Informatica Inc

NYSE:INFA

Earnings Call Analysis

Informatica's Solid Q2 and Raised Full-Year Guidance

Informatica reported a strong second quarter, with total revenue growing 6.6% year-over-year and a significant 37% increase in cloud subscription ARR, reaching $703 million. Driven by robust customer momentum and a cloud-only strategy, the company raised its full-year guidance. The latter now expects cloud subscription ARR to range between $829 million to $843 million, and subscription ARR to be between $1.265 billion to $1.299 billion. Additionally, non-GAAP operating income is projected to grow around 18.5%, while adjusted unlevered free cash flow is anticipated to increase by approximately 23%.

Second Quarter Performance Highlights

Informatica reported a solid performance in the second quarter of 2024, achieving and surpassing its guidance metrics. Total revenue grew by 6.6% year-over-year, driven by a significant increase in cloud subscription annual recurring revenue (ARR) and a continuous rise in customer adoption. The total ARR reached $1.67 billion, up 7.8% from the prior year.

Generative AI Initiative

Informatica launched CLAIRE GPT, a generative AI chat interface on the IDMC platform, after a year of extensive private preview. This positions the company as the only data management platform combining AI and GenAI capabilities tailored for large enterprises. This innovation supports the firm’s commitment to digital transformation and cloud modernization for its clients.

Revenue and ARR Growth

The firm’s cloud subscription ARR demonstrated exceptional growth, rising 37% year-over-year to $703 million, exceeding expectations and achieving a company record. Overall, subscription ARR rose by 15% year-over-year. The cloud subscriptions now constitute 42% of the company’s total ARR, reflecting the effective execution of its cloud-only strategy.

Customer Expansion and New Deals

Informatica expanded its customer base, reporting 272 clients with a subscription ARR exceeding $1 million, a 28% year-over-year increase. The number of customers spending over $5 million grew by 30% annually. Prominent clients include American Airlines and a major GPU supplier, both leveraging Informatica’s cloud solutions for enhanced data management and customer experience.

Guidance for 2024

Given the strong performance in the first half, Informatica raised its full-year guidance across several metrics. The updated cloud subscription ARR forecast is between $829 million and $843 million, representing approximately 35.5% growth. Subscription ARR is now expected to range from $1.265 billion to $1.299 billion, with a growth rate of approximately 13.2%. Non-GAAP operating income is projected to be between $538 million and $558 million, indicating an 18.5% year-over-year growth.

Profitability Metrics

In the second quarter, non-GAAP operating income increased substantially by 31% year-over-year, reaching $115 million. The operating margin improved by 5.4 percentage points from a year ago, and adjusted EBITDA stood at $119 million. Net income was $71 million, with a net income per diluted share of $0.23.

Cash Position and Financial Strength

The company maintained a robust cash position, ending the second quarter with $1.13 billion in cash and short-term investments, up $307 million year-over-year. Informatica’s net debt was $704 million, and the net leverage ratio was a solid 1.3x. The firm also successfully repriced its $1.8 billion term loan, resulting in substantial interest cost savings.

Operational Highlights and Future Outlook

The execution of a cloud-only strategy has fostered strong customer momentum and high renewal rates. Informatica’s transition to partnering more with professional services also signifies positive developments for the firm’s financial model. The second half of 2024 is expected to witness continued upward trends, driven by digital transformation, modernization efforts, and GenAI initiatives.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Thank you for joining today's Informatica's Fiscal and Q2 2024 Earnings Call. My name is Cole, and I'll be the moderator for today's call. [Operator Instructions] I'd now like to turn it over to Victoria Hyde-Dunn, Vice President of Investor Relations. You may proceed.

[Victoria Hyde-Dunn, executive]

Thank you. Good afternoon, and thank you for joining Informatica's Second Quarter 2024 Earnings Conference Call. Joining me today are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the IR website after the conference call concludes.

During the call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks. Please review the company's SEC filings, including the section titled Risk Factors included in our most recent 10-Q and 10-K filing for the full year 2023. 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 Relations website.

With that, it is my pleasure to turn the call over to Amit.

[Amit Walia, executive]

Thank you, Victoria, and everyone, for joining us today. I will start today's call by summarizing 3 key points. First, we had a solid second quarter. Our results were within and above all second quarter guidance metric ranges. This was driven by continued strong customer momentum and consistent execution from a cloud-only consumption-driven strategy. Second, we continue to deliver the best data management product on the industry's only AI-powered platform. After a 12-month extensive private preview, we have launched CLAIRE GPT, our generative AI chat interface on the IDMC platform. Informatica is now the industry's only cloud data management platform with AI and GenAI capabilities for motive enterprises, and it is the [ sideline ] for data and now as well as for AI. [ Kurt ]? Given our strong execution in the first half of the year, we are raising cloud subscription ARR, subscription ARR, non-GAAP operating income and adjusted unlevered free cash flow after tax guidance for the full year.

We remain focused on supporting our customers' digital transformation, cloud modernization and now the GenAI initiatives. Starting with the second quarter results. Total revenue grew 6.6% year-over-year. Subscription ARR grew 15% year-over-year and cloud subscription ARR grew 37% year-over-year, both exceeding the high end of our guidance range. We delivered a record $703 million in cloud subscription ARR, exceeding the $700 million mark for the first time. We strengthened our cash position and grew non-GAAP operating income by over 31% year-over-year above the midpoint of the guidance range. The macro environment remained stable in the second quarter, consistent with the prior quarter. Approximately 74% of cloud net new ARR in the trailing 12 months came from new cloud workloads and expansion. We are attracting new customers, expanding opportunities with existing customers, and driving new workloads in the G2K market, supported by a robust partner ecosystem and a very healthy cloud pipeline.

Customers that spend more than $1 million in subscription ARR increased 28% year-over-year to 272 customers. customers spending more than $5 million in subscription ARR grew 30% year-over-year. We saw continued strong growth in our average subscription ARR per customer which has now reached [ $321,500 ], a 17% increase year-over-year.

