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Informatica Corporation (NASDAQ:INFA)

Q2 2013 Earnings Call

July 25, 2013 5:00 pm ET

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 & Service and Secretary

Analysts

Mark R. Murphy - Piper Jaffray Companies, Research Division

Brent Thill - UBS Investment Bank, Research Division

Raimo Lenschow - Barclays Capital, Research Division

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

Michael Turits - Raymond James & Associates, Inc., Research Division

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

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Abhey Lamba - Mizuho Securities USA Inc., Research Division

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

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

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

Jamison Manwaring - Goldman Sachs Group Inc., Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Rakesh Kumar - Susquehanna Financial Group, LLLP, Research Division

Matthew L. Williams - Evercore Partners Inc., Research Division

Operator

Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Informatica Q2 2013 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Stephanie Wakefield, Vice President of Investor Relations, 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 second quarter 2013 financial results. Today's call is being webcast and will be available for replay on our Investor Relations website at www.informatica.com/investor. As a reminder, today's discussion will include forward-looking statements, such as our projected financial results for the third quarter and fiscal year 2013; our growth opportunities and strategies; our product plans, demands for our products and services; and the future effects of acquisitions and future integration efforts. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. For a discussion of these risks and uncertainties, you should review our recent SEC filings including our most recent Form 10-K. We assume no obligation and do not intend to update or revise any forward-looking statements made during this call as a result of new information or future events. Also, during today's call, we will discuss non-GAAP financial measures. A reconciliation of the GAAP to the non-GAAP numbers is provided in today's earnings press release and in the Supplemental Metrics section of our Investor Relations website.

Sohaib and Earl will share a few comments about the quarter before we turn to your questions. [Operator Instructions]

With that, I'd like to turn the call over to Sohaib.

Sohaib Abbasi

Thank you, Stephanie. Our Q2 results reflect our continuing progress to resume our growth momentum. Total revenues grew year-over-year by 17% to $223 million and software revenues grew by 18% to $91 million. Included in software revenues, quarterly subscription revenues grew year-over-year by 70% to $11 million fueled primarily by our leading cloud data integration service.

This afternoon, I will update you on our progress in key geographic regions to effectively pursue growing customer demand. Then after Earl's review of our financial performance, I will outline key investments we are making to advance our technology leadership for both short-term and long-term growth.

In North America, our results reflect strong customer demand in key vertical segments, particularly, financial services and healthcare. We are winning more strategic decisions as customers across many verticals aspire to become data-centric enterprises.

In financial services, compliance with changing regulatory requirements and customer centricity are driving customer demand. And in healthcare, the Affordable Care Act places even greater emphasis on cost-effective quality care that, in turn, is opening up new opportunities.

In Europe, we continue to further strengthen our leadership team and drive more rigorous sales discipline. Last quarter, in my meetings with more than 15 customers in Europe, I noted a broad range of demand drivers across the various countries.

In Spain, emphasis in operational efficiency is driving customer demand for Informatica ILM and data integration. In the U.K., focus on regulatory compliance and customer centricity is driving demand for Informatica MDM, data integration and Data Quality products.

And in Asia Pacific, we achieved solid results, led by continued strong performance in South Asia. As a notable milestone, Indonesia's leading provider of mobile telecommunications and digital data services, Telkomsel selected Informatica for an initiative to increase customer lifetime value. Using Informatica, Telkomsel tends to connect, enrich and standardize call detail records for timely event-based marketing and more effective cross-sell opportunities.

Now let's turn to product results. As a reminder, our expansive product portfolio continues to drive both up-sell opportunities for our core products and cross-sell opportunities for our newer products. Among our core products, our well differentiated Informatica Data Quality continues to benefit from higher customer priority being assigned to trustworthy data. One of the largest back-office transaction clearing houses selected Informatica Data Quality.

At Informatica World, we launched our latest product, PowerCenter Express, designed specifically for departmental data integration jobs. And last week, we announced general availability of that product for download and install in less than 10 minutes.

In December, we introduced PowerCenter Big Data Edition with native support for Hadoop, as well as built-for-purpose analytic databases such as AMC Pivotal Greenplum, Teradata Aster Data and IBM Netezza. Among the early adopters in Q2, a private wealth management division of a bulge bracket bank selected PowerCenter Big Data Edition to pursue its goal to be #1 in portfolio performance for its clients. Leveraging cost-effective scalability offered by Hadoop, the bank will analyze large volumes of investment and segment performance data to determine the best match for its clients' portfolio.

In addition to up-sell opportunities of our core products, we have an even bigger cross-sell opportunity for our expanded product portfolio. The customer usage of our newer products has increased consistently from 4% in 2007 to 43% of the active projects in Q2 2013, representing growing adoption that positions us well for this bigger, largely untapped cross-sell opportunity.

