Informatica Corp. Q3 2009 Earnings Call Transcript

Informatica Corp. (INFA)

Q3 2009 Earnings Call

October 22, 2009 5:00 pm ET

Executives

Stephanie Wakefield - Senior Director of IR

Sohaib Abbasi - Chief Executive Officer

Earl Fry - Chief Executive Officer

Analysts

Mark Murphy - Piper Jaffray

Tom Ernst - Deutsche

Tom Roderick - Thomas Weisel Partners

Brent Williams - Benchmark

Frank Sparacino - First Analysis

Brad Whitt - Broadpoint AmTech

Nabil Elsheshai - Pacific Crest Securities

Derrick Wood - Wedbush Securities

Nathan Schneiderman - Roth Capital

Brad Sills - Barclays Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3, 2009 Informatica earnings conference call. My name Kiana and and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to the Ms. Stephanie Wakefield, Senior Director of Investor Relations. You may proceed.

Stephanie Wakefield

Good afternoon and thank you for joining us today. I am here with Mr. Sohaib Abbasi, our CEO, and Mr. Earl Fry, our CFO to discuss our Q3, 2009 results and to talk about our outlook for the business. I will read the Safe Harbor and then hand it over to Sohaib for these comments.

Some of these comments we’ll make today are forward-looking statements, including statements concerning our being well positioned to pursue our growth strategy, our projected financial results for future periods, opportunities for growth in the data integration market, the expected benefits to our customers and products with the acquisition and integration of Agent Logic, its employees and its technology, the planned use of our products by some customers for more than traditional data warehousing projects, the strength of customer demand for our products, customer adoption of our latest product lines, efforts being conducted with strategic partners, and our expectations regarding future industry trends and macroeconomic development.

All future-looking statements are based upon current expectations and beliefs. However, actual results could differ materially. There are many reasons why actual results may differ from our current expectations. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and Informatica undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date that they are made.

Please refer to our recent SEC filings, including the Form 10-Q for the quarter ended June 30, 2009 for a detailed description of the risk factors that may affect our results. Copies of these documents maybe obtained from the SEC or by contacting our Investor Relations department.

During this afternoon’s discussion, we will be using GAAP and non-GAAP numbers. Our GAAP results and the reconciliation of the GAAP results to the non-GAAP results are contained in and attached to the earnings press release, and in the supplemental metric section of our Investor website at www.informatica.com/investor.

Before I hand it to Sohaib, I would like to remind you that this call is being webcast and will also be available for replay at the Investors Relations website. I would like to ask you, when we get to the question-and-answer period to please confine yourself to just one question. We will allow additional questions if time permits. Thank you.

With that, I’ll hand it to Sohaib.

Sohaib Abbasi

Thank you, Stephanie. In Q3 2009, we achieved record third quarter revenues and record third quarter operating income, making it our 20^th consecutive quarter of record non-GAAP operating income. With our time tested strategy and the team’s proven operational discipline, Informatica attained sustained record results over the past five years. Even over the past year or two, during the deepest economic recession of our generation.

Unlike most enterprise software companies, Informatica reported positive revenue growth and higher operating income growth every quarter during this economic recession. Total revenues grew by 8% year-over-year to $123.4 million, and new licensed revenues grew by 9% to $50 million. Adjusting for the impact of changes in currency exchange rates, total revenues and new license revenues would have grown by more than 10%.

Total non-GAAP operating income grew by 22% year-over-year, with non-GAAP operating margin up 25%. With non-GAAP EPS of $0.22, we attained the most profitable third quarter ever. I would like to commend and applaud the Informatica team for their extraordinary efforts and disciplines.

Our business is progressively benefiting from improving macroeconomic conditions across several industries in most major geographic regions. Now, more customers are pursuing strategies for business survival rather than simply business survival. The associated IT initiatives have raised the priority and urgency of the enabling data integration. In fact, our regional results reflect these trends.

In the Americas, our results highlight increasing customer demands across several vertical industry segments. In parts of Europe, particularly the UK and Germany, the early signs of teaching customer priorities and purchasing processes are encouraging, and in Asia Pacific including Japan, customer demand underscores a bigger business potential for us to realize.

In the Americas, one of the largest fast food chains in the world selected Informatica for their Global Information Management Project to help fuel revenue growth. Using Informatica PowerCenter and Data Quality, they will reconcile product data anomalies, and build a data hub for a single view of products.

