Informatica Inc
NYSE:INFA
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Informatica Inc
Earnings Call Analysis
Q3-2023 Analysis
Informatica Inc
The company exceeded expectations in the third quarter, surpassing guidance across all major financial metrics. This strong performance, fueled by steady customer momentum and the execution of a cloud-only consumption-driven strategy, has allowed the company to raise its non-GAAP operating income and adjust its unlevered free cash flow after-tax guidance for the full year.
There is a clear focus on accelerating cloud transformation and establishing the AI-powered IDMC as the preferred data management platform. The company showcased customer growth, with a significant increase in customers spending over $1 million in subscription ARR. Furthermore, the company has successfully migrated 5% of its on-prem maintenance Base to Cloud at the end of Q3, which is up from 4.5% at the end of Q2.
Looking forward, the company aims to deliver balanced profitable growth by continuing a successful cloud-only consumption-driven approach, confirmed by an announced restructuring plan aimed at reducing the workforce and the global real estate footprint by about 10%, while streamlining the cost structure and enhancing focus on cloud strategy.
With notable customer stories featuring decades-long partnerships and expansions into new use cases, such as with Mercedes Benz France, Holland America Line, Whataburger, and Clemson University, the company bolsters its reputation as a leading solutions provider. Additionally, it highlighted product innovations in Cloud Data Governance & Catalog and Master Data Management (MDM) services, reflecting a strong commitment to product differentiation.
The company is also expanding its reach through strategic partnerships, including recent announcements with Oracle Cloud and Google Cloud. These partnerships, along with a growing focus on data and AI practices with major consulting firms, underscore the company's attempt to deepen its influence in the data management market.
The non-GAAP gross margin improved and the operating income grew significantly, by 53% year-over-year, with operating margin witnessing an 8.8 percentage point improvement from the prior year. Adjusted unlevered free cash flow after-tax also exceeded expectations, and the company closed the quarter in a strong cash position, with a sound net leverage ratio".
Leveraging a positive trajectory, the company has raised its non-GAAP operating income and adjusted unlevered free cash flow guidance for the full year, expecting growth of approximately 25% and 46% at the midpoints, respectively. For Q4, the company forecasts continued growth in cloud ARR by 35% year-over-year, with total revenue expected to grow by approximately 8% at the midpoint. Overall, the company remains prudent in its outlook amid macroeconomic uncertainties, while also maintaining strong momentum heading into the last quarter of the fiscal year.
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Hello, and welcome to the Informatica Inc. Fiscal Q3 2023 Financial Results. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to Victoria Hyde-Dunn, Vice President of Investor Relations. The floor is yours. Please go ahead.
Good afternoon, and thank you for joining Informatica's Third Quarter 2023 Earnings Conference Call. Joining me today are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer.
Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the IR website after the conference call concludes. During the call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors included in our most recent 10-Q and 10-K filings for the full year 2022.
These forward-looking statements are based on information as of today, and we assume no obligation to publicly update or revise our forward-looking statements, except as required by law. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP.
A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's Investor Relations website. It is my pleasure to turn the call over to Amit.
Thank you, Victoria. Thank you, everyone, for joining us today. I will start today's call by summarizing three key points. First, we delivered a solid third quarter. We exceeded guidance across all top and bottom line metrics, driven again by strong customer momentum and execution from a cloud-only, consumption-driven strategy.
In addition to exceeding guidance in Q3, based on our strong performance, we are raising non-GAAP operating income and adjusted unlevered free cash flow after tax guidance for the full year. This is in addition to the raise we did on these metrics from our previous earnings call.
Second, we continue to accelerate our innovation-led cloud transformation to make IDMC powered by our AI engine player the data management platform of choice for enterprises across the globe, as they build their modern data architecture to drive their AI-driven digital transformation. Third, as we look ahead to next year, we remain committed to delivering balanced profitable growth while continuing to build on our successful cloud-only, consumption-driven strategy. As a part of this, we announced a restructuring today, which I will discuss in more detail at the end of my remarks. Now let's discuss these topics in more detail.
Turning to Q3 highlights. We exceeded the high end of guidance for ARR and revenue metrics. Cloud subscription ARR grew 37% year-over-year to a record $550 million. Our subscription ARR grew 15% year-over-year and total revenue grew 10% year-over-year. We strengthened our cash position and beat the high end of guidance for non-GAAP operating income and adjusted unlevered free cash flow after tax as well.
The macro environment remains stable for the third quarter, consistent with the prior quarter. We continue to be encouraged by the momentum of our cloud-only, consumption-driven strategy as the sales mix shifts for self-managed to cloud subscription ARR with cloud subscription ARR now representing 51% of subscription ARR, up from 43% a year ago. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansion with the remaining 15% from on-prem cloud migration.
Furthering the trend of accelerating migrations of our on-prem and maintenance base to IDMC, at the end of Q3, we have now migrated 5% of that base to cloud compared to 4.5% at the end of Q2. Customers are adopting the IDMC platform with new users and use cases across organizations.
In the third quarter, customers spending more than $1 million in subscription ARR increased 17% year-over-year to 224 customers. Customers spending more than $100,000 of subscription ARR increased 7% year-over-year to 1,978 customers. Let me share a few customer stories highlighting our best of breed solutions capabilities on the IDMC platform.
Mercedes Benz France has been an Informatica customer for over 2 decades and has recently extended their partnership with us. IDMC will help them address evolutions of their data architecture and further enable use cases to data anonymization, mass ingestion, data quality and more to enhance their operations.
Holland America Line is a leading cruise line company offering cruises throughout the world. An existing cloud data integration and mass ingestion customer, they recently expanded their IDMC footprint, accelerating their power center modernization to the cloud and adding other platform capabilities.
Whataburger is an American regional fast food restaurant chain headquartered in San Antonio, Texas. As an existing Informatica customer, they selected the IDMC platform to lay their cloud platform foundation as they seek to scale their number of locations to increase revenue and improve customer experiences in their restaurants.
