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Executives

Stephanie Wakefield - Vice President of Investor Relations

Sohaib Abbasi - Chairman, Chief Executive Officer and President

Earl E. Fry - Chief Financial Officer, Chief Administration Officer, Principal Accounting Officer, Executive Vice President of Global Customer Support and Secretary

Analysts

Brent Thill - UBS Investment Bank, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Karl Keirstead - BMO Capital Markets U.S.

Stewart Materne - Evercore Partners Inc., Research Division

Steven R. Koenig - Wedbush Securities Inc., Research Division

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

James Wesman

Patrick D. Walravens - JMP Securities LLC, Research Division

Informatica (INFA) Q4 2012 Earnings Call January 24, 2013 5:00 PM ET

Operator

Good afternoon. My name is Alley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Stephanie Wakefield, Vice President of Investor Relations. Ms. Wakefield, you may begin your conference.

Stephanie Wakefield

Good afternoon and thank you for joining us today. I'm here with Sohaib Abbasi, our CEO; and Earl Fry, our CFO, to discuss our Q4 and fiscal 2012 results and to talk about our outlook for the business.

I'll read the Safe Harbor and then hand it over to Sohaib for his comments. Some of the comments we'll make today are forward-looking statements, including: Statements concerning our projected financial results for future periods; our growth and operational strategies; our initiatives to address recent challenges and improved performance; our market and growth opportunities; our ability to scale our business; our technology leadership and products development; our product portfolio and product opportunities; customer adoption of and demand for our products and services, including product upgrades, new releases and new products; the expected use of and benefits of -- from our products and services; the expected benefits of our partnerships and acquisitions; our effective tax rate and income tax provision; our pipeline conversion rates; our hiring plans; our international and public sector businesses; our future plans for Heiler Software AG and the timing of the overall process and any associated integration benefits or potential synergies; the impact of Heiler on our future financial results; and our expectations regarding industry trends and macroeconomic developments.

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 our quarterly report on Form 10-Q for the quarter ended September 30, 2012, 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 attached in the earnings press release and are also available in the Supplemental Metrics section of our Investor Relations website at www.informatica.com/investor.

Before I hand it off to Sohaib, I'd like to remind you that this call is being webcast and it will also be available for replay at the Investor Relations website. [Operator Instructions] Thank you. Sohaib?

Sohaib Abbasi

Thank you, Stephanie. As we stated last quarter, our top 2 priorities remain the same; regain our operational discipline and resume our growth momentum. Our Q4 results demonstrated good progress on both counts. In Q4, we attained record quarterly revenues, about $230 million and record annual total revenues in excess of $800 million. This afternoon, I will comment on our progress in each major geographic region. Then, after Earl's review of our financial performance, I will discuss technology drivers and our measures that reinforce our confidence in our ability to resume our growth momentum.

Across all regions, under John McGee's leadership, our field organization continues to strive for more consistent results through disciplined sales cadence. These operational changes include: Rigorous customer budget-related deal qualification to improve sales pipeline quality; agile cross-functional resource alignment to expedite deals; and milestone-based multi-quarter pipeline management to better manage future business.

In Europe, with Paul Hoffman as the interim leader, we attained strong results, reflecting encouraging progress towards regaining our operational discipline. Clearly, last quarter, we were more effective in pursuing the sustained customer demand across our entire product portfolio. And with the recent appointment of our new EMEA leader, an experienced and more regarded Informatica executive, we are well-positioned to grow the business in FY '13 and the coming years.

In North America, under new leadership, we attained strong sequential improvement, with successes across multiple vertical segments, including important wins in financial services, public sector, high-tech and energy. And in Asia Pacific, led by strong performance in Japan, we attained solid results and developed business momentum for our new fiscal year. In 2012, we added more than 50 new customers in Asia Pacific.

Now, let's turn to product results. Continuing the multiyear trend, our expansive product portfolio is driving both upsell opportunities for our core products, and cross-sell opportunities for our newer products. Our product team delivered important releases this past quarter. In December, we introduced Informatica PowerCenter Big Data Edition, featuring the Informatica virtual data machine or VDM. PowerCenter Big Data Edition now supports data integration processing natively on low-cost commodity Hadoop computing clusters. By virtualizing data integration processing, the Informatica VDM can execute the same task on Hadoop clusters, or on traditional middleware computing platforms, or even in the database. With the Informatica VDM, customers can effectively leverage all their computing resources by developing once and deploying anywhere, on premise or in the cloud. No other vendor offers this capability. I would like to emphasize, no other vendor comes close to offering this capability. Customers will continue to benefit from the productivity of the familiar, declarative, visual, no-coding development environment of PowerCenter. In other words, by combining lower-cost Hadoop computing clusters with near-universal connectivity of Informatica, customers can now productively and cost-effectively leverage increasing volume and variety of data from transaction data in on-premise business applications and cloud computing services to interaction data in social media services and device sensors.

