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Informatica Corp. (NASDAQ:INFA)

Q1 2010 Earnings Call

April 22, 2010 05:00 AM ET

Executives

Stephanie Wakefield - Investor Relations

Sohaib Abbasi - Chairman and CEO

Earl Fry - EVP and CFO

Analysts

Tom Roderick – Thomas Weisel Partners

Nathan Schneiderman – Roth Capital Partners

Mark Murphy – Piper Jaffray

Jonathan Doros – Raymond James

Brad Whitt – Broadpoint

Brent Williams – Benchmark Company

Brad Sills - Barclays Capital

Mitesh Dhruv - Bank of America

Derrick Wood - Wedbush Morgan Securities

Operator

Good afternoon. My name is Kirsten and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Corporation first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

I would now turn the call over to Ms. Stephanie Wakefield. Madam, you may begin your conference.

Stephanie Wakefield

Good afternoon and thank you for joining us today. I am here with Sohaib Abbasi, our CEO and Earl Fry, CFO to discuss our Q1 2010 results and to talk about our outlook for the business. I will read the safe harbor and then hand it over to Sohaib for his comments.

Some of the comments we will 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 benefit to our customers and products of the acquisition of 29West, our integration of Siperian and 29West, their employees and 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, and our expectations regarding future industry trends and macroeconomic developments.

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

Please refer to our recent SEC filings including the Form 10-K for the year ended December 31st, 2009 for detailed descriptions of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by contacting our Investor Relations department.

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

Before I hand it off to Sohaib, I'd like to remind you that this call is being webcast and will also be available for replay on our website.

I would also like to ask you as well 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.

Sohaib Abbasi

Thank you, Stephanie. I am pleased to announce that in Q1 2010 we attained record first quarter revenues and record first quarter non-GAAP operating income.

This afternoon, I will highlight some of the drivers for our first quarter results. After Earl's presentation of our financial results, I will comment on our business outlook as well as our recent acquisition of 29West, a pioneer in the Ultra Messaging category.

Total revenues grew by 24% year-over-year to $135.1 million. New license revenues grew 25% to $55 million.

Total non-GAAP operating income grew by 28% year-over-year with non-GAAP operating margin up 22%. With non-GAAP EPS of $0.21, we achieved the most profitable first quarter to date. Our record Q1 results are a testament to our relentless pace of innovation driven by our singular focus and guided by our clear technology vision. Our sustained results are a measure of the efforts by the Informatica team to repeatedly adapt our go-to-market approach with the changing macroeconomic environment. Within each of the major geographic regions, we benefitted from the global economic recovery and the operational discipline exemplified by the Informatica team.

In the Americas, the exceptional results attained by our team in the eastern region within the United States underscore our potential to do even better.

Within EMEA, our results indicate better business prospects in emerging markets particularly Eastern Europe and a more stable environment in Southern Europe.

In Asia Pacific including Japan, we attained record Q1 results.

Across all the major geographic regions, both the economic recovery and the lessons of the great recession shaped the primary business priorities of our customers. These business priorities include increasing revenues through customer centricity and agility, reducing cost through operational efficiency, diversifying through globalization, scaling with industry consolidation and complying with all regulatory regimes. By enabling these business imperatives of our customers, data integration now has a more strategic role than ever before as illustrated by our customer wins around the world.

In the Americas, Horizon Healthcare Services, New Jersey’s oldest and largest health insurer selected Informatica to build a trading partner gateway. Expanding use of Informatica as a standard, Horizon’s integration competency centered plans to replace the legacy EDI based solution with Informatica B-to-B data exchange. By Informatica B-to-B data exchange, customers expect to reduce costs through operational efficiency and IT productivity.

In Europe, Turkey’s largest bank by shareholders’ equity, Akbank selected Informatica for a strategic IT initiative with the dual goal of helping reduce its IT infrastructure cost by 20% and grow their base of 9 million. By offloading their operational reporting to lower cost modern systems, Akbank plans to augment expensive Mainframe computers. By consolidating customer data from a variety of sources including Mainframes, data mark and even XML file into one (centralized) data warehouse. Akbank plans to increase revenues through customer centricity and more effective targeted marketing campaign.