We are pleased with the increasing adoption of our Master Data Management products for strategic customer initiatives. M.D. Anderson, the #1 cancer center in the U.S. chose Informatica MDM for 2 important initiatives: First, to comply with the regulatory mandate to convert medical codes from ICD 9 to the latest ICD 10 standard by 2014. And second, to manage Master Data from past clinical trials across multiple domains for cancer research. The goal of the related 8-year initiative, Project Moonshot, is to find cure for 5 types of cancer.

Last quarter, we won several important customer decisions that adopt Informatica Information Lifecycle Management products over other alternatives. A community-based healthcare provider in California selected Informatica ILM to retire more than 150 applications using Informatica data archiving, as well as to ensure the privacy of sensitive data using Informatica Data Masking.

To further expand our cloud offering, Informatica Cloud Summer 2013 release featured native connectivity to SAP for hybrid applications, new data masking for data privacy and MDM enhancements for single view of customer information across multiple orgs within salesforce.com. Our broader Informatica Cloud offering is leading to new up-sell and cross-sell opportunities.

Schumacher Group, one of the largest healthcare resources in the U.S., standardized an Informatica Cloud to integrate data in salesforce.com with data in other cloud services such as Workday and with data in on-premise packaged applications such as PeopleSoft and custom SQL server-based applications. Schumacher group replaced 4 other products with Informatica Cloud. Last quarter, the group adopted Informatica's Cloud MDM to gain a single view of patients and doctors across 5 different salesforce.com orgs, each corresponding to a different service line.

Our broadest ever product portfolio positions Informatica for even more strategic partnerships with our customers. As an illustrative example, in the financial services segment, one of the largest type of lending companies in the U.S. standardized on almost the entire Informatica portfolio that helped increase its profitability through trustworthy, holistic and authoritative data on customers, as well as market segments.

To sum up, our Q2 results reflect our progress to effectively pursue growing demand for our broadest ever portfolio of products and services.

Now I'll turn it over to Earl to give you more details on our financial results. After Earl's comments, I will discuss key investments we are making to strengthen our technology advantage for both short-term and longer-term growth.

Earl E. Fry

Great. Thank you, Sohaib. Sohaib mentioned our total revenues were a second quarter record at $222.4 million, up 17% on a year-over-year basis. Software revenues, which include license and subscription revenues, were $91.4 million, up 18% year-over-year. The license revenue component of software revenues came in at $80.1 million, up 13% year-over-year while subscription revenues grew to $11.3 million, up 70% year-over-year.

Total service revenues were a record $131 million, up 16% year-over-year with the maintenance revenue component up 13% to $99.7 million and the consulting and education component up 28% to $31.3 million.

Our deal metrics were solid in Q2. We booked license orders from 76 new customers in Q2 while existing customers contributed 79% of our license order value with each of these metrics consistent with what we reported a year ago. We booked 15 transactions over $1 million, the same as a year ago, and we closed 94 deals over $300,000, up significantly from 70 transactions a year ago. Our average transaction size for orders over $100,000 came in at 441k, up 4% from a year ago and the average transaction size for orders over $50,000 was 339k, up 7% from a year ago. 26% of our license orders came from the indirect channel and an additional 33% of our direct orders in Q2 were referred to us by partners or resellers. So the overall total of indirect and referred orders was 59%, down from 68% in the year ago second quarter and reflecting the stronger contribution and improved execution from our direct sales team this year. 25% of our license revenue came from the indirect channel in Q2.

Our Q3 geographic results reflect solid contribution from North America, stabilization in Europe against a still challenging macro backdrop and improved contribution and productivity for both Asia and Latin America.

License orders as a percentage of total license orders from North America came in at 60%, down from 65% in the year-ago second quarter, while license orders from EMEA and the rest of the world was 40%, up from 35% a year ago. North America represented 65% of total revenue in Q2 compared to 67% a year ago, while EMEA and the rest of the world represented 35% of total revenue in Q2 compared to 33% a year ago. From a vertical industry perspective, financial services, public sector and healthcare were our top contributors to new license orders.

Non-GAAP gross profit, which excludes $5.6 million in amortization of acquired technology and $1.4 million of stock-based comp, came in at $184.9 million or 83% in Q2, consistent with a year ago and with Q1. Software margins were 97% in Q1, consistent with the year-ago second quarter. Service margins were 73% compared to 74% in the year-ago second quarter, reflecting a slightly higher mix of consulting services, primarily as a result of the Heiler software acquisition.

Excluding charges for stock comp, amortization of intangible assets and facilities restructuring and acquisition-related adjustments totaling $16.6 million, our Q2 non-GAAP operating expenses were $135.4 million, up from $129.2 million in the first quarter and up from $112.8 million in the year-ago quarter. The year-over-year increase in operating expenses reflects increased investments in sales capacity and sales specialist, as well as increased incremental investment in cloud integration, Big Data and MDM initiative and all of these are investments we're making inline with our top priority, which is to drive increased revenue growth.

As a percentage of revenue, non-GAAP operating expenses were 61% of revenue for the second quarter compared to 59% in the year-ago quarter. Non-GAAP operating income, as a percentage of revenue, was 22.3% in the second quarter, down from 24.1% a year ago but relatively consistent with 22.5% in Q1.