And our early wins are impressive. In Q4, the social media giant, Facebook, selected PowerCenter Big Data Edition for their enterprise data migration and integration initiatives. Another consumer Internet pioneer and leading restaurant reservation service, OpenTable, chose Informatica Big Data Edition to ingest transaction data from several thousand Microsoft SQL Server databases into their next-generation analytics infrastructure based on IBM Netezza. This customer also plans to use PowerCenter Big Data Edition to access and parse social interaction data from social networking sites, and synchronize data between MongoDB and Hadoop.

Beyond upsell opportunities for our core products, we have an even bigger cross-sell opportunity for our notably expanded product portfolio. The customer usage of our newer products has increased consistently, from 4% in 2007 to 44% of the active projects in Q4 2010, representing growing adoption that positions us well for this bigger, largely untapped cross-sell opportunity. In other words, our cross-sell opportunities include 56% of our customers that have not yet adopted even one of our newer products.

Let me give you a couple of examples of cross-selling our leading MDM product. A long-term Informatica customer and partner, one of the largest technology companies in the world, selected Informatica MDM over SAP to manage master data across the entire organization for better decision-making and operational efficiency. Informatica MDM will manage 1.5 billion records required by 400 on-premise applications and cloud computing service, Salesforce.com. By managing master data through multiple domains, including customers and products, Informatica MDM will be instrumental to streamlining the business process from quote to cash as part of the one of the top priority corporate initiatives. Using Informatica MDM, this customer expects to reduce IT cost and expedite time to results.

In another example, a major government-sponsored enterprise selected Informatica MDM to manage reference data for counterparty and counterparty relationships. The flexible data modeling and robust matching capability of Informatica MDM will facilitate linking legal entities and subsidiaries to better manage risk and increase auditability. Using productive Informatica MDM technology, this enterprise plans to cut IT costs by more than $1 million.

Our newer products are also playing an increasingly important role in our strategic partnerships. For example, in Q4, Cognizant Testing Services business unit, employing 20,000 professionals, selected Informatica ILM as a key technology. Cognizant chose the proven Informatica test data management product over their own in-house technology to better meet customer demands.

As these examples showcase, our growing product portfolio represents a significant incremental cross-sell opportunity within our base of more than 5,000 successful customers and 450 partners. With more customers and partners choosing more than 1 Informatica product category and expanding adoption within each of these product categories, Informatica will continue to benefit from cross-sell and standardization decisions for years to come.

To sum up, our Q4 results demonstrate our progress to regain our operational discipline and, yet again, reaffirm our growth strategy.

Now, I will turn it over to Earl to give you more details on our financial results. After Earl's comments, I will discuss the technology drivers and the progress of the measures we implemented that, in turn, reinforce our conviction in our long-term growth opportunity. Earl?

Earl E. Fry

Thanks, Sohaib. Our total revenues for the fourth quarter were a record $234.7 million, up 3% year-over-year, up 23% sequentially and above the high end of our guidance range. While license revenues of $104 million were down 7% year-over-year, license revenues were up 58% sequentially, which underscores the progress we've made in addressing many of the execution issues we encountered in 2012. Service revenues were a record $130.7 million, up 14% year-over-year and up 5% sequentially. Breaking down the components of service revenues, maintenance revenues were $94.4 million, up 12% year-over-year and up 3% sequentially, while consulting, education and subscription revenues came in at $36.3 million, up 19% year-over-year and up 11% sequentially.

Geometrics were strong in Q4, reflecting improved sales execution. Our existing customers contributed 86% of our license order value, compared to 90% in the year-ago fourth quarter and consistent with last quarter. We booked 26 transactions over $1 million, up from 22 a year ago, and we closed 142 deals over $300,000, up from 128 a year ago. Our average transaction size for orders over $100,000 came in at a solid 456K, and the average transaction size for orders over $50,000 came in at a healthy 361K. 18% of our license orders came from the indirect channel and an additional 46% of our direct orders in Q4 were referred by partners or resellers. The overall total of indirect and referred orders was 64% compared to 68% last quarter and 61% a year ago. 19% of our license revenue came from the indirect channel in Q4.

Moving to geographic mix. License orders, as a percentage of total license orders, from North America were 55%, compared to 57% a year ago and 74% last quarter, while license orders from EMEA and the rest of the world were 45%, compared to 43% a year ago and up significantly, from 26% in Q3. North America represented 57% of total revenue in Q4, while EMEA and the rest of the world represented 43% of total revenue. Our European team clearly had a strong fourth quarter, reflecting better sales execution and operational discipline. From a vertical industry perspective, financial services, health care and public sector were our top contributors to new license orders.

Non-GAAP gross profit, which excludes amortization of acquired technology and stock compensation, was a healthy 86% of total revenue in Q4, consistent with the year-ago fourth quarter and up from 84% in Q3. License margins were 99% in Q4, consistent with both Q3 and the year-ago fourth quarter. Service margins were 75%, compared to 76% in Q3 and 73% in the year-ago fourth quarter and continued to be driven by better than 95% maintenance renewal rates and increasing contribution from our subscription services.

As a percentage of revenue, non-GAAP operating expenses were 58% of revenue for the fourth quarter, seasonally better than 60% in the third quarter, but up significantly from 53% in the year ago fourth quarter. We generated $64.7 million in non-GAAP operating income. And non-GAAP operating income, as a percentage of revenue was 27.6%, down from 32.8% a year ago, but up seasonally from 23.7% in Q3.