In Asia Pacific, one of the top Japanese IT systems leaders, Fujitsu selected Informatica for its hosted core banking services that automate operations of branches, ATMs, call centers and Internet channels for both retail and corporate customers. Based on the success of its initial customer, Fujitsu now plans to utilize Informatica for additional banking customers. By leveraging its Informatica based assets, Fujitsu expects to reduce the development costs by 25% compared to their other alternatives.

These representative customer wins showcase our success in expanding our addressable markets beyond the traditional data warehousing category. Over the past five years, our opportunity has grown from enabling a single discretionary IT project to being selected for multiple high priority IT projects. As a result of this growing trend, 58% of our deals over $100,000 were with customers that plan to use Informatica for more than data warehousing. In addition, in Q1 more than 79% of our professional services fees were from consulting engagement beyond traditional data warehousing.

Guided by our clear and expansive technology vision, we now deliver the broadest ever product portfolio. With strategic acquisitions accelerating our roadmap, we have effectively expanded the data integration market to now span eight software segments; enterprise data integration, data quality, B-to-B data exchange, application information lifecycle management, complex event processing, master data management, Ultra Messaging and cloud computing data integration.

Growing customer adoption of the latest product releases within these categories is fueling our license revenue growth. The promising customer response to Informatica 9 is further advancing our (inaudible) in the core categories of enterprise data integration and data quality. With the first production shipment in mid December, more 100 customers are now using Informatica 9. As an example, Chicago State University selected Informatica 9 for reporting freshman class demographic metrics as specified by the higher learning commission. By uniquely facilitating better collaboration between IT and business users, Informatica 9 will enable Chicago State University officials to gain relevant trustworthy and timely metrics that are required for government funding of student aid.

With broader adoption, last quarter almost 60% of the PowerCenter transaction included either a premium price edition or a separately priced option. In addition, 41% of the transactions over $300,000 included data quality products.

Customer adoption of our products in the four emerging categories of B-to-B data exchange, application information lifecycle management, complex event processing and master data management is increasingly contributing to our license growth. In Q1, more than 25% of our transactions over $100,000 included these new product categories. The initial customer response to our latest MDM product is particularly encouraging as we achieved our internal goals. With our growing product portfolio and the critical nature of MDM projects, Informatica is becoming a more strategic technology partner for our customers.

As an example, a global broad based healthcare company selected Informatica’s multi-domain MDM to build two data hubs, a customer hub and product hub. The goal of the customer hub is to drive cross sell and up sell opportunities through better analysis of healthcare customers buying habits and trends. The goal of the product hub is to reduce its inventory and purchasing costs by better aligning these with the customer demand. With these two data hubs, the company expects to save millions of dollars while successfully fulfilling customer demand.

Finally, in Q1, we achieved our best ever quarterly result for our Informatica cloud business. Now more than 650 companies use Informatica cloud to integrate our premise data managed by Salesforce.com.

To sum up, our record Q1 results are further evidence of the team’s relentless pace of innovation guided by our clear technology vision. Now, I will turn it over to our Earl to give you more details on our financial results. After Earl's comments, I'll discuss our business outlook and our strategic acquisition of the Ultra Messaging pioneer 29West.

Earl Fry

Thanks, Sohaib. Our Q1 total revenues of were $135.1 million were up 24% on a year-over-year basis and above the high end of our guidance range.

License revenues of $55 million were up 25% year-over-year and service revenues of $80.1 million were up 23% year-over-year.

Breaking down the components of service revenues, maintenance revenues of $57 million were up 18% year-over-year while consulting, education, and subscription revenues came in at $22.3 million, up 41% year-over-year reflecting both the recovery in our consulting business as well as increasing subscription revenues.

Our deal metrics were solid. Existing customers contributed 85% of our license order value, down from 87% in the fourth quarter and up from 80% in the first quarter a year ago. We did license business with 226 existing customers and added 44 new customers during the quarter. In addition, we welcomed an additional 89 new customers to Informatica as a result of the Siperian and 29West acquisitions. We booked a first quarter record seven transactions over $1 million, up from two in the year ago first quarter. More significantly though, we also closed a first quarter record 49 deals over 300K, up from 39 in the year-ago first quarter.

