Informatica Corporation (NASDAQ:INFA)
Q3 2008 Earnings Call
October 16, 2008 5:00 pm ET
Sohaib Abbasi - Chairman and Chief Executive Officer
Earl E. Fry - Executive Vice President and Chief Financial Officer
Stephanie Wakefield - Senior Director, Investor Relations
Tom Ernst - Deutsche Bank Securities
Tom Roderick - Thomas Wiesel Partners
Mark Murphy - Piper Jaffray
Nathan Schneiderman - Roth Capital Partners
Derrick Wood - Pacific Growth Equities
Nabil Elsheshai - Pacific Crest Securities
Michael Nemeroff - Wedbush
Brian Denyeau - Oppenheimer & Co.
Daniel Cummins - Soliel-Lime Rock Research
Sasa Zorovic - Goldman Sachs
Welcome to the Q3 2008 Informatica earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Stephanie Wakefield, Senior Director of Investor Relations.
I’m here with Sohaib Abbasi, CEO, and Earl Fry, CFO to discuss our Q3 2008 results and to talk about our outlook for the business.
Some of the comments we will make today are forward-looking statements, including statements concerning our being well-positioned to pursue our growth opportunity, our projected financial results for future periods, opportunities for growth in the data integration market, the planned use of our products by some customers for more than traditional data warehousing projects, the strength of customer demand for our products, efforts being conducted with strategic partners, and our expectations regarding future industry trends and our economic development.
All forward-looking statements are based upon current expectations and beliefs; however, actual results could differ materially. There are many reasons why actual results may differ from our current expectations. These forward-looking statements should not be relied upon as representing our views as of any subsequent date and Informatica undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date that they are made.
Please refer to our recent SEC filings including the 2007 Form 10K and the second quarter 2008 Form 10Q for detailed descriptions of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by contacting our Investor Relations department.
During this afternoon’s discussion, we will be using GAAP and non-GAAP numbers. Our GAAP results and the reconciliation of the GAAP results to the non-GAAP results are contained in the earnings press release and in the supplemental metric section of our Informatica.com Investor Relations website.
Before I hand it off to Sohaib, I would like to remind you that this call is being webcast and will also be available for replay at www.informatica.com/investor.
I would also like to ask you when we get to the Question-and-Answer period, to please confine yourself to just one question. We will try to allow additional questions if time permits.
With that, I’ll turn it over to Sohaib.
I am pleased to report that the total revenue grew by 19% year-over-year to QA3 record of $113.8 million dollars.
License revenue grew by 12% year-over-year to $5.8 million dollars.
Total non-GAAP operating income grew by 48% year-over-year with non-GAAP operating margin of 22%, our most profitable third quarter to date.
I would like to thank the Informatica team for their exceptional operational discipline to obtain record third quarter results of revenues and operating income in these extraordinary times of macro economic turmoil.
Q3 performance again validates the focus growth strategy that we have pursued for the previous four years. As most of you know, we have consistently executed on a three-prong growth strategy. First, diversification beyond our primary geographic regions. Second, growth of our market beyond the traditional data warehousing segment. And third, expansion of our product portfolio beyond the traditional EPO technology.
With our geographic diversification strategy, international regions obtained a record 40% of our total revenues compared to 36% in Q307. Our marquis customer wins in almost every major geographic region underscored the global demand and highlight our opportunity for sustained growth.
In Asia/Pacific, Australian Taxation Office or ATO selected Informatica to support various strategic initiatives, including implementation of a new super annualation legislation. Simply put, ATO will use Informatica to better manage the retirement benefits for all Australian citizens while with using IT costs.
In Europe, Norridge Union, part of the largest instrument services provide in the UK chose Informatica to improve the quality of data. Norridge Union expects to improve productivity by more than 400% with UC costs and expediting the results.
In the Americas, we benefited from strong customer demand across multiple industry segments, including health care, public sector, and financial services.
One of the largest health benefit companies in the US chose Informatica for their IT department to help pursue their aggressive growth plans fueled by acquisitions every quarter. Their newly formed Informatica competency center standardized Informatica to help automate post operation of their first IT systems and reduced costs.