As the higher education industry is moving to cloud, Clemson University in South Carolina sought to partner with us to accelerate the enterprise transformation initiatives. Recognizing our [ test to beat ] IDMC platform and selected our cloud data innovation, master data management and cloud data governance and catalog to create a single source of truth for the data-driven strategy.
Next, we added product innovation to IDMC's cloud-native, AI-powered platform to improve productivity for our customers and partners. In our cloud data governance and catalog service, we added [ rest ] APIs to extend the reach of rich metadata for our third-party apps; expanded data classification capabilities for Databricks, Kafka and Microsoft Power BI; and expanded breadth and depth of metadata connectivity with new scanners for Microsoft Synapse SQL script, Apache Hive, urban data Modelur, Purview for AWS CLI and Microsoft Purview.
Our focus on IDMC becoming the metadata system of record for enterprises continues to accelerate. In our MDM and 360 app services, we added many innovations for data stewards for their productivity, including bulk edits to the change management process and dynamic modeling experience to capture context-sensitive attributes, a very important feature for them.
Our investment towards faster time to value continues as we launched a new material master extension designed for centralized ordering and mastering of material data. This, when combined with Supplier 360 and Product 360 can manage the entire value chain of an item as it moves from raw material to finished product, which you can see is critical in terms of product innovation, shipping and profitability for companies.
Turning to Privitar, we continue to make good progress integrating the technology capabilities into the IDMC platform, and we should be done by the end of Q1 of 2024, including the ability to use IPUs to consume Privitar capabilities.
Next, our AI CLAIRE is embedded in all our solutions, leveraging ML algorithms and NLP on Metadata to drive intelligence and productivity, accessing 50,000 metadata-aware connections now leveraging 36 petabytes of active Metadata in the cloud and the platform processing over 71 trillion mission-critical out transactions as of September 30, growing 60% year-over-year. We continue to accelerate our progress in AI with CLAIRE GPT, now available in private preview as a native IDMC service. We will utilize IPUs to drive usage and help customers democratize and simplify their data.
In the beta, we have enabled data discovery and metadata exploration use cases. Over the next few months, we will enable data exploration, ELT pipeline creation and content generation. As for CLAIRE Copilot, which is already available to our customers, we released CLAIRE generated pipeline capability that allows customers to utilize AI to AutoMap sources to master data management targets.
Additionally, we added CLAIRE-powered FinOps capabilities that help users set detailed run time data management job parameters based on desired performance and cost SLAs. Our commitment to delivering product differentiation and innovation has won us a recognition from industry analysts.
Dresner Advisory Services ranked us as the #1 in its 2023 Dresner Advisory Services Master Data Management Market Study. For the third consecutive year, Bloor Research named us a champion in its Market Update for Master Data Management 2023 report. And for the fourth consecutive year, Constellation Research has named Informatica to its Confidential Shortlist Metadata Management, Data Cataloging and Data Governance.
As for our commitment to customer centricity and ensuring our customers get value from a market-leading product in IDMC, that has also won us a recognition from thought leaders. Our focus on our customers and their success was recognized by J.D. Power for delivering an outstanding customer service experience to customers globally under its certified assisted technical support program. This is the third consecutive year Informatica earned the certification and met the current software benchmark for customers at excellence. The TSIA or Technology and Services Industry Association named Informatica, a winner in the 2023 Innovation in Customer Portals that Improved Digital Customer Experience Category.
Turning to partners. In Q3, we furthered co-selling activities with our ecosystem partners and announced new partnerships with Oracle Cloud and Google Cloud above and beyond the many existing partnerships that we have. At Oracle CloudWorld, we announced the launch of our North America point of delivery on Oracle Cloud, which is now live and the expansion of our cloud data governance capabilities with the autonomous database and Golden Gate.
We'll also launch partner for Oracle's Cloud Marketplace private offer program. At Google Next, we announced a new solution combining our SaaS MDL on Google Cloud, the Google Cloud's customer data platform based on Google BigQuery.
With our GSI partners, we've seen a significant increase in GSI partners doubling down with us and building their data and AI growth plans with IDMC as the standard solution. During the last quarter, we launched a joint strategic growth plan with LTIMindtree to help customers accelerate cloud monetization and bring their data and AI to life across the 12,000 strong data and AI practice employees. We also became a launch partner for Randstad Digital while building a data and AI practice consisting of Informatica IDMC scale people.
Capgemini launched an ESG solution built on IDMC to help customers define an ESG data strategy and build a data management hub. In August, towards the middle of the month, we launched PowerCenter Cloud Edition, our new cloud modernization program that significantly lowers the migration time from on-prem power center to IDMC. In addition, it allows power center users more flexibility to manage the migration of individual workloads over time once the initial implementation of PowerCenter Cloud Edition is live.
In the first quarter of its availability, and as I said, it was middle of the quarter, we saw 1/3 of our migration deals using this new technology. Going forward, we expect the vast majority of our migration to use PowerCenter Cloud Edition, which has the potential to accelerate PowerCenter maintenance migrations in future periods.
Now looking ahead. We continue to manage the business for long-term durable growth. And let me give you some context on the restructuring that we announced earlier today. Look, since 2016, Informatica has been on a product-led, innovation-focused transformation journey. We have steadily invested in supporting our new product-led self-managed and cloud businesses, driving our transition to a subscription business model. In January of this year, we transitioned to a cloud-only consumption-driven strategy as part of a multiyear plan to drive cloud-centric, balanced profitable growth as we shift from on-prem subscription to cloud data subscription.
As a part of the strategy, we have been focused on simplifying our organization from hybrid to cloud, creating operational efficiencies, synergies and improving our agility and speed of execution. In that context, Today, we announced plans to reduce our global workforce by approximately 10% or 545 roles and reduce our global real estate footprint. Mike will share with you the financial details later in the call.
We made this decision as a part of the final step in our cloud-only, consumption-driven transformation to streamline our cost structure. The increased focus and simplicity of our cloud-only strategy will enable us to maintain our sales capacity while delivering continued best-in-class product innovation and customer satisfaction as an AI-powered cloud company with strong cloud subscription ARR growth. You see the strong momentum in our business execution reflected throughout the year and in Q3 results that we reported today. We executed very strongly against all top line and bottom line metrics.