Let me share 2 customer stories. American Airlines is the largest airline in the world, offering safe, dependable and friendly air transportation to its customers along the numerous loyalty services dedicated to making every flight something special, American Airlines purchased a cloud data quality product to improve real-time customer experience and retention through excellent loyalty program incentives such as low fare options, mileage redemption in-flight entertainment and more. One of the world's largest graphic processing unit suppliers, or GPU suppliers, selected Informatica's IDMC platform, which includes MDM, data quality, data integration and data governance capabilities. Next, approximately 26% of cloud net new ARR at trading 12 months came from on-prem to cloud migrations or modernization, as we say. This is still a very small portion of our on-prem installed base, but it continues to provide us with the opportunity to modernize our customers and grow our cloud business. We see strong customer adoption of Power Center Cloud Edition, representing over 80% of all monetization deals in Q2.

Let me share 2 customer stories here. Westpac, which is Australia's first bank and a major player in New Zealand managing numerous legacy apps following acquisitions to support its business strategy, which focuses on data-driven decision-making, automation and AI, the bank has expanded its partnership with in [ Informatica ]. Transitioning from power center to the IDMC perform. This will help us fact reduce data management costs, petite automation initiatives and elevate the customer experience across branches, online platforms and call centers. As a leading medical technology company, Siemens Healthineers is committed to improving access to health care for underserved communities worldwide and is striving to overcome the most threatening diseases. The company is principally active in the areas of imaging, diagnostics, cancer care and minimally invasive therapies, augmented by digital technology and AI. Siemen Healthineers opted to modernize their on-prem Informatica data governance and catalog solutions to IDMC. And further expand their footprint to include cloud data quality to address regulatory requirements and provide trustworthy data to the enterprise. At Informatica World earlier in May this year, we welcomed thousands of global customers' prospects ecosystem partners and GSI partners. We have the opportunity to engage, collaborate and see firsthand how Informatica empowers enterprises to democratize data.

They also heard testimonials from how the powerful combination of data and AI can deliver unprecedented business outcomes. We featured Scott Guthrie, EVP of Cloud and AI Group at Microsoft as the [indiscernible] speaker. We announced a public preview of IDMC as an Azure-native ISV service, the private preview of our data quality native app for Microsoft Fabric and the general availability of our cloud data access management support for Azure. We also featured Sridhar Ramaswamy, CEO of Snowflake on main stage and announced our GenAI blueprint for Snowflake Cortex and a new native SQL ELT for Snowflake. At Snowflake Summit, we announced the general availability of our Snowflake native app, the enterprise data integrator for high-speed replication of critical enterprise data to Snowflake, expansion of our native SQL ELT to support Snowflake GenAI functions and a cloud data access management support for Snowflake integrated with Snowflake Horizon governance capabilities. We were awarded Databricks 2024 Data Integration Partner of the Year at the Data and AI Summit where we announced our GenAI Blueprint for Databricks DBRX, full verification of Uniti catalog support across IDMC. Our native ELT capabilities for Databricks and the availability of our cloud data integration, no cost service tier where Databricks Partner Connect.

We were awarded MongoDB's 2024 build with Partner of the Year as well. We launched our cloud data governance and catalog service natively on Oracle Cloud. We also expanded or rather extended our support for open table formats in Apache iceberg. Iceberg adoption is in its early stages of growth across the cloud data ecosystem partners from Snowflake to AWS and Microsoft Fabric and now with the acquisition of [ Tabler ] by Databricks.

Informatica's new open table format connectors support advanced data ingestion and integration use cases to drive large-scale data engineering operations for high-performance analytics and ML projects. Turning to GSI partners. Some of our largest partners have experienced significant growth within the Informatica practices for expanding their data and AI practice. We have seen growing interest in developing and taking solutions to market based on IDMC. For instance, LTIMindtree launched a solution to assist non Informatica businesses with legacy on-prem data integration products in monetizing and transitioning to Informatica IDMC.

As part of our ongoing strategy, we are seeing more partners assume a greater role in implementation services work supporting our customers, and we welcome that. We continue to be the leading innovators in our industry. Over the year, we've invested over $1 billion only, but the biggest innovators of data management engineering in [indiscernible]. We've [ illite ] many categories in data management. We were pleased to be recognized by IDC as the market share leader in 2023 worldwide report for both the data integration and data intelligence markets. We were also recognized as champions of the Blue Research 2024 market update reports for Data Fabric, data quality and test data management.

Now let me turn to GenAI, which is at the top of our customers' minds. As I speak with CDO, CIO digital leaders across the globe, there is a universal agreement that everyone is ready for GenAI except their data. Data management brings AI to life ensuring trust, responsibility, ethical use and value creation. Our efforts to assist customers with their AI strategic initiatives are twofold, Informatica for GenAI and GenAI from Informatica. Both available on the single IDMC platform. Now Informatica for GenAI includes all of IDMC capabilities, data integration, data governance, data quality, master data management, app integration and cataloging which are critical to processing mission-critical workloads.

In June, IDMC processed 97 trillion cloud transactions per month, growing 59% year-over-year. At Informatica world, we unveiled new features and product enhancements, including building no core GenAI apps with prompt engineering, rag and react AI agent support. We support popular LLM and vector DDs with enterprise-grade scalability and governance. We included new capabilities for contextualizing LLMs on enterprise data, including chunking embedding and ingesting into vectors DBs. IDMC will add support sources for documents, images and video sources with full integration across cloud data access management policies, data quality rules, catalog and integration pipelines. IDMC is LLM agnostic, future-proof and has out the box connectors for easy navigation of any model from any hyperscaler to small providers. A few fantastic drill like use cases include a California-based credit union uses IDMC to optimize sentiment analysis with customer support training. It provides proactive customer service by identifying customer support KPIs reducing customer handling time through automated analysis of large volumes of phone interactions and providing decision support using open AI.

A large marketing company uses IDMC to build GenAI-based incident management, alleviating the burden on the incident management team by automating incident risk incident assessment and providing actionable insights with sentiment analysis using LLM with the rack framework. A large pension firm in Canada is using IDMC to build a GenAI-based intelligent chatbot, improving employee productivity by reducing the processing time for queries on insurance proposals and claims through automated analysis and decision support using locally hosted LLMs.