GAAP net income for the second quarter 2013 was $0.16 per diluted share including the after-tax impact of amortization of acquired technology and intangible assets, facilities, acquisition-related adjustments, acquisition and other expenses and share-based comp. Excluding these items, non-GAAP net income was $0.31 per diluted share, within our target range of $0.29 to $0.32 per diluted share.

Total headcount at the end of Q2 was 3,080, an increase of 238 from the end of Q1 and up 387 from a year ago. Sales and marketing headcount ended the quarter at 1,035, up 39 from Q1 and up 119 from a year ago. Our Q2 headcount numbers include employees from the Heiler acquisition, which totaled 172 in total and 25 in sales and marketing. Looking forward, we expect to continue to add critical headcount in all areas of the company through the second half of 2013.

Cash flow and balance sheet metrics were solid again this quarter, reflecting strength and consistency in our business model. We ended the quarter with $604 million in cash and investments, up from $593 million in Q1. We generated a second quarter record, $33 million in cash from operations and, over the past 12 months, we generated over $210 million in cash flow from operations.

During the second quarter, we used $21 million in cash to repurchase 594,000 shares of our stock and ended the quarter with 111.3 million shares outstanding on a fully diluted basis. DSOs were 62 days in Q2, within our target DSO range of 55 to 65 days.

Based on Q2 orders, our potential future revenues disclosure, which includes deferred revenue balances, as well as orders not yet taken to revenue, as of June 30, will be $298.2 million, up over $1 million from Q1 and up over $40 million from last year. Our deferred revenue balance increased to a record $273 million and is comprised of $263 million in current deferred and $10 million in long-term deferred. Deferred revenue was up over $5 million from Q1 and up over $35 million from last year.

Our tax rate for the quarter was 31% on a GAAP basis and 32% on a non-GAAP basis. We continue to expect our non-GAAP tax rate for the full year 2013 to be approximately 33% before the impact of certain discrete tax items. We do, however, expect to incur onetime acquisition integration-related tax expenses in Q3, which will impact our GAAP tax rate significantly in the third quarter and cause our GAAP tax rate to be closer to 40% for the full year 2013. We continue to expect our income tax provision, as well as both our GAAP and non-GAAP tax rates, will have some variability and will be very sensitive to our quarterly geographic mix of earnings.

Now, while we closed the acquisition of Heiler software late in Q2, we continue to expect that we will not begin to realize the benefits of fully integrating Heiler's systems with ours or any potential synergies from the transaction until very late 2013 or early 2014. Until then, we continue to expect Heiler to contribute several million dollars of revenue per quarter and expect the acquisition to be marginally dilutive to earnings in Q3.

Now turning to guidance. Our guidance for 2013 includes the previously mentioned assumptions for our tax rate; the dilutive impact of recent acquisitions, as well as cost associated with our upcoming move this quarter to a larger headquarters facility. 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 technologies and a stronger sales organization. Based on these assumptions, we are setting Q2 -- Q3 revenue guidance in a range of $220 million to $230 million and setting Q3 non-GAAP earnings per share guidance in a range of $0.30 to $0.33. For the year 2013, we are increasing our target for total revenue by $10 million to a range of $895 million to $935 million and raising the lower end of our non-GAAP EPS target to a range of $1.36 to $1.46. As we have said before, due to the incremental investments and modestly dilutive impact of recent acquisitions, we expect non-GAAP operating margin, as a percent of revenue for the full year 2013, to be a little lower than what we reported in the full year 2012. And as a reminder, our non-GAAP EPS targets 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 $0.10 per share per quarter, the tax affected impact of pre-occupancy building operating expenses of approximately $0.02 per share in Q3 and an estimated $0.08 per share impacting Q3 due to a onetime acquisition integrated -- integration-related tax expense. And, of course, any major acquisition costs and expenses.

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

Sohaib Abbasi

Thanks, Earl. We are investing to advance our technology leadership for sustained growth. Last month at Informatica World, we launched Vibe, the industry's first virtual data machine or VDM. With almost 2 decades of engineering effort behind it, Vibe VDM represents 3 distinct opportunities for short-term, mid-term and long-term growth.

First, as a short-term growth opportunity, built-in Vibe powers the expensive Informatica product portfolio with our compelling differentiated value proposition “Map Once. Deploy Anywhere.”. Second, as a mid-term growth opportunity, Vibe inside will enable programmers to build data-centric applications spanning on-premise IT, card services and even social media. And third, as a long-term growth opportunity, Vibe, for the Internet of things, will enable data processing across a new generation of sensors, devices and servers. As a reminder, Vibe VDM simplifies the ever-increasing complexity of data infrastructure in 2 ways: First, marry universal access to data regardless of whether the data resides in mainframe files, SQL relational databases, NoSQL databases, Hadoop HDFS, whether on-premise or in the cloud. And second, Lingua Franca specification of processing regardless of whether the processing is executed in middleware software, inside SQL relational databases on Hadoop clusters whether on-premise or in the cloud. Informatica Vibe simplifies data complexity with “Map Once. Deploy Anywhere.” With Vibe VDM, there are fewer skills for developers to master and a simpler IT infrastructure for IT staff to manage.

