INFA - NYSE

Good afternoon, everyone, and welcome to Informatica's Fiscal Q2 2022 Earnings Conference Call. My name is Tia, and I will be your event specialist today. After the speaker's prepared remarks, there will be a question-and-answer session. Thank you. I would now like to introduce our host, Victoria Hyde-Dunn, Vice President, Investor Relations. You may proceed.

Thank you. Good afternoon and thank you for joining us to review Informatica's second quarter 2020 [ph] earnings results. Joining me on today's call are Amit Walia, Chief Executive Officer; and Eric Brown, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide 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 2021. These forward-looking statements are based on information as of today, and we assume no obligation to publicly update or revise our forward-looking statements, except as required by law. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not 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.

Well, thank you, Victoria, and good afternoon, everyone, and thank you for joining us today. But let me begin by saying that we are very pleased to deliver Q2 results that exceeded the high end of our guidance. Total revenue growth was 9% year-over-year with subscription annual recurring revenue growth being 31% year-over-year and cloud ARR growth being 42% year-over-year. We strengthened our cash position and beat the high end of guidance for non-GAAP operating income. Our IDMC platform is the growth engine for new and existing enterprise customers running mission-critical workloads, and we continue to observe the expected mix shift from self-managed to cloud. And importantly, we are on track to deliver $1 billion in subscription ARR by the end of this year, a milestone few software companies can achieve. We are also reiterating our full year 2022 guidance for all ARR metrics and non-GAAP operating income. We are, however, slightly lowering total revenue guidance to reflect foreign exchange headwinds. Now let me share business insights on the second quarter and then observations for the second half of the year before I hand over the call to Eric to recap Q2 financial results and provide full year and Q3 guidance. Now, I have previously talked about how we have prioritized our R&D investments to accelerate cloud-first workloads through product innovation and strategic partnerships. In May this year, we hosted our annual customer conference called Informatica World. Our theme was data is your platform. Thousands of customers attended in person and virtually, including strong engagement with executive levels and a broad range of user personas from around the globe. We unveiled many industry-leading new data management capabilities to help customers and strategic partners across all levels, functions and IT realize greater business value out of their data. To provide further detail and context, I'll frame my comments today around three strategic priorities and our investment focus. I'll begin with product innovation; then I'll go to strategic partnership expansion; and finally, the go-to-market. So, let me begin with product innovation. We have been accelerating our pace of innovation to meet our customer needs to drive digital transformation and build their intelligent data enterprise across four distinct journeys. Let me begin with the first journey, analytics, where we are democratizing and simplifying data engineering workload execution. We launched a new product called Data Loader to simplify data management for departmental users. Our Data Loader is a no cost, zero code, zero DevOps and zero infrastructure-required SaaS offering that will help departmental users across an organization to move from data to insights in minutes. Data Loader's simple 3-click experience is now available for the Google BigQuery, Snowflake and Databricks. We also announced a private preview of INFACore, a simple plug-in for any development and data science framework, which simplifies composing data pipes by turning thousands of lines of code into a single function, allowing users to consume, transform and prepare data from any source within their integrated development environment. Now turning to our second customer journey, MDM and Business 360 apps. We are accelerating our investment in prebuilt Business 360 apps that enables customers to easily rationalize, combine and share customer, supplier and product data from hundreds of data sources into a single version of the truth and drive business insights. In that context, we expanded a long-standing collaboration with Microsoft Azure and announced a software-as-a-service version of our multidomain Master Data Management for Microsoft Azure. Informatica's SaaS version of MDM on Azure uses AI and ML to help customers create a data foundation that provides a golden record of truth that spans overlapping, conflicting and related data across customers, suppliers and products. Informatica's SaaS MDM will be generally available for purchase from the Azure Marketplace in August. With the addition of this multi-tenant native MDM, we have now completed our product road map with all products on our IDMC platform available as SaaS multi-tenant offering. I'm excited about that. We also expanded our cloud-native, multi-tenant MDM with two additional purpose-built applications, Supplier 360 to speed up the onboarding of suppliers, improve collaboration and reduce risk; and Product 360 to efficiently acquire, manage and publish relevant, clustered, enriched product data. Now turning to the third customer journey, data governance and data privacy, where we are enabling predictive data intelligence in the cloud with integrated governance, catalog, data quality and data marketplace capabilities powered by broad and deep cloud-native metadata intelligence, empowering data users of all skills to find, understand, trust and access the data needed for all use cases. We expanded data governance capabilities with Microsoft's Power BI. We also announced the expansion of our partnership with Snowflake to collaborate on deeper integration between Snowflake and Informatica's cloud data governance and catalog service. We continued expansion of our scanners with even deeper penetration into Salesforce, SAP and Microsoft Azure ecosystems. We added new intelligent capabilities on our data quality suite for anomaly detection, which automatically highlights potential data quality issues that are very hard to detect for users. And our automated data classifications delivered out of the box have nearly doubled, enabling our customers to reliably identify even more critical data elements related to PII and other domains. And lastly, for our fourth customer journey, app integration and hyperautomation, where we are integrating and connecting apps to automate end-to-end business processes. Within that, we announced a brand-new API Center as a one-stop shop to create, deploy, monitor, replicate and retire APIs. It provides a single integrated view of all APIs within an enterprise to drive productivity, transparency and usability. The API Center can also auto generate data APIs in minutes that deliver integrated, trusted and governed data along with the business process automation that is simple, fast, secure and more dependable by leveraging Informatica's API database. It is through our IDMC platform that we enable organizations to treat data as their platform to address these mission-critical workloads. And to give you some more context, the breadth of our IDMC platform remains unparalleled and provides a suite of 7 best-in-breed solutions that are powered by CLAIRE, our AI engine, with over 50,000 metadata-aware connections and leveraging 11 terabytes of active metadata in the cloud. IDMC is delivering mission-critical solutions that serve an ever-increasing base of global customers and operates at a significant scale, processing 38.5 trillion cloud transactions per month as of June 2022, which is an increase of 77% year-over-year and approximately 20% sequentially. Now