Now turning to GenAI from Informatica. We launched CLAIRE GPT, the first GenAI power data management assistant grounded by enterprise metadata intelligence, leveraging core IDMC capabilities. In May, we announced the general availability of CLAIRE GPT in North America after an extensive 12-month review program. CLAIRE GPT is that ChatGPT for enterprise data, providing capabilities like data discovery, merited exploration, finding data quality, data linkage and even creating ELT pipelines.

Along with CLAIRE GPT, we also have CLAIRE copilot capabilities embedded in all the products structured on IDMC, providing in context product data assistant with CLAIRE generated classifications.

One of Informatica's key differentiators in its metadata system of record, which provides valuable insights into data assets, location, quality and relevance for analytics and data science use cases. This is more than just Informatica metadata. It is metadata across the enterprise data warehouses, applications, BI tools or main trims from trained LLMs and SLMs. CLAIRE engine is now leveraging over 49 [ petabytes ] of active metadata in the cloud. Customers are in the early stages of piloting CLAIRE GPT. Since it's long, over 150 enterprise customers have consumed IPUs on CLAIRE GPT usage, primarily for data discovery and exploration use cases. To give you a few examples, SSM Healthcare uses CLAIRE GPT to enhance data literacy with its natural language interface for data discovery, examining lineage of the data and thoroughly assessing data quality with CLAIRE GPT they provide a self-service interface for medical information officers to effortlessly get insights on the data, such as the number of orthopedic providers in their network, ensuring appropriate patient coverage.

A global supply chain data analyst use CLAIRE GPT to monitor, maintain and report on product movements as receipt, dispatch and storage without meeting Sequel. These examples provide just a glimpse into real-life use cases and stories that customers share feedback with us. To further show our commitment to helping enterprise customers embrace trusted and holistic data for their AI initiatives, we are introducing a new promotion in August to drive broad CLAIRE GPT adoption. The offer is for eligible North America customers to use CLAIRE GPT at no additional cost through the end of 2024.

Now looking into the second half of the year, we are pleased to raise 4 guidance metrics for the full year. including cloud subscription ARR to 35.5% from 35% earlier. We have good execution and momentum in the first half of the year and believe our operational health remains very strong. As evidenced by a predictable cloud subscription revenue business model, our strong customer base, healthy cloud pipeline and retention rates and growing unlevered free cash flow. Our growth priorities continue to center around 3 strategic initiatives outlined at the Investor Day. First, data-driven digital transformation is crucial for our customers to achieve digital leadership. In fact, with GenAI on the horizon, customers are accelerating those. Second, modernizing legacy data states to help enterprises harness the advantages of being a digital business; and lastly, delivering GenAI capabilities and assisting customers in exploring the intersection of data and AI for data management. These important initiatives for modern enterprises are a tailwind for Informatica's for many years to come. As I wrap up, I want to thank all my Informatica colleagues, our partners, our customers and our shareholders for their ongoing support.

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

[Michael McLaughlin, executive]

Thank you, Amit, and good afternoon, everyone. Q2 was another solid financial quarter across the board with all key growth and profitability metrics within or above our guidance metrics. I'll begin my discussion of Q2 results with a quick review of the components that make up Informatica's annual recurring revenue or ARR. Our ARR falls into 3 categories: cloud subscriptions, which grew 37% year-over-year self-managed subscriptions, which we no longer actively sell and therefore, are gradually declining and maintenance for on-premise perpetual licenses that we no longer actively sell, which is also a gradual decline.

With that in mind, let's start with total ARR, which was $1.67 billion, an increase of 7.8% over the prior year. This growth was driven primarily by new cloud workloads strong cloud net expansion with existing customers and stable self-managed subscription and maintenance renewal rates. Foreign exchange rates negatively impacted total ARR by $2 million. Cloud subscription ARR was $703 million, a 37% increase year-over-year and 10% -- sorry, $10.6 million above the midpoint of our May guidance. New cloud workloads and strong net expansion with existing customers drove cloud subscription net new ARR of $190 million year-over-year and $50 million sequentially. Cloud subscription ARR now represents 42% of total ARR, up from 33% a year ago. Foreign exchange negatively impacted cloud subscription ARR by about [ 720,000 ]. Our cloud subscription net retention rate remained very strong in Q2. At the end-user level, it was 119%, up 3 percentage points year-over-year and flat versus last quarter.

Flat subscription net retention rate at the global parent level was 126%, up 4 percentage points year-over-year and up 2 percentage points versus last quarter. Managed subscription error declined in the quarter as expected to [ $494 million ]. This was down 2% sequentially and down 7% year-over-year, somewhat better than our expectations coming into the quarter. subscription ARR, which is simply the sum of cloud ARR self-managed ARR, grew 15% year-over-year to $1.2 billion, which was $18.5 million, above the midpoint of our May guidance. Foreign exchange rates negatively impacted subscription ARR by approximately $1.1 million.

The third component of total ARR is maintenance for on-premise perpetual licenses sold in the past, which now represents 28% of total ARR. [ Manta ] ARR was down approximately 7% year-over-year to $472 million. This was in line with our expectations for the quarter. Modernizing our on-premise customer base to Informatica's Intelligent Data Management Cloud is a large opportunity for us. As of the end of Q2, we have migrated 6.1% of our maintenance and self-managed era based to cloud, up from 5.5% last quarter. We have a life-to-date average 2:1 ARR uplift ratio on these migrations, including power center and master data management migrations. In Q2, we closed a similar number of cloud modernization deals as in Q1, in the first half of this year, the number of modernization deals grew 58% year-over-year.

And in the second half of the year, we expect modernization growth to be above our average cloud subscription ARR growth rate. To summarize our Q2 ARR performance, the 3 components of our ARR summed to 7.8% total ARR growth year-over-year Cloud subscription or ARR growth of 37% drove this increase, offset by gradual self-managed subscription and maintenance ARR declines. We expect similar trends to continue throughout the second half of 2024 as a direct result of our cloud-only strategy.