Finally, also in Americas, Bank of Santander, the sixth largest bank in the world, selected Informatica as the standard platform to automate several IT projects, including facilitating their post merger integration of ABN operations in Brazil.
As these customer profiles illustrate, we continue to diversify our business beyond our primary geographic regions and grow beyond the traditional data warehousing segment.
In Q3, 49% of the license transactions over $100,000 with customers that plan using Informatica for projects beyond data warehousing.
In addition, 72% of our professional services fees were from consulting engagement beyond traditional warehousing projects.
Equally importantly, these projects are increasing customer adoption of our latest product lines. Real Time data integration, data quality including identity resolution, B to B data exchange, and data integration software service.
In Q2, as part of the new Informatica .6 release, we delivered the new power center Real Time addition. The initial adoption has been encouraging as 15% of power center deals over $300,000 in Q3 including Real Time edition.
As an example, a leading North American energy company plans to use power center, Real Time edition, as part of their announced plans to split into highly focused energy companies, a natural gas company, and a fully integrated oil company.
We continue to benefit from our leading products in the data quality category, including our latest identity resolution products.
In Q3, all the transactions over a million dollars and 47% of the transactions over $300,000 included data quality products. As an example, a super regional bank in the US plans to use Informatica data quality to help improve data quality required to litigate risks associated with mortgage and mortgage back securities portfolio.
Several leading enterprises chose Informatica data quality, including Australian Tax Office and Encana Corporation. An increasing number of customers are adopting our well differentiated B to B data exchange products to share data with their own partners. The list of customers that chose B to B data exchange include Hawaii Medical Association, B&B Sarano, and Encana. Each of these customers will benefit from the support for a variety of industries specific, such as HIPAA for health care and Swift for financial services.
In Q3, we launched data lotus service within Informatica, the industry’s first and only integration of the service, offers the first bi-directional data integration software service. Customers such as Pro Quest, Real News Standport, and McGraw Hill are now using Informatica’s on demand services to retain control over their off premise outsource data managed by salesforce.com.
To be even better positioned for these growth opportunities, we continue to strengthen our partnerships. Our proven track record of platform neutrality distinguishes Informatica as the most trusted provider of data integration and data quality software.
Last month in Japan, we formed a strategic partnership with NEC, a growth top global technology leader. Together with NEC, we will pursue promising opportunities within Japan related to regulatory compliant, modernization, and other IT initiatives, such as mass data management.
Our partnership with Excensure is stronger than ever with the highest number of consultants skilled in Informatica. With a new specialty practice, Excensure will focus even more to better utilize over 2,000 consultants trained in Informatica.
In addition in Q3, we added five new OEM partners, including Expeditors International, Responses, and Rivionix. Rivionix will embed Informatica B to B data exchange in their on demand advance pricing system for their customers to improve sales and profits. Now retail grocery stores will share their sales history data required by Rivionix to help determine pricing, including markdowns and promotional offers.
To sum up, I am pleased with the records Q3 revenues and operating income despite the these challenging times. Our team’s remarkable operational discipline enabled us to benefit from the sustained customer demand in almost all major geographic regions. Throughout our customer adoption and continual product innovations have diversified and expanded our opportunities beyond our traditional market.
Now I will turn it over to Earls to give you more detail on our financial results.
Earl E. Fry
Despite the macro economic turmoil, Q3 was another solid quarter. Total revenues for Q3 were a third quarter record, $113.8 million, up 19% on a year-over-year basis, and at the very high end of our original guidance range of $111 to $114 million.
License revenues were a third quarter record at $45.8 million, up 12% year-over-year. Service revenues were an all-time record at $68 million, up 24% year-over-year and of those total service revenues, maintenance revenues were an all time record of $49 million, up 38% year-over-year, while consulting and education revenues also were a third quarter record, $19 million, up 13% year-over-year.
Our yield metrics reflect the strength of our value proposition, especially in these tougher economic times.
Existing customers contributed 76% of our license orders value, consistent with second quarter, and down from 83% in the third quarter of 07.
We did business with 231 existing customers and added 55 new customers during the quarter.