GAAP net income for the fourth quarter was $0.28 per diluted share, which includes the after-tax impact of amortization of acquired technology and intangible assets, building operating expenses, acquisition and other expenses and share-based compensation. Excluding these items, non-GAAP net income was $0.41 per diluted share, which is $0.02 per share higher than the high end of our guidance range due to our solid license revenue performance and a lower-than-expected tax rate resulting from the better-than-expected increase in contribution from our European operations.

Based on Q4 orders, our potential future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken to revenue, as of December 31 will be $297 million, up $45.6 million or 18% sequentially, and up $45.7 million or 18% year-over-year. Total headcount was 2,814 at the end of Q4, consistent with Q3 and up by 260 from a year ago. Sales and marketing headcount ended the quarter at 968, a decrease of 14 from last quarter, but up by 99 from a year ago. And it's worth noting that many of our new sales hires started in January '13 and, of course, will be reflected in our Q1 headcount.

Turning to the balance sheet. We generated $60 million in cash flow from operations, up sequentially and year-over-year, and we ended the quarter with over $536 million in cash and investments, which was a $48 million decrease from Q3 due to the completion of the tender offer for the shares of Heiler AG, and the continued execution of our stock buyback program. For the full year 2012, we generated a record $200 million in cash flow from operations, a full 15% increase from 2011.

DSOs were 67 days in Q4, better by 4 days from a year ago and seasonally just above our target DSO range of 55 to 65 days.

Our deferred revenue balance increased to a record $250.8 million, and is comprised of $242 million in current deferreds and $8.8 million in long-term deferreds. Deferred revenue was up over $36 million on a year-over-year basis, and also up nearly $24 million sequentially.

We ended the quarter with 110.8 million shares outstanding on a fully diluted basis. And during the fourth quarter, we repurchased 832,000 shares of our stock for $22.3 million.

Our quarter-to-quarter income tax provision has had some variability and will continue to be very sensitive to our quarterly geographic mix of earnings. We expect our normalized tax rate to be roughly 33% on both a GAAP and non-GAAP basis for 2013 before the impact of certain discrete items. In addition, we expect our tax rate for the first quarter specifically, to be lower than our normalized 33% rate, as we will record a onetime $2 million benefit for retroactive enactment of the federal R&D tax credit.

In October last year, we announced a voluntary takeover offer for all of the outstanding shares of Heiler Software AG. In mid-December, the tender offer was completed, and we now own nearly 98% of the Heiler shares. As a result, in the fourth quarter, we consolidated Heiler's results for the approximate 1-month stub period, where we owned the majority of Heiler's outstanding shares. Please remember that the takeover offer is only the first step in our process to acquire and integrate Heiler's business. We expect that we will not begin to realize the benefits of fully integrating Heiler's business with ours or any potential synergies from the transaction before sometime in late 2013, after we've taken further integration measures under German law. Until then, we expect to -- we continue to expect Heiler to contribute several million dollars of revenue per quarter and to be dilutive to our earnings by about $0.01 per share per quarter through at least the third quarter of 2013.

Now, turning to guidance. Our guidance for 2013 includes the previously mentioned assumptions for our tax rate and the Heiler acquisition. Also, as we've consistently stated over the past few months, our top priority is to drive increased revenue growth by continuing to invest in new products and a stronger sales organization. Based on these assumptions, we are setting Q1 revenue guidance in a range of $196 million to $206 million, and setting Q1 non-GAAP earnings per share guidance in a range of $0.29 to $0.32. For the year 2013, we are setting targets for total revenue in a range of $850 million to $900 million and non-GAAP EPS in a range of approximately $1.31 to $1.46. We also expect non-GAAP operating margin, as a percent of revenue for the year 2013, to be relatively flat with the year 2012. Just a reminder, our non-GAAP EPS estimates do not include the after-tax impact of an estimated $0.04 per share per quarter charge for the amortization of intangibles and acquired technology, the tax affected impact of stock comp of approximately $0.09 per share per quarter and any major acquisition cost and expenses.

So, in summary, despite our operational challenges in 2012, we exited the year a much stronger company; stronger financially, stronger strategically and stronger organizationally. And we expect that this will be the foundation for stronger results in 2013.

So with that, let me turn it back to you, Sohaib.

Sohaib Abbasi

Thanks, Earl. Our conviction in our long-term opportunity is firmer than ever for 3 reasons: First, our increasing addressable market; second, promising new opportunities driven by market and technology trends of big data and cloud computing; and third, our own measures to more effectively scale our business.

First, we have expanded our addressable market more than fivefold to a product portfolio expansion over the past 8 years. Today, we estimate that addressable market to be $40 billion, as measured by customer spend on software and services. As only $8 billion of that customer spend is on software, most of that spend is on labor costs. No wonder, in the majority of our deals, we do not face a commercial competitor. And our compelling value proposition is to do more with less by automating these tasks. Better yet, as the gold standard in data integration, Informatica offers a more productive, more maintainable and more auditable alternative.

The leading industry analyst, Gartner, recently ranked core data integration as one of the top 3 growth technology categories based on projections through 2016, ahead of virtualization infrastructure, security and business intelligence.