Now I'd like to review our revenue results for the second quarter. GAAP total revenues were $401 million, an increase of 6.6% year-over-year. Foreign exchange rates negatively impacted total revenues by approximately $1.6 million on a year-over-year basis. Our revenue was approximately $1.4 million below the midpoint of our May guidance due to 2 primary factors: First, as a direct result of our strategy to shift more of our customers' implementation and support work to our professional services partners, professional service revenues were lower than our original forecast. This is a positive development for Informatica as our services partners are an important go-to-market channel and services related to our software are an attractive business for those partners.

To illustrate the importance of this channel for the first half of the year, closed wins in which partners brought Informatica into the opportunities represented more than 30% of total bookings. The second factor impacting our GAAP total revenue this quarter was somewhat lower average term length of self-managed subscription renewals. This resulted in less upfront recognized self-managed subscription revenue per the ASC 606 accounting standard, than our previous forecast. As most of you know, ASC 606 accounting for self-managed subscription revenue does not impact ARR billings or cash flow. Shorter-term length on renewals means less GAAP revenue is recognized upfront per ASC 606 that ARR billings and cash flow are not affected. We expect these 2 trends, lower professional services revenue and shorter self-managed renewal terms to continue for the remainder of the year, and therefore, we are lowering our full year 2024 GAAP total revenue forecast accordingly, as we will discuss in a moment.

Subscription revenue, which includes cloud subscriptions and self-managed subscriptions increased 16% year-over-year to $264 million, representing 66% of total revenue compared to 61% a year ago. Our quarterly subscription renewal rate was 90%, down 2 percentage points year-over-year due to lower self-managed subscription renewal rates, offset by higher cloud subscription renewal rates. Our subscription renewal rates have been largely consistent with our expectations so far this year. Revenues in our maintenance and professional services category were $136 million, Maintenance revenue of $116 million represented 29% of total revenue for the quarter, and our maintenance renewal rate was 96%, up 2 percentage points year-over-year. Professional services revenues, which includes implementation consulting and education to make up the remainder of this category and are down almost $4 million year-over-year.

As I mentioned a moment ago, our implementation service revenue has been declining as our services partners assume a greater share of that work for our customers, and we expect this trend to continue in the second half of the year. Cloud subscription revenue was $161 million or 61% of subscription revenues, growing 35% year-over-year.

As a reminder, due to the timing difference between revenue and ARR recognition, the relative growth rates of these 2 metrics may differ from period to period. Turning to geographic distribution of our business. U.S. revenues grew 7% year-over-year to $256 million, representing 64% of total revenue, while international revenue grew 5% to $144 million. using exchange rates from Q2 last year, international revenue would have been approximately $1.6 million higher in the quarter, representing international revenue growth of 6.5% year-over-year. Informatica's consumption-based pricing unit, the IPU, represented approximately 58% of second quarter cloud new bookings. The remainder of cloud -- of Q2 cloud bookings were primarily for customer or supplier records for our MDM products, which is also a multiyear committed consumption-based pricing model. We had 3 new IPU services, including CLAIRE GPT to our IDMC platform this quarter. We now have 36 day management capabilities that our customers can access and consume on our unified platform using IPs.

Now I'd like to move on to our profitability metrics. Please note, I will discuss non-GAAP results unless otherwise stated. In Q2, our gross margin was 82%, an increase of over 1.6 percentage points year-over-year. We remain focused on maintaining healthy gross margins as our business transitions to the cloud. Operating expenses were consistent with expectations Operating income was $115 million, growing 31% year-over-year and exceeding the midpoint of our May guidance by almost $2 million. Operating margin was 28.7%, a 5.4 percentage point improvement from a year ago. Adjusted EBITDA was $119 million and net income was $71 million. Net income per diluted share was $0.23 based on approximately $315 million outstanding diluted shares, basic share count was approximately 301 million shares.

Adjusted unlevered free cash flow after tax was $71 million, better than expected due to faster cash collections and other working capital dynamics. Combined with Q1 results, unlevered free cash flow for the first half of 2024 was in line with historical linearity. I will update our expectations for the full year in a moment. Cash paid for interest in the quarter was $38 million, in line with expectations. In June, we repriced our $1.8 billion outstanding term loan reducing the applicable margin by 50 basis points and eliminating the credit spread adjustment related to the transfer from LIBOR to SOFR. This repricing will save approximately $11 million in pretax interest expense on an annual basis.

We ended the second quarter in a strong cash position with cash plus short-term investments of $1.13 billion, an increase of $307 million year-over-year. Net debt was $704 million and a trailing 12 months of adjusted EBITDA was $529 million. This resulted in a net leverage ratio of 1.3x at the end of June.

Now I'll turn to guidance, starting with the full year 2024. We are very pleased with our execution in the first half of 2024, and we have good momentum going into the second half of the year. This reflects confidence in our cloud-only consumer-driven strategy, supported by strong customer momentum and renewal rates. Therefore, we are raising FY 2024 cloud subscription ARR by $3 million and subscription ARR by $4 million at the midpoint. We now expect cloud subscription ARR to be in the range of $829 million to $843 million, representing approximately 35.5% year-over-year growth at the midpoint of the range. We now expect subscription ARR to be in the range of $1.265 billion to $1.299 million, representing approximately 13.2% year-over-year growth. We are reaffirming total ARR to be between $1.718 billion and $1.772 billion, representing approximately 7.3% year-over-year growth.

Turning to total revenues. We expect the same dynamics regarding professional services and self-managed renewal duration as we saw in Q2 to continue for the remainder of the year. We estimate this impact to be approximately $21 million, about evenly split between these 2 dynamics. Additionally, due to the recent strengthening of the U.S. dollar against the euro, pound and yen, we now expect increased FX-related headwinds -- revenue headwinds of approximately $4 million compared to previous assumptions. Taking this all together, we are updating GAAP total revenues downward by approximately $25 million to the range of [ $1.66 million ] and [ $1.68 billion ]. Representing approximately 4.7% year-over-year growth at the midpoint of that range. It's very important to understand that this reduction in total revenue guidance does not reflect any change in our expectations for our core recurring revenue software business. lower expectations for lower -- for low-margin professional service revenues and lower upfront self-managed revenue recognition pursuant to ASC 606, along with FX, are the cost. We delivered better-than-expected bottom line results and our raising guidance for our non-GAAP operating income by $5 million and adjusted unlevered free cash flow after tax by $10 million at the midpoint.