let me turn to our next priority, where we are striving to make Informatica the easiest to do business with and to win together with our partners as we are being the Switzerland of data within the enterprise ecosystem. Now I talked about Informatica World. Informatica World featured marquee customer -- marquee speaker participation from all of our strategic ecosystem partners, including Thomas Kurian, CEO of Google Cloud; Scott Guthrie, EVP, Cloud + AI Group from Azure; Andy Mendelsohn, EVP at Oracle; Matt Garman, SVP, Sales and Marketing from AWS; Christian Kleinerman, SVP, Products at Snowflake; and Adam Conway, SVP, Products at Databricks. I'm deeply honored to have these prestigious industry leaders share insights on how together we're helping our customers build an intelligent data enterprise and stay competitive in a digital-first economy. Beyond Informatica World, we continue to share more partner innovation. At Snowflake Summit, we announced a new enterprise data integrator for the Snowflake-native application framework, and we were highlighted as a partner in Snowflake's announcement of the native applications framework. And we were awarded Snowflake's industry competencies in financial services and health care and life sciences, reflective of the significant joint customer adoption we have in these industries. At Databricks Data and AI Summit, we announced expanded support for Databricks' SQL, advanced data quality for Databricks, expanded data governance and data cataloging with IDMC and the private preview of INFACore that I mentioned earlier, developer extension libraries for Databricks notebooks. We recently also joined the Data Cloud Alliance, created by Google Cloud, which focuses on making data and analytics more accessible via modern data management technologies. And finally, a very important new strategic partnership with Oracle. Informatica was named by Oracle as a preferred partner for cloud enterprise data integration and governance for data warehouses and lake houses on Oracle Cloud infrastructure. With this partnership, IDMC has now become the most widely available data management platform supporting all key major cloud providers, AWS, Azure, GCP and now Oracle. In the second quarter, the number of ecosystem co-sell wins grew over 105% year-over-year and the marketplace transaction volume tripled year-over-year, indicating excellent traction with key ecosystem partners. And now turning to our global system integrator partners, where we continue to make improvements to the program to attract new partners and our global system integrator partners continue to build Informatica in their solutions. In that context, Informatica has joined Wipro's FullStride Cloud Services data platform as a premier collaboration partner alongside a stellar group of companies, including AWS, Microsoft, GCP and Oracle. Informatica also expanded its partnership with KPMG and launched two new offerings: KPMG Modern Data Platform and KPMG Powered Enterprise Data Migration. Several more partners established centers of excellence to access -- with access to our migration factories, including Infosys and KPMG, plus several regional boutique partners to support our customers in moving their on-prem workloads to the cloud. And in that, we continue to drive maintenance to cloud migrations. As you all know and I've said that before, it has an approximately 9- to 12-month lag to convert from maintenance ARR to cloud ARR once implementation is completed. Our differentiated cloud technology platform, IDMC, has been widely recognized by the marketplace and reflects our ongoing commitment to delivering product-led innovation at a global scale. We are proud to once again being named a 2022 Gartner Peer Insights Customer Choice for MDM. We've also been named a leader in both Forrester Wave's Enterprise Data Fabric and Enterprise Data Catalog for DataOps categories in Q2 of 2022. And more recently, Gartner named Informatica as one of the top vendors in the 2021 event stream processing platforms worldwide report. We were recognized as the second-largest vendor with market share greater than IBM, Confluent, Software AG, TIBCO and SAP. And finally, turning to our go-to-market sales motion. Our customer relationships remain very strong as highlighted by the number of customers spending more than $1 million in subscription ARR that increased 51% year-over-year to 175 customers. Additionally, customers spending more than $100,000 in subscription ARR increased 20% year-over-year to 1,791 customers. Our increasing focus on vertical industries is leading to deeper customer discussions. Earlier this year, we launched IDMC for Retail. More recently, we announced and launched IDMC for Healthcare and Life Sciences with customers like Blue Cross Blue Shield of Kansas City and New York City Health and Hospitals as well as IDMC for Fin Serv, Financial Services, with customers like RBC Wealth Management, Bank of Montreal and Freddie Mac. We continue to take the platform and make it more relevant to enterprises, industries and use cases. Let me give you some examples of our customer wins. Norwegian Cruise Lines, a leading global cruise company, purchased our IDMC platform, replacing several single-product vendors, allowing them to take full advantage of all the capabilities on the platform, including data integration, data quality, API management, data governance and master data management. In Guaranz, a mutual insurance company based in France, Paris with 250,000 members and EUR 3.4 billion in assets under management, as a part of its digital transformation to drive their own innovation, improving their own operational excellence and maintaining customer sat, chose Informatica's Customer 360 SaaS to help them create a trusted single view for their customers and employees. HDFC Bank, the largest private sector bank by assets and the world's 10th largest bank by market cap, chose Informatica's MDM Customer 360 and Data Quality to be deployed into HDFC's Azure cloud to create a trusted 360-degree view of their customers. Informatica will partner with Microsoft Azure architecture team to support HDFC's digital transformation. Another great example of a strategic partner co-win is with Abu Dhabi Ports Group. The company is undergoing a multiyear digital transformation program, which includes investments in people, processes, technology and data to enable a data-driven culture. We leveraged our deep relationship and jointly coordinated with Snowflake and Cognizant to demonstrate a true mentality in helping Abu Dhabi Ports Group. We're also very pleased to see customers looking to modernize to cloud and leverage our cloud data platform. Volvo Group was one of the first customers to embark on a PowerCenter modernization journey towards the cloud. They're looking for a common data management solution to support all of its enterprise business units and plan to leverage their entire IDMC platform as a single data management platform across all of Volvo. So as I step back, in summary, we delivered outstanding Q2 results, which reflect our strong product and market fit, loyal and growing customer base and our ability to execute in this early innings of a $44 billion TAM in which we are consistently recognized as an industry leader with an expanded strategic partner ecosystem. Our cloud momentum remains strong, and we are continuing to process mission-critical workloads. I believe Informatica's best-of-breed solutions on our IDMC cloud data platform offer resilience and relevance to delivering customers' digital transformation needs. We are managing the business for long-term durable growth, positive cash flow and continued profitability. Lastly, even though we are ahead on ARR and profitability metrics for the first half of the year, we continue to remain prudent as we think about guidance for the second half and the full year. Thank you to all our employees, customers, partners and shareholders for their support. And with that, let me now turn the call over to Eric. Eric?