Delivering, timely, holistic and trustworthy data, this product the data hub will enable product and many focused marketing campaigns to drive incremental business. Also in the Americas, the US Transportation Security Administration or TSA chose Informatica as the standard data integration suite for all TSA screening and credentialing systems. With this decision, TSA plans to expand their use of Informatica beyond the enterprise data warehouse for the consolidated business process performance reporting.

In Europe, a world leading insurance conglomerate, ING Insurance selected Informatica for several important IT initiatives, including regulatory compliance, IT modernization, and systems rationalization. ING Insurance plans to use Informatica for their five-year Solvency II Regulatory Compliance Project.

Informatica will also help migrate data from legacy, custom IBM AS/400 based applications to a modern packaged PeopleSoft financial application. In addition, Informatica will help consolidate data from 427 systems, down to 93 applications. In addition to reducing IT costs, these initiatives would help accelerate growth with faster introduction of products through new channels.

Also in Europe, one of the top global system integrators, BT Global Services chose Informatica for a major public safety agency. This agency aims to deliver an accurate and responsive disclosure service to enhance public safety by protecting the vulnerable in society through safer recruiting. With Informatica Data Quality and Identity Resolution, this agency will pursue its mission by continuously monitoring and accurately matching information against data feeds from other law enforcement agencies.

These customer wins illustrate our growing success in expanding our total addressable market beyond the single IT category of data warehousing projects. Now, by enabling multiple business critical IT initiatives, data integration delivers more value than ever before. Representing this growing trend in Q3, 55% of our deals over $100,000 were with customers that plan to use Informatica for more than data warehousing.

In addition, in Q3, more than 78% of our professional services fees were from consulting engagements beyond data warehousing, including data migration and master data management projects.

We also continue to expand our total addressable market with additional adjacent technology categories. Last quarter, we further expanded our broadest ever portfolio with our acquisition of Agent Logic, a pioneer in a sixth category and Complex Event Processing or CEP. Growing customer adoption of the latest innovations across these six infrastructure software categories is fueling product license revenue growth.

As a reminder, these six categories include Enterprise Data Integration, Data Quality, B2B Data Exchange, Application Information Life Cycle Management, CEP and Cloud Computing Data Integration.

In the data integration category, we won for customer decisions with our track record of leadership and innovation. As one example, Brazil’s largest telecom operator Oi selected Informatica for IT projects to facilitate post merger integration with Brasil Telecom. Oi chose Informatica for our well differentiated value, cost effective scalability, with PowerCenter Grid option, and openness with power exchanges, near universal data access.

70% of PowerCenter transactions over $300,000 included Informatica platform or premium priced editions, mealtime and advanced and almost 80% included add-on options. In the Data Quality category in Q3, we continued to benefit from growing adoption of the latest products by customers such as ACH Food, ING Insurance and Union Bank of California. Last quarter, 39% of the transactions over $300,000 included Data Quality products.

In the B2B Data Exchange category, product adoption continues to grow by customers in our targeted vertical industry segments. In Q3, Bank of the West, the Dutch Ministry of Defense and Paramount Pictures were among the customers who selected Informatica B2B Data Exchange over other alternatives.

In the application ILM category, we attained our internal quarterly targets. Several customers including [Avagon], British Columbia Ferry Services and Cincinnati Children’s Hospital selected Informatica to reduce storage and database costs associated with inactive all test data.

Using Informatica ILM, Cincinnati Children’s Hospital plans to reduce storage costs and improve performance by archiving data from their PeopleSoft application. In the new Complex Processing category, we had an encouraging start in the first month post acquisition of Agent Logic.

As an example, the US Coast Guard chose Informatica for their Maritime Awareness Global Network program. The Informatica CEP solution will enable them to continuously monitor vessel behavior to sight any anomalies for a timey intelligent response.

Finally, in the Cloud Computing Data Integration category, customer adoption momentum is accelerating for both Informatica On Demand services as well as the cross enterprise data connectivity products. Over 100 organizations subscribe to premium Informatica On Demand services to retain control over the data managed by salesforce.com.

An additional 300 organizations utilize the core On Demand Data Loader Service for salesforce.com. In Q3, Aramark, Qualcomm and Toshiba were among the several dozen new customers to subscribe to Informatica On Demand services.