We booked four transactions over $1 million versus five in the year-ago quarter. More importantly, we closed a third quarter record 55 deals over $300K, up from 44 in the year-ago third quarter.
Our average transaction sizes for orders over $100,000 came in at $299K and the average transaction size for orders over $50,000 came in at $222K. These average transactions sizes were down slightly from a year ago, which we believe is reflective of the current environment.
75% of our license orders came from our direct reps and 25% of our orders were from the indirect channel, the same as a year ago.
In addition to the 25% sold indirectly, we had 41% of our direct orders in Q3 influenced by partners or resellers. The overall total of indirect and influenced orders was 66% compared to 53% a year ago and up from 43% a year ago. Seven of our top ten deals were influenced by our partners this quarter.
Licensed revenue from our direct business was 75% in Q3 with 25% of our license revenue coming from the indirect channel.
Moving to geographic mix, while international revenue was at an all time high at 40% of total revenue in Q3, up from 36% a year ago, and up from 31% in the second quarter.
International orders as a percentage of total license bookings were 36%, down from 38% a year ago and down from 42% in the second quarter, reflecting a tougher selling environment in parts coupled with very strong domestic sales execution.
The vertical sectors that contributed most to our Q3 orders were financial services, heath care, and government, with particularly strong year-over-year and sequential growth in both health care and government.
Non-GAAP gross profit, which excludes $1.4 million in amortization of acquired technology and $495K of share-based comp, came in at $93.2 million, or 82% in Q3, at the very high end of our target range of 80% to 82%.
License margins were 98% in Q3, consistent with prior quarter and year-ago quarter. Service margins were a record 71% in Q3, up from 68% last quarter and from 69% a year ago.
Excluding $5.9 million of charges for share base payments, facilities restructuring, and amortization of intangibles assets, Q3 non-GAAP operating expenses were $67.8 million, down $2.5 million sequentially.
As a percentage of revenue non-GAAP operating expenses were 60% of revenue for the third quarter, better than the 62% in Q2 and measurably improved from 64% in the year-ago third quarter.
We generated a third quarter record $25.4 million in non-GAAP operating income, up 48% from a year ago, reflecting continued strong leverage in the business model. As a percentage of revenue, non-GAAP operating income was 22%, a full 440 basis points better than the 18% operating income reported a year ago.
We generated about $1.5 million of net interest and other income in the quarter as investment yields declined significantly.
We recorded a tax provision of $5.8 million in the third quarter, which resulted in a GAAP tax rate of about 30%.
We delivered third quarter record GAAP net income of $13.4 million and achieved GAAP fully-diluted EPS of $0.14 in the third quarter. Excluding adjustments for share-based payments, facilities restructuring charges, and the amortization of acquired technology and intangibles, we came in above the high end our earnings range and generated non-GAAP diluted EPS of $0.19. This compares from $0.19 in the year-ago third quarter and demonstrates continued operating leverage in our financial model despite the significant year-over-year step function increase in our tax rate.
Based on our Q3 orders, our future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken to revenue, as of September 30, will be $133.7 million. This is an increase of $18 million, or 16%, above the level of a year ago, but down $5.8 million sequentially due entirely to a decline in deferred revenue balances., which we’ll cover in a minute.
Total head count was 1,560 at September 30, an increase of 28 from the end of Q2. Sales and marketing head count ended the quarter at 551, a decrease of 1.
Now turning to the balance sheet and cash flows, both of which remain solid, but as you might expect were impacted by the rapid strengthening of the dollar and FX translation losses during the quarter.
We generated $10.3 million in cash from operations in Q3. We spent $1.2 million on property and equipment, had a $6.5 million negative impact from foreign currency translation, generated $7.3 million in cash from stock option exercises and employee stock purchase plan purchases, and used approximately $21.4 million to repurchase over 1.3 million shares of our stock in Q3. As a result of the heavier than normal share repurchases, overall cash and investments balances decreased by $11.1 million and we ended the quarter with about $451 million in cash and investments.
DSOs were 48 days in Q3, better than 59 days in Q2, and 54 days reported a year ago and also better than our target DSO range of 55 days to 65 days.