As a short-term opportunity, powered by built-in Vibe, we delivered PowerCenter Express, our latest product, which is designed specifically for departmental data integration jobs. We now offer a continuum of data integration products from those providing wizard-driven simplicity for business analysts to those supporting full lifecycle productivity for professional developers. Informatica Cloud to PowerCenter Express to PowerCenter Enterprise Edition to PowerCenter Big Data Edition, all powered by built-in Vibe. Customers are able to leverage the Informatica platform at different price points and with different skill levels. Unlike other vendors, powered by built-in Vibe, Informatica allows customers to seamlessly scale from departmental to enterprise deployments without rewriting data integration jobs.

As a midterm growth opportunity, we plan to promote Vibe Inside packaged as a software development kit, or SDK, for programmers and ISPs to embed in applications. Unlike traditional applications, modern applications combine transaction data, managed by on-premise databases and by cloud services, as well as interaction data collected by social media and the Vibe sensors.

The data infrastructure for traditional business applications has been a relational database to access, process and manage on-premise transaction data. The data infrastructure for modern business applications must access, process and manage structured transaction data on-premise and in the cloud, as well as unstructured interaction data in social media, devices and web log files in batch or in realtime.

Vibe Inside SDK will deliver the data infrastructure of Virtual Data Machine for programmers to build modern data-centric applications. As an early adopter example, with Informatica Vibe Inside, Dun & Bradstreet is delivering the D&B360 data-as-a-service. Working together with industry partners, Vibe Inside represents a midterm opportunity to promote a modern, standards-based data infrastructure for the next-generation data-centric applications.

And finally, as a long-term opportunity, we plan to adopt Vibe for the Internet of things. With the ubiquitous sensors and devices, the promise of the Internet of things or the investor Internet is to enrich our lives. Sensors in people will monitor vital health signs with a promise to prevent disease or tailor treatment. Sensors in cars will detect potential collisions with a promise to take evasive actions with automatic braking systems. But this promise of the Internet of things can only be realized by harnessing the broad variety, a machine interaction data in realtime. As a precursor of such longer-term opportunities, an aerospace supplier enabled by Informatica is innovating ways to monitor device-sensor data in realtime for preventive maintenance of auxiliary power units on large commercial aircrafts.

Simply put, our well-differentiated Informatica Vibe VDM positions us with a competitive advantage for short-term, midterm and long-term growth.

At our recent Informatica World user conference, we showcased 2 of our key advantages: Vibe VDM, to simplify the complexity of the information infrastructure; and our expansive product portfolio, to put information potential to work. And to further expand our portfolio, we completed our acquisition of Heiler software that offers leading product information management solutions for customers to optimize multi-channel coms.

To sum up, with these key investments, to maintain our track record of innovation, Informatica is well positioned to pursue our sustained growth opportunity.

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

Question-and-Answer Session

Operator

Your first question comes from the line of Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Earl, the Q3 revenue guidance is materially higher than I would have expected. And I'm also looking at your billings growth this quarter is higher than, I think, we all expected. And yet, I wasn't exactly sure how to interpret your commentary about your up-sell. I'm trying to understand how to fit all that together. Could you comment on the pipeline, maybe your degree of visibility heading into Q3. And to share what is it that's giving you the confidence to guide for a sequential increase here in Q3?

Earl E. Fry

So I think part of it is that we saw good, absolute -- even though the mix was slightly higher in terms of international contribution, because we had very good contribution from Asia and Latin America in Q2. We did grow in all geographic theaters in Q2. So you do know that we have said for a while that we're kind of a work in progress in terms of what we're doing in EMEA. And I think the fact that we saw good stabilization there, despite a tough macro environment, it gives us a good conviction that as we start to execute better in the back half of the year, that we should see improvement there. Again, in Asia and in Latin America, we've had good, consistent growth in contribution and expect continued growth in productivity. And North America was good. I mean, we, I think, it was better in certain areas but in verticals, financial services, I think we're benefiting from the investments we've made and the positioning of the product portfolio, I think we're benefiting from the macro environment being better domestically, that particularly helps financial services. What's going on with healthcare exchanges, it's helping us in state and local and some of the new product and solution announcements that we've had around our healthcare vertical is helping to drive good demand there. So, again, there are -- so, I think all of that gives us better conviction and visibility as we go into the back half of the year.

Mark R. Murphy - Piper Jaffray Companies, Research Division

And then if I may ask just a very quick follow-up, Sohaib. Is there anyway you can approximate that the relative growth rates of your ETL or analytical products versus the operational or your newer categories, perhaps including MDM. I think many of us are just trying to understand the multiyear growth trend for, I guess, the core versus the newer technologies and maybe whether there's a similar trends or fairly different?