Thank you, Amit, and good afternoon, everyone. We delivered a strong quarter and exceeded the high end of guidance across total revenue and all ARR metrics with cloud ARR growing at 42% year-over-year. Demand for IDMC platform remained healthy as we process mission-critical workloads. We beat non-GAAP operating income guidance by $22 million on the strength of higher total revenue and lower spending. As Amit mentioned, we are mindful of the uncertain macro environment and are taking a prudent approach to guidance for the balance of the year. Let me provide commentary on Q2 results before discussing expectations for the balance of 2022. Turning to Q2 results. Total ARR increased 16% year-over-year to $1.44 billion. We added $197 million in net new total ARR in the second quarter versus the prior year. And we remain on track to deliver over $1.5 billion in expected total ARR this year. Cloud ARR performance was once again strong, increasing 42% year-over-year to $373 million and exceeding the high end of guidance. Cloud ARR now represents 26% of total ARR, an increase of 5 percentage points year-over-year. We added $110 million in net new cloud ARR in the second quarter versus the prior year. And sequentially, we added $30 million in net new cloud ARR in the second quarter of 2022 versus the first quarter of 2022. We continue to see a sales mix shift from self-managed to the cloud. Turning to subscription ARR. This increased 31% year-over-year to $896 million, $11 million above the high end of guidance and driven by new subscription customer growth and improvements in our renewal rates, including cloud. The mix of subscription ARR is now 62% of total subscription ARR as compared to 55% last year. We added $210 million in net new subscription ARR in the second quarter versus the prior year, an increase of 19% year-over-year. And importantly, we remain on track to deliver $1 billion in subscription ARR for the full year. 54% of subscription customers are net new. And our average subscription annual recurring revenue per customer in the second quarter grew to approximately $243,000, a 22% increase year-over-year on an active base of nearly 3,700 subscription customers. The subscription net retention rate was 113%, flat sequentially. As previously mentioned, we expect to see fluctuations in this metric due to the mix of new bookings from new customers versus existing customers and the timing of large initial deal sizes expanding in the first year. We continue to expect a 120% subscription net retention rate long term as we build out the cloud business. And lastly, maintenance ARR finished better than we expected and was only down 2% year-over-year at $541 million with strong renewal rates that were up one percentage point year-over-year. As a reminder, we have significantly reduced sales of perpetual licenses in favor of cloud offerings, and this will naturally result in a gradual decline in maintenance ARR over time. Turning to revenue. We delivered $372 million in total GAAP revenue, an increase of 9% year-over-year and $4 million above the high end of guidance due to upside from self-managed subscription revenue recognition, partially offset by foreign exchange. Subscription revenue increased 24% year-over-year to $207 million. Subscription revenue represented 56% of total revenue as compared to 49% a year ago and reflects stronger customer demand for IDMC. Our subscription renewal rate was 94%, up one percentage point from a year ago and demonstrates the resilience of our business as the IDMC platform remains a mission-critical part of customers' operations. Maintenance and professional services revenue were in line with expectations at $163 million and represented 44% of total revenue in the quarter. Stand-alone maintenance revenue represented 35% of total revenue. Consulting education revenue make up the difference and fluctuates based on customer requirements, representing 8% of total revenue. U.S. revenue grew 11% year-over-year to $243 million, representing 65% of total revenues. International revenue grew 4% year-over-year to $129 million, representing 35% of total revenues. Now turning to consumption-based pricing. It's been about 1.5 years since we launched our consumption-based pricing model, featuring Informatica Processing Units, also known as IPUs. Recall that IPUs allow our customers to dynamically and seamlessly choose how they use any of our cloud solutions and services. As of Q2, IPUs represented approximately 30% of cloud ARR, roughly double compared to a year ago. Approximately 47% of our cloud new bookings were IPU-based, indicating a healthy momentum of this offering. Before moving to our profitability metrics, I'd like to point out that I will be discussing non-GAAP results for the second quarter unless otherwise stated. Gross margin is 81% and similar to Q1, notwithstanding the mix shift to cloud. For Q2 operating expenses, we observed an increase in travel and marketing expenses to support our Informatica World event. Looking out to the second half of the year. We have slowed net new hiring, and we are optimizing investments and spending in the greatest areas of opportunity for cloud acceleration, product innovation and strategic partnership expansion. Operating income was approximately $70 million and exceeded the high end of guidance by $19 million due to higher revenue and reduced rate of spending. Adjusted EBITDA was $75 million and net income was $45 million. Net income per diluted share was $0.16 above our expectations based on