With our track record of innovation and neutrality, we further strengthened our partnership with industry giants, HP and Intel, as well as category pioneers like enterprise search vendor Endeca. Partnering with HP, we will jointly deliver a new portfolio of Business Intelligence Solutions that help customers accelerate business decisions, and optimize business performance.

The portfolio of data management solutions sold by each HP Business Intelligence Solutions team will combine Informatica data integration with HP Neoview data warehousing platform, as well as HP strategic consulting services.

Together with Intel, we will deliver a solution to customers in the financial-services segment by embedding Informatica B2B Data Exchange, Intel SOA Expressway will reduce time and IP costs associated with payment processing systems that use industry standards such as SWIFT, NACHA, FpML and FIX.

Finally, the enterprise search technology pioneer Endeca plans to embed Informatica in their Information Access Platform as the data ingest engine for all their search, navigation and analytic offerings.

With our strongest ever part in ecosystems, customers can rely on Informatica to effectively leverage their existing IT investments and gracefully embrace new technology innovations. To sum up, our record Q3 results representing the 20^th consecutive quarter of non-GAAP record earnings underscore our time tested strategy, the teams’ proven operational discipline, and Informatica’s track record of relentless innovation.

Now, I will turn it over to Earl to give you more details on our financial results. After Earl’s presentation, I will comment on our business outlook and key growth initiatives in 2010.

Earl Fry

Thanks, Sohaib. As Sohaib mentioned, we are pleased with our results especially since all of the components of revenue showed signs of recovery in the third quarter. Total revenues for Q3 were $123.4 million, up 8% on a year-over-year basis, above our guidance range, and just about $1 million shy of the all-time revenue record.

Our license revenues came in at $50 million, up 9% year-over-year and up 3% sequentially. Service revenues were $73.4 million, up 8% year-over-year, and up 7% sequentially. Breaking down the components of service revenues, maintenance revenues were strong at $55.2 million, up 13% year-over-year and up 7% sequentially, while consulting, education and subscription revenues came in at $18.2 million, down 4% year-over-year, but up 8% sequentially.

Our geometrics were solid. Existing customers contributed 84% of our license order value, up from 78% in the second quarter and up from 76% in the third quarter of 2008. We did license business with 237 existing customers and added a healthy 58 new customers during the quarter.

We booked five transactions over $1 million, up from four in the year-ago third quarter. We closed 49 deals over 300K down from 55 in a year ago third quarter but up from 44 in the second quarter of this year.

Our average transaction size for orders over $100,000 came in at 365K, and the average transaction size for orders over $50,000 came in at 254K, both up from year-ago and prior quarter of levels, as this quarter we enjoyed an all-time record number of transactions in the $500,000 to $1 million range.

26% of our licensed orders came from the indirect channel, and additional 42% of our direct orders in Q3 were influenced by partners or resellers. The overall total of indirect and influenced orders was 68%, up from 67% last quarter, and up from 66% a year-ago. License revenue from our direct business was 78% in Q3, and 22% of our license revenue came from the indirect channel in Q3.

Moving to geographic mix. North America orders as a percentage of total license orders were 67%, up from 64% a year ago and up from 63% sequentially. The mix of orders from EMEA and the rest of the world was 33%, down from 36% a year ago, and down from 37% in the second quarter.

While North America revenue was 63% of total revenue in Q3, up from 60% a year ago, and down from 66% sequentially. Revenue from EMEA and the rest of the world was 37% of total revenue in Q3, down from 40% a year ago, and up from 34% sequentially.

From a vertical industry perspective, while Financial Services continue to be our largest contributor, we were particularly pleased to see strong order contributions from a much broader cross section of industries, including communications, public sector, manufacturing, healthcare and hi-tech.

Our non-GAAP gross profit, which excludes $2.1 million in amortization of acquired technology and $0.5 million of share based compensation came in at $104.5 million or 84.7% of revenue in Q3, better than our target range of 80% to 82%, and reflecting the increased mix of high-margin license and maintenance revenues.

License margins were 99% in Q3, consistent with Q2 and up from 98% in the year ago quarter. Service margins driven by continued 95% maintenance renewal rates and our ever increasing installed base were 75%, up from 74% last quarter and up notably from 71% a year-ago.