Second, our pioneering innovations to leverage new market and technology trends of big data and cloud computing are further expanding our market opportunities. I'll elaborate on both of these. Big data projects are starting to move beyond the initial early adopter experimental stage among our customers. Big data represents higher volumes, broader variety and higher velocity of data. To better quantify this market opportunity, big data is better viewed as a confluence of 3 technology trends; big transaction data, big interaction data and big data processing. To gain business value, the 3-pronged promise of big data is to analyze transaction data, to relate social interaction data and to correlate device interaction data in a cost-effective manner, using big data processing such as Hadoop. And more specifically, to realize the business value of big transaction data, the analytic platform has evolved from the first-generation data warehousing databases to a broader, multifaceted analytic platform, including new technologies from multiple vendors.

Beyond loading traditional data warehousing databases, Informatica core products integrate data from multiple operational systems, both on premise and in the cloud for ingestion by a broad range of these analytic offerings, including: data warehousing databases like Teradata; build for purpose analytic databases like EMC Greenplum; in memory databases like SAP HANA; agile business intelligence like Laketech [ph]; and low-cost commodity computing clusters supported by Hadoop vendors.

For big data, some analysts have speculated that Hadoop is an alternative to ETL and cited a brick-and-mortar retailer's IT choice as a harbinger of things to come. In fact, Hadoop is yet another data silo to integrate and includes yet another programming environment, MapReduce. As evidenced by Facebook's choice, Informatica Platform offers a more productive and maintainable alternative to hand coding in MapReduce. In my opinion, when it comes to Hadoop, Facebook's choice may be a better harbinger of things to come.

Cloud computing is further fueling demand for the Informatica Platform. Cloud computing has now become mainstream among organizations, driving the next wave of data fragmentation beyond the enterprise. Informatica's pioneering innovations in cloud data integration enable hybrid IT by combining data in on-premise applications, with data in the cloud.

In addition to the growing base of Informatica cloud customers, we are establishing new partnerships with emerging cloud computing category leaders. For example, Ultimate Software, a leading cloud provider of human capital solutions has expanded their use of Informatica to empower their customers with self-service reporting and analytic capabilities.

And finally, we continue to implement our own measures to more effectively scale our organization. To better plan for 2013, we've complemented our traditional top-down sales capacity model with bottoms-up planning. Every sales manager participated in this process, refining territories and quantifying the opportunities within these territories. With better alignment across the management team, we believe we are better prepared for consistent results.

Furthermore, with increased sales specialization for our new product areas that is better aligned with our sales account managers, we will benefit in 2 ways: Our sales specialists, including world-class domain experts, will team with our account managers to sell new products and, equally importantly, will free up time for our account managers to devote to selling our core products. These managers will help increase sales productivity and help resume our growth momentum.

To sum up: With the increasingly critical role of our expansive product portfolio and the promising opportunities driven by technology mega trends of big data and cloud computing, coupled with our focus in operational discipline, Informatica is well-positioned to resume our growth momentum.

So with that, I will open it up to your questions. As Stephanie said earlier, [Operator Instructions] Thank you. Operator, may we have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

The sales transformation that you went through, if you could just help us understand, where you're at? And if you could also just touch on some of the changes in Europe and how long you think that's going to take to stabilize and start to show improvement this year?

Sohaib Abbasi

Brent, let me comment on the sales transformations and where we are, and I'll also comment on Europe. We have the leadership team in place. As you know, we brought in a new worldwide head of our field organization, and we also appointed a new leader for our North America operations in Q4. We had Paul Hoffman as the interim leader. We've got a permanent leader who will be assuming complete control by the beginning of April. And so we have the leadership team intact and it's the same team that, in fact, has had experience working together to deliver a very solid Q4. We're very encouraged that we now have a full team, a very capable team that would lead us forward in 2013. In Europe, clearly, with Paul Hoffman as the interim leader, we saw much improvement in terms of our operational discipline and, of course, we had a solid quarter in Europe. With the new leader appointed, who will be assuming and will be transitioning into that role this quarter and assuming full control, I believe it will take us a couple of quarters for us to actually get Europe at the same level of operational discipline as we'd like to. But I expect that we will continue to see improvements over the coming quarters.

Operator

Your next question comes from Raimo Lenschow with Barclays Capital.

Raimo Lenschow - Barclays Capital, Research Division

Just briefly, I just wanted to think, as we think about 2013 and '14, where do you think at what point in the journey should we talk about normal growth rates for you again? Obviously, you're on the right track here. And at what point, will investors say, I have to say, okay, so I see Informatica as fully back on track and this is the growth I can see going forward?

Sohaib Abbasi

Raimo, let me comment on it and I will also ask Earl to provide you his perspective on it. From a demand perspective, we continue to see very strong demand. And, in fact, the best evidence, of course, is in Europe where the demand did not go away. We had sustained demand and, with better execution, we were able to actually deliver much improved results. So, from that perspective, I mean, we are very enthusiastic about the opportunities ahead of us. We have had a very good traction with the Big Data Edition. And, of course, both Facebook and OpenTable are new logos to Informatica, and they both have adopted Big Data Edition, a product that was delivered in the final days of the year. So both from a customer demand perspective and our product portfolio perspective, we are well-positioned and I expect that, particularly with Q2, we should be able to actually see much better results.