approximately 284 million diluted shares outstanding. The basic share count was 280 million shares. We ended the second quarter in a very strong cash position with cash for short-term investments of $582 million. Net debt was $1.3 billion and with the trailing 12-month adjusted EBITDA of $367 million. This resulted in a net leverage ratio of 3.5x. We expect the business to naturally delever to approximately 3x by the end of this year and then to below 2x by the end of 2024. Unlevered free cash flow after tax was $33 million and approximately $32 million lower than our expectations due to two primary reasons. First, we had a $15 million higher-than-expected cash outflow from cash tax payments in Q2, a portion of which is timing-related. We also saw a slight increase in our day sales outstanding, which resulted in a working capital adverse for Q2. GAAP operating cash flow was $16 million compared to $40 million in Q2 last year. This summarizes Q2 results. Now let me turn to guidance. We continue to feel good about the underfunded lines of the business, our durable and predictable subscription revenue stream, high cloud growth and healthy gross margins. We remain confident in achieving approximately 40% cloud ARR growth for the full year as the mix shift from self-managed to the cloud continues, and our renewal rates are improving. While we did see better-than-expected subscription and cloud ARR results in the first half of the year, we are not flowing the beat through the balance of the year in keeping with our prudent approach given the current macro environment. Now for full year guidance. Looking at the full year 2022 guidance. We are reiterating guidance for the year ending December 31, 2022, as follows. We expect total ARR in the range of $1.52 billion to $1.55 billion, representing approximately 13% year-over-year growth at the midpoint of the range. We expect subscription ARR in the range of $990 million to $1.01 billion, representing approximately 25% year-over-year growth at the midpoint of the range. We expect cloud ARR in the range of $438 million to $448 million, representing approximately 40% year-over-year growth at the midpoint of the range. We expect non-GAAP operating income in the range of $325 million to $345 million. We are updating the full year 2022 total revenue guidance to be in a range of approximately $1.54 billion to $1.56 billion. At the midpoint, we are reducing GAAP total revenue by approximately $45 million due to currency headwinds from a stronger U.S. dollar. Now foreign exchange rates do affect our operating income. However, the overall impact is mitigated since we have a considerable amount of operating expenses denominated in foreign currency serving as a natural offset. Net, we are holding our full year non-GAAP operating income guidance unchanged as we control our spending and further optimize our ARR renewals business. We are updating the full year 2022 unlevered free cash flow after-tax guidance to be in the range of $290 million to $310 million. At the midpoint, we are lowering unlevered free cash flow by $33 million. Most of this variance is working capital-related as our quarters are a bit more back-end loaded in terms of overall bookings, and we are starting to see some customers delay payments, creating a slight increase in our DSOs. We expect these trends to continue in the second half of the year. In addition, we're expecting $5 million to $10 million more of additional cash taxes this year. Taking all this into account, we are establishing Q3 guidance for the quarter ending September 30, 2022, as follows. We expect subscription ARR in the range of $920 million to $930 million, representing approximately 26% year-over-year growth at the midpoint of the range. We expect cloud ARR in the range of $399 million to $405 million, representing approximately 40% year-over-year growth at the midpoint of the range. And we expect non-GAAP operating income in the range of $77 million to $84 million. We expect GAAP total revenues in the range of $385 million to $395 million, representing approximately 8% year-over-year growth at the midpoint of the range. We estimate the Q3 impact of foreign exchange to be around $15 million. We reported Q2 non-GAAP net income and a non-GAAP tax rate of 23%. For the full year, we estimate a 23% non-GAAP tax rate as well. Looking to fiscal 2023 and beyond. We continue to expect a long-term steady-state non-GAAP tax rate of 24%, which reflects where we expect cash taxes to settle based on the structure and geographic distribution of operational activity. For modeling purposes, we estimate Q3 unlevered free cash flow to be approximately $55 million. Additionally, for the third quarter of 2022, we expect basic weighted average shares outstanding to be approximately 280 million shares and diluted weighted average shares outstanding to be approximately 283 million shares. For the full year 2022, we expect basic weighted average shares outstanding to be approximately 281 million shares and diluted weighted average shares outstanding to be approximately 288 million shares. In closing, we began this year with an objective to grow cloud ARR by approximately 40% year-over-year to $442 million, achieve $1 billion in subscription ARR and $335 million of non-GAAP operating income at the midpoint of the range. We are on track to meet these objectives through the first half of the year, and we are reiterating our full year guidance for these metrics. Thank you. And operator, you may now open the line for questions.