Sohaib Abbasi

Mark, as you know, it is very difficult for us to distinguish the variety of use cases for our flagship PowerCenter products. To illustrate an example, I mean, there was a significant deal in Europe by a customer that plans to use Informatica to load SAP data into Teradata for doing decision-making. And that same customer is now using Informatica to synchronize data between SAP and salesforce.com for more efficient operations. So given used cases like that, it is hard to distinguish. However, as we've commented on with the interest in Big Data initiative and the 6 different ways of doing analytics through a variety of different alternatives, including Hadoop, I am very optimistic that we're very well positioned in our core market. And at the same time, we're very pleased with the uptake of our newer products.

Operator

Your next question comes from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

On the second half of the year view, Earl, I know everyone's always enjoys getting your macro view in terms of the assumptions that, I think, you just mentioned that a few of those inputs. But if you could just help us understand some of the other inputs. And when you raise the guidance by $10 million, the core Informatica versus Heiler, can you at least just give us a sense of how that played out in terms of the raise of the guide?

Earl E. Fry

Sure. So in addition to my previous comments, I think, in there, we do have -- continued to be a little tempered in our view, especially for Q3, out of anything coming from Europe, so that would also be relevant to the contribution from Heiler, since most to their revenue stream comes -- still currently comes out of Europe. So that basically says we're reasonably comfortable even with the seasonal softness we would expect to see in Europe. We feel very good about, in general, about North America. I think, like many other companies, we are a little cautious, even within this guidance, a little cautious on what we would see out of the federal government contribution even though it should be seasonally stronger, I'm not sure it's going to be as seasonally strong as we've seen in years past. But that's mitigated by this -- by the strength that we've seen and the continued pipeline and contribution from state and local, in particular, what we're seeing around the investments that, say, the local governments are making around healthcare exchanges. And so, again, I think the -- I think against that backdrop, I think I would frame that as the North America environment in macro environment I think is a reasonably good one. I think the one place of caution might be in federal governments then where it'll be seasonally strong but may not be as seasonally strong as in years past. I think Europe is -- we're kind of going through a trough but that's no different than our expectations over the last few quarters. And we feel better about our ability to execute and manage the pipeline in Europe. And with Asia and Latin America, those are relatively small contributors but we're getting good productivity. And despite what people say things are slowing down macro, there's still a faster growth rate in those regions than in other parts of the world. And a lot of what we do is going to be more heavily dependent on Informatica's specific contribution and sales efforts as opposed to macro effect.

Operator

Your next question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Research Division

Can you just a little bit talk about the -- as you discussed the investment levels and your investment to the short- and long-term growth opportunity. And what kind of level of core underlying growth are you kind of considering when you do these investment levels? Because the one thing we're all struggling with is this -- are you a company that still has a market opportunity to be a 20% grower or should we kind of now be kind of happy with the 15% levels that we are seeing the moment. Just help us. And I know you probably can't go into concrete details but just help us understand of how you're thinking there, please?

Sohaib Abbasi

I believe that we have an opportunity, in the long run, to obtain the same growth levels as we have historically. And the reason for that confidence comes from 2 observations. One is across a variety of industries, the business imperatives all mandate having the trustworthy, holistic timely data. In other words, the customer demand drivers continue to be stronger than ever. And the second reason is if the technology megatrends, whether it's cloud computing or social or mobile or Big Data, are opening up a lot of new opportunities. And it's that confidence that is driving our investments in many of the initiatives that we highlighted from our core technology, with a core differentiating technology in Vibe to continuously broadening our product portfolio. So we are well positioned to take advantage of all of these growth drivers.

Operator

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

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

So the question I wanted to ask was around the 17 or the -- I'm sorry, the 15, 7 figure deals and really the execution around the big deals in the quarter and what sort of pipeline might hold going forward. So I guess the first part of the question is, can you talk about what product choices customers are making that are driving some of those big deals? I think last quarter, MDM was a key driver behind some 40% of those. So maybe an update on that metric. And then as you look at the execution amongst your big deals in the quarter and how you think about it for the pipeline, can you just talk about, again, were there $5 million deals, deals above that or was this kind of a mix of a lot of just $1 million to $2 million type of deals?

Sohaib Abbasi

Tom, I mean, the largest deals, almost all of them involve broader data integration. Of course, they -- many of them included analytics and data warehousing as well, but almost all of them was broad usage of our technology across a variety of initiatives. In terms of the product categories themselves, Data Quality was a very big part of almost all of those deals. And among the newer products, MDM did particularly well and, of course, growing interest in ILM in terms of data -- specifically for data privacy. Now looking at the broader mix of deals over $300,000, again, those products, clearly, the broader data integration was at the top of the list, data Quality being a bit part of it and MDM continues to be a very big part of those deals as well.

Earl E. Fry

Maybe just a little more color. MDM products were included in over half of the $15 million deals. The ILM product offering was in the 1/3 of those transactions and we had -- and there were no transactions that were $5 million or above. So most of the transactions started with a $1 million or a $2 million, so actually, a nice, very balanced contribution this quarter.