We continue to see the same momentum going into Q4. We are confident in delivering strong growth fueled by AI tailwinds for data management use cases, new and expanding enterprise customer relationships, strong cloud net retention rates and our economies of scale. We plan to discuss more at our Investor Day on December 5.
In close, I'm proud of our teams, thankful and grateful to our customers and partners for continuing to help drive our cloud focus growth. With that, let me now hand the call over to Mike. Mike, please take it away.
Thank you, Amit, and good afternoon, everyone. Q3 was another solid financial quarter across the board with key growth and profitability metrics exceeding our expectations. As I did last quarter, I'll begin the review of our Q3 results by reminding everyone how to best understand Informatica's ARR and GAAP revenue.
Our ARR and revenue fall into 3 basic categories: Cloud subscriptions, which we have guided to ARR growth of 35% for the full year, self-managed subscriptions, which we are no longer actively selling and which we have guided to decline year-over-year in FY '23 and maintenance from perpetual licenses sold in the past, which we also expect to decline going forward.
We also earn a relatively small amount of revenue from implementation and education services, which we expect to decline slightly this year as our professional services partners perform more of that work for our customers. This service revenue is not counted as ARR.
With that in mind, I'll start with our total ARR for the quarter, which was $1.58 billion, an increase of 7% over the prior year. This was driven by new cloud workloads and steady renewal rates. We had $108 million in net new total ARR versus the prior year. Foreign exchange negatively impacted total ARR by approximately $1.4 million, in line with expectations when we set our guidance in August.
Turning now to the 3 components of Informatica's ARR. Cloud subscription ARR was $550 million, a 37% increase year-over-year, which was $10 million above the midpoint of our August guidance. Cloud subscription ARR represents 35% of our total ARR, up from 27% a year ago. New workloads and strong renewal rates drove cloud subscription net new ARR of $149 million year-over-year and $37 million quarter-over-quarter. Approximately 85% of the quarter's cloud new bookings came from new cloud workloads and expansion of existing cloud engagements with the remaining approximately 15% from on-premise customer migrations.
Our cloud subscription net retention rate was 118%, up 3 percentage points year-over-year and up 2 percentage points versus last quarter. Self-managed subscription ARR declined slightly in the quarter, as expected, to $528 million. This was flat sequentially and down 2% year-over-year, in line with expectations. We expect self-managed subscription ARR to continue declining next year, yielding a negative year-over-year growth rate. This decline is the direct and intentional result of our cloud-only consumption-driven strategy.
Subscription ARR, which is simply the sum of cloud ARR and self-managed ARR grew by 15% year-over-year to approximately $1.08 billion, which was more than $22 million above the midpoint of our August guidance. Subscription ARR now represents over 68% of total ARR, up from 64% a year ago. Foreign exchange negatively impacted subscription ARR by approximately $1.5 million, again, in line with expectations when we set our guidance in August.
The third component of total ARR is maintenance on perpetual licenses, which represents 32% of total ARR. Maintenance ARR was down 6% year-over-year to $499 million, in line with expectations. As a reminder, we no longer sell a meaningful amount of perpetual licenses. As a result, we expect maintenance to continue declining gradually at a fairly constant rate.
Through the third quarter of this year, we have migrated 5% of our legacy maintenance base to cloud subscription, up from 4.5% last quarter with an average 2:1 ARR uplift ratio. In total, these 3 components summed to 7% total ARR growth for the quarter.
Cloud subscription growth of 37% drove this increase, offset by intentional and expected gradual declines of self-managed subscription and maintenance. This financial trajectory of high cloud growth, combined with the gradual decline of self-managed and maintenance is the direct result of our cloud-only consumption-driven strategy. We expect these trends to continue in the fourth quarter and beyond.
We saw good growth in our average subscription ARR per customer in the third quarter, growing to over $283,000, a 13% increase year-over-year. We have 3,799 active subscription customers, an increase of 78 subscription ARR customers year-over-year.
Now I'd like to review our revenue results for the third quarter. GAAP total revenues were $409 million, an increase of 10% year-over-year. This exceeded the midpoint of our August guidance range by $9 million due to a slower-than-expected decline in maintenance revenue and strong renewals. Revenue from our Privitar acquisition was not material in the quarter.
Foreign exchange positively impacted total revenues by approximately $5 million on a year-over-year basis. The accounting impact of Informatica shift to cloud subscription sales and away from self-managed on-prem sales, was a headwind to revenue again this quarter. If our cloud versus self-managed new bookings mix was the same this quarter as it was in Q3 last year, total revenues would have been approximately $19 million higher than we reported, increasing our year-over-year revenue growth rate to approximately 15%.
Subscription revenue increased 22% year-over-year to $262 million, representing 64% of total revenue compared to 58% a year ago. Our quarterly subscription renewal rate was approximately 94%, flat year-over-year.
Maintenance and professional services revenues were $147 million, representing 36% of total revenue in Q3, in line with expectations. Stand-alone maintenance revenue represented 30% of total revenue for the quarter.
Our maintenance renewal rate in the quarter was 95%, also in line with prior periods. Implementation, consulting and education revenues comprised the remainder of this category down $7 million year-over-year, representing 5% of total revenue. The decline in services revenue is due primarily to the lower attach rate of Informatica implementation services to new IDMC sales. Our implementation partners are taking on more and more of that work free us to focus on high-value software and consulting sales.
Turning to the geographic distribution of our business. U.S. revenues grew 8% year-over-year to $263 million, representing 64% of total revenue, while international revenue grew 14% year-over-year to $145 million. Using exchange rates from Q3 last year, international revenue would have been approximately $5 million lower in the quarter, representing international revenue growth of 10% year-over-year.
Consumption-based IDUs are a frictionless way to access the IDMC platform and are a core part of our strategy. Approximately 60% of third quarter cloud new bookings were IP-based deals. IP now represent 45% of total cloud subscription ARR, up 2 percentage points sequentially. The remainder of our Q3 cloud bookings were also sold under multiyear consumption-based pricing, such as customer or supplier records for our MDM products.