Earl E. Fry

That said, obviously, Raimo, we had -- 2012 is going to make it a tough baseline year, because of the shortfall that we had in the middle part of the year. So the quarterly, year-over-year comparison 2013 will be, obviously, subject to that baseline in 2012. So I think on a normal kind of routine, normal seasonal growth rate and year-over-year basis, it's probably going to be looking at 2014 when you start to see more consistent, normalized trends. Again, I think I'm -- we're looking forward to 2013 being normal from a seasonality standpoint as we look at each of our quarters, but that still will give us slightly funky, as you will, year-over-year comparison when we're looking at versus 2012.

Operator

Your next question comes from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Sohaib, I wanted to ask you, looking back on the middle part of 2012, almost every company that ties into big data analytics or data integration, ran into some kind of issues and saw some extent of softness in their license sales. So, in retrospect, do you think that it was kind of a coincidental, synchronized execution issues across all those companies? Or do you think we -- maybe we saw a sector-wide pause in demand? Maybe your customers were digesting some of their recent purchases and that now they're reengaging?

Sohaib Abbasi

Mark, I mean, the extent of the challenges that we experienced make it difficult for me to make any observations on the broader segment. We clearly have commented that in retrospect, there were a lot of things that we could have done better. And all I could say is that we have made great improvements in terms of our own execution, and we have validated and confirmed that the demand was always there. And the best evidence, of course, is the performance in Europe. So I am very optimistic about the demand that is ahead of us, that we will be fulfilling this year. Our customers are looking at analytics and are making investments, and Informatica, with our neutrality across a variety of different analytic appliances, is very well-positioned for growth.

Mark R. Murphy - Piper Jaffray Companies, Research Division

And, Sohaib, if I could, just a quick follow-up. I wanted to ask you how the MDM product line performed in Q4 and just your approach regarding the overlay sales specialists for the MDM product line in 2013. I think based on your commentary, are you fully reinstating that model with the overlay of the sales specialists?

Sohaib Abbasi

We had a very strong quarter in MDM in Q4. We had several competitive wins, and I cited one of them earlier, very, very strong quarter indeed. We are well-positioned in terms of sales specialization. In fact, I would say, we have the best of both worlds in that we continue to have world-class domain experts that know the applicability of our technology in certain verticals and can articulate what the business value is, as well as sales specialists that will provide the knowledge about the product and the positioning of it. And we have a model that we are implementing, where it will be a lot more collaborative. So we'll end up gaining in a couple of ways; the specialists help us with the new products, while freeing up time for our account managers to focus on our core products.

Operator

Your next question comes from Tom Roderick with Stifel, Nicolaus.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

A little bit of a qualitative question here. But as you exit the year and clearly, you pulled through some big deals, the 26 deals over $1 million, qualitative question here would be, how do you feel about the pipeline as you enter the year, relative to sort of what it looked like at the beginning of last year? Sort of curious whether or not this was an element of kind of flushing out a majority of the big deals that were in the pipeline, or do you still feel like you have a lot left? And if you can kind of comment geographically on that, Europe versus U.S., that would be really helpful.

Sohaib Abbasi

Tom, I mean, there wasn't anything extraordinary in terms of what we did in Q4 that we've not experienced in prior years. We've clearly effectively pursued the opportunities that were available to us. Looking forward, the pipeline is very healthy. We have taken several measures that we started in Q3, as early as Q3, to ensure that we had a much higher quality pipeline. And that was evident in a lot of the metrics that we used to manage our business and that continues to be the case. We continue to -- our pipeline continues to reflect a very healthy demand across the product portfolio.

Operator

Your next question comes from Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I'm wondering, with respect to the sales force, how much change there's going to be either to headcount, or to territories, or to the way that people are paid in 2013 versus 2012? Just some general comments there would be helpful.

Sohaib Abbasi

We are -- we were very, very thoughtful in terms of our planning and, as I mentioned, I mean not only did we do the traditional top-down, but also bottoms-up; every manager that was involved. And one of the key considerations for us was one was we wanted to make sure that our sales people had their comp plans available to them at the beginning of the year. And, in fact, we actually had all that done faster than I've ever seen being done at Informatica. We rolled it out. And the other thing that went into our planning was to ensure that there was minimal disruption at the territory, at the account management level. And we reassured our field at the kickoff meeting that there will be very few, if any, disruptive changes in our organization. So I feel that we are well-positioned with our field organization going -- starting 2013.

Earl E. Fry

And maybe one other comment there, in the vast majority of cases, for most of the reps, they will actually see a meaningful reduction in quota in 2013 compared to 2012. So I think the combination of lower quotas, consistent territories, the headcount being in place at the start of the year and having incremental help in terms of subject matter experts and specialists for some of the newer products, I think our sales team is going to feel a lot better starting 2013 than they did starting 2012.