Our deferred revenue balance totals $115.4 and is comprised of $104.9 million in current deferred and $10.5 million in long-term deferred. Deferred revenues are up over 17% from a year ago, but did decline sequentially by $6.4 million. This sequential decline is in large part due to the impact of foreign currency movement and to a lesser degree due to the typical seasonal timing of Q3 maintenance renewals. We expect deferred revenue balances to increase in Q4 on both the year-over-year as well as a sequential basis.
On a non-GAAP basis, we ended the quarter with 104.4 million shares outstanding on a fully diluted if converted basis.
Now looking forward, from a share count perspective, we expect shares outstanding to remain relatively flat for a few quarters and due to lower interest rates, we expect to generate less than $1 million of net interest and other income per quarter.
While our income tax provision will remain very heavily dependent on our geographic mix of earnings, we continue to expect our effective tax rate to be roughly 30% on a GAAP basis, which should approximate about 29% on a non-GAAP basis, and again, this is before the impact of any discrete tax items or the expected Q4 benefit from the reinstitution of the R&D tax credit.
The current macro economic and financial environment is clearly in a state of turmoil and will likely have some impact on our business; however, the extent of this impact is very difficult to quantify. We have made and we will continue to make changes in our operations to deal with a range of economic scenarios, but even in a difficult environment, in 2009, we believe we can grow revenue by at least 10% and expect that we’ll be able to grow non-GAAP EPS at a slightly faster rate in revenue.
For the fourth quarter of 2008, we expect there will be some season uplift, but expect that the conservative customer buying patterns that we’ve experienced since March of this year will continue through the fourth quarter.
We are setting Q408 revenue guidance in a range of $125 to $130 million and non-GAAP EPS guidance in a range of $0.22-$0.24. For the year 2008, we are targeting revenue in a range of $456 to $461 million, which is within our prior guidance range and non-GAAP EPS for the year between $0.74 and $0.76, which is slightly better than our prior guidance range.
Please remember that our non-GAAP EPS targets do not include the after-tax impact of an estimated $0.02 per share per quarter charge for the amortization of intangibles, the facilities restructuring charge of approximately one half cent per share per quarter, and the tax-affected impact of stock option expense of approximately $0.03 per share per quarter.
So, with that, I’ll turn it back over to Sohaib.
Q3 results again showcased the exceptional operational discipline of the Informatica team to deliver record results even in such uncertain macro economic times.
In these times of uncertainty, operational efficiency and cost production are our top business priorities for our customers. Over the last two quarters, we will find our operational procedures with three measures to emphasize better linearity of closing deals throughout the quarter.
First, our recent marketing campaigns have focused on top customer business imperatives and IT initiatives. Regulatory compliance and real time information delivery. Our team is better prepared to help our customers quantify the business value with tools such as analysis of return on investment and finally, by setting targets, we conducted more business much earlier in the quarter.
More importantly, Informatica’s sustained record results are a testament to our value proposition for customers to do more with us.
Our Q3 record number of 55 deals over $300,000 is evident that more customers are recognizing the value of automating data integration projects, using Informatica over the traditional labor intensive hand holding approach. Demand for data integration is also being fueled by the increasing pace of industry consolidation resulting from more mergers and acquisition activities.
Reducing the combined costs or increasing combined revenues through post merger synergy dictate system consolidation and data consolidation.
Regulatory compliance mandates data warehousing. In fact, the industry analysts Gardner ranked data integration as one of the hottest categories in the software market and we continue to advance our leadership in Gardner’s latest data integration category with a high score for ability to execute.
Today, Informatica is well positioned to continue to pursue a sustainable multi-billion dollar opportunity with our most competitive product ever. Despite the revised outlook in IT spending, we are poised to continue to grow revenues and operating profit in the quarters to come.
So with that, I will open it up for your questions.
(Operator instructions) Your first question comes from the line of Tom Ernst of Deutsche Bank.
Tom Ernst - Deutsche Bank
Earl mentioned on the call that financial services was again one of your stronger verticals and that’s interesting, because it’s bounced back nicely over the last couple of quarters from weakness previously. Can you explain, I think you explained last quarter how approaching that business with smaller deals have enabled you to create growth in that industry. Is this something you think is broadly applicable to other markets and are there other tactics you think you can employ besides what you mentioned on this call about weekly planning, should the demand environment be even tougher than you expect?