Operator

Your next question comes from the line of Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Question. There's lot to invest in here, a lot of R&D, a lot in sales and marketing. You've guided to margins down slightly this year. Any preliminary thoughts as you look out to '14 and whether or not that should be a year in which we begin to see margin expansion or if that's another investment year before we're done?

Sohaib Abbasi

As we've commented on, I mean, our #1 priority is revenue growth and we have made investments in terms of sales, capacities, specialization. And some of them are beginning to pay off. The results that Earl highlighted in terms of our newer product performance are a good indicator that those investments are paying off. And as I commented on, looking in the long term, there are many trends including the Internet of things that we are well positioned to benefit from and we will continue to make investments in order for us to have the product portfolio for sustained growth.

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay. If I get a housekeeping follow-up, can I just -- how much did Heiler contribute in the quarter and what was the year-over-year FX headwind to revenue?

Earl E. Fry

Yes, we're actually not going to get in to the specifics on Heiler other than it was very consistent with our expectations of kind of several million dollars of revenue with a slightly higher mix towards consulting services as opposed to license, which also showed up in gross margin line. Then as far as FX, a very nominal impact, so on from a revenue basis, a very modest headwind both sequentially, maybe barely over $1 million headwind sequentially and then a little less than $1 million year-over-year. Negligible, essentially no impact on earnings and, virtually, no impact sequentially on deferred revenues or future revenues. So very little and modest impact on currency this quarter.

Operator

Your next question comes from the line of Ed Maguire with CLSA.

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

Just with the launch up PowerCenter Express, could you discuss any changes to pipeline management or are prospecting in the sales force that may accompany that? And how you're going to look to translate that into a expansion into those new users?

Sohaib Abbasi

Ed, as you know, I mean, we just made the product available, generally available, last week. So it is very early to talk about specific programs and trends and talk about that. However, the initial reception has been very strong. It is the most popular component of our block, as we call that, on Informatica market place, there's been over 1,000 downloads already. And those downloads have been from 59 district countries, half of it in the U.S., the other half being outside of U.S.. In terms of the opportunities that PowerCenter Express presents is, we now have a departmental data integration offering, a much more economical offering that will compete with some of the other low-cost alternatives, with a big advantage that there are no dead ends, like in the other products. If they need to scale up to the enterprise level, the customers have to rewrite all the data integration jobs. With PowerCenter Express, they could seamlessly scale to PowerCenter Enterprise Edition and that will be a long-term up-sell opportunity that would be available to us.

Operator

Your next question comes from the line of Michael Nemeroff with Crédit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

My question. Just one for Sohaib. If you could just maybe give us a couple of metrics or maybe some anecdotes about the uptake of Big Data version in the quarter, that would be helpful.

Sohaib Abbasi

We announced an extension of our partnership with Teradata. Teradata will now bundle in Informatica PowerCenter Big Data Edition as part of their Hadoop appliance. And we're the only vendor that they bundled as part of their Hadoop appliance and that bodes extremely well. We also are beginning to see successful deployments of PowerCenter Big Data Edition. In fact, one of the largest financial services institution benchmarked our offering with a variety of other offerings, including hand coding, and found that Informatica Big Data Edition was twice as fast as any other offering. So we are very encouraged by the success, which, of course, means we've got some great reference points positioning us better for future opportunities. Now Big Data Edition is much more than Hadoop. In fact, it has connectors for Greenplum and a variety of other analytic platforms. There were dozens of transactions last quarter for deployment of our products for those analytic alternatives.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And just one follow-up, if I may. Can you give us maybe a percentage of the customer base that's using the Big Data version, like you've given us percentage uptake on previous versions?

Sohaib Abbasi

It's been out for about 6 months. So it is -- at this stage, it would be relative to our installed base, it would be a small number. Clearly, our customers are experimenting with 6 alternatives for the Big Data or doing Big Data initiatives from Hadoop to built for purpose analytic databases, in-memory databases, Agile BI, cloud analytic services, so I believe that we have a tremendous opportunity that is largely untapped.

Operator

Your next question comes from the line of Abhey Lamba with Mizuho Securities.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Yes, I just want to dig into this large deal activities. I think I went back and this was probably the first time ever that you're second quarter number of $1 million-plus deals was below the first quarter level. Is this just a function a very strong first quarter or is there anything about the close rates that you can talk about? And also as part of the discussion, if you can talk about what's the pipeline for us and for the second half for these large deals?

Sohaib Abbasi

I think the key metric, Abhey, that we focus in on are the deals over $300,000. Because the deals over $1 million are very hard to predict. And for that reason, it's not quite as a good of an indicator for the health of our business as the deals over $300,000. So I would not read too much into that number of $1 million deals. And as Earl commented, there were no extraordinary deals that were over $5 million deals. In fact, it was a very balanced quarter from a deals metric perspective. And what is very encouraging is that we look at the mix of $300,000 deals, there is a very good representation of our entire product portfolio. Data Quality being in more than 40% of those deals, MDM being in more than 20% of those deals. So it's a very healthy mix of those that -- which gives us even more confidence for the second half of this year.