Our average transaction sizes for orders over $100,000 came in at 337K and the average transaction size for orders over $50,000 came in at 247K, both up nicely from year-ago levels of 292K and 219K respectively. 28% of our license orders came from the indirect channel and an additional 35% are direct order in Q1 were referred by partners and resellers. The overall total of indirect and referred orders was 63% compared to 64% last quarter and 56% a year ago.

License revenue from our direct business was 69% in Q1 and 31% of our license revenue came from the indirect channel in Q1.

Moving to geographic mix, North America orders as a percentage of total license orders were 62% compared to 64% a year-ago and 69% in Q4. The mix of orders from EMEA and the rest of the world was 38%, compared to 36% a year-ago and 41% in Q4.

North America revenue was 65% of total revenue in Q1, relatively consistent with 66% a year-ago and 63% in Q4. Revenue from EMEA and the rest of world was 35% of total revenue in Q1, again relatively consistent with 34% from a year-ago and 37% from Q4.

From a vertical industry perspective, financial services, healthcare, and high-tech were our top contributors to new license orders in Q1.

Non-GAAP gross profit, which excludes $2.8 million in amortization of acquired technology and $0.7 million of stock comp came in at $111.8 million or 83% in Q1. Consistent with 83% a year-ago, but down from the all-time record of 86% in Q4.

License margins were consistent at 98% in Q1, while service margins driven by continued 95% maintenance renewal rate were 72%, the same as a year-ago, though down from 74% in Q4 as a result of the recovery in our consulting business.

Excluding charges for stock comp, amortization of intangible assets, facilities restructuring and acquisition related adjustments, which totaled $11.8 million, Q1 non-GAAP operating expenses were $81.6 million, down from $85.2 million in the fourth quarter and up from $66.8 million in the year-ago first quarter.

The increase in year-over-year spending was due to increased investments in sales and marketing, coupled with increased investments in R&D and sales and marketing as a result of our recent acquisitions. As a percentage of revenue, non-GAAP operating expenses were 60% of revenue for the first quarter, better than 61% in the year-ago first quarter.

Despite the dilutive impact of our Siperian acquisition and the modest incremental dilution from our 29West acquisition, we generated $30.2 million in non-GAAP operating income, up 28% from a year-ago. As a percentage of revenue, non-GAAP operating income came in a little over 22%, up 69 basis points from a year-ago, again despite the dilutive impact of the two first quarter acquisitions.

GAAP, net interest, and other income came in at $1.35 million in the first quarter and includes the $1.8 million gain on the sale of a minority equity investment. Excluding this gain, non-GAAP, net interest, and other income came in at a net expense of $0.5 million.

Our tax provision was 27.5% on a GAAP and 29% on a non-GAAP basis and was better than expected as a result of a consistently higher mix of EMEA revenues and profits, as well as lower than expected US profits due to higher US-based acquisition and amortization costs.

Bottom line, we delivered another record first quarter with GAAP net income of $11.8 million and GAAP fully diluted EPS of $0.12, and non-GAAP fully diluted net income of $0.21 per share, which was above the high end of our guidance, despite the incremental dilutive impact of the 29West acquisition in Q1.

Based on our Q1 orders, our potential future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken to revenue, as of March 31st, will be $169.4 million, down slightly sequentially, but seasonally better than prior year and up by a record $29.1 million compared to a year-ago.

Total headcount was 1,917 at March 31st, an increase of 162 from the end of Q4, and up 251 from a year-ago. We added 120 employees in Q1 as a result of the Siperian and 29West acquisition. Sales and marketing headcount ended the quarter at 665, an increase of 54 with 41 of the sales and marketing additions coming from the two acquisitions.

We ended the quarter with over $354 million in cash and investments, a decline of $110 million from Q4, reflecting the $167 million in net cash outlays for the acquisition of Siperian and 29West increase from Q3.

