I wanted to double click on this faster place a 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 of years.
Do we think about maybe the mix of cloud versus self managed exiting this year or are maybe over the next 36 months and how should we be thinking about a faster pace.
The shift to cloud really start to becoming a meaningful issue or potential issue I guess for GAAP revenue.
Given the Rev. Rec policies of cloud versus self managed you kind of laid out on the second quarter kind of a $15 million to $20 million impact because of this positive shift to cloud, but when we start to annualize that.
And even think about a faster pace, how should we be thinking about potential lower GAAP revenues, maybe out in 'twenty three 'twenty four.
It's great to talk to you and let me let me take the first few and hand, it to kind of comment on the revenue part of it so first of all.
I think I've always said at.
We started our journey to cloud, we would never beholden just to migrate their customers in fact, the majority of it.
97, 8% of our cloud workload and business comes from net new workloads that have gone to the cloud type tools.
Agile or just be AWS, and our database aboard and we.
We will never take our eye off the ball in capturing net new workloads, because they expect we know our product renewal rates are at mid Ninety's very sticky products. We sell are operational workloads once we land.
Please go.
Now coming to migrations.
It is definitely one of those things that I think we'll.
We will start slowly and then have a lag and install and the reality product. These are all operational workloads the <unk>.
<unk>.
Listing business outcome and I think I've used my favorite example, all the time like maybe delivering 10-K 10-Q reports for our CFO Nobody's going to just say, okay have it be 95% accurate.
Accurate in the cloud no it has to be the same.
I'm thinking that example is an extreme and in that we are having our reps are having a conversation with every customer on migration deals.
And we booked the deals, but there's going to be a lag between maintenance and.
In Florida.
Being recognized until we complete the migration that is like I think length of equipment.
And it all snowball as this is the year, where you're going to have us keep saying that because I think over the course of 12 to 18 months.
Mobile affect them slowly catches up.
<unk>.
We are fully committed to driving the migration migration has asked nobody can touch it because it's very operational and we automate the whole migration, which could be otherwise it cannot be done not extinguish taboo. So could you we are absolutely tied to bring the regulations 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 part will be more second half, we're going to be massively a cloud first where assistance punished business and as we go into next year. It will be cloud forest 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 Rev Rec related impact.
Let me can I hand, it over to Eric the kind of take it from there and give you a sense of how that 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.
Sure, Yes, so koji, but one other thing I would add is what drives cloud momentum. In addition to the migrations, we talked last quarter about Ipu's. This quarter, we saw on a relative basis and even stronger contribution of our new cloud business.
Nominated in Ipu's versus kind of conventional licensing so the ICU interest, which is consumption based is stepping a conscious year over year, but also sequentially. So that helps us in this long term drive to cloud in regards to.
<unk> impacted GAAP revenue non-GAAP op income margins.
Sure and then longer term.
Kind of as an exception today in the script.
Basically gave our best point estimate for Q3, and Q4, GAAP revenue and non-GAAP op income.
And Thats based on what we see happening with.
Q2, and longer range look into the pipeline and et cetera. So.
That gives you some additional new detail on those quarters that we wouldn't typically provide and I think if you look at that you add up the GAAP revenue in the non-GAAP op income in <unk> based on those numbers versus what we had before.
Youll see that there is more profitability in the second half.
Cloud deals eventually catch up but the one year anniversary mark they're fully amortized and they've caught up relative to their self managed counterparts.
Takes a bit more time and again.
There is no change, though in the cash flow margin.
For the AOR metrics, because we cash collect the cloud deals just likely cash collect a self managed.
Theres more cloud mix say in the mid to long term versus what we thought initially.
Last year, when we were going through the IPO process.
You'll have a little more of that kind of like lagged effects. So there'll be some deferred gains in op income margin over time.
Relative cloud mix cash flow will be impacted <unk> will be impacted again for the reasons I noted earlier on.
And there could be some slight kind of deviations on the gross profit margin line again cloud carriers Cogs were soft manage really really does not to date, we've been able to manage that really really well.
Consistent 80, plus percent non-GAAP gross profit margins and so I think that for those two metrics, which are ASC 606 dependent upfront GAAP Rev. Rec is flow 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 for 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.
