Informatica Inc.’s stock plummeted more than 33% in after-hours trading after the data integration company reported lower-than-expected revenue in the fourth quarter.

Informatica blamed internal sales issues and customers’ more rapid than expected migration to the cloud, which hit maintenance revenues.

Revenue fell nearly 4% from a year ago, to $428.3 million, below consensus estimates of $457 million. Earnings per share of 41 cents beat estimates of 38 cents. Net income rose more than 30%, to $128 million in the quarter.

The company lowered its guidance for the fiscal first quarter. Revenues are now expected to be between $380 million and $400 million, a growth rate of 2.1% on a constant currency basis and below consensus estimates of $410.9 million. Total annual recurring revenue is expected to be between $1.673 billion to $1.697 billion, up 3%.

Subscription revenue declined slightly in the fourth quarter to $297.4 million from $302.4 million a year ago. Maintenance and professional services revenue dropped more than 9%, to $130.8 million. Cloud subscription annual recurring revenue grew 34%, to $827 billio, and the company said it should top $1 billion in 2025.

Subscription shortfall

Informatica attributed the revenue shortfall to an unexpected $46 million decline in renewals for its subscription business, particularly self-managed subscriptions. That was compounded by a lower average duration for self-managed subscriptions and a greater-than-expected shift of customer implementation and support business to professional service partners, a trend the company has encouraged.

Customers are migrating to the cloud and an accelerating rate, which has slowed revenue recognition, said Chief Executive Amit Walia in an interview with SiliconANGLE. “We had a huge spike in modernization in the fourth quarter,” he said. “That is a very, very good thing. Everybody wants that to happen.”

However, accounting rules require that customers moving to the cloud receive credits on their on-premises maintenance fees. Those credits are typically redeemed over a period of several years. “So we recognized less cloud revenue upfront,” Walia said. “As customers modernize to they cloud, they roll off of maintenance, so it degrades total ARR. We don’t get the incremental cloud ARR and we degrade the maintenance ARR.  It’s a double whammy for us in the short term.”

The CEO characterized the effect as temporary, however, saying cloud subscription revenues continue to grow at a 30% annual rate and the cloud subscription net retention rate stood at 124% in the fourth quarter. That means renewing customers, on average, pay 24% more for renewals than for their current subscription.

‘Internal issues’

“We had our own internal operational issues in terms of how the team was running that business and we had some incentive issues,” Walia said, adding that the renewal rate percentage was in the “low 90s” in the quarter. “It’s not a bad renewal rate, but we can do far better than that.”

The departure of an executive also caused confusion in the sales ranks. “The new person changed the strategy, shelved the project for a period of time and churn happened that should not have happened,” he said.

Informatica plans no organizational changes as a result of the revenue miss, Walia said. “This is a onetime internal issue,” he said. “It’s not an organizational challenge; it’s an incentive challenge. We know how to fix it. “

For the first quarter, cloud subscription ARR is expected to be in the range of $840 million to $852 million, representing 29.6% year-over-year growth at the midpoint of the range or 29.7% year-over-year growth on a constant currency basis.

Walia said artificial intelligence model training and inferencing has been a tailwind to Informatica’s business by spurring organizations to unify data silos and improve data governance. About 100 customers are using Informatica’s Intelligent Data Management Cloud for retrieval automated generation and AI orchestration and the AI pipeline grew fourfold in the first half of the year.

“Where we will see a bigger impact is as customers go from proof-of-concept to productions, but that lags at least three quarters out,” he said.

Photo: SiliconANGLE