Excluding charges for share based payments facilities restructuring amortization of tangibles and patent contingency accrual reversal totaling $6 million, Q3 non-GAAP operating expenses were $73.6 million, up 2% from $72.4 million in the second quarter, and up from $67.8 million in the year-ago third quarter due to increased investments in R&D and sales and marketing as well as increased acquisition costs.

As a percentage of revenue, non-GAAP operating expenses were 60% of revenue for the third quarter, the same as a year ago. As a result of higher revenues and our continued cost discipline in Q3, we generated a third quarter record $30.9 million in non-GAAP operating income, up 22% from a year-ago.

As the percentage of revenue, non-GAAP operating income was 25%, 270 basis points better than the 22.3% non-GAAP operating income reported a year –ago, and reflects our continued commitment to grow operating margins.

Net income and other income continues to be impacted by defining interest income as investment yields continue to contract and resulted in net expense of 128K in the third quarter. Our tax provisions both on a GAAP and non-GAAP basis was 27% in the third quarter, a bit better than expected due to discrete items related to the filing of our 2008 tax returns during the third quarter.

Bottom line, our or strong customer value proposition combined with improving sales execution allowed us to deliver GAAP net income of $16.2 million and achieve a third quarter record GAAP fully diluted EPS of $0.17.

On a non-GAAP fully diluted basis, we came in above our earnings guidance range and generated third quarter record, non-GAAP EPS of $0.22. Currency fluctuations had only a nominal impact on revenue and expenses, and essentially no impact on earnings both on a year-over-year and sequential basis.

Based on Q3 orders, our future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken for revenue as of September 30 will be $144.8 million, up $2.7 million sequentially and up $11 million compared to a year-ago.

In addition, the short-term license portion of deferred revenues increased by over 40% sequentially and by over 7% on a year-over-year basis. Total headcount was 1,760 at September 30, an increase of 65 from the end of Q2, almost entirely due to the Agent Logic acquisition.

Sales and marketing headcount ended the quarter at 620, an increase of nine. We expect to continue adding headcount very selectively and specifically will look to be adding distribution capacity in the fourth quarter.

We ended the quarter with over $423 million in cash and equivalents, a $2 million increase from Q2 even after paying for the Agent Logic acquisition. We generated $15.6 million in cash from operations in Q3, compared to $19.1 million in Q2 and better than the $10.3 million generated in the third quarter a year ago. We expect the fourth quarter to be a seasonally strong cash flow generation quarter.

DSOs were 62 days in Q3 relatively consistent with 61 days in Q2, up from 48 days a year ago and within our target DSO range of 55 to 65 days. Our DSOs do continue to reflect the macro environment as some customers are taking slightly longer to pay, and many customers continue to place their orders late in the quarter.

Our deferred revenue balance increased to a third quarter record, $132.1 million, and is comprised of $126.1 million in current deferreds and $6 million in long-term deferreds. Deferred revenues are up strongly, up $16 million from a year ago and up $4.1 million sequentially.

On a non-GAAP basis, we ended the quarter with 105 million shares outstanding on a fully diluted converted basis, with the increase in shares reflective of the impact of our share price increase during the quarter on the treasury stock method computation.

Now, looking forward, from a share count perspective, we expect shares outstanding to slightly increase over the next few quarters, and we continue to expect net interest and other income to remain slightly negative. We expect our income tax provision to continue to be very sensitive to our geographic mix of earnings and we expect our effective tax rate will be 31% to 32% on both a GAAP and non-GAAP basis before the impact of certain discrete tax items.

We continue to be encouraged by signs of the increasing breath of our recovery in our North American business and are particularly encouraged by the early signs that we are seeing of stabilization and growth in certain regions in Europe. While we still expect a very slow and muted macro recovery, we see growing evidence in our pipeline that data integration and Data Quality is becoming an increasingly high priority investment for our customers and prospects.

Based on these indicators and expectations, we are targeting Q4 ‘09 revenue of $135 to $140 million with non-GAAP EPS in the range of $0.25 to $0.28. These Q4 targets would equate to revenue growth of 67% for the full year and non-GAAP operating margins of 25% or more for the full year 2009.

Also based on the increasingly encouraging signs we’re seeing in our business, we are setting full year 2010 targets of $530 to $560 million in total revenue, and $0.93 to $1.03 in non-GAAP earnings per share.