Now I'd like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated. In Q3, our gross margin was 82%, up 2 percentage points year-over-year even as our software sales mix shifts to the cloud. Operating expenses were consistent with expectations.
Operating income was approximately $128 million for the quarter, growing 53% year-over-year and exceeding the midpoint of our August guidance range by $13 million. Operating margin was 31.3%, an 8.8 percentage point improvement from 22.5% a year ago.
Adjusted EBITDA was $132 million and net income was $81 million. Net income per diluted share was $0.27 based on approximately 297 million outstanding diluted shares, the basic share count was approximately 289 million shares.
Q3 adjusted unlevered free cash flow after tax was $96 million, better than expectations due to higher operating income performance and collections and lower cash taxes. Adjusted unlevered free cash flow after tax margin was 23.5%. Cash paid for interest in the quarter was $38 million. Keep in mind that our free cash flow from quarter-to-quarter can be quite volatile based on working capital fluctuations and other nonlinear cash items such as tax payments.
We ended the third quarter in a strong cash position with cash plus short-term investments of $869 million. Total debt outstanding was $1.85 billion, and net debt was $978 million. Our adjusted EBITDA over the 12 months through the end of the third quarter was $431 million, yielding a net leverage ratio of 2.3x.
Stepping back and looking at our year-to-date results, we were very pleased with our execution so far in fiscal 2023, and we feel like we have good momentum going into Q4. As Amit discussed a few minutes ago, today, we announced a restructuring plan that will reduce our global workforce by about 10% and shrink our global real estate footprint. As a result, we expect to incur nonrecurring restructuring charges of approximately $35 million to $45 million, with the majority incurred by the end of the first quarter of 2024. These charges will include cash expenditures for employee transitions, notice period and service payments, employee benefits, real estate-related charges and other costs.
We estimate the cost savings benefit of these restructuring actions will be approximately $84 million on a GAAP basis or approximately $70 million on a non-GAAP basis in fiscal 2024, with only a small amount of savings this fiscal year. Importantly, this restructuring does not negatively impact our full year 2023 guidance.
Turning now to guidance. In Q4, we expect the same trends we have been seeing so far this year to continue. Namely, our new sales will be predominantly cloud, and we expect our cloud ARR to grow by 35% year-over-year. And because we are no longer selling a significant amount of self-managed subscriptions or perpetual licenses, self-managed subscription ARR and maintenance ARR is expected to decline on both a sequential and year-over-year basis.
We delivered better-than-expected results again in Q3 and have good momentum going into Q4. That being said, Q4 is our biggest quarter of the year and still face a considerable amount of uncertainty in the macro environment. Therefore, we believe it is prudent to reaffirm our previously issued full year guidance for revenue and ARR.
With respect to our non-GAAP operating income and all under free cash flow, however, we are raising our full year guidance. We now expect non-GAAP operating income to be in the range of $430 million to $450 million, representing approximately a 25% year-over-year increase at the midpoint. We now expect adjusted unlevered free cash flow after tax to be in the range of $410 million to $430 million, representing approximately a 46% year-over-year increase at the midpoint.
At this point in the year, our fourth quarter guidance is simply a derivative of our full year guidance, so I'll just briefly give you the highlights. We expect GAAP total revenue will be in the range of $420 million to $440 million, representing approximately 8% year-over-year growth at the midpoint of the range. We expect subscription ARR to be in the range of $1.098 billion to $1.118 billion, representing approximately 11% year-over-year growth at the midpoint of the range. We expect cloud subscription ARR to be in the range of $604 million to $614 million, representing approximately 35% year-over-year growth at the midpoint. And we expect non-GAAP operating income to be in the range of $130 million to $150 million, representing approximately 23% year-over-year growth at the midpoint.
For modeling purposes, I'd like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after tax for the fourth quarter to be in the range of $114 million to $134 million. Second, we estimate cash paid for interest will be approximately $40 million in the fourth quarter. And for the full year, we estimate cash paid for interest will be approximately $149 million. Third, with respect to income taxes, our Q3 non-GAAP tax rate was 23%, and we expect that rate to continue for the full year of 2023.
We estimate full year 2023 cash taxes to be approximately $80 million. On a GAAP basis, we expect the significant volatility of our income tax provision and rate to continue. For the full year 2023, we expect a GAAP tax provision in line with our cash taxes.
And lastly, our share count assumptions for the fourth quarter of 2023, we expect basic weighted average shares outstanding to be approximately 292 million shares and diluted weighted average shares outstanding to be approximately 297 million shares. For the full year 2023, we expect weighted average shares outstanding to be approximately $288 million and diluted weighted average shares outstanding to be approximately $293 million.
Yesterday, our Board of Directors approved a new share repurchase authorization that enables us to buy up to $200 million of our Class A common stock through privately negotiated transactions with individual holders or in the open market. Our committee of the Board will determine the timing, amount and terms of any repurchase.
While we do not currently have any specific plans to purchase shares, this authorization gives us the opportunity to move quickly if and when opportunities arise. And finally, at our upcoming Investor Day on Tuesday, December 5, we intend to provide a deeper understanding of Informatica's business strategy, product innovation growth drivers and financial objectives. If you're interested in attending in person, please contact Victoria.
Operator, you can now open the line for questions.
[Operator Instructions] The question today comes from Alex Zukin with Wolfe Research.
I guess maybe just the first one. When you mentioned the macro conditions not really changing in the quarter. Can you maybe talk to what you're seeing the combination of impacts we've heard, obviously, from all the hyperscalers at this point, some of whom talk about attenuating optimization trends and solid AI workloads as being a driver for consumption.
Can you maybe just talk about what you're seeing out there in the market, some of these larger projects that you're attaching to? Because it does feel like you had some meaningful improvement in some of your consumption dynamics and cloud NRR actually went up. So I'm curious if you can tie that into any comment around stabilizing or bottoming trends there.
So look, I think first is you have to really realize how unique we are. When you look at -- when you ask the question of hyperscalers, we basically are the Switzerland of data. So when customers are looking to, whether it's an Azure or an AWS or GCP or in some cases, a warehouse or a lake, we solve all of those use cases and master data management and governance use cases. So we kind of have a embed situation, where we have basically sit in the middle of multiple different platforms. So when different demand can move from one to another, it doesn't really impact us 1:1. So that's one.