[Operator Instructions] The first question is from the line of Matt Hedberg with RBC Capital Markets.

Really great results. And obviously, it's a difficult operating environment. You noted strong results here, and you're maintaining a level of conservatism by not increasing ARR guidance, which seems certainly prudent. That's what, I guess -- we're a month into 3Q. Have you seen any changes in buying cycles, like any elongation or extra approvals or anything of that nature? Is it just you're maintaining that prudence with the expectation that something like that could happen at some point?

Matt, good to talk to you. I think as we’ve talked throughout the course of the last couple of months, I think we are maintaining a sense of prudency, if I can use that word. Look, I think we’re all looking at a uncertain macro with so much going on, and I think I’ll repeat that all of you know. So I think the right thing to do is for us -- we’ve obviously had a pretty good first half, and we see momentum in terms of what we offer to the market and what workloads we serve. But look, I think the right thing to do is to be prudent and be thoughtful about what the second half could be and walk into that by keeping our guide for the year and just see how the world shapes up.

And Matt, in response to your question, given we're about a month into the third quarter, and there's no net change in the first month versus what we saw towards the end of Q2 in terms of purchasing returns, others...

Yes. That’s great to hear. And then I think we’re all really interested in the consumption, the IPU success. And it seems like you’re -- you continue to see a lot of traction on that. There are a lot of questions from investors, too, about consumption models and perhaps an economic slowdown. Any sense for how that might trend in your base? Obviously, it’s an expanding trend, but just sort of curious if you have any sort of anecdotes on how that might progress.

Yes. Thanks for asking. So first of all, we're seeing a great mix shift in our cloud net new business. We're now nearly 50% of our new cloud business being denominated in IPUs. And as of right now, if I look at cloud ARR ending balance Q2, IPUs comprised 30% of that. A year ago, we were roughly 15% IPU-denominated. So there's great uptake in regards to the offer. And we're going to continue to push it. We expect to be back at a 50-50 mix in the near term here. And in terms of usage patterns, again, we’re about 1.5 years into the offering. And we’re seeing customers kind of scale up as we would like over their first 6 to 12 months. We’ll see kind of the first kind of 2-year anniversary cohort in about two quarters. And that will give us kind of a better read on kind of the launch of the product about 1.5 years ago.

The next question is from the line of Pinjalim Bora with JPMorgan.

Congrats on the quarter. I guess since macro is top of mind for everybody, I want to thread that needle a little bit more. You did talk about slowing down hiring as well. Is -- I'm trying to understand if you're seeing anything in the pipeline. How would you characterize the strength of the -- strength and quality of the pipeline as you kind of enter the second half?

No. Thanks for the question, Pinjalim. I think in terms -- and I'll break it into 2. So in terms of the demand for digital transformation and data lake digital transformation, those conversations are continuing to be basically very robust. When I was in Europe last week and I had met a bunch of CEOs, high on top of their priority. And I think in that context, our pipeline creation remains very healthy. We had Informatica World. We are having these conversations. I think where you see the uncertain macro environment translated to that is not pipe rate. It's more conversion of that pipe. Quite naturally, deals get elongated. There is more scrutiny on deals, of course, in a time like this. There are pockets of customers who are probably facing the impact of the current economy more than other pockets of customers, and there will be more scrutiny. So deal cycles increase, scrutinies increase. But in general, I would say, pretty healthy pipe rate, strong interest. And that's what we see. And I think, look, that's not a surprise given where the world is in the current environment.

