Informatica IPO: Better the second time around?
Today, Informatica is going public, once again. The company, which went private in a $5.3 billion deal back in 2015, expects to raise $841 million on this round. Informatica's emergence from private equity comes as the company has transitioned to a cloud-first business where subscriptions have climbed to nearly half of overall revenue.
Informatica's journey into private equity has been a familiar one: A company seeks to transform its core business without the pressure of having to deliver quarterly results to Wall Street. It's a well-trod path that has been followed by a wide range of household names, and most recently in the data world, Cloudera. As with most PE financing, the objective was to pivot the company's core business. Namely, shift the revenue pipeline from the classic perpetual license and maintenance model to subscription; rearchitect its cloud offering into a modern cloud-native offering based on microservices; embed AI-powered automation; and finally, as icing on the cake, move its cloud pricing to usage-based.
Overall revenue during the 5–6 years under private equity ownership rose just under 30% from $1.07 to $1.37 billion by Q2 2021 during that period, putting Informatica firmly in the "mature" company growth category. But transformation, not revenue growth, was the goal of going private. Subscription revenue rose from just under 10% of overall revenue in 2015 to almost 50% this year, with most of the shift coming from licensing and professional services, rather than maintenance, which has continued to grow modestly.
What that means is that the company shifted new sales to subscriptions, deemphasized professional services (leave that to the SIs), but that much of the installed base held onto their software and is still paying maintenance. That makes sense given that during the private equity period, Informatica was on a build-out of the cloud-native, microservices-based Intelligent Data Management Cloud (IDMC) SaaS offering, which took a chunk of that time to fill out the portfolio.
The same goes for usage-based pricing. As we wrote earlier this year, Informatica has been gradually moving to an "Informatica Processing Unit" charge model. It's a canonical pricing model that assigns weighted pricing and allows mixing and matching. As we noted at the time, a compute hour of Cloud Data Integration may be priced or rated at 0.16 units while a compute hour of Cloud Data Quality comes in at 0.38 units. At the time, IPU pricing was made available for data quality and data integration pieces; since then, pricing has been extended to the bulk of the IDMC SaaS portfolio.
The back story
With the pieces put in place, Informatica has chosen to once more plunge into the financial market. It's a second chapter for a company that has ridden several waves and troughs of change. Founded back in 1993 at the dawn of the data warehousing era, Informatica's first target was ETL. In the early days of data warehousing, this was a largely ad hoc, manual coding process. Informatica replaced this with a visual, metadata engine-based approach that stored the mappings. We saw the original product, PowerMart, demonstrated to us on a PC in a hotel room in 1996 on the eve of a major database conference, for which the company was too small to afford a booth.
Over the next few years, Informatica extended to adjacent data integration areas such as data quality and data profiling, as it tapped into rising demand for data warehousing coinciding with Y2K-driven migrations to relational databases. It went public in 1999, with shares jumping 84% after the IPO.
But in the years following Y2K, the company took a stumble with an aborted foray into "analytic applications" which threatened its extensive partnerships with the BI ecosystem. When Sohaib Abbasi took the helm as CEO in 2004, it was time to go back to basics. Abbasi refocused the company on building out its data integration portfolio, most notably with the acquisition of Siperian that led the company into its Master Data Management and data governance businesses.
During Abbasi's watch, the big question was whether Informatica could build sufficient critical mass to stay independent, as this was during an era where Oracle and SAP were on furious acquisition sprees: They were building out not only their enterprise application portfolios but also encroaching onto Informatica's turf as well. Abbasi kept the company independent, building it into a $1 billion+ business with a wide diverse assemblage of tools spanning data integration, big data, information lifecycle management, MDM, data replication, and data virtualization. But the portfolio was anything but unified, revenues were plateauing, and with the cloud gaining traction, it was time to regroup. As Larry Dignan reported, Microsoft and Salesforce ventures bought into the deal led by a European hedge fund and the investment arm of a Canadian pension fund.
So where to now?
Informatica reenters public markets with a clear push to the cloud. Of note, year over year, subscriptions have risen 34%, which roughly coincides with the rate by which "new products" (greenfield sales) have grown.
As this is IPO 2.0 for Informatica, IDMC is Cloud 2.0. Its first foray was more of a hosted version of Informatica's classic portfolio and was offered on a bring your own license basis.
The IDMC portfolio has now been rounded out covering data integration; API and app integration; data quality; MDM; Customer and Business 360 (an outgrowth of MDM); data catalog; and data governance/privacy. Key pillars of IDMC are its metadata system of record, and an AI engine called CLAIRE that uses AI and machine learning to automate data management tasks.
Growth in the cloud has chiefly come from new accounts or from established accounts opportunistically adding new services, which is impressive for a 25-year-old company. But the big question is when the core of the installed base will make the plunge. Just ask Microsoft, Oracle, SAP, or any other enterprise name. They all have established client bases, share the same challenges, and are at varying stages of transitioning their core businesses to the cloud.
A key indicator, which is that barely 1% of maintenance revenue has converted to the cloud, quantifies both the opportunity and challenge that Informatica faces. Informatica is addressing this by making the path as simple as possible with an automated migration factory; this recalls the automated migration tools that each of the major cloud providers are offering to grease the skids to get enterprises to migrate legacy on-premises databases to cloud database-as-a-service (DBaaS) services.
Nonetheless, as Informatica has emphasized cloud as the future, it's notable that during the period of private equity ownership that maintenance revenue actually increased just over 15%; as noted above, customers were holding onto their Informatica software as the company was building out the SaaS portfolio. But here's a fun fact. For that 1% that switched to cloud, Informatica found that consumption for SaaS services expanded their overall spend by about 80%.
This is occurring as the company continues being challenged by niche providers. That's nothing new for Informatica, especially in ETL and data quality spaces – those are segments that became commoditized long before the cloud. Customers are always tempted by point alternatives that are quick to fire up, and there are more choices than ever. There are plenty of cloud-based data preparation and dataflow services using Spark, Flink, or other streaming services. They are powered by coding from Python, Java, Scala, or other languages of choice for building data pipelines for filtering, transforming, and/or cleaning data. And then there are providers like Fivetran, which has capitalized on the low cost of cloud storage for data transformation in place.
Fivetran's growth shows that the same principles are still in place in the age of the cloud, where it becomes easier than ever for firing up point services and paying for it with just a credit card. Fivetran's challenge is the reverse of Informatica's; as we noted a few weeks back, it bought HVR to gain more traction with enterprise-scale migrations. Conversely, Informatica is addressing the quick, cloud tactical purchase with mix and match usage IDMC pricing that also lets customers start small.
There's another side to the story. Just as the proliferation of desktop systems and local area networks begat the mushrooming of disjointed spreadsheets and dashboards across an organization, the cloud promises or threatens to lower those barriers even further. This is occurring as there is more scrutiny than ever on data. Machine learning models are inhaling copious volumes of data like oxygen. Privacy and data sovereignty mandates are pushing organizations to become accountable to the lineage and consumption of data. Maybe you are using a point service to transform data, but can you then vouch that the right data is being used, by the right people, and for the right scenarios? That's the case for a unified approach to understanding the ebb and flow of data. Delivering what it terms "trusted data," is core to what Informatica in the cloud is banking on.