We now expect non-GAAP operating income to be in the range of $538 million to $558 million, representing approximately 18.5% year-over-year growth at the midpoint. And we now expect adjusted unlevered free cash flow after tax to be $545 million to $565 million representing 23% year-over-year growth. Turning to the third quarter, we are establishing guidance for the third quarter ending September 30, 2024, as follows: we expect GAAP total revenue to be in the range of $412 million to $428 million, representing approximately 2.8% year-over-year growth at the midpoint. We expect subscription ARR to be in the range of $1.199 billion to $1.219 billion, representing approximately 12.2% year-over-year growth. We expect cloud subscription ARR to be in the range of $738 million to $748 million, representing approximately 35.2% year-over-year growth. We expect non-GAAP operating income to be in the range of $139 million to $151 million, representing approximately 13.2% year-over-year growth.

All of those growth rates are at the midpoint. For modeling purposes, I would like to provide a few more pieces of additional information. First, we expect total ARR for the third quarter to be in the range of $1.66 billion to $1.69 billion representing approximately 6.3% year-over-year growth at the midpoint of the range. Second, we expect unadjusted -- sorry, we expect adjusted unlevered free cash flow after tax for the third quarter to be in the range of $110 million to $130 million.

Third, we estimate cash paid for interest will be approximately $36 million in the third quarter and approximately $146 million for the full year, using forward interest rates based on 1 month SOFR. Fourth, with respect to taxes, our Q2 non-GAAP tax rate was 23%, and we expect that rate to continue for the full year.

And lastly, our share count assumptions. For the third quarter, we expect basic weighted average shares outstanding to be approximately 304 million shares and diluted weighted average shares outstanding to be approximately 312 million shares. For the full year, we expect basic weighted average as outstanding to be approximately 302 million shares and diluted weighted average shares outstanding to be approximately 313 million shares.

In summary, we are very pleased with our second quarter performance and the first half of the year. We are focused on executing our cloud-only consumption-driven strategy and delivering our 2024 guidance.

Operator, you can now open the line for questions.

[Operator]

[Operator Instructions] Our first question is from Matt Hedberg with RBC.

[Matthew Hedberg, analyst]

I guess maybe for either of you, who ran on the role, I think, obviously, Mike you go out some of the [ wine ] items that that impacted you guys. But I think it certainly looks like core underlying strength in subscription and cloud ARR was strong. I guess I wanted to ask a little bit more about your increased cloud error guidance. What are the primary reasons for this optimism? And I think you mentioned maybe the pipeline, just general customer interest. Just is there a macro element to this as well? Just sort of curious on that because certainly look good to us?

[Amit Walia, executive]

Sure. Thanks for the question, Matt. Look, I think we -- macro, I said like we look -- the macro look appear to be the same to us in the last quarter as in Q1. I think what we are seeing is definitely -- pipeline has been very healthy. This year, Informatica world, some of you were there was the biggest Informatica world ever. And coming out of the pipeline of that Informatica world was the biggest pipeline that we've ever had. And going back to the 3 initiatives that customers are spending on, ongoing digital transformation, modernization and now GenAI, it's actually become a [indiscernible], I think I said that before. To get to GenAI customers have to modernize even faster. And they have to get to digital faster then only they get the benefit of GenAI.

And of course, the early innings in GenAI are also playing a role, people have to set their data states in place -- so -- and with IDMC, they can do the current initiatives that they are currently on, and they can start experimenting GenAI. That has allowed customers to feel very future-proofed in what they are implementing here. All of those that we are seeing as being the tailwind to pipe create and healthy deal closure and also you see big deals, like the 5 million-plus deals we talked about ARR as well as $1 million pretty healthy growth over there.

[Matthew Hedberg, analyst]

Got it. That makes sense. And then Mike, just maybe one for you on the strategic shift to more PS revenue going to partners. I guess I'm curious, is there a benefit to your margins over time due to this? And I guess, secondarily, can you give us a sense for -- after this updated assumption, how much of your PS revenue is left, I guess, as we think towards calendar '25 and beyond?

[Michael McLaughlin, executive]

Yes, sure. So it's going to be essentially margin neutral. We're a software company, not a professional services company. And while we have a great professional services organization, and we're really proud of them. it's not a profit center for us. It's there to ensure the successful implementation of the software to ensure that the customers realize value that they should from the software once they own it. So we're very happy for our GSI and regional services partners to do that business instead of us if our customers want them to. We don't pay commissions to our salespeople to sell PS, it's more of a pull from our customers when they want it.

So this decline is a natural trajectory. It's gone a little faster than we expected. It's declined over the last 3 years, and we thought this year was going to be the bottom. But it's actually declining faster than that. And so we lowered guidance accordingly. I think the number, if you look last year for our professional services, including our education services, was $97 million, and we had thought it was going to be about flat, and we were taking it down, as I said in the remarks by, low double digits, [ $10 million, $11 million, $12 million ] for the year.

[Operator]

Our next question is from Alex Zukin with Wolfe Research.

[Unknown Analyst]

This is Patrick on for Alex. Just wanted to clarify, maintenance renewal rates are going higher, but duration is down. So can you just explain the dynamics there? Are self-managed customers renewing, but you're just seeing more 1- and 2-year deals versus 2- and 3-year deals prior. And I'm curious as to how or if you can try to further accelerate that migration story?

[Michael McLaughlin, executive]

Yes. Sure, Patrick. So, let's start with a clarification because it's important to keep maintenance, which is on on-prem perpetual licenses and self-managed, which is essentially on-prem subscriptions separately because the dynamics in terms of renewal are a little different. Maintenance contracts are almost all 1 year. They have been since the dawn of time. And the renewal rate there is very constant. The term of those renewals actually doesn't matter because maintenance is recognized ratably because it is a service, not a software license. It's all in the self-managed piece, which is on-prem subscription contracts.