Thanks, Amit Thanks, Eric Thanks, so much for the color that's all for me. Thank you.
Thanks Koji.
Thank you Katie we now have the next question from Patrick <unk>.
<unk> with Deutsche Bank. Please go ahead, when you're ready.
Hey, Thank you for taking my question.
I guess just wanted to double click on the guide for <unk> operating margins.
Just can you help us like.
[laughter] model this out.
Which you go to some other kind of qualitative color as to the factors behind.
The guide but.
As most of these costs kind of fall in the sales and marketing line as a result isn't dramatic 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 as a result of the investments you've articulated and then I guess, how should we think about <unk>.
G&A and then.
The Gms as well just can you just kind of help us pick it apart.
Sure Yeah, so to kind of recap.
We think that there is like we said, it's a $15 million to $20 million overall GAAP revenue op income impact if we look at the impact is little bit lower on on revenue.
We see kind of like a $10 million 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 youre going to see is higher sales and marketing expense Informatica event, driven you are also going to see given the higher mix of cloud not just for Q2, but bear in mind ever since we went public and we go back to the IPO model, we've consistently trended well ahead on cloud <unk> cloud <unk> 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'd kind of roughly distribute the delta there between kind of the.
The gross margin the Cogs line versus Opex and specifically in Opex is going to be more on the sales and marketing line. We don't see any significant trend line changes for example on G&A.
Alright Thats helpful.
We've talked about cloud.
A few times.
In regards to cloud adoption.
What are you seeing with your customers in terms of the kind of tools. They are using is it is it makes integration is it.
Yes.
Just can you go through like provide us some color there it sounds like which are the which is the initial landing point and as you know.
So kind of cross sell adoption motion.
That is fairly typical at this early stage in cloud that you might see repeated more broadly as your customers adopt cloud tools.
Sure Patrick I think this is about the direct and the agility of the platform comes in I think we lost you Havent had gone when you were talking about them publicly talked about Zhejiang because we added the full journey for us.
Every journey as a multi product journey, whether it's analytics, which is about data warehouses that they didn't.
Lakes audits MDM and the context of a business 360 audit committee the governance privacy, our application of integration of our hyper automation customers use multiple products in all of them and they can land in any one can expand there are landed anyone joining expanding to other journeys.
I've said that last.
During the IPO time, and I'll keep repeating that's how it goes there is no one landing motion, but I think it has lagged in analytics and from there. It goes we are very well hedged across the critical journey. So customer can actually begins with nvme and from there. They can go to analytics and go to a data lake or data that I'll use case or take.
Go to a data Lake and then have governance on top of your stock seems to even talk about the snowflake partnership it could be any of that any of those journeys and that's where do we have strong resiliency and hedge against not having just one road into our customers' data driven digital transformation.
Great that's very clear.
Okay.
My questions.
And if I could maybe just to add on a 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 is 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 are really doubling down on product led.
Innovation integration with our key ecosystem partners.
Okay.
Operator next question please.
We now have a question from Tyler <unk> with Citi. Please go ahead, when you're ready.
Yes. Thank you for taking my question.
I just wanted to be.
Better understand.
Kind of what Youre seeing in the business as we think about the moving pieces in the guide.
So it seems like Youre clearly seeing more cloud.
Obviously Claudia are accelerated.
Net new was up double versus a year ago.
Yet if I look at your guidance. It seems 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 just.
I just wanted to make sure I understood that right and was there an unusual dynamic in maintenance there are for Q1.
That is expected to change as we go out throughout the year, just help us understand kind of the.
The moving pieces there. Thank you.
Sure.
As you May recall, when we talk about our Q4 results.
Refer to our maintenance are are at that point as peak maintenance, where peak maintenance IRR, we fully expected a decline from Q4 to Q1 in fact, our initial opening guide had a steady but graceful decline on maintenance over the course of 2022.
That had a built instead of assumptions for <unk>.
Renewal rate and a certain rate of call it 5% to 6% non renewals over the course of the year what.
What we saw in Q1 was slightly better than expected rate of renewals and <unk>.
Small improvement sustained throughout the year or when you are operating on half a billion plus.