Tom, let me first of all comment a little about our top three verticals. Financial services and health care were the top two. Public sector was a close second to those two. Those two tied and we’re very pleased with how our business has diversified across a multiple verticals and our dependence in financial services is not quite as high as they used to be. We are pleased with the results we saw in financial services both here in domestically as well as internationally.
We clearly commented last quarter that we conducted a lot of transactions in financial services in Q2. There were several transactions in financial services and we continue to find opportunities in financial services both domestically as well as internationally, but again, as I commented earlier, our dependence in financial services is much slower than it used to be and health care was one of our top verticals this last quarter. Thank you, Tom.
Your next question comes from the line of Tom Roderick of Thomas Wiesel Partners.
Tom Roderick - Thomas Wiesel Partners
Earl, I was hoping you could give a little bit of commentary in terms of what did and did not happen in terms of deal closures and closure rate at the end of the quarter and maybe provide a little commentary on how that processes into your thinking for head count growth, particularly sales growth as you go into the end of the year and into 2009.
Tom, let me comment a little bit about what we observed in this quarter and then I’ll ask Earl to also provide his perspective on that. As you know, we implemented certain measures to improve linearity by setting weekly targets both this quarter as was the case in Q2.
We conducted more business in the first two months than we have in any of the prior quarters in the last four years; however, September was an extraordinary month and September 29 was an extraordinary day and I’m certain that you could certainly appreciate what was going on in terms of the business being conducted. Overall, I am pleased that our team has done an exceptional job adjusting to the dynamics that reflect the uncertainty in the market. The linearity in the first two months was better than it has been. Even in the final days with the exception of September 29, I am pleased with the result that we obtained.
Now, as we commented earlier, there is greater scrutiny in terms of the processes and our field organization is much better prepared to be able to articulate what the business value is. I am please, despite all of the uncertainty and despite the macro economic considerations, our team did an exceptional job.
Relative to hiring, you’ll notice that in Q3, we basically we already moderated our hiring in Q3 and I think that’s just prudent in this environment. We’ll continue to monitor obviously at a close range monitor the macro situation and our expectation is that we’ll continue to grow, but obviously we’re going to be very prudent in where we make additions going forward, but I think we feel like we’ve got a good handle on pipelines and the sales team did a good job of executing through some of that turmoil in September.
Your next question comes from the line of Mark Murphy of Piper Jaffray.
Mark Murphy - Piper Jaffray
For Q4, your guiding to a consistent kind of a sequential change for total revenue. If we compare it to how you’ve guided in prior years of about 10 to 14%, but the environment is tougher and the FX impact is slightly adverse. Can you walk us through the process there? Are you assuming lower close rates against a larger pipeline or is there some other dynamic?
I think we do feel good about our pipeline going into Q4 as we have kind of going into every quarter this year. Our assumption is that we’ll continue to see buying behavior that we’ve seen since the March timeframe, which we think is a conservative view going into Q4. Obviously as we’ve grown the business and as you see in Q3, we have a much higher or had a very strong maintenance renewal. I think we feel like we’ve got good coverage going into Q4 and feel like those are conservative numbers going into the last quarter.
Mark Murphy - Piper Jaffray
Identity systems, is that still on track for about $8 to $10 million in second half of 08 and could you give any color on how that’s split off between Q3 and Q4?
Sure, the $8 to $10 million was our expectation when we closed the deal back in the middle or late Q2. We did get about a million dollars or so benefit as we expected in Q2 and continued on track. The team executed well in Q3, so right on track. So I think we are right on track to get to that $8 to 10 million for this year and actually we’re slightly ahead of the curve in terms of the impact on EPS. I think I had mentioned that in Q3, it was probably going to be very modestly diluted. It came in neutral, dead on neutral for Q3. So we feel like it should help us going forward.
Your next question comes from the line of Nathan Schneiderman of Roth Capital Partners.