Yes, understood. Just to be certain, so the things -- I understand you might see that, the lengthening of deal cycles or deal deferrals. But at this point, you’re not seeing anything?

Well, I think nothing out of the ordinary. You see where we were in the first half of the year. We obviously are maniacally executing, assuming those kind of things may play out in a macro environment like this. Obviously keeping our eyes very close on the ground to make sure that we continue to execute the same way as we did in the first half. And again, that's reflected in our guidance that Eric gave. We overdelivered in the first half. We're carrying the prudence to the second half but holding our guidance for the full year for ARR metrics.

Got it. And a quick follow-up to Eric. The reduction in revenue, $45 million, is -- I think you’re saying it’s FX. Is it 100% FX? Or is there a little bit from the mix shift versus conservatism in the second half?

It's nearly 100% from FX with more of that being seen in the second half versus what we observed in the first half.

The next question is from the line of Alex

This is Strecker on for Alex. Eric, you mentioned that there were some customers trying to delay payments. Can you just elaborate on that for us more? Is it just a handful of specific customers? Is it coming out of specific regions? And then how are you factoring that into your own modelling going forward in the back half of the year?

Sure. Yes. We -- as you know, last year, we had a really good overperformance on operating cash flow and working capital. So we really had finely tuned DSOs. And what we observed in Q2 is at the end of the quarter, customers in those -- there were customers in all of our major geos, select customers, that were delaying payments. We're expecting payments last week of the quarter. We didn't get them. Net, we saw a 3-day to 4-day increase in our DSOs sequentially. And we're expecting this new slightly more elevated level of DSO to persist as of the end of the year. And so when we run the numbers, rough and tough, an extra four days of DSOs. That's what we're thinking right now as of the end of the year. That's around $25 million of adverse to working capital. And so we're assuming that the level in summary is slightly elevated based on what we saw in Q2.

The next question is from the line of Koji Ikeda with Bank of America.

I just wanted to kind of follow up on that previous question on the delay in payments, Eric, and just wanted to kind of fully understand that. I appreciate the color there. So just thinking about the delay in payments, has that been isolated now? Or just thinking about the future, how could this potentially affect unlevered free cash flow further in the future?

Yes. This is what I would characterize as kind of a transient event. I think that -- we've kind of seen these things in the past in kind of macroeconomic slowdowns. People are just trying to manage by paying a week late, let's say. If that crosses your quarter, as it did in our case, it directly impacts the stats. So what we're assuming here is that the current level that we're at, a slight elevation persists throughout the Q3 and Q4 and hence, the modification to our unlevered free cash flow. The other thing impacting unlevered free cash flow is a full year higher cash tax payment outflow of $5 million to $10 million. So those are the two things driving the minus $33 million on unlevered free cash flow for the full year.

Koji, one thing I’ll add to what Eric said is that -- I mean, remember, we serve the true enterprise segment. Our customers are all of the customers we talk about. So I think -- we understand them. They have been long-standing customers, and I think this is a transient thing, as Eric said. These are the blue-chip customers across the globe. We don’t look at this as anything that crosses a longer duration in any way, shape or form.

Yes. And just to drill down one more level there, Koji, we've seen no change in kind of bad debt profile. So these are simply a bit of delays as opposed to a change in kind of credit profile outlook across our customer base.

Got it. Got it. And just one follow-up here, if I may. Just thinking about the cloud subscription ARR guidance here, if I run it through the model, it looks like the implied Q4 sequential net new cloud ARR add, it looks pretty good, like pretty healthy from a sequential add basis. So just I understand the enterprise sales and renewal cycle seasonality here, but just really kind of curious to hear what has given you the confidence in that seasonal strength. If you achieve that guidance, that Q4 net new sequential ARR would be the highest here by a pretty big margin.

I'll go and I'll let Eric add to the numbers as well. Look, I think I'll break it again into 2. We serve mission-critical workloads. And to be candid, like enterprises are still focused on digital transformation. That's not going away. Given the uncertain macro, yes, we talked about deals can elongate, there can be more scrutiny. But at the end of the day, people have to invest in making their business digital first, customer first or data governance has to happen, and we continue to see that healthy discussions. Obviously, we have taken our first half overachievement and made sure that, that gives us the ability to derisk the second half, in a way, and carry the whole year with a prudent guidance. So our conversations are absolutely -- the ones we’re having with customers, as I was explaining, I was in Europe last week or the week before last. I forget now. All of the conversations were around how do I make sure I can help customer success -- by customer, how do I understand my customers better, how do I get better analytics. I’m in a multi-cloud world. How do I make sure my data quality is good? Those conversations are happening across the board. And Eric, you want to add to the numbers?