Second is, look, we've always been focused on mission-critical workloads. And we've never chased, what I've always said, sometimes nice to have workloads that churn the fastest in a bad economy. And I think that has served us well. So when customers buy us, were always buying us with the idea that I'm in it for the long haul, not churn on this. Very minimal on these nice-to-have workloads. And that strategy has always worked very well for us. Of course, having the best products and a single platform, which also reduces the risk for our customer to go stitch together multiple products also helps them. Because they don't have to spend more money and create more risk in stitching things together.
And then last but not the least, like what I'm hearing from customers a lot is, look, customers are optimizing their spend. Data tied to AI is definitely amongst the top 3, if not the top 2. And all of those things are helping us. And lastly, like I said, our partnerships, we've been manically focused on that. We talked about the hyperscalers and the GSI partnerships, with them, building practices on us, building reference architectures on us, all of those things create a kind of snowball effect or a tailwind effect as you might like to think about it, Alex.
Perfect. And then maybe just a follow-up. You mentioned the restructuring plan. Do you just need -- because of the consumption dynamics that you're seeing in your customer base, do you just need less people to facilitate that? It's more product-led roads and self-service? And then maybe just an update on our comment on Ithaca and the share repurchase authorization as well.
I'll take the first, and Mike please cover the Ithaca one. So yes, and more to the first question that you said, I think, look, I said that even the beginning of the year that as we transition to the final version of our transformation cloud only there's a lot of hybrid duplicative things, paddle things that we were -- we had that there was just no way around it.
We took one round of simplification earlier this year and certain other things were there, and I've been saying that in every earnings call that there is more operating leverage that we feel we will be. And I think those are all the things that we are doing that are not necessarily needed as we think about the business. It's a lot simpler for all the things you said and many other things, we don't need duplicative things to maintain or to do.
In fact it also, as I said, makes the business a lot more nimble and fast because we just don't need 10 people to go structure a deal, as an example, if I may use that. And of course, in a lot of cases, cloud makes it a lot simpler and easier for customers to engage and buy from us or even use on us.
All of those things play into that. And I think I'll touch on one thing that maybe you didn't ask is that timing for us was a very important critical decision maker. Look, we talked a lot about whether it's January or now. We start our new fiscal year in January. We knew where we were, and we basically wanted to have a fast start to next year. We see good traction against IDMC. So we thought, look, we're not -- there's a lot of quota-carrying capacity. In fact, they're not touching any of that stuff. So we feel good about Q4, as you heard from our guide. We wanted to get this thing done so we can plan and have the right people in all the right roles. So we not only finish well but have a fast start to 2024.
Mike, you can cover Ithaca, please.
Sure. Alex, let me see if I can unpack the Ithaca and buyback authorization announcement. So I'll start with Ithaca. I think LP was an investment vehicle that was established in 2015 in conjunction with the Informatica go-private transaction. At that time, there was a group of large institutional and strategic shareholders, who wanted to invest in the deal alongside our lead investors, Permira and CPPIB. Ithaca was established to hold the shares of those strategic and institutional investors, and that vehicle has been controlled in terms of the boats and decisions about disposition or distribution of the shares by Permira since 2015.
Ithaca was designed at the outset to terminate on the 2-year anniversary of the IPO of Informatica. That IPO, as you know, was in October of 2021, so that 2-year anniversary is upon us. In the months leading up to that planned termination, the holders of 51.4 million of the 60 million shares in the Ithaca vehicle chose to extend the life of Ithaca for at least another year and leave it subject to the governance provisions that have been in place since 2015.
The holders of 8.6 million shares, that's four holders, have chosen to take the distribution of their shares and they will, once that distribution happens, have control of the votes and they'll be making individual decisions about any dispositions of those shares going forward. We expect that distribution to take place sometime in the next 2 to 5 business days.
Now there's 3 important pieces of context around the Ithaca distribution. First of all, the 4 entities that are receiving shares are all large institutions or strategic investors that know Informatica well, and they have experience in investing in public equities. Secondly, we have no indication from any of these holders that they have an intention to sell their shares in the near term. And then third, the buyback authorization. So let me talk about that.
The buyback authorization is not, by any means, a signal that we're changing our capital allocation policy. Informatica continues to prioritize investment growth, deleveraging on a net basis and strategic and tactical M&A as uses for our balance sheet cash and our free cash flow.
So why are we doing the buyback? Well, the buyback authorization gives us the flexibility to engage with any potential sellers of large blocks of shares and to negotiate private off-market transaction to purchase those shares, if it's available on terms that are attractive to Informatica. We don't intend -- although we do have the flexibility to be buying shares in the open market, rather we're targeting the opportunity to buy large blocks of shares in private transactions.
So there's no change in capital allocation policies. There's no attention to reduce our public float. Rather, it's the ability to be flexible and nimble if the opportunities to buy shares in large blocks becomes available. Long explanation, let me see if that answers your question and if you have any follow-up, tell us.
It sounds like the 2 are a bit linked, if I'm reading the commentary correctly.
Yes. You are reading it correctly. Look, we recognize that we have relatively low liquidity and that any large sales in a short period of time can dislocate our stock for purely technical reasons. The buyback gives us the ability if large sellers are so willing to negotiate off-market private acquisitions of those shares if they're on mutually favorable terms. They're linked in that regard.
Our next question comes from Matt Hedberg with RBC.
Maybe following up on Alex's question. I think what stood out to us in addition to cloud NRR accelerating sequentially, but also it looks like large customer growth also accelerated on a sequential basis, which is great to see. I guess I'm kind of curious given the comments on macro and demand that you talked about, curious on the sustainability or durability of elevated cloud NRR. And I mean, is that a trend given this increasing push to cloud that could perhaps continue into next year?