Nathan Schneiderman - Roth Capital Partners
I was hoping you could speak to some of the weakness that you all saw in the Amea region and, Earl, I was hoping you could speak to any movement of customers hording cash toward the end of the quarter stretch payment terms and just wondering if you feel the sequential decline in license reflected some of the weak macro conditions or if it was more FX or something else?
We have seen good execution in Amea. Our team has done a good job for the last several quarters. As you know, we had a tough comparison, we had a successful very strong Q3 a year ago. In Amea, it would be best to actually look at the business in different sub-regions within Amea. In southern Europe, in France and in Spain, our business is very strong. In eastern Europe also our business is very strong. Central Europe has been doing well for a number of quarters. UK, we actually did see some of the uncertainty effect of the buying patterns in our customers. It would be difficult to actually generalize across all of Amea, but very specifically UK does have some of the challenges as a result of macro economic environment, whereas eastern Europe and southern Europe, our business is strong.
We didn’t really see any customers hording cash through the quarter. We were up in terms of cash flow for operations, up over 20% from where we were a year ago. Q3 is always a tougher quarter from just cash flow generation. I expect Q4 will be seasonally strong. We didn’t see any impact from FX other than what we kind of commented on where obviously the balance sheet gets translated differently for all of our work in capital that’s held overseas. So obviously, we took some translation losses both in terms would show up on the cash flows as well as in defers on the balance sheet.
Your next question comes from the line of Derrick Wood with Pacific Growth Equities.
Derrick Wood - Pacific Growth Equities
Just curious if you guys are seeing any change in competition, given that the change in the spending mentality in today’s environment? And if you could give us an update now that Cognos business objects are fairly digested, any update on the relationships with Cognos and SAP?
The competitive landscape has not changed over the last several quarters. In terms of the commercial competitors, we compete against IBM in about 15 to 20% of our deals and will win the vast majority of them, over 70% of those deals, against IBM. Similarly, the other competitors that we commented on earlier, we see even less frequently. In less than 5% of the deals, we would compete against those other vendors.
Now as it turns out, we partner with several of the companies that also have opened up in products, we partner with Oracle, Microsoft, SAP, all three of them. In terms of industry consolidation, the impact of that obviously has not been reflected to many of the metrics that I mentioned. Those metrics have remained the same; however, the uncertainty as a result of the industry consolidation has allowed us to highlight and distinguish Informatica as being the neutral provider.
The concern a lot of our customers have is whether Cognos is part of IBM. We continue to support other competing databases from Oracle and Microsoft in others and Informatica ensures that our customers are not locked out of their data.
Your next question comes from the line of Nabil Elsheshai from Pacific Crest Securities.
Nabil Elsheshai - Pacific Crest Securities
Would it be safe to assume, based on your comments you just made, that you have not been competing more frequently with SAP/business objects or have you started seeing them more in the field?
We’re not competing with them any more frequently than we have in the past. As you know, Nabil, SAP continues to ship Informatica technology. We have had a multi-faceted partnership with SAP. Now to put it in context, technology represents less than a percent, perhaps a half a percent of SAP’s revenue, and SAP partners with us for the 99% or 99.5% of their business where we compliment SAP. In fact, our customers are using Informatica in order to migrate data in and out of SAP. We play a very important role. We’ve commented on several transactions in the past. We have a strong partnership with SAP and I expect that we will continue to ensure that our joint customers are very successful.
Nabil Elsheshai - Pacific Crest Securities
Okay, and following up on the Amea stuff. I think historically there’s been some organizational changes there. How are you feeling about where you have the organization in terms of key people in place and positioned to go forward?
Our leadership team has done a remarkable job. We have had a consistently strong result in Amea for several quarter. As you know, we made changes a couple of years ago to bring in new leadership in Europe, at the European level as well as we made a few other changes as an example in central Europe over a year ago and we are pleased with the results that we’ve attained in Amea and the only area that I highlighted where we’re monitoring very closely is UK and that is primarily because of macro economic concerns, but overall Amea management has done an exceptional job in delivering consistently strong results.
Your next question comes from the line of Michael Nemeroff of Wedbush.