Operator

Your next question comes from Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Earl, I have a question for you on the revenue guidance in your approach in general, just to try to understand kind of where it skews in, in conservatism. So if I look back toward the middle of the year, you guys jumped the gun on your Q3 view and missed after missing Q2. And then it seems like you tried to skew your view maybe a lot more extra conservatively for the Q4, and you've had a -- just had a good quarter. So how are you approaching the 2013, if we can kind of compare it to the way you approached it last year?

Earl E. Fry

Well, it's kind of interesting, Nate. I think I actually got comments kind of half one way and half the other starting Q4, whether or not Q4 was either too -- guidance was too conservative, or a bunch of investors were wandering whether or not it was too aggressive, assuming such strong seasonal growth. So I think we're looking -- I'm looking at it with the same degree of conservatism, with the benefit of having a strong fourth quarter, with basically a sales management team that has put a lot more rigor in the pipeline discipline cadence within the quarter. I think we have more stability and greater strength across the sales organization. So the confidence level is probably higher. And as Sohaib mentioned, I think the pipeline has never been cleaner as we've entered a quarter. So that gives us a pretty high level of confidence going into the year, and that's baked into some of the guidance. That said, we still have some work to do. Sohaib mentioned that it's still going to be probably a couple of quarters before we really start firing on all cylinders in Europe. So that also is baked into how we're thinking about the year.

Operator

Your next question comes from Jesse Hulsing with Pacific Crest.

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

A previous question touched on your MDM overlays. But I believe you also had some disruption with your ILM and Ultra Messaging pipelines. How have these -- have the pipelines for these products recovered? And what are your plans for -- from an execution perspective for maintaining or not maintaining overlays for these groups?

Sohaib Abbasi

The specialization model and my comments that I made about MDM apply to the other product lines as well, including ILM. And I state a significant win that we had and a partnership that I believe will contribute in the coming quarters. The pipeline and our outlook remains very positive about those other products. And again, my comment about having the best of both worlds, with the main experts and sales specialists, apply to these newer products, all the new products.

Operator

Your next question comes from Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Sohaib, I was just wondering if there was an industry growth rate for the blended product portfolio that you use to benchmark, whether you're taking share in the market. And if there isn't a single number, then how are you determining that you're maintaining or taking share? And then for Earl, can you just help us understand the top line contribution from Heiler in Q4 and in 2013?

Sohaib Abbasi

Michael, as you know, we've talked about -- that we are in the early stages of data integration. There are many factors that are going in, in terms of the long-term growth, some of which are mega trends that many people have not figured out how to quantify the impact of cloud and social computing, mobile computing, as well as big data. So the way that we look at it is using some of our own internal metrics about how often are we competing against our competition. And, as you know, I mean, the majority of our deals are not contested by a commercial competitor. The competitor we see most frequently is IBM, 15% to 20% of our deals. And our win rates against them continue to be very high. Our win rates against our Tier 1 competitors remain over 75%. So we believe we have differentiation, with virtual data machine, with a lot of other technology. And with our focus, I believe we'll be able to continue to advance our competitive advantage.

Earl E. Fry

Yes. And, Mike, the contribution from Heiler, again, was for the 1 month stub period, which means we've probably got a little more than 1/3 of their revenue, but about 1/3 of their expenses. So contributed about a little over 1% of our revenue in Q4, and it was essentially neutral to earnings in Q4. My expectation is they'll contribute several million dollars of revenue per quarter in 2013, the new -- the dilutive to earnings for probably the first 3 quarters until we can get them fully integrated. And then, at that point, they'll be neutral to accretive. So again, I think the way to think about it is, is they're probably a plus or minus a 2% contributor to overall revenue in 2013.

Operator

Your next question comes from Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I just had a question on the large deal metrics. It was, obviously, very strong, but the license was still down year-on-year. Presumably, the MDM contributed to the large deal club [ph]. But maybe you could talk to, was the average size of the large deals, not as great as it had been in the past, or did you still have some more work to do to get in some of the core products or into your lower deal sizes? I'm just trying to reconcile the strong large deal flow with still the down license growth.

Earl E. Fry

Yes, sure. So again, there's always a little bit of a difference between -- there's not a perfect correlation between order metrics and license revenue, depending on where the transactions are coming from, and whether or not we can take it to revenue in the month that we take the order. That said, of the 26 transactions that we had, over $1 million, the vast majority, 17 of them, were -- started with a 1; so kind of good diversification, not a lot of big deals in that mix. And, in fact, there was -- 8 of the transactions were kind of between that $2 million to $4 million plus range, so only one really needy transaction during the quarter. So we feel very good about the mix. Optically, it's a little high versus a year ago. But the total contribution from those 26 deals, over $1 million, is not very different from the 22 deals, over $1 million, a year ago.

Operator

Your next question comes from Ed Maguire with CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

When you look back at what happened in the second and third quarters and how you've addressed it, how much in retrospect, in hindsight was pure execution? And how much may have been some changes in the market that you've adapted to?

Sohaib Abbasi

Ed, just looking back and seeing the improvement that we saw in Q2 and -- in Q4 and what we've seen moving forward in terms of our pipeline, the majority of the challenges were as a result of sales execution issues, our own operational challenges. And we had commented on many of the things that we've done to improve performance. And looking forward, we feel like we have addressed the challenges and, at the same time, we have -- we are better prepared for 2013.