And that the amount that's recognized upfront per ASC 606 is hefty and a change in the duration from 3 to 2 to 1 or anywhere in between has a remarkably large impact on the GAAP revenue recognition. So -- we had expected it to come down. It's a natural thing as we end of sale the product and more and more folks are preparing themselves to move to the cloud, if not today, maybe at the next renewal. And we see that trend of reduced renewal term actually as a confirmation that migrations are going to continue to moved rapidly and hopefully move even faster because the customers are setting themselves up to move as indicated by voting with their [indiscernible], as you will, by shorter durations on the self-managed contracts.

So it's all self-managed on-prem, not maintenance. And the revenue -- the GAAP revenue reduction that we've established puts it, we think, is a realistic level for the rest of the year. And I can not -- I can't end this answer though, by reminding everybody that it doesn't affect ARR, it doesn't affect billings. Doesn't [ affect ] cash flow. As you can see, we've actually increased our bottom line guidance despite the fact that GAAP revenue is coming down.

[Unknown Analyst]

And then a quick follow-up, if you don't mind. In terms of what is contemplated in the implied second half net new cloud ARR guide, any way to directionally think about whether there's more or less migration baked into that number given the implied ramp?

[Michael McLaughlin, executive]

So we haven't sort of explicitly changed our expectations for the pace of migrations through the year. As I mentioned in my remarks, we expect the growth of our migration, both in terms of deals and dollars year-over-year to be faster than our average cloud subscription growth we're guiding to 35.5% cloud subscription overall. Migrations will grow faster than that, reflecting all the things we've talked about over time, including power center Cloud Edition, making it easier, faster, less risk for our customers. to move. And we remain confident in that forecast. We're optimistic that it will maybe go faster than that, and particularly in 2025, we see lots of reasons to be optimistic, but for now, we're not changing our explicit expectations for migrations for the rest of the year.

[Operator]

We have a question from Kash Ranjan with Goldman.

[Kasthuri Rangan, analyst]

Congrats on the quarter. It looks like the cloud momentum is picking up. So Amit, a high-level question for you, as you approached 2025 with Cloud ARR, firmly above 20% of total ARR. And with the cleanup done with respect to the ASC 606 revenue recognition of the on-prem lowering the guide is the right thing to do. But how does this set you up for accelerating revenue growth rate potentially into double digits for next year?

[Michael McLaughlin, executive]

Look, I think it sets us up well for accelerating revenue growth, but double digits in 2023. This isn't official guidance, but [indiscernible].

Is probably not realistic. But accelerating revenue growth, we do feel good about. And that's all consistent with what we talked about last December at our Investor Day when we set out our medium-term guidance. We still feel good with that medium-term guidance on that. As you may recall, was calling for double-digit revenue growth by the end of '26 or into '27 with double-digit ARR growth in 2026. So that all still feels good to us.

[Operator]

We have a question from Koji Ikeda with Bank of America.

[Koji Ikeda, analyst]

A couple from me. So I am looking at your investor presentation, Slide #48. It's the maintenance to cloud migration, illustrative example I think this is a new slide, and it does give the -- in your prepared remarks, you did talk about 20% -- 6% of net new cloud ARR coming from migrations. But in this slide, it talks about the effects of credits. And so I guess the question here is, is there a way to maybe qualitatively or quantitatively talk about how much higher the percentage of net new ARR would have been this quarter or maybe on a trailing 12-month basis if there were not credits given -- and the effect to cloud ARR?

[Michael McLaughlin, executive]

Yes. Well, thank you for digging all the way to Page 48 into the deck. It is a new slide, and we produced it because we got so many questions on this, and it's hard to answer well without a little bit of a visual aid. You've got it right that the credits that are offered for existing maintenance and in some cases, professional services for migration, lower the ARR that we recognizing cloud during the term of the initial cloud deal, sort of average 2.5 years, summer 2, summer, 3 summer longer. And then the full AR is not fully realized or unlocked as we say internally until that first renewal. There's really not a great way for you to model it. You can certainly try and we can give you some things to think about primarily the fact that it's 6 months as the Power Center Cloud Edition transition period.

So we give folks credit for their maintenance in full for that 6 months of maintenance. That's the primary variable. And so you certainly can take a stab at modeling, we model it internally -- but it's -- it gets complicated in the lines of your spreads you get pretty complex pretty fast.

[Koji Ikeda, analyst]

No, that's very helpful. And follow-up here. You did talk about CLAIRE GPT being available now on IPU. So great to see your customers have a low friction adoption way for CLAIRE GPT I guess question here is that will you be able to see usage of CLAIRE GPT through the IPU? And is there the potential for CLAIRE GPT to be broken out as a percentage of IPUs in the future?

[Amit Walia, executive]

So the first answer is yes. Customers can CLAIRE GPT through the IPO model. That's the intent, which is why I mentioned that. And the examples I gave you are the examples of customers who've started using CLAIRE GPT with the IPO model. So our goal right now is to obviously drive as much adoption of the CLAIRE GPT service because that in general, obviously, will be driving more of IDMC services and its usage and we feel very good about it. I think, Koji for now, we have -- we're not looking to break that at all. I mean we don't break any of our services in general in the IPO model Obviously, when we come to the next -- any session, we can -- we'll keep giving you guys more information around where we are headed in that direction and more things. But right now, we don't have any any plans to break the CLAIRE GPT IPU consumption from regular IP consumption, like we haven't broken for any other service.

[Operator]

Our next question is from Andrew Nowinski with Wells Fargo.

[Andrew Nowinski, analyst]

I want to ask a question on your cloud ARR is clearly very strong this quarter and your guidance for Claudia. I was also very impressive. Which seems to be the opposite of what we saw of measure tonight. Does that signify the durability of your Cloud ARR segment and how it can continue growing at a high pace despite some of the weakness we're seeing these?