Michael Nemeroff - Wedbush
First, Earl, could you give us what the currency impact was on license revenue this quarter? Then also if you could give us guidance on what you’re expecting based on what you’re seeing for the license growth rate for next year and then also, Earl, how much does the environment have to improve for you to do let’s say 12% growth in 2009?
I actually don’t have the exact numbers on currency impact for license. I can tell you that it was over $2 million from kind of a total revenue perspective, so for the license fees have to be something plus or minus about a million dollars on a year-over-year basis, but that’s just an approximation. Mike, we don’t specifically break out license growth and especially in these kinds of uncertain times.
My comments around our outlook for 2009 is that even given a tough environment, we should be able to grow revenue by at least 10%. Wouldn’t preclude anything above that, but we feel very good about how we’re positioned, even if you look at how the turmoil that’s going on in financial services. One could argue that if you’re focused on the right accounts or the consolidators in this environment, which clearly there are going to be many consolidators, that they’re going to need more data integration, data migration, data consolidation tools than they would have otherwise. So I think that’s when we kind of mentioned that we have made and we’ll continue to make operational changes. We feel good about doing at least kind of that level of growth in 09.
Michael Nemeroff - Wedbush
Earl, one quick follow-up. You were at the helm of the finance team during the last downturn. If you could maybe compare what the environment feels like this time around compared to last time and maybe some reference.
I guess I shouldn’t start off with negative, but I will. I think the macro environment is clearly much tougher. I think we’re in for a longer haul here in terms of how tough the environment is. The last downturn was basically a check only one. So the recovery actually happened recently quickly.
That said, I feel much better about where the company is positioned. Just think about the progress that we made, not only from a product standpoint, from a technology standpoint, from a management team perspective, from a geographic coverage perspective. So I look at it from a macro point, but we’ve seen some of those things before.
We’ve seen some of these early on, as early as the first half of last year in terms of some of the impact on domestic financial services. So I feel very good about the Informatica team’s ability to execute and navigate through this and I think looking at how our products are positioned in terms of helping our key organizations do more with less and a focus on consolidations on migration. That should play very well in this environment.
Your next question comes from the line of Brian Denyeau of Oppenheimer.
Brian Denyeau - Oppenheimer
If you could talk briefly about the FY09 outlook. You said greater than 10% growth in EPS. I know you talked more about focusing on EPS growth, but if you could just sort of drill into your margin expectations and how you see some of your OpEx plans. I know it’s early, but is this a situation that you could get towards 150-plus basis points?
I think the environment is so tumultuous and you can build such a broad range of scenarios that, Brian, I’m just going to ask for a little bit of flexibility there before making any firm commitment on what specific kind of operating leverage we could be getting next year.
I think we’ve shown an ability to be very responsible with how we’ve grown the business. We’ll continue to do that. These are somewhat unprecedented times and like I said, the commitment is that we’re going to continue to show operating income growth faster than revenue growth and depending on what your favorite scenario is or kind of how things start to step out over the next few months. I think that will give us a lot more clarity and I would hope to be able to provide greater clarity when we talk next quarter.
Your next question comes from the line of Daniel Cummins of Lime Rock.
Daniel Cummins - Lime Rock
I want to ask about the M&A strategy going forward. I know you feel pretty well rounded out here. Do you think you’re going to see some pretty compelling offers come your way just giving the funding environment etcetera or are you going to perhaps just cling to utmost conservatives and just sort of be out of the market even for small deals.
Then I wanted to know if you would discuss a little bit about this evolution in data warehousing towards appliances, Microsoft picking up Data Allegro and Oracle and HP getting together. How does that really affect your business with respect to your products in data warehousing?
Finally, I know you have a solution specifically around M&A in your end markets. Have you begun to see any kind of pick up interest there, even just given the chaos in financial?
We have been very disciplined in our M&A strategy. Our single goal is to establish Informatica as the dominant leader and our acquisitions to date have reflected that. We have done three acquisitions in the last three years and we have been very pleased with the overall results. We’ve attained the targets that we set for ourselves in every one of those. Even now we will be similarly disciplined and we will look at opportunities for us to accelerate our road map. Clearly the evaluations are likely to be somewhat more attractive, but that itself is not going to be the criteria that we will use, but instead we will look at opportunities that would allow us to accelerate our road map and, again, as I commented on earlier, our historical acquisitions would give you a sense of the way we look at acquisitions and the discipline we have in terms of showing the success of it.