Operator

Your next question comes from Matt Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

My question is in regards to your cloud business. I believe it was sort of in that mid-single million dollar revenue per quarter run rate, growing faster than the overall business. I guess I'm wondering what was the exit rate for this quarter. How should we think about the product portfolio in terms of enhancements this year? And maybe what kind of run rate could we exit 2013 at?

Earl E. Fry

Sure. We exited the year in Q4, it was really at the high-single-digit millions of dollars of revenue in Q4 for all of our subscription business. And, obviously, the cloud is a huge contributor to that. Our address validation business also had a decent quarter in Q4. And as far as prospects going forward, I'll let Sohaib take care of that.

Sohaib Abbasi

We -- we'll have a focus on cloud. We have -- many of our customers are now beginning to actually look at having a hybrid IT organization, combining the cloud services that they're subscribing to with their on-premise IT infrastructure. With the new CMO, Marge Breya, we will have a very focused campaign around cloud and promoting the hybrid IT organization. We have a very competitive product portfolio. We were one of the early pioneers. We have hundreds of organizations that are relying on Informatica, and several that are already deploying Informatica, both on-premise and in the cloud in a hybrid environment.

Earl E. Fry

And that said, I think the Cloud MDM solution that we introduced in September, we're starting to see good early interest, and that should be a nice contributor over the next -- starting 2013 and over the next few years.

Operator

Your next question comes from Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I did want to follow up on Tom's question, kind of ask it a different way. How much of the improvement in Q4, within the EMEA region, was perhaps the result of catch-up from the lack it's been [ph] the last prior quarters? And is there any way you could give us a sense of that dynamic, just so that we -- as you look forward, the stability in that region is ahead of us?

Sohaib Abbasi

Greg, it would be difficult to actually quantify how much of that would be catch-up, because it's hard, in many cases, to be able to be certain about individual transactions. However, I would say that the demand that we've talked about over the several quarters was always there. We had not been quite as effective in pursuing that demand in the prior quarters. So clearly, some of that is probably reflected in the Q4 numbers and, as I commented on earlier, we're expecting the -- despite the fact that we had a very strong quarter, relatively speaking in Europe, we expect that it would take us a couple of quarters to get the operational discipline the -- to the level that we'd like in Europe.

Operator

Your next question comes from Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So I'm calculating about $100 million in international revenue. I'm curious if you can parse that out between EMEA and the other areas. I'm guessing it's around 70% of it. And you talked about, 2 quarters to get Europe stabilized. After that's done, what do you think's the go-forward like, of back to normal growth rate for us to think about?

Earl E. Fry

Yes. So, Shelby, you're right in thinking about it as the vast majority of our international revenues is coming out of Europe, especially in the Q4, given the -- our comments. And we did have a very strong contribution from our European team. So it's probably skewed a little higher percentage than I would normally expect coming out of Europe in terms of their portion of the international mix. That said, we did have strong contribution from Asia-Pac and Latin America, and I do believe that over -- as we normalize things in 2013, we'll continue to see probably faster growth over the course of the year. Each quarter may vary a little bit, but to see faster growth out of our international regions than we would out of the U.S.

Operator

Your next question comes from Karl Kierstead with BMO.

Karl Keirstead - BMO Capital Markets U.S.

Earl, just to continue on that geographic discussion, if international revenues in the fourth quarter were $100 million, $101 million, then it would imply North American revs were down about 9%. I'm wondering if you could give a little color on that deceleration, and when you think North American revenues might turn positive. And then I've got a quick follow-up.

Earl E. Fry

Yes. Again, I think that's a function of the -- just of the mix and kind of at the end of the quarter, what deals could be taken to revenue and what deals ended up kind of sitting on the balance sheet. So there's some of that that's going on. Recognize that in Q4 that we had a particularly strong public sector quarter in Q3, driven almost entirely out of the U.S. Public sector, while it was strong in Q4, most of that strength came from -- or a large portion of that strength came from our international public sector. So the North America public sector was actually not a very strong contributor compared to -- not only compared to Q3, but also compared to a year ago. That said, I do think -- I'm just reiterating what I said earlier, that I do think our international operations, over the course of 2013, will probably grow faster than North America. I think the other factor that muted some of North America's results in Q4 was the fact that financial services, while it's still our largest vertical, was not head and shoulders above other verticals, like public sector, like health care, like manufacturing, like communication. So we had good diversification in Q4, which I think bodes well for how we're thinking about where business is coming from in 2013. We're not going to be over reliant on any 1 region or vertical.

Operator

Your next question comes from Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

I guess my question, Sohaib, was when you guys have now had the Big Data Edition out there, I guess how do you view that, in terms of bringing net new incremental customers into the fold, in terms of the Facebooks, versus how many of your existing customers might be looking for something to help smooth the on-ram [ph] to Hadoop? And I guess what does that do, say for an existing customer in terms of the potential expansion of your relationship with them?