Yes. And the other thing, too, we mentioned this in the Q1 call too. We assume kind of a rate of change over the course of the year, a steady remix improvement quarter-by-quarter sequentially on cloud, net new business versus self-managed net new business. And we can see this at the midway point of the year and the significant mix change improvement in pipeline towards cloud versus self-managed. And that's part of what informs our implied view on Q3 and Q4 cloud NRR [ph] sequentially in the guidance. The second thing, too, is that another way to improve cloud in our ending balances is to do better on your renewals. And we've seen a nice improvement in year-over-year renewals. We noted one percentage point increase in overall subscription or renewal rates inside that. There's two renewal rates, self-managed and cloud, and I can tell you that the cloud renewal rate year-over-year also had a nice improvement. So that certainly helps the cloud ARR outlook for Q3 and Q4.

The next question is from the line of Tyler Radke with Citi.

Can you hear me okay?

Yes, Tyler.

I wanted to see if you could comment just on the overall macro environment in terms of supporting platforms and consolidations. We’ve heard a number of companies talk about consolidating point products and niche solutions. And I’m curious if you’re seeing an increased appetite from customers just as budgets are more under scrutiny and maybe how you’re adapting to that or benefiting from that.

Yes. I think there are three ways to look at it. Number one is absolutely, we have the unique advantage of having a strategy of the best-of-breed products, as you can see in the Magic Quadrants, and a single platform where all the products are very seamlessly integrated. Number two is that platform is a very open microservices-driven platform fits into our customers' reference architecture in a multi-cloud environment. And number three, the whole IPU-based consumption model lets customers start and go from any service on the platform to any incremental service very easily. All of those things are allowing us to not only expand use cases but also take out multiple point providers where the customers are struggling to spend money and just integrating them to get to a final use case. So we see those benefits across the board, especially in an environment like this.

Great. And just in terms of overall cloud migration update, as you’re having the conversation with these customers, are you seeing them increase the prioritization or just decrease their overall shift to the cloud just as they’re thinking about their road map for this year? Just any change in terms of the cloud versus on-premise that you’ve seen in your customers?

No change, to be honest. I think, in general, we see no change than what we saw last quarter or the quarter before in terms of migrations. I think I'll always -- I think we always say that, look, when you look at our business, we are absolutely focused on every area in which we can help our customers go to the cloud with our offerings. The majority of it is we've continued to grow through net new workloads. Migration is a tremendous area of focus, still a small percentage of our overall cloud ARR. And as we’ve said in every call, we are having those conversations. Of course, that takes a lag because, obviously, it’s an operational workload. It takes a while to migrate them to the cloud. But no change in those conversations from what we have been having in the last couple of months.

The next question is from the line of Brad

It's Jamie on for Brad. I just wanted to dig into the cloud portfolio adoption. Is there anything you can call out around particular product module strength? I mean, any parts of the portfolio that are outperforming? Or if you could provide some sort of contribution framework, that would be great. Any color?

Sure, Jamie. It's kind of like asking me which of my kids I love more. Actually, to be honest, that's the beauty of the platform. We -- I think you -- I kind of was talking about a customer example, and you can see from that, that the breadth of participation of our portfolio on the platform is pretty strong and -- whether it's analytics, whether it's MDM apps or it's data governance. And to be candid, like you take something like data quality, it’s needed in an analytics workload. It’s needed in an MDM workload. It’s needed equally in a data governance workload. So we think of it in context of use cases, and those use cases, all of them have participated quite well, quite healthily. In fact, we like that because that gives us a natural hedge that we have many use cases, and we can obviously traverse those use cases at any given point in time with our customers wherever the investment dollars go. And the other thing to note is that our use cases traverse from the front office all the way to the back office within a company. Whether it’s helping get new customers, understand churn, managing supply chain, doing analytics of the business, we serve the full enterprise. So it’s pretty good participation across the board, Jamie.

The next question is from the line of Fred Havemeyer with Macquarie.

I first wanted to begin with just momentum that you’re seeing around artificial intelligence and machine learning and workloads in the cloud. I recall back at Informatica World that the Data Loader in the cloud natively was supporting AI and ML workflows. So could you talk about any sort of the initial traction that you’re seeing there? Particularly, I recall hearing a number of companies recently, cloud companies, talking about the importance of AI and ML workloads in the cloud to their momentum in their public cloud businesses. So would love some color and context what you’ve seen.