Adds up and so that is indeed, the reason why we raised the maintenance of our guide by $10 million and the overall total Aero guide by by 10 million we have enough.
Data and telemetry on these installed base accounts too.
So that higher renewal rate through the balance of the year and into an updated and increased two <unk> guide.
Okay and.
Maybe for me on the R&D investments, 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 does this new features.
Clearly you've talked about of Informatica cloud and how that.
A good roadmap there for a number of years so.
I guess you know.
What what's kind of catch you off guard and what do you need to build that but you don't have thanks.
So let me clarify nothing is catching us off guard.
Let's kind of step back for a minute.
What what Eric mentioned was.
We had a certain amount of hiring that was weaker.
We thought we would do in Q1.
Especially put R&D related to the roadmap items that we had talked about beginning of the year related to this year's roadmap and the partnerships like still take that we just announced that trickles into Q2.
So there is nothing that is partners I've got all of it happened was stuff that would be taught ambitiously. We hired in Q1 is now just move to Q2, we will be hiring against the plan that we had shared beginning of the yields you want 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 to you all.
Click announcements Informatica world coming up Youll, you heard many many model where there. So the only thing that has gotten us off guard in a positive way is that we've had a bigger mix shift towards cloud in Q1, and we see that happening in Q2, as well, which we will take that any given day.
It is causing you to Rev. Rec related revenue does that nothing else has gotten us off guard.
Alright, thank you.
Thank you China, we now have.
And then a question on the line from Alex Hacking from Wolfe Research. Please go ahead, Alex Your line is open.
Yeah.
Hi, This is brook entre Alex Thank you for taking my question and congrats on the quarter.
Eric can you tell us more about the quality of your pipeline specifically around the comments on a 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 convergence. Thank you.
Yeah.
I mean, all quality of pipe as you heard me talk about a couple of customers across the globe across all verticals.
Initial workloads across the board generally we've talked about so we feel pretty good about it.
And you know these are whether it's analytics to the lakes deal that houses.
The 361 at the customer 365, 360, driving digital transformation, all what they had audit governance and privacy auditor.
So those are all the elements we.
We've talked about also earlier this year investing in fed ramp and all of those things are all.
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, you talked about the fact that we think more than that in that roadmap. It is much more easier to use.
New features and functionality without there and that's where the natural even is in terms of digital transformation. So that's what we see and that.
What is giving us the increased movement towards cloud and also that's coming from the pipe that we are creating across the globe.
Thank you.
Thank you.
We have no further questions. So I would like to hand, the call back to Amit.
After some closing remarks.
Yes. This is Eric I'll overall, I think you want to go forward.
Absolutely.
So so thank you operator, and thanks to everyone on the call today two to recap what we covered today.
<unk> 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 mix shift to cloud is tracking ahead of our expectations in the first half of the year.
Detailed the limited near term impact on Q2 revenue and operating income and confirmed that there is no Q2 impact on <unk> 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.
For the full year, we are raising total aero guidance and reaffirming all the remaining full year 2022 guidance metrics.
Over to you.
And as Lee and as we wrap up I'll build on what Alex said, let me reemphasize.
Had a very robust cash flow generating business with strong outgrowth.
We have completed our business model transition from license to subscription before we went IPO.
Completing that transition successfully without impacting our margins and free cash flow.
So we know a thing or two about doing business model transition successful.
We are seeing a slightly faster than expected self managed to cloud migration mix shift, which is a very good thing for the long ago.
Think about our ability to manage this mixture of successfully.
As evidenced by our strong results on the IRR and Unlevered free cash flow.
Our customers are continuing to invest in digital transformation and data management isn't particularly.
Hence we continue to invest in our cloud product innovation road map and strategic cloud partnerships I mentioned that earlier that I'll repeat it we are hosting our customers that informatica world in person in Las Vegas from May 24 to 26, but also global lifestyle.
We believe we're shedding a lot of product innovation and hosting customers and key partners there.
I'll give you some names Scott Dudley for Microsoft will be there in person and others like Thomas calling from GCB question SVP of product that snowflake and Mac carbon had a go to market AWS.
Thank you once again for your continued support and have a good rest of the evening.
Okay.
Thank you that does conclude today's call you may now disconnect your lines.
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