So look, we don't guide to NRR. We've said that many times. And NRR is a number that can go up and down over the course of quarters in a year. We obviously look at it very carefully, thoughtfully in the full context of a year. I've said many times that we look at it and we care a lot about it, but we don't 100% solve for it. Because when we acquire a new customer, that customer is zero value add to NRR, but incredibly important for us because we know forever that when we land a customer, given the mission-critical workload that we saw, we get a customer for life, so that's statement number one.
But to your question on large customers, look, we solve multiuse case problems through one platform that has multiple products. And that serves large enterprises always very well. Second is large enterprises inherently have complexity, they turn to us. Large enterprises also are gravitating towards. They don't want to build a pancake to solve and build a new modern data architecture. They rather have one platform and a few ancillary teams around it. All of those things are benefiting us.
And then last but not the least, like we've talked about migration. I mean a good part of migration also comes from large customers that are trying to move to cloud now, taking old power center to our cloud. All of those things are driving to the large enterprise or larger customers gravitating towards us with demand.
I'm curious, was there any sign of -- any vertical strength that you call out, perhaps federal government or any other thing that was noteworthy on the results?
Not really. We didn't. I mean Q3, as you all know, is the fiscal Q4 of federal government so that naturally is built like that from their seasonality point of view. So there's nothing special to call out because that's always the case every year. No, we didn't call out any particular vertical that had an extraordinary effect on our numbers.
We now turn to Brad Zelnick with Deutsche Bank.
Amit, I wanted to home in on partnerships. Informatica has always been a partner of choice for the GSIs and other technology partners, but you really seem to be making an extra push here. And I'd be curious, actually, specific to Oracle. I took note of that relationship that you called out that you guys announced around their CloudWorld. And there's just so much enterprise data that sits in Oracle database. I'd be curious, what's the initial reception to what you've announced? What kind of alignment is there in the field? And is this something that will extend this well to the relationships that they now have with Microsoft Azure?
All of the above, Brad, first of all to the question. Look, when we think of our business, we think long term. I mean we are not thinking of the next quarter, obviously, as you can imagine. Oracle is a pretty established large-scale infrastructure company. So you know that the databases or the data warehouse has tremendous installed base. That alone, that installed base was tied to a power center customer also. And then they are actively going after new workloads that over a period of time, they will also be aggressively moving towards their cloud and obviously, the partnership with Azure, which by the way is a great part for us.
So our belief is that we are the only data management partner of choice with OCI, there's no one else but us. They are very well enterprise-centric like we are. So there's active work that has been going on with our field teams, product teams. And we're pretty bullish about what this will bear fruit or as we think about 2024 and beyond. A lot of work has to happen in the early days, and I think the team has done a lot of that work. You've seen they've come to our conference. We've gone to their conference to talk about it. I'm pretty excited about that. And I think as you said, with Azure and OCI, Azure being a great partner that creates an even easier way to get in front of our customers and reduces a lot of friction, so I'm pretty bullish about it.
It's great to hear. Maybe if I could just follow up on the acceleration that you saw on now 5% of the legacy base having made the migration relative to what was just 4.5% last quarter. Any change in terms of incentives, carrot versus stick or big customer cohort that came through? Or anything that should inform what we might think of in the quarters to come as to how that might progress?
No, on migrations, I think we've collectively -- I talked about it so much. And I now say it in full candor, it's one of those things that I'm extremely happy about. But at the same time, we look at that with I use this word on my own team: constructive dissatisfaction because there's so much more to do over there. And it's a captive base and we want to get them to the cloud sooner than later.
And I think we've done a tremendous amount of work. I always said, look, we wanted to make sure we capture the new workloads and we get to the migration. We came to a point where we actively worked in first solving for getting the customer pain points very clear to us, getting it behind the partners, waiting on the migration utilities.
The last mile was we learned a lot from our customers in doing a round 2, a version 2 of the product. PowerCenter Cloud addition that we launched in August came out and, by the way, it was adopted very, very quickly. I think I shared a 1/3 of the deals we did in Q3 with PowerCenter Cloud Edition. Given that the product GA middle of the quarter, and we expect the lion's share of this quarter to be that.
I look at that definitely one that absolutely will bend the curve and increase the slope of the curve as we think about next year. And all the work that we have done with partners and other things is naturally going to help us do that. So not a lot on us. That's an area where we've absolutely got to punch harder. And expect more attention from us in that area as we can call it next year.
It's a big opportunity at 2:1.
Our next question comes from Andrew Nowinski with Wells Fargo.
Operator is the line still open?
This is -- hello, can you hear me? This is Stefan on for Andy. Can you hear me?
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Ladies and gentlemen, we have our speakers back. Andrew, please continue with your question.
Your cloud ARR growth was solid and similar to last quarter. Is there any color you can provide as it relates to trends going into the next year?
Sure. I think philosophically, I think with the trends in 2 categories, things that -- I'll put them in AI and non-AI categories because I think no call would be complete if we don't touch AI. Look, there is a lot of work that's happening in the world of data that is not necessarily tied to AI. Customers are still wanting to understand their entire business whether it's a Customer 360 use case to do churn, new customer acquisition, supply chain, back-end efficiencies, data governance.
There is a lot of work that's happening at data, hence, data management becomes incredibly important. And the trend over there that we see is that while that demand is very strong, that customers have after many years of experimenting with multiple things have also come to the point that if they have to build the modern data architecture, they cannot stitch it together with 50, 60 unique little, little, small tools over there. The cost and the risk is very high. And that's where we have best of breed and our platform solves the case for them.
So we see that non-AI, I put purposely on AI, that's still a lot of work going on across the globe. If you go talk to a bank in the middle of nowhere, they're not necessarily running to AI tomorrow, but they still have a lot of work to do to run that business.
Then we come to AI, where basically a tremendous amount of interest, and I think as we all have learned that it's the fastest slope curve right now. Everybody wants to do something. This year, we had a lot of our customers figure out what use cases they want to go into. And in that case, we will see the first few use cases get into test and then production next year. That's where the GSIs are working with a lot of our customers with us. And in that case, good quality data, governance of data becomes paramount. Every enterprise customer is worried about governance of data in the context of Gen AI. We are seeing that.