[Amit Walia, executive]

Thanks, Andrew, for the question. Look, I think if you step back, one of the things that we have always said. First of all, the uniqueness for Informatica is that we serve every hyperscaler platform, every data platform, every use case across the industries. So it's not necessary that whether an Azure or GCP or an AWS or a Snowflake or Databricks, any of their individual things directly impact us quarter in or day in day out. Obviously, we serve a broad ecosystem. Obviously, our strength and durability is that we serve across all of the Switzerland of data, as I said, and as you heard from me, becoming the Switzerland AI in the new world.

And that's the strength of the durability of the business. and customers, the other one is that, look, we are a very unique place. We've got the best-of-breed products. We're the only platform that brings it all together and with AI that in our industry, which is massively fragmented in data management, there isn't even one that remotely comes to us. And I think that's another thing that's obviously benefiting us and not forgetting modernization. So I think all of those are playing into the momentum we are seeing in .

[Andrew Nowinski, analyst]

Okay. And just a follow-up, maybe just at, I guess, it is you cited, I think, a new stat you said 26% of cloud ARR came from migrations this quarter. Was that an improvement relative to last quarter? How has that changed? .

[Michael McLaughlin, executive]

It's actually not a new stat. We introduced it at our Investor Day in December, and we've mentioned it on our calls or at least in Q1, and this is the second call of the year. So back in -- at our Investor Day, I think that -- that was 17%, maybe 18% and it was 24% in Q4 and this 26% now. So it's going up. There's quarter-to-quarter volatility in that, and it's in any given quarter, a lot of small numbers, relatively speaking. So but it continues to be very strong and that -- and our medium-term expectations that we've also talked about is we expect the contribution from migrations over the multiyear period to be 30% to maybe as much as 1/3 of our total.

[Operator]

We have a question from Pinjalim Bora with JPMorgan.

[Pinjalim Bora, analyst]

Amit, I want to ask you a high-level question. There seems like there's some confusion among the investor base around kind of table formats and how the adoption of table formats might or might not impact the data integration space I know it's early, and there are kind of 3 different formats at this point. But I'd love to hear if you think -- how do you think of it? Is it a net positive, neutral, negative to the overall integration space?

[Amit Walia, executive]

Pinjalim, back to the question. Net positive. So I think, look, overall, for us, it has -- it's a net positive for us. Any time anything new has come, it creates more work to be done. New table format does not change the need that there is a massive amount of data sits within a large enterprise. Look, we serve the enterprise, right? Fragmented, large, complex infrastructure running around multiple databases we've been multiple instances of those databases with transactional data, nontransaction data, even if you have to bring into one of these tables for analytic purposes, they have to be prepared. They have to be formatted. They have to be put in the right quality. And then only some analytic work can happen whether these tables are in a warehouse or a lake.

The second one is I remember, it's a constant piece of work to be done. When the core system keeps adding new data, new things, they have to be constantly updated and prepared to bring it back to this table again for any analytic work look to be added. And then from there, just to continue the workflow within an enterprise, data has to be taken out of this these tables to pass it to the BI layer for visualization, which we also participate in. And then, of course, that's just a core pipelining data integration part. Don't forget that governance and all of those things sits on top of it. So weaken this as a net positive. We already support it. We have the connectors that we support it, connect us to bring data in, take data out, support the open data formats, all of those things. So that's how we look at it at a very high level Pinjalim. Happy to share more, but we are -- we don't see this -- and we see this as a positive overall.

[Pinjalim Bora, analyst]

Got it. One follow-up for Mike. Mike, can you talk about the IPU cohort that renewed this year? How has been the adoption rate across products? And is there any difference in the expansion characteristics with that cohort of comes using IPUs versus non-IPUs?

[Michael McLaughlin, executive]

Well, as time goes on, we have more and more IPU renewal experience, we only began selling IPUs I don't know, 3.5 ago, something like that, maybe 4. And so -- last year, the number of IP renewals was not a lot of deals, but it's a lot more this year, and we feel really good about our experience. We have a handle on what utilization both absolute levels and patterns lead to high probability of renewal, and we have a pretty good handle on what the early warning indicators are in the utilization data that we can see that suggest we should get a customer success person into that account well in advance of renewal so that we can help them get value out of the software and improve the chance of renewal when the time comes. .

So I wouldn't say that we have a there's not a cohort difference in '24 versus '23 renewals that we can see. They're both in line with expectations. We think they're very good both on relative on an absolute basis. And we're getting better at it every day as we learn more and more from the telemetry we get from the usage of IPUs.

[Amit Walia, executive]

The only thing I'll add to that is to what Mike was saying is that we -- with the bigger and broader base of IPUs out there right now that we end up renewing. The thing that we are very -- we are very pleased to see is that expansion of those IPUs is definitely increasing. So we see more expansion happening to customers who at IPUs, which allow -- which basically both cross-sell, upsell. And that definitely we are seeing an increase in momentum this year and last year. So that clearly more IPUs better renewals, better usage, more expansion. That's what we are seeing as a trajectory of our business.

[Michael McLaughlin, executive]

And I'll just add, when we use the word expansion we made in term expansion, so not a renewal, or -- so this is before the renewal comes up, the customers doing great, using lots of IPs and they come back to us and ask for more. And that's a really low cost to market. It's a really high value sale for us and for them, and the momentum there is super encouraging.

[Operator]

Our next question is from Will Power with Baird.

[William Power, analyst]

Amit, I wonder if you could kind of talk about the nature of your customer conversations in this climate where there's a lot of questions around the health of software spend broadly, how they're thinking about the prioritization around data and AI spend and obviously, your IDMC platform, specifically, I mean, the cloud numbers suggest that, that continues to be prioritized. But just it would be great to kind of hear your perspective on what -- how customers are thinking about prioritizing their spend in the current environment? .

[Amit Walia, executive]

Thanks for the question. I think I'll separate that into 2 categories. So one is the broader customer spend environment and what they -- how they are prioritizing data and AI and then particularly tied to us. Look, I think without doubt, I think customers have realized that they have to spend in this area. And I've said that many before that customers are moving more towards spending offensively in transformational projects, but that doesn't mean that customers are net increasing their overall IT spend by a very big margin, Customers are obviously looking within their spend and say, "Hey, I got to prioritize these couple of things. But then it means that I have to define a better way to be more effective in the existing spend I have. And of course, in some cases, the prioritization also happens. Absolutely, we see that. But data and AI remains definitely a top 3 spend category along with security in particular.