Our non-GAAP EPS targets do not include the after tax impact of an estimated $0.03 per share per quarter charge for the amortization intangibles and acquired technology. The facilities restructuring charge of approximately $0.015 per share per quarter, and the tax effected impact of stock option expense of approximately $0.03 per share per quarter.

With that, I will turn it back over to Sohaib.

Sohaib Abbasi

Thank you, Earl. We are seeing a new focus on data integration. We consistently attained record quarterly results over the previous five years. In 2010, with improving macroeconomic conditions, we are well positioned to further accelerate our growth through relentless innovation that delivers compelling business value to our customers.

Based on improving financial conditions, economists at IMF proclaim an economic recovery with a virtuous circle of rising confidence but caution that receding downside risk remains a concern. To be an early beneficiary of this recovery, organizations are actively pursuing strategies for business revival beyond the business survival considerations of last year.

At the same time, the lessons learned during the recession are still being applied. Operational efficiency and cost reduction remain a top priority. To be agile and efficient in their business strategies, organizations aspire to become data driven enterprises.

In other words, data integration has a higher sense of purpose and priority than ever before. Through relentless innovations over the previous five years, Informatica has effectively expanded our product portfolio with one technology category every year and one new product or product option almost every quarter. Growing adoption of the latest products introduced over the last year will continue to drive our product license revenue growth in 2010.

The upcoming Informatica 9 release will further fuel our product license revenue growth in 2010 and beyond. Informatica 9 is the single most important release in Informatica’s history.

Informatica 9 is the infrastructure platform to enable the great data growth in enterprise. By overcoming three key formidable challenges, Informatica 9 enables organizations to become data driven or in other words gain a competitive advantage from their most valuable IT asset data.

To become a data driven enterprise organizations face three daunting challenges. First, business users often cannot rely on IT alone for the most business relevant information. Second, business users frequently do not regard the data to be trustworthy for their purposes, and third, business users do not have timely access to data in the appropriate forum. Until now, these formidable challenges have marginalized the value of IT, and compromise the most business critical strategies.

Informatica 9 will help organizations overcome these three challenges though business IT collaboration, pervasive Data Quality and innovative SOA-based data services. Business IT collaboration will ensure that fit for purpose systems deliver the most business relevant data. The pervasive Data Quality services will assure all stakeholders to trust data for their business purposes. An open SOA-based data services will enable even more types of operational data integration projects to deliver timely data in the appropriate format.

We would like to invite each of you to the Informatica 9 launch webcast event on November 10. To register, please visit the Informatica website.

To sum up, the combination of the strongest ever customer demand and our broadest ever product portfolio positions Informatica strongly to reaccelerate our growth.

So, with that, I will open it up for your questions. As Stephanie said earlier, we would appreciate it if you confine ourselves to one question. Thank you.

Operator, may we have the first question?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Mark Murphy of Piper Jaffray. You may proceed.

Mark Murphy - Piper Jaffray

Yes. Thank you very much. Congrats on the strength. I am wondering what type of economic assumption is embedded into your 2010 guidance. I think yesterday Infosys were saying that IT budgets will be flat year-over-year in 2010 and others are saying those could be up 3 or 4%, so just curious to get your viewpoint there?

Sohaib Abbasi

Thank you, Mark. We believe that as a result of greater scrutiny in terms of the IT budget, the budgets are being realigned and are now helping Informatica position data integration as a much higher priority item. There have been surveys that have been conducted by our customers that indicate that data integration has become a much greater priority. The reason for this is that we are enabling IT initiatives that are very closely associated with either business survival, operational efficiency, cost reduction strategies or with business survival identifying who are the top customers and what are the most promising products.

So, having a value proposition would just do more with that as well as a very compelling business value of enabling their business survival and business survival strategies has elevated the importance and priority of data integration. In fact, Gartner also in their survey identified that data integration was now one of the hottest segments. I’d also like to ask Earl for his comments.

Earl Fry

Yes. I don’t think we have a strong opinion on kind of the macro scenario for IT spends, whether you want to paint a flat scenario or a very slow growth scenario. I think the important thing is that there is relative certainty in the budgets and that you don’t have any kind of major events going on.