Now that is -- basically, we see that working into next year as well. So when I look at the business, those are all the things that are happening with simplification of the tech stack and not having a 1,000-plus boom, all of those things are the things that you are seeing to our benefit.
Great. And then just one more. Is there any color that you could provide on customer interest you're seeing so far in both Privitar and CLAIRE GPT and private preview? And how's that interest tracking against your internal expectations?
Very good. So Privitar, by the way, like I said, in fact, inside Gen AI be even more of a use case for it. Data, our customers they want to democratize data and they leverage like our governance and our data marketplace capabilities or even when they want to take MDM and operationalize that and democratize it to a bunch of users, they needed access management.
You can't have any data going to anybody. You cannot have the Wild West. So data access management, which you basically think of it to say, in the data stack, it's the identity and access management use case over here. It's not the same, but I'm just kind of driving an analogy. Very important and especially for the large customers, the regulated industries, it is significantly important.
So we saw that, and hence, we accelerated our road map by buying Privitar. Pretty excited about it, I think I've met a bunch of customers who have all been very complementary of what we have. And I -- as I said, our goal has been to get that on the IDMC platform, so it can be the cloud data service with IPOs and I expect that to obviously naturally be scaling from there and be attached to those use cases first.
In terms of CLAIRE GPT, look, I think hopefully, everybody, first of all, know that we launched CLAIRE in 2018. We've been driving a lot of AI workloads, AI productivity within our products, embedded in our products for the last many years. We have taken the chat interface and put it on top of IBM in CLAIRE GPT, their co-pilot is already GA. We put it in hands of our customers, private preview, give us feedback, play with it. By the way, our customers, including our partners also, the GSI partners, their practices are giving us feedback on that one.
It's a very good early reception. We are also learning from customers where they get productivity, where they want to take it. We get tons of future requests and all that stuff. So we are loving it right now. Expect to hear more from us, and that will be one of those things as we come towards Informatica, well, next year, is going to have a lion's share of attention at the conference.
We now turn to Patrick Colville with Scotiabank.
So I mean when I look at numbers, cloud ARR growth has barely decelerated at all. It's been incredibly impressive what you guys have done, especially in the face of kind of tight IT budgets and public cloud vendors, their growth momentum is slowing. So I guess if IT spending is better next year than it was this year, and AI momentum continues. I mean is there a world where we could expect Informatica's cloud ARR growth to like reaccelerate?
Patrick, great question. Look, I will just replay that back to my exec team also. That's what I keep telling them. I want more. So we all want that, of course. I think look, in all fairness, right now, we are looking at -- we've been very resilient for a reason. And I've always said that we focus on critical workloads, mission-critical workloads for enterprise customers. Hence, we will never go belly up or belly down. So that has served us very well, the resilient customers.
And we care -- I keep repeating customer sat, it matters a lot for enterprise customers. You don't just throw a product over there and then let that bloom and then the world blows up, you're not there. We don't do that. So innovation and customer centricity is the reason I repeat those all the time because it matters to those customers.
Well, we come to Investor Day and share a lot about next year, so I can do that right now. But we always weigh everything on the positive side of the ledger and all the things that can be on negative side of the later and think through it. At Investor Day, we'll give you a lot more color about next year and medium term as well.
Okay. And then I guess just one more on the restructuring. Are there specific areas that you can share that were impacted? I mean is it more -- is it kind of deemphasizing for example the self-managed domain within Informatica, both in terms of go-to-market and product dev and emphasizing cloud? Or is there any kind of way you can double-click is the -- which areas are being, I guess, deemphasized and then as a result, maybe which shares are being more emphasized?
So all of the above, Patrick. All of the above. Including things like that, look, for me, this has been -- as you think about the company and if -- and I almost thought about it, if you were a cloud-only company that started today at this game, what would you be? So we also looked at that as to where do we simplify our organization structures. Because I firmly believe, in certain areas, we basically were probably not as nimble and as fast-paced as I would like it to be.
So we looked at those things, where are the right investments. Where are the investment that we don't really need, and where can we also accelerate decision-making, execution. I said that a couple of times even internally to my own teams. If we were -- I'll give you an example, if there are 5 people or 10 people to make a decision on a deal, why do we need to slow down from a customer point of view. So all of those things we looked at end-to-end and came to these decisions. Difficult decisions that we just announced today.
Our next question comes from Jaiden Patel with Pinjalim Bora.
My question is are you starting to see higher expansion rates among IPU-based customers, and what should we expect looking forward?
Pinjalim, so the answer to that is, yes. We obviously, we've talked about IPUs quite a bit, and we care a lot about IPU adoption, IPU expansion, all of those things. We definitely have a team that focuses on IPU expansion, and I think that team has done an incredible job, and we saw pretty good IPU expansion. So that happened, of course, which obviously naturally flows into NRR that we shared. So yes, the answer to that is yes. And we both focus on IPU adoption and expansion. And both of them are maniacal focuses and the expansion part has worked out well, and we'll continue to be heavily invested in that.
And by the way, one of the things that I might add, I think I keep reminding that our NRR we stated one way. I think we are, by definition, a bit of a conservative company, I guess. But if looked at the other way that other companies also report, it would be coming to what, 124?
124.
So 6 points higher. So cloud NRR, the 118 that we reported could be equivalent to 124 like a bunch of other companies also report. So we feel very good about it.
Got it. And then as a follow-up, can you help us understand the general puts and takes around 2024 revenue growth?
I think that will be an incredibly good discussion at the Investor Day, Pinjalim. 4 weeks, right? I guess the 4 weeks and a few days away, I would love to share that with you, and I think you will get a ton of details from us is how to think about it. I think I'll let Mike cover that, but 4 weeks, and we'll be talking about it.
In general, though, as you've probably heard me say before, it's more or less a free line Excel spreadsheet. It's how fast is cloud going to grow and how fast our self-managed and maintenance going to decline. There's a 4 factor, which is how much of that self-managed decline and maintenance decline is actually migration from those 2 buckets into the cloud bucket, but it's a pretty simple model. You can see historically how maintenance has declined. We think that's going to continue. Self-manage is starting to decline as we've deemphasized selling self-managed at the beginning of this year. We'll be able to give you some better guidance about what to expect in that bucket when we meet you in December. And then we have good momentum on cloud growth. And again, we'll give you more sense for our expectation in about a month.