As anticipated, cash flow from operations was very strong during the first quarter as we generated $42 million in cash flow from operations, up from the $29 million generated in Q4, and up significantly from the $13 million generated in the first quarter a year-ago.

DSOs were 52 days in Q1, better than 67 days in Q4, better than 55 days a year-ago, and better than our target DSO range of 55 to 65 days.

Our deferred revenue balance increased to an all-time record $149.3 million, and is comprised of a $145.2 million in current deferred and $4.1 million in long-term deferred. Deferred revenues are up $21.6 million from a year-ago and up $5.1 million sequentially.

We ended the quarter with a higher than expected 107.8 million shares outstanding on a fully diluted if converted basis, reflective of the impact of our share price increase during the quarter on the treasury stock method computation as well as incremental equity grants issued to employees associated with the two acquisitions.

Looking forward from a share count perspective, we continue to expect shares outstanding to slightly increase over the next few quarters and we continue to expect net interest and other income to have a negative impact on earnings per share by about $0.05 per share per quarter.

While we expect our income tax provision to continue to be very sensitive to our geographic mix of earnings, given the recovery in our EMEA business, we now expect our effective tax rate to be no more than 30% on both a GAAP and non-GAAP basis before the impact of any certain discrete tax item. So the modestly accretive impact of the lower expected tax rate should offset the modestly dilutive impact of the share count increase.

As you saw in the press release, we are excited to announce the acquisition of 29West. The deal closed at the very end of Q1. In the last 10 days, did not add any revenue to our first quarter and was slightly dilutive to earnings by just under $0.01 a share. We expect the 29West acquisition to be slightly dilutive in Q1 and for the year of 2010. We added 49 employees as a result of the 29West acquisition, the majority of which are in R&D.

As we start 2010, we are encouraged by the increasing breadth of recovery we are seeing in our business. While we still expect a muted macro recovery, we continue to see evidence of data integration is becoming an increasingly high priority investment for our customers and prospects.

Based on these indicators and expectation, and including the modest dilution from both the Siperian and 29West acquisition, the slightly expected tax rate and the higher share count, we are raising our revenue guidance for the full-year 2010 to a range of $575 million to $610 million, and raising the lower end of our non-GAAP EPS guidance to a range of $0.95 to $1.03.

For the second quarter, we are targeting Q2 revenue $140 million to $145 million with non-GAAP EPS in a range of $0.21 to $0.23. Our non-GAAP EPS targets do not include the after-tax impact of and estimate a $0.03 to $0.04 per share per quarter charge for the amortization of intangibles and acquire technology, the facilities restructuring charge of roughly $0.05 per share per quarter, the tax effective impact of stock comp of approximately $0.04 per share per quarter and any major acquisition costs and expenses.

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

Sohaib Abbasi

Thanks Earl. As you noted earlier, the economic recovery and the lessons of the great recession are shaping the primary business strategies of our customers from business survival to business revival. With that operational efficiency and become an early beneficiary of the economic recovery, enterprises require relevant trustworthy and timely data. In other words, organizations aspire to become data driven enterprises as data matters more than ever before.

With our broadest ever product portfolio, Informatica enables the data driven enterprise. And last month we announced yet another significant new development. To advance our technology leadership and expand our addressable market even further, last month we announced our acquisition of 29West.

With this strategic acquisition, we are pursuing three goals. First, expand our addressable market with another adjacent category Ultra Messaging. Second, further strengthen our business in our top vertical financial services. And third, advance our technology leadership by delivering the industry’s first platform to zero latency data delivery and data integration.

29West pioneered Ultra Messaging technology to send and receive millions of messages per second with microsecond delivery time. By adopting 29West, financial services firms, gain a competitive advantage in the front office with zero latency IT infrastructure. By one estimate, a million second of creating latency is worth a $100 million a year to a major brokerage firm.

These front office operations require instant delivery of a broad range of trustworthy relevant data including market trading positions, global risk, compliance, and customer data. IT department typically hand code point-to-point integration to address these requirements.

With 29West, Informatica offers a more productive and reliable alternative. This combination expands our addressable market with another adjacent category Ultra Messaging. According to The TAB group, total spend on overall messaging infrastructure is estimated to be nearly $2 billion.