So, the way I would think about it is, prospects or customers that are still wrestling with survival mode, and so it would characterize it will probably be closer to the flat IT spends. Companies and prospects, customers that are looking at revival mode clearly will have some degree of growth and may be meaningful growth in their IT budget. I think in either case, we should be beneficiaries of that. Clearly with companies that are in revival mode, we could see much broader use of our technologies.

Operator

Our next question comes from the line of Tom Ernst of Deutsche. You may proceed.

Tom Ernst - Deutsche

A little different angle on the same sort of question. How do you look at your efficiency be it closure rates or sales force productivity measures. Clearly, your tone sounds a lot more positive about seeing stability and uptake you’ve given already in those metrics. Where are we in recovering to what you would consider kind of a more normal healthy growth year on productivity measure?

Sohaib Abbasi

Looking at the sales metric, clearly the sales pipeline is stronger than it has been. In fact, going into Q4, we had one of the strongest pipelines. So that is a very encouraging indicator that the customer demand for our technology continues to grow and our value proposition continues to be viewed as being very compelling.

As you know, Tom, we introduced certain measures in order for us to ensure better disciplines in terms of closure rates and those measures have actually helped. In terms of sales productivity, we would expect that as more of the technology that we have delivered becomes mainstream that we would see a higher productivity in certain regions. Overall, the metrics are very positive and I’d also like to ask Earl to comment on some of the productivity metrics.

Earl Fry

Yes. So, we’ve been operating at what I would consider a good productivity levels in North America. We continue to do that and, in fact, my comments indicated that we would be adding distribution capacity starting right now. That’s primarily going to go in the areas where we have very good productivity, and clearly want to add resources like in North America.

I think one of the things may be directionally that that we’ve gotten a little more confidence is, we have seen a pickup in productivity, pipeline, conversion rates in certain geographies in Europe. So, I think that gives us a little more confidence.

Now, we have what I would call latent capacity there. So, I don’t think we need to add a lot of resources there at this moment, but we see improving productivity and improving metric. Again, it’s not across the board, but in certain portions in EMEA, and that is directionally much better than we had three months, six months, nine months ago.

Operator

Our next question comes from the line of Tom Roderick of Thomas Weisel Partner. You may proceed.

Tom Roderick - Thomas Weisel Partners

Thanks and good afternoon. I am looking at the operating margin here of 25% which is the highest you’ve ever had outside of the fourth quarter and wondering, as you look at the last year you’ve made some pretty conscious decisions to cut costs.

As you look forward, the pipeline’s strong; the top line is getting better. How high will you let those operating margins go and how much is, just building on Tom’s last question, but how much capacity do you want to add back into the business? Should we think about less leverage being in the model next year?

Earl Fry

I think consistent with how we talked about things over the last few years we see tremendous growth opportunity in this space. So, maybe I would take exception to you saying that we cut costs. I think we managed costs well through the downturn. We specifically did not cut significant costs or investments in development or in distribution. So, I think because of that we’re positioned very well to take advantage of growth as we are starting to head towards recovery here. That said, I mentioned we will be adding distribution capabilities as early as Q4.

So, I think the expectation should be that as we return to faster revenue growth, and while operating margins on an absolute dollar basis will track and will increase as a percentage of revenue, the rate of growth on operating income as a percentage of revenue should not be as fast as you’ve seen over the last couple of years.

The focus is going to be as it always has been on growing EPS in absolute dollars at the fastest most prudent rate we can. We will do that and we’ll continue to get operating leverage, but I don’t think people should be expecting the 250 kind of basis point year-over-year improvement going forward as revenue is reaccelerated.

Tom Roderick - Thomas Weisel Partners

Just in the longer term Earl, is there a level at which we ought to think about kind of being peak margins for the business here?

Earl Fry

There maybe, but at this red hot minute I don’t know what that would be so I don’t know that I want to put a limit on it.

Operator

Our next question comes from the line of Brent Williams of Benchmark. You may proceed.

Brent Williams - Benchmark

Hi. Congratulations on the quarter and congratulations Stephanie for reading the longest disclaimer at the beginning of the conference call that I have ever heard. I wanted to ask about price points on the Complex Event Processing stuff, how does that match up versus the price points that you’re typically seeing in deals now and as you bring the might of your assembled sales force to bear, do you see deal sizes shooting up over the next year or so or do you think it’s just sort of gradually kind of floats up?