Now, your second question was about data warehouse appliances and Microsoft paid quite a high valuation for Data Allegro and that reflects their own assessment of the potential of that market. Data Allegro is not alone. There are many data warehouse appliance as well as the leaders that was announced between Oracle and HP.
Daniel Cummins - Lime Rock
Yeah, I got the sense Microsoft even feels this is a product that can brought all the way up market eventually.
Right. Exactly, and to us that is excellent news, because Informatica is the trusted neutral provider of data integration technologies. The more database technologies that are provided by all these larger vendors, the more there will be demand for technology such as ours to migrate data to load data into those data warehouses and consolidate those data warehouses, and the more adversity there is, the more it will be the value of neutrality.
We are very good partners with every single one of those vendors and our results have reflected the fact that our neutrality has allowed us to pursue a lot of such opportunities. So for us, the more data warehouse appliances, the more room there is for us to continue to grow.
Now your third question was about the opportunities that are enabled as a result of industry consolidation. Every time a company acquires another company, regardless of what industry, in order for them to gain the synergies, they have to consolidate their IT systems. A company can only have one general ledger system. If they’re looking for cost synergies or if they’re looking for revenue enhancement opportunities, they have to consolidate the systems and we’re commented on many such opportunities. In fact, even in this call, we’ve talked about a health benefit vendor and across all of those, there are customers using Informatica to consolidate all of that data in order for them to have a holistic view to make all the right choices.
So clearly, industry consolidation represents a tremendous growth opportunity for Informatica, one that we have already realized and will continue to pursue those. Thanks, Dan.
Your final question comes from the line of Sasa Zorovic of Goldman Sachs.
Sasa Zorovic - Goldman Sachs
When you look at your guidance, specifically regarding geographies, do you see any difference specifically between what your outlook is like at this point in the Americas versus Europe?
Actually, let me comment on our outlook in terms of by geography and then I’ll also ask Earl to provide you with his perspective on that.
We have benefited from a growth in every single one of the major geographic regions and I expect that we will continue to do that. Now, we’ve had an opportunity for us to grow our revenues outside of Americas over the last couple of years as we encountered some of the uncertainty in America as early as Q1 of 2007; however, we’re very pleased with the strong results that we’ve attained in America as well.
Looking at across the geographic regions, clearly we have a tremendous growth opportunity within America in certain verticals, including health care, including public sector, in certain regions within America. Latin American, we have experienced a tremendous amount of growth. In Europe, in southern Europe and eastern Europe and other parts of Europe, we have experienced tremendous growth and we continue to be very optimistic. Obviously, in some parts of Europe, like specifically in the UK, we’re beginning to see some of the macro economic uncertainty, and of course Asia Pacific has been a strong performer for us.
Again, we are prudently optimistic about our prospects to continue to grow in all the major regions.
I think Sohaib covered that pretty well. I’m particularly pleased that even in a very tough domestic market, which I think you can assume from a macro standpoint, it’s leading the world in terms of being I guess ahead of the curve is a nice way to put it.
Our sales team domestically have executed very well over the last couple of quarters, which I think gives us that baseline confidence that we’ll be able to continue to grow the business, because the larger piece of it continues to grow despite a very tough macro environment.
That said, I think kind of the relative mix that we’re seeing from domestic versus international is probably pretty close to what we should expect for the next couple of quarters. If you want to take the bear cage on Amea for a minute, I guess I’ll let you take that, but by the same token I think our traction in Japan and Asia is picking up and especially as a result of the identity acquisition, I think we’ll continue to see good increasing traction coming out of Asia Pacific.
So again, I think that domestic international mix I would expect to be relatively consistent over the next couple of quarters.
I would now like to turn the call over to Sohaib Abbasi for closing remarks.
In closing, Informatica is well positioned to continue to execute on our proven three-prong growth strategy in the quarters to come. Thank you.
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