Earl E. Fry

And kind of put that in context, the 15 deals and the $1 million deals in the second quarter ties a all-time record for us. So unusual metric really is we had a large number of $1 million deals in Q1 this year versus -- and compare a large number in Q2 last year, which is why, as Sohaib said, we really focused -- we'd give you that 1 metric because everybody kind of expects it, but the one that be focused on internally is the deals over 300k. And that was up over 30% versus a year ago and almost 50% higher than what we had in Q1, so we actually feel very good about the deal metrics in Q2.

Operator

Your next question comes from the line of Steve Koenig with Wedbush Securities.

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

I'd like to ask you about some comments that John McGee told us about InfoWorld. He talked a little bit about 10% growth in sales production or sales productivity? I'm wondering if you could maybe elaborate, how should we think about productivity growth per rep going forward versus headcount growth and how that translates to the growth opportunity for you guys?

Sohaib Abbasi

I think the data point that you're referring to was a data point in terms of what we've seen this year relative to a year ago, and that's a small sample size. We continue to add sales capacity. They're rep, time associated with new reps, so it would be very difficult to give you 1 number in terms of how the overall aggregate sales productivity will come out. We continue to add capacity where we are acquire and then in regions where we've got relative stability in their organization, for example, in Asia Pacific, we continue to see sales productivity continue to go up. In general, I would expect that over several quarters, we will continue to see productivity go up.

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

Okay. And that's despite the sales ads, you think, in aggregate, the productivity can grow here?

Sohaib Abbasi

We've made a lot of changes over the last 4 quarters or so. And I would expect that moving forward, it will be relatively more stable. And as a result of it, over several quarters of productivity, we should start to see improvements.

Operator

Your next question comes from the line of Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Just a couple of questions for you. Earl, on the subscription growth that's up 16% sequentially and 70% year-over-year, this was really fast sequential growth. And I'm just curious if you could share more details there. Are you seeing deals that are flipping from perpetual to cloud at the last minute? Are you seeing any of your existing customers bagging the traditional solution and flipping to that cloud solution? Or is this just being driven by kind of pure cloud deals from the get-go?

Sohaib Abbasi

These are all pure cloud deals, Nate. As we've talked about and the example that I gave about Schumacher group in doing salesforce.com with WorkDay. Schumacher Group was not using our on-premise product. So as customers start using cloud offering and recognize that now they have another form of data fragmentation, they are coming back to Informatica, in some cases, or in other cases, there are new customers coming to Informatica. We're dealing with cross Enterprise Data Integration. Now we will continue to actually help our customers integrate this high levels data on-premise, but this is a net new opportunity where data is now being fragmented across enterprise boundaries and across cloud service providers.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Got it. If I could sneak in another quick one. Just in terms of the sales force uptake, the made some strategic changes this year in your selling approach. How satisfied are you that systems are functioning optimally at this point or any change that you notify -- you'd highlight for us in terms of the sales approach now versus a few quarters ago?

Sohaib Abbasi

I am very pleased by the progress that we've attained. Clearly, from a new product performance perspective, we've showcased the performance, the strong performance that we've seen with the new product. Clearly, the sales specialization model has made a big difference. Now as we commented on earlier, we do know that there are steps we need to continue to take, particularly in Europe, and we will remain very focused on those.

Operator

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

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

I'm wondering if you could comment on the linearity of the quarter. Did things get better as you went on?

Earl E. Fry

Q2 linearity was pretty typical for us, so there's nothing really, in my mind to highlight one way or another. Very typical linearity and pretty consistent really across all geo.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Okay. And then I think I believe on last quarter, Earl, you may have mentioned that you had a record number of reps hit quota and I don't think it was dependent on any large deals. I'm just kind of curious if you could refresh that metrics?

Earl E. Fry

Yes, we continue to see good progress in terms of the number of reps that are contributing. And it kind of matches with what we, the general color that we gave in terms of the geo contribution. So obviously, the focus in Latin America and in Asia are off a very good start this year. North America, reasonably good, probably better in certain verticals than in others. And then in EMEA, as we've talked about, is pretty consistent, that's a work in progress. But I do expect that we'll start to see better contribution productivity and more reps getting to quota later this year.

Operator

Your next question comes from the line of Jesse Hulsing with Pacific Crest.

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

Guys I don't know if this has been asked, because I'm hopping from call to call. But looking at your seasonality, you're up about 3% quarter-over-quarter for your, I guess perpetual license business x cloud, did you see any deals pulled into Q1 or pushed into Q3 because that's pretty well below average seasonality for that part of the business? Maybe talk about assumptions into your seasonal guidance for Q3.