Our next question comes from Fred Havemeyer with Macquarie.
Congratulations also on cloud growth in the quarter. I think it's one of those things that continues to be impressive to see within the Informatica's model. I want to focus on a topic I hope is not a little too tired, at least for me, at the moment, but just generative AI-related use cases and more specifically, efficiencies, perhaps you can find within your own business and with your clients.
We've seen a lot of use cases around generative AI for data labeling and more efficient, perhaps, like data transformation capabilities. So I'm curious just big picture here. How might you see your strategy around utilization of generative AI evolve? And do you think that there are additional areas you can gain efficiencies through using this technology?
Great question, Fred. And I think I'll put 2, 3 categories. One is Informatica for AI use cases, which is like forget even if you did not don't have CLAIRE. To do AI, customers need to have holistic data, good quality data, governed data, things like that, and I can go on and on and data labeling is one of those examples. So that's called Informatica for AI. So if companies want to do AI, they need data management, they need IDMC and we are part of that workflow.
Second is AI within Informatica, which is CLAIRE and how CLAIRE GPT and CLAIRE Copilot are embedded within our products and they naturally make our products, the AI coming out of products to drive more intelligence and more automation for their customers so they can do more with less, and they can do things that they could never do, which -- so that's second benefit that we get from -- so because our products become a lot more valuable for them.
And I think, where you probably were also asking how we use Gen AI internally within the company for a variety of our own running the company. And so we're doing all 3, we are participating in the first 2 in the context of driving our business. And the third one is basically making ourselves a lot more smarter, nimbler, productive and totally as a company. So all of those 3 are our focus right now.
Our next question comes from Koji Ikeda with Bank of America.
Just one for me here. I wanted to ask you a question on IPUs and curious to hear what the overall end markets perception of the IPU pricing model shaping up today, now that it's been off for some time.
I mean you did mention in your prepared remarks, 60% of new cloud bookings is coming from IPU. So that's a pretty good indication. But maybe some qualitative commentary could be helpful. And then also, you mentioned that 15% of cloud bookings is coming from transitions from power centers. So do you believe that the IPU unit could have a potential to accelerate the migration of legacy power center users out there?
The answer to the second part is yes. So the first part is, by the way, like you said, all new bookings are consumption, IPU and non-IPU. The non-IPU with MDM, which is a record space. Now we don't have it on IPU because customers like to buy by records. So and customers love it. Because, look, what's not to like? It's statically simple, and customers have to just figure out what they want to do, and they can start small and grow big. Or like I said, we -- because we solve mission-critical workloads, typically, customers want to buy a good price bargain, so they want to invest in the future.
So I think customers have -- I have not met one customer who has not liked it. If anything, our job is to keep telling customers because sometimes they buy this, forget that they have the IPU to do anything. So we keep driving that adoption. But I think right now, I think there are 3 words that our customer base have learned, and our goal is to make sure that they all memorize it. IDMC, CLAIRE, IPU. These are 3 words that we want everybody in the world to learn. So pretty good about it. And I think, yes, migration, obviously, they get IPU so they can also start a small migration, start a whole migration, mix, give them all that.
Our final question today comes from Howard Ma with Guggenheim.
I wanted to ask about the expense side or I should say the profit side. I was surprised to see gross margin tick up sequentially because I thought given the higher cloud mix that it said would decline. So can you -- I guess for Mike, can you comment on I guess, on gross margin? And also as you -- I don't want to steal away any thunder from the Analyst Day.
But on the expense side, as you deemphasize investments in self-managed and I guess, power center, too, although I'm pretty sure you've already deemphasized a lot of R&D investments there, how should we think about margins, I guess, both on gross margin and the OpEx line as times like that?
Thanks for the question, Howard. So I'll start with gross margin. You should continue to expect some volatility in our gross margin from quarter-to-quarter. It's for a couple of reasons this quarter. One is despite what I'd like to happen, our cloud COGS don't grow completely linearly with cloud ARR revenue. We put up new pods in certain geographies, and that creates a lumpy expense in a particular quarter when we spool it up. And then as that pod gets filled up, the marginal cost, which is lower than the average cost follows behind.
And so in earlier quarters this year, we saw more of that lumpy onetime spool up cost than we did in Q4, where we benefited from new revenue, for the most part, going into existing pods and, therefore, had lower marginal cost per dollar of revenue.
The other thing going on in our gross margin this quarter and has been throughout the year, which is a reduction in the amount of professional services that we're doing as a percent of our total revenues.
In professional services, I'm sure you know, are a low gross margin business. So if we lose and, again, lose is not necessarily a bad thing because it means that our partners are doing it for us, allowing us to focus on software. If we lose $1 of professional services revenue, we also lose $0.80 of COGS or some number in that range. So those are the tailwinds to our gross margin this quarter. Our target, as we've said before, is to maintain 80% plus gross margins going forward as far as I can see, as we continue our transition. And we'll talk more about that at Investor Day.
Now with respect to overall operating expenses, I guess all I can point you to now is that savings that we've estimated in '24 on a GAAP and non-GAAP basis that will result from the structure. Those savings are spread across the various categories of our spend, our non-COGS spend, of course. And you can add those dollar for dollar to your model today in terms of exactly what part of the business they'll hit. We'll give you more of that in December.
This concludes our Q&A. I'll now hand back to the management team for closing remarks.
Thank you. Well, look, I appreciate you all joining today. In closure, I'd like to just say that as we continue accelerating our innovation-led, cloud-only consumption-driven transformation, I couldn't be proud of our success, couldn't be prouder of them. Transformations are not easy, and we've been very thoughtful in our actions while delivering cloud growth, operating leverage and profitability.
This is all due to a long-term strategic focus on building best-of-breed solutions on the IDMC platform and working tirelessly to make it powered by AI CLAIRE, the data management platform of choice for enterprises across the globe. And we're excited about where we are, excited on how we're going to close the year and look forward to seeing you all at Investor Day in December. Thank you.
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.