Sure, Fred. I think, again, I'll break it into two parts. First of all, we build big levers in AI and ML. In fact, we started CLAIRE back in 2018, 2019. So first of all, CLAIRE, our AI engine, is embedded in every product. So it's naturally providing intelligence and automation, whether you are -- like I talked about, data quality, anomaly detection. There's rules and then CLAIRE goes in and basically finds many more things that a human cannot find. So it's already driving value in the context of existing products, and it's scaling more and more. And in a multi-tenant cloud world today, we are running CLAIRE on 11 terabytes of metadata. It's just getting smarter, helping our customers leverage that metadata. Secondly, in the context of Data Loader, you asked me the question. Indeed, early days, we launched the Data Loader. Our attempt there or our goal there or our strategy there is to make sure that we make data integration or doing those jobs that are -- bring it to the business user in a matter of such a simplified user experience. I talked about three clicks and make it dramatically easy that the business user does not even realize they're doing all these complex things that a complex IT user is used to. There, obviously, we're pretty excited. We talked about the BigQuery, Snowflake and Databricks and expect more to come. That's early days but great traction. We're tracking usage. And early days, it's been -- it exceeded our expectations.

And then I'd just love to ask a follow-up question here as back -- also in Informatica World, I believe that you highlighted -- you announced industry-specific and vertical-specific IDMC solutions across financial services, health care, life sciences and I think more. I just wanted to ask, could you provide any updates about your progress with verticalized solutions and then, more broadly, your strategy with vertical specific go-to-market?

Yes. No, it's a terrific question. So look, we are -- the way we think about verticalization is we're not an application software company that you verticalize all the way up to the UI and UX. That's not the business we play. But our goal is to make sure -- like when we bring data quality, let's say, or data governance to financial services versus health care versus life sciences versus retail, there are many things inherently where they could get industry-specific, whether it's regulations or types of data or types of things they do that we want to make sure that are more customized for them. So what does it do for them? Reduces the time to value, accelerates for them to get their projects done and reduces the amount of people and expenses they have to spend to customize it to their particular industry needs. That’s what we’re going to continue to do, whether it’s connectors, scanners, rules, AI models. And expect that for us to do that for these verticals more and more and more verticals over the course of time as we continue to take IDMC to more and more industry-specific use cases.

The next question is from the line of Andrew Nowinski with Wells Fargo.

I had a question on FX again. I appreciate you were just in Europe. But if FX headwinds force you to lower the revenue outlook and your solution is presumably more expensive for international customers now, I guess, did you also factor in a longer-term slowdown in spending then from international customers?

This is Eric. No. I mean just to recap the change in FX, we didn't really mention FX in the first quarter. We're 90 days in. Here we are at the halfway point, and it's very clear that the U.S. dollar has strengthened. It's going to remain strong. I mean it's plus -- it is our functional currency for us, the currencies that matter. It's 15% to 16% stronger kind of year-over-year. So the $45 million is simply that translation impact. It has nothing to do with like a change in demand in international. And the other thing I want to point out in FX is that we're rather unique in that we have a very large amount of non-U.S. dollar-denominated operating expenses. And so we have a built-in natural hedge from FX because our euro, India rupee, et cetera, expenses with the strong U.S. dollar give us that natural offset. And so notwithstanding that, we're changing the top line for FX only. And we're able to absorb the net bottom line impact with that OpEx offset, and we're holding non-GAAP op income constant for the full year. And so I just wanted to make that point on FX as well.

Okay, got it. If I can just follow up to that, I guess, geographically, how was demand in Europe through the month of July as well as maybe even last quarter as well? If you could provide any color on that.

We don’t see any degradation in demand in Europe at all. I mean – so I think Europe performed pretty fine for us. Nothing out of the ordinary that we saw or we are seeing, to be honest.

Yes. Maybe to clarify, too, we talked about international revenue being up 4% year-over-year for Q2. If we had FX adjusted at that growth rate, it would have been roughly 10%, pretty much in line with U.S. growth of 11% revenue year-over-year. So maybe that helps further calibrate the FX impact.

Thank you. There are no additional questions at this time. I will pass it back to Eric Brown, CFO, for any closing remarks.

Great. Thank you, operator. So I’d like to quickly do a bit of a recap as we hit the midyear point. So first of all, we opened 2022 with full year guidance for 40% cloud ARR growth, $1 billion in subs ARR by the end of the year, non-GAAP operating income of $335 million at the midpoint. We are ahead of these objectives as of the end of Q2. The only things that we see changing for the full year is the top line-only impact of FX as discussed and a transient decrease in unlevered free cash flow due to slightly elongated customer payment cycles and higher cash taxes. The underlying health of our business is excellent, and the advantages of our scale of $1.5 billion in total ARR is evident. Amit, back to you.

Well, thanks, Eric. And once again, I'll reiterate that, look, we're a very unique company. We've always said that we focus on enterprise customers, mission-critical workloads, building out a pretty scaled, multi-tenant, cloud-native platform. And that has given us the ability to observe healthy momentum from current and new customers running their mission-critical workloads on the IDMC platform. I'd like to reiterate that we reported a great quarter, we reported a great first half, and we remain on track to deliver our commitments for the second half and the full year for both growth and profitability. Thank you very much for your time, and I look forward to next quarter.