Sohaib Abbasi

So we did have a strong Q1, kind of across all metrics. Q2, I think, was reasonably typical, although I do expect that we are going to gain momentum as we go into the back half of the year. And that's probably how Q3 guidance has been formed as well, so my guess is we see less than typical decline in license/software revenues going Q2 to Q3. So I do think, relatively speaking, we might see a -- hopefully see a slightly better Q3 that we've seen in recent years.

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

And I don't know if this has been asked but federal, what are your views on potential for a budget flush, and how do see that business trending in Q3?

Sohaib Abbasi

Yes, so we did comment upon that with a couple of questions, so federal government, we -- public sector, we do expect that we will get -- it's one of our largest verticals. We do expect some degree of seasonality out of the federal sector in Q3 but we're tempering our expectations and that's, again, built into the guidance, we're tempering. And as a federal government contribution just because of what we've seen in terms of sequestration, but we think that, that's going to be offset somewhat by the strong contribution that we've seen in pipeline, that we've seen building in state and local.

Operator

Your next question comes from the line of Greg Dunham with Goldman Sachs.

Jamison Manwaring - Goldman Sachs Group Inc., Research Division

This is Jamison calling for Greg. With the separation of subscription and license revenue, how do you see the subscription revenue growing as proportion of your total software revenue? Does that level out at 20%, 25% or do you expect that to -- it looks like it's gone up about 1% as a percentage since the last quarter.

Sohaib Abbasi

Yes, we do expect that to be our fastest growing piece of the business. I don't know that we've set any targets or expectations for how big that could be as a proportion of the software mix. It's nice to see both the perpetual as well as the subscription lines growing. Expect both of them to continue to grow at a good rate but, obviously, expect the subscription rate to be significantly higher even going to the next several quarters and years.

Operator

Your next question comes from the line of Pat Walravens with JMP Group.

Patrick D. Walravens - JMP Securities LLC, Research Division

I hope this hasn't been asked already, but Sohaib I was wondering if you could update us on the healthcare insurance exchange opportunity that you discussed last quarter?

Sohaib Abbasi

We have about a dozen states that are using Informatica technology for those. And that continues to be one of the reasons why state and local has had a strong quarter and the outlook continues to be very strong. And that's one of the many opportunities that has been opened up with the Affordable Care Act.

Operator

Your next question comes from Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Just wondering if you could envision how the business model looks like, the next 1 to 2 years -- I'm sorry for my throat. As you flood your cloud and big data business, it occurs to me that you enjoy your rapidly growing subscription revenue stream. How should we be thinking about your business going forward? Is it a combination of license plus subscription or do you envision rolling in 2 into 1 reporting line item, just so we don't overly focus on license and not give credit for your subscription revenues, that's one part of the question. And second, Earl, more wanted to clarify the raise to the guidance. How much of that is consulting versus license? It does look like Heiler had more consulting that you folks had in your business model?

Earl E. Fry

Sure. We've just broken out the sectors for license and subscriptions, so I would expect that we'll continue to have that delineation for some period going forward. And as Sohaib mentioned, these are different offerings, we're seeing good traction for both, seeing good opportunities for both, so I would expect that will continue to break them out separately, and also subtotal them as total software revenues, because those are basically -- all of the combination of that is basically new placements of our software. So I don't see that changing anytime in the foreseeable future. And then relative to the raise in guidance, actually, the raise in guidance is really kind of across the board, so I would not ascribe that just to consulting contribution from Heiler. My comment relative to the Heiler consulting contribution was relative to mix and relative to margin contribution from the services business relative to historical numbers. So I think Q2 is a reasonable benchmark in terms of there's nothing that's particularly unusual in Q2 in terms of the mix of our various lines of revenue. And I would expect to see kind of normal seasonality and growth from the Q2 lines going forward.

Operator

Your next question comes from the line of Rakesh Kumar with Susquehanna Financial.

Rakesh Kumar - Susquehanna Financial Group, LLLP, Research Division

So I wanted to dig a little deeper on stabilization in Europe. Wondering if you could comment on pipelines in Europe and some of the improvement that you see?

Sohaib Abbasi

I spent 10 days in Europe last quarter and I was encouraged by 2 things. One is the strengthening leadership team and the stabilization of our team. And I was also impressed by the variety of demand drivers. As I commented on in southern Europe, the focus is on operational efficiency, products like ILM and our core data integration to reduce labor costs. There is a healthy pipeline for that and in northern Europe, focuses on both increasing the top line with customer-centricity initiative as well as regulatory compliance. So there are healthy demand drivers and the customers are beginning to look beyond the macroeconomic uncertainty and starting to make those investments.

Operator

Your next question comes from the line of Matt Williams with Evercore Partners.

Matthew L. Williams - Evercore Partners Inc., Research Division

Actually, all my questions have been answered. I tried to get out of the queue but I guess I did not. So thanks anyway.

Sohaib Abbasi

Thanks, Matt. So let me -- in conclusion, for 2013, our singular mission remains the same, advance Informatica as the clear leader in data integration with the increasingly critical role of our expansive product portfolio and our key investments for differentiated innovation, Informatica is in the strongest ever position for sustained growth. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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