Sohaib Abbasi

We had a good start with Complex Event Processing. One of the reasons why we were particularly excited about the acquisition of Agent Logic was the product integration opportunities that would be available to us.

We talked about two very specific use cases one of which was identity event processing, and that is particularly relevant in an applications in the public sector for intelligence to be able to monitor not just events but make sure that those events are associated with the people who you think you are trying to monitor.

With that combination we’d be able to command a higher price point just because it would allow us to position multiple products. The other use case that we talked about was active data integration, the combination of data integration and Complex Event Processing. So for that reason, I expect that it would not only contribute directly, but also indirectly by allowing us to position a broader portfolio.

Operator

Our next question comes from the line of Frank Sparacino of First Analysis. You may proceed.

Frank Sparacino - First Analysis

Hi. Earl, I am just curious from a license revenue perspective, when you look at the $4 million increased on a year-over-year basis, how much of that is acquisition versus organic growth?

Earl Fry

The majority of that would be acquisition related. If we look at the fact that we had Applimation, a small AddressDoctor acquisition, the Agent Logic, since it happened in the month of September really contributed very little in terms of revenue growth. So, I would say, a little more than half of that growth would be due to the acquisition. Let’s also not forget that there is at least a couple of percent headwind from the currency perspective on a year-over-year basis that has worked against us. So, if the question is, is there still organic growth over that period of time, the answer is definitely yes.

Operator

Our next question comes from the line of Brad Whitt of Broadpoint AmTech. You may proceed.

Brad Whitt - Broadpoint AmTech

Okay. Thanks for taking my questions. I just had a question around your customer audit process and I am curious as to how much revenue contributions that makes to your license revenue kind on a quarterly basis.

Sohaib Abbasi

Yes, we have had a customer audit/compliance team for a while now. We used it in conjunction with our field sales team. We do work that closely with our field. It’s the best way to characterize it. It’s a very low single digit percentage contributor to our stream at this point. I think it’s something that I think we’ve used really across the globe. My bet is that it stays at relatively consistent percentage.

I don’t see that being a very large percentage of the business going forward. Again, we have restrictions on our product usage to specific CPUs, to specific products. So, most of our products tend to be in use. We’ve got good maintenance renewal rates. So, it’s a decent opportunity but not one that I would look at it saying well that’s going to move the needle a lot.

Operator

Our next question comes from the line of Nabil Elsheshai. You may proceed.

Nabil Elsheshai - Pacific Crest Securities

On the Data Quality stuff, we’ve seen the attach rates on the big deals bouncing around a little bit, but do you have a sense yet with version 9, what kind of incremental attach rate that you can get, if it’s 35% on average or whatever for this year with version 9? Have you got any feedback from the beta customers on what kind of an attach rate you might see next year or beyond?

Sohaib Abbasi

Nabil, there is no reason in the mid to long-term for the majority of our deals that include PowerCenter not to also include Data Quality. As we have commented in these earnings calls, we believe that Data Quality is becoming very much an integral part of the data integration projects, particularly in some of the master data management projects as well as in data migration projects. We have been seeing that trend in that growing number of transactions have included Data Quality product.

With Informatica 9, we have achieved a level of unification that we believe will have a very compelling proposition for it to be included in the majority of the deals, as well as it will open up a substantial opportunity for us go and sell to our installed base. I would estimate that maybe less than 20% of our customers are using Data Quality products across a variety of data sources and that opens up a lot of opportunities and we are very excited about Informatica 9 and Data Quality specifically.

Operator

Our next question comes from the line of Derrick Wood of Wedbush Securities. You may proceed.

Derrick Wood - Wedbush Securities

Thanks guys. I was hoping you could elaborate a little bit on the HP relationship that you announced a month or two ago. When did that actually go live? When would you expect incremental revenue from that? Who at HP was actually going to be selling it? Is it consulting, is it sales people? Also, how strategic of a partnership do you expect this to be?

Sohaib Abbasi

We’ve had a 10 year partnership with HP. HP recently reorganized all of the different assets that they had to pursue business intelligence including Neoview product as well as certain BIA Services, including what they acquired through their acquisition of Knightsbridge, and including some of the other services that were being offered by others within.