The unique thing we are seeing is that that the data layer is becoming a key enabler for GenAI and anything to do in that area. There's a tremendous mindshare for that. Everybody wants to do. That's not a matter of if, it's a matter of when. And number 2 is that, in our case, what's very unique is customers don't have to look left and right -- the same IDMC platform allows them to do GenAI work and the existing 3 GenAI district transformation that's going on. So they're very future-proofed. And with IPUs, they can seamlessly start experimenting GenAI workloads while they are running their current projects. They don't have to make either our decisions. And as I said, within IDMC, they can use IDMC for GenAI. We shared that at Informatica were some of the demos. And now CLAIRE GPT is also available on the IPU model on the same platform to basically do next new GenAI projects. that definitely is a very unique thing to us. That's obviously showing up in our cloud pipeline and the strong cloud ARR our results.

[William Power, analyst]

That's helpful. And maybe if I could just ask a second one for Mike. Anything to call out with respect to linearity, I know you all indicated the macro was pretty stable in Q2, but anything to call out in June and maybe even into July versus trends you might have seen in April and May?

[Michael McLaughlin, executive]

Well, very consistent with last year. almost on the screws. It's software, our business usually isn't that predictable, but it's been, again, very similar to last year. We think the macro feels similar deal cycle feel similar and pipeline build also looks very similar.

[Operator]

We have a question from Howard Ma with Guggenheim.

[Howard Ma, analyst]

I have one for Mike and a follow-up for Amit. For Mike, I think Mike have kind of already answered this in the last response, but it's on the cloud ARR upside and the raise. So by raising less than the beat I just want to be clear, is that just a matter of being prudent? Or -- and then perhaps in reality, there's less risk in the back half and especially given my questions are likely to step up -- or is there potentially something more in the phase that you're seeing in the future?

[Michael McLaughlin, executive]

I would -- it's prudence in derisking. There's nothing to it to that, Howard.

[Howard Ma, analyst]

Okay. Great. Great. I just wanted to be clear. And for a Amit, wanted to ask you about another type of catalogs, so not open table formats, but around data bricks, open sourcing their unit catalog -- so really, how impactful is this on the entire data catalog space and on Informatica specifically? Is it more of like a the rising tide lifts all both situations. And then you expect it to increase overall awareness of the importance of data catalogs -- or could this be a threat to Informatica?

[Amit Walia, executive]

How would we created the data catalog category? And I think I've always said that our catalog is a very different catalog. It's a catalog of catalogs. Every -- when enterprises look for a catalog provider, they look at 1 metadata system, a record creator, which is what we become data resets only in Databricks, only in Snowflake, in fact, more data sets out of Databricks. And not all data will go to Databricks. We love them. We partner with them, but that's just a practical reality. We support [ Uniti ], so customers can have metadata catalog within Unity. It's like everybody has to have that. I think sometimes we get confused about the same word like I've said, databases have to have data governance, too. That's a very different governance for data basis. Without that a database does not become a database, but data governance at the [indiscernible] level across an enterprise is a very different thing. So words can be very different, although they can be used very similarly.

Unity is open source now. I think that's what I last I checked is what Databricks has done, which is good for the Databricks ecosystem. But we absolutely see our catalog growing very, very strongly because the use cases we serve, no other catalog is even remotely close to what we serve because it's not just a catalog. It serves enterprise-grade governance, enterprise-grade metadata system record on which an enterprise GenAI initiative will sit, and that's what we're seeing the tailwind to us.

[Operator]

We have a question from Patrick Colville with Scotiabank.

[Patrick Edwin Colville, analyst]

So Mike, the disclosure you guys gave on the proportion of net new ARR from migrations is super helpful. So 26% of TTM net new ARR this quarter. Last quarter, it was a tad higher, it was 28%. Why would there be would it kind of tick down very slightly versus last quarter?

[Michael McLaughlin, executive]

Yes. Thanks for reminding me. I misquoted that earlier in the call, I thought it was 23%. Look, it's quarter-to-quarter variability. You'll also notice in my script that I mentioned that the number of migration deals this quarter was about the same as what we saw last quarter, whereas last quarter, it was more than on a year-over-year basis. So it's quarter-to-quarter variability is what it is. And that's why we used the TTM number instead of a quarterly number because we don't want folks to get confused or panicked about what maybe noise not signal. We -- and as I said, we expect that contribution to the growth of the migrations on a year-over-year basis in terms of contribution to NAR to grow faster than our average cloud growth rate. So it's all consistent with what we expected during the year, and I would just encourage you not to get too obsessed with quarter-to-quarter volatility. I know it's hard, but do your best.

[Patrick Edwin Colville, analyst]

Okay. Okay. And -- but I guess the key message is -- and this is your answer to Andy's question earlier, is you expect to be increased from here, right? I think you said 30% to 33% of net new ARR is expectation in the future?

[Michael McLaughlin, executive]

Yes, that's our medium-term expectation of the kind of steady state through the 2026 medium-term period.

[Operator]

We are out of time for questions, so I'll pass the call back to the management team for any closing remarks. .

[Amit Walia, executive]

Well, thank you. Well, look, I really appreciate everybody taking the time today. As you can see, we are extremely thrilled with a solid performance in Q2 and obviously, over the course of first half, first half is an important checkpoint for the year where we are. We remind everybody we run an annual business on a quarterly business, so we feel very good, which is why when we look at look at the second half and we look at the year, we've raised our guidance for cloud ARR, subscription ARR, non-GAAP opening and unlevered free cash flow after tax. So we feel very good about the business where we sit.

All the 3 vectors of growth, whether it's digital transformation, modernization of GenAI continue to help increase pipeline and drive our business. We look forward to obviously Q3 and rest of the year, but I think we're in great shape, and we remain confident to close out a strong year. Thank you very much.

[Operator]

That concludes today's call. Thank you all for your participation. You may now disconnect your lines.