Sohaib Abbasi

Kirk, what is unique about the approach that we took was we provide complete interoperability between Hadoop and all of the other alternatives for big data. Big data, in our customer base, is not limited to just Hadoop, but rather, many customers are using a variety of different technologies like EMC, Greenplum, like SAP HANA, like Exalytics, like Exadata. And the opportunities available to us are -- with Big Data Edition, span all of those variety of different technologies. The Hadoop implementation and the offering clearly allows us to get new logos. Facebook and OpenTable are, clearly, new customers that have not used Informatica in the past, opens up new opportunities. But Big Data Edition does position us well with our existing customers just as much.

Operator

Your next question comes from Steve Koenig with Wedbush.

Steven R. Koenig - Wedbush Securities Inc., Research Division

If I could just slip in a two-parter. The first one, probably for you, Sohaib. Customers, are they pausing to reevaluate plans as they study next-generation analytics technologies? Is that having any impact on you? And then just for Earl, very wide, wider than normal, full year EPS range. What's behind that? Is it all due to license variability?

Sohaib Abbasi

Steve, I would not say that the customers are pausing to reevaluate. Clearly, there is a lot of experimentation going on, with a variety of different alternatives. Informatica, because of our neutrality and the fact that we allow customers to ingest data in a variety of different analytic alternatives is very well-positioned.

Earl E. Fry

Yes. And, Steve, as far as the $0.15 EPS range for the year, I guess I wouldn't read too much into that other than it is going to be a -- you're right that license revenue growth, and depending on how you pick that trajectory, will have a fair impact on EPS range. I think the other variability, especially in the front half of the year, is going to be what kind of contribution we get out of Heiler. Again, recognize that while do own 98% of the shares, legally, we are not in complete control of that organization, so cannot effect, whether it's sales strategies or synergies. So that part, we have a little less control over than we might otherwise. So -- and you can expect, as we get farther along in the year, that range -- that earnings range will get tighter.

Operator

Your next question comes from Derrick Wood with Susquehanna.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

I guess a question for Earl. The sales and marketing costs were significantly above the year-ago levels, yet, you had license revenue down. Can you just give us a sense for where those expenses are coming from, and then maybe shed some light on sales, hiring plans for 2013? And I'd be curious if the lower quotas would have any material impact on margins.

Earl E. Fry

So a number of factors affecting sales and marketing costs in Q4 again. And it shouldn't necessarily be a surprise [indiscernible]. We've signaled pretty hard that with the organizational changes that we've made, with the people that we're bringing on board, the fact that we're adding to subject matter experts, sales specialists, we've put -- we've positioned and significantly strengthened the sales organization, most of that was done in Q4. That also included some changes and some exits from the company. So you have a combination of a good achievement by a good portion of these sales teams, so commission costs are up year-over-year. Recall that we did, in targeted areas, bring down quotas in the July timeframe for a handful of our sales teams. We had some onetime termination costs, as well as some onetime recruiting costs which show up and inflate the Q4 numbers. That said, I also mentioned that we had -- we have many salespeople that are starting -- that have started in January timeframe, which will probably keep the sales and marketing costs at a relatively hot level through the year. I would expect that our hiring would be more -- at least it's planned right now to be moderated a little bit compared to what we've seen not necessarily in Q4, but in Q1, 2 and 3 of last year. And we'll assess where we are. So we'll continue to make strategic hires in the first half of the year. I think we're very comfortable with the existing amount of capacity and the tenure of folks that we're starting the year with. And depending on how strong our first half is, we'll revisit how hot we keep the kind of distribution spend as we go into the back half of the year.

Operator

Your next question comes from James Wesman with Raymond James.

James Wesman

Earl, I just want to clarify your earlier comments in the Q&A. For 2013 revenues, are you expecting normal seasonality? And, if so, should we expect that for the total and the license line, or one or the other per se?

Earl E. Fry

Yes. My comments are for normal seasonality, which means you'll have to go back beyond 2012 to see normal seasonality. And also, you've got a recession year in there, so I guess the term normal is you'll need to normalize a number of historical years. That said, my comment is related both to -- primarily to license revenue, but also, by implication, total revenues as well.

Operator

And your final question comes from Peter Lowry with JMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

It's actually Pat. So, Earl, I may have missed this and if I did, forgive me. But how should I think about the license revenue growth for '13?

Earl E. Fry

So I don't know that we commented specifically on license revenue growth. We gave guidance in the $850 million to $900 million range for total revenue. I do think that -- and, again, this is 1 where the year-over-year compares are a little choppy, given the baseline for 2012. So I think it's going to have some degree of variability by quarter. Clearly, Q1 will be a tougher quarter, in terms of a year-over-year compare. And then Q2 and Q3 should be very easy quarters, in terms of license revenue growth. And then Q4 kind of depends which end of the range you want to be on, of that $850 million to $900 million, on what you assume for growth rates in Q4.

Operator

Ladies and gentlemen, that is all the time we have today for the question-and-answer session. At this time, I would like to hand the conference back over to your presenters for closing remarks.

Sohaib Abbasi

So, in summary, for 2013, our singular mission remains the same: Advance Informatica as the clear leader in data integration, with the increasingly critical role of our product portfolio for both the existing and emerging computing platforms, Informatica is in the strongest ever position to grow to $1 billion and beyond. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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