So, there is now a central group within HP for business known as Business Intelligence Solutions, and the extension that we announced of our partnership was a strategic partnership with that aspect of HP. HP Business Intelligence Solutions sales team will be selling Informatica as part of both a product offering for Neoview as well as part of services offering, including one for Data Quality and another one for master data management. We are very excited about this partnership and it has the potential of being as strategic a partnership as the ones we’ve enjoyed with Oracle and Microsoft and SAP. Thank you.

Operator

Our next question comes from the line of the [Satish Druv] of Bank of America. You may proceed.

Unidentified Analyst

Thank you, Sohaib and Earl. My question is, in your 2010 guidance, what kind of revenue expectations are you embedding for version 9 incrementally and for the HP partnership?

Sohaib Abbasi

(Satish), we have a track record of delivering products through relentless innovation as I’ve commented on. We have delivered a new category every year, and a new product every quarter. In other words, we are not quite as dependent as some of the other software companies are on one single product release, but rather, I expect that we will continue to benefit from all the products that we have delivered over the last 12 for 18 months.

Informatica 9 will further fuel the license growth. I expect that our customers will adopt Informatica 9, and open up new opportunities for us for up sell and cross sell at the same pace that they’ve adopted earlier releases. Looking at Informatica 8, it took several quarters for our installed base to upgrade to that. I expect that there will be early adopters in Q4 and Informatica 9 will have a measurable impact on our results. I expect that Informatica 9 will continue to contribute to our revenue growth for 2010 and beyond.

Operator

Our next question comes from the line of Nathan Schneiderman of Roth Capital. You may proceed.

Nathan Schneiderman - Roth Capital

Hi Sohaib and Earl. Thanks very much for taking my questions. I guess a two-part question for you here. One, the license off the balance sheet was down a little bit more than a million but Earl you mentioned in your comments that license and deferred revenue was up 40% sequentially. I was curious on a dollar basis, how much did it increase and also on op margin for 2010, I guess you gave us the high end of what you’d achieve, but would you expect to achieve at least 100 basis points of improvement? Thanks very much.

Earl Fry

Yeah, I think it’s very reasonable to expect that kind of improvement in op margins. May be we can take this offline. I am not sure I am tracking how you are coming up with the deferred revenue piece because deferred revenue balances are up, and we do not have specific disclosure on the breakdown of deferred license on the balance sheet other than the color that I gave. I think it’s fair to assume that the increases that I am talking about at least on kind of that 40% level would equate to several million dollars of increase.

Nathan Schneiderman - Roth Capital

Was there anything unusual that caused that license increase on your deferred?

Earl Fry

There were times if you would have signed any large agreement that’s billed, you would have to recognize that overtime or with the partner delivering solutions overtime then that would be something that would show up and could be a larger than usual number that would be sitting in deferreds.

Operator

Our next question comes from the line of Brad Sills of Barclays Capital. You may proceed.

Brad Sills - Barclays Capital

Just a question on Europe. You mentioned UK and Germany improving. How much of that would you attribute to macro versus execution? I assume it’s more execution, and if that’s the case what would you attribute that to?

Sohaib Abbasi

It’s a combination of improving macro environment and much better operational discipline. Much in the same way as in Americas our team did an exceptional job adopting their procedures in order to be better prepared. Our European team took very similar measures. There were also some changes in the leadership. The combination stronger leadership and better operational discipline resulted in a much better results.

In addition to that, they did a much better job in terms of forecasting. That gives us even greater confidence that the team has a much better idea of how to calibrate what the opportunities are and then deliver on their forecast.

Earl Fry

Brad, I think, one of the things that we’ve talked about for a while is the last change that we made in kind of the sales management in Europe was kind of late last year. You noted that we were not executing particularly well in North Europe as we’ve talked over the last couple of quarters. I think those changes are good, they’re positive. However, the results weren’t quite there, because the macro environment was so bad.

So, once you get a little bit of lift in that macro environment, then the execution and the operational improvements that have been started to get put in place as early as Q4 last year and early this year, starts to outweigh the macro drag. So, I think, that’s what we’ve started to see and show demonstrable results, particularly in North Europe.

Operator

With no further questions in the queue, I will now like to turn the call back over to Mr. Sohaib Abbasi.

Sohaib Abbasi

In closing, Informatica is well positioned to further accelerate our growth in 2010 by executing on our proven three-pronged growth strategy in the quarters to come. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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