With an architectural breakthrough that eliminates throughput bottlenecks of traditional broker based or daemon-based messaging, 29West delivers differentiated high-end Ultra Messaging technology. As a result, 29West delivers an order of magnitude improvement in latency, throughput, and predictability compared to traditional messaging systems. This combination also strengthens our business in our top vertical, financial services. More than a 100 financial services leaders rely on 29West, the mission-critical messaging infrastructure.

Finally, in combination with 29West, we are advancing Informatica’s technology leadership by delivering the industry’s first zero latency, data integration and data delivery platform. Now our customers can automate and even broader range of data integration projects beyond the traditional near real-time, including projects requiring microsecond latency.

Hundreds of current Informatica customers use traditional messaging products for near real-time data integration projects, including operational master data hubs, inter-enterprise B2B data exchange and complex event processing.

Combined with 29West’s faster and more reliable Ultra Messaging, the Informatica platform uniquely supports zero latency data integration for customers to be even more responsive and agile.

To reiterate, by enabling the business survival strategies of our customers, data integration now has an even greater purpose, priority, and urgency. As the largest independent leader in data integration with the track record of continual innovation, Informatica is strongly positioned to pursue this growth opportunity.

So with that, I will open it up for your questions. As Stephanie said earlier, we would appreciate if you can confine yourselves to one question. Thank you. Operator, may we have the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Again, please limit yourself to one question at a time in order to ensure that everyone has a chance to participate. Our question comes from the line of Tom Roderick with Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

Hi guys, thanks, and good afternoon. Sohaib you offered a couple of anecdotes there regarding early adoption of Informatica 9. But I was wondering if there might be some more metrics behind the adoption of Informatica 9 with respect to what percentage of deals you may have seen that that we are moving in that direction? And also with respect to the data quality adoption, is Informatica 9 alone accelerating that data quality adoption? And then just the last piece of that question, do you still expect that by the second of this year, we will see the majority of deals here that will be driven by INFA 9? Thanks.

Sohaib Abbasi

Sure. Thanks Tom. Informatica 9 is generating a lot of interest. We have a marketing program where we are going to 50 different cities and showcasing Informatica 9 and that is generating a lot of interest. These events are attended by hundreds of people at each location and it is generating a lot of leagues.

Now with Informatica 9, as the name would suggest, our goal was to promote the entire platform much more than just a power central or data quality offering. And from that perspective, the best metric that we are using internally to measure the business impact of Informatica 9 is our overall license revenue growth and clearly we are very happy and pleased with the 25% that we attained this last quarter.

In terms of the data quality adoption, it is generating a lot of interest. We have some customers that have gone production on data quality version 9. And in fact in conjunction with our master data management offering, there is even greater interest in data quality. So we are pleased with Informatica 9, the level of interest and lead that is generating. And we continue to track all of our metrics internally. Thanks Tom.

Tom Roderick – Thomas Weisel Partners

Thank you.

Operator

Our next question comes from Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

Hi Sohaib and Earl. Thanks very much for answering my questions. Just in and looking at sales cycles, I was hoping you can tell us overall, are cycles shortening, lengthening or staying about the same? And same question for you in the individual geographies, the US, EMEA and APAC?

Sohaib Abbasi

We have not really seen any significant change in terms of the sales cycles. What we have seen in general is a relative to about a year-ago, the focus of our customers has shifted from business survival around operational efficiency to business revival. And some of the examples that I sighted like the Akbank example where they are looking at building consolidating all of their customer information in order for them to grow their customer base.

Similarly the example that I sighted from the healthcare life sciences’ industry, we are beginning to see adoption of our technology for a broader range of projects, whereas a year-ago it was all around operational efficiency and IT productivity. Now there is a broader adoption not just for operational efficiency, but also for growing the top line.

In terms of the individual sales cycles, I guess the best metrics would be some of the deal metrics that Earl indicated, as $7 million deals is a record for Q1. And we also had a record number of transactions over 300,000. And those are all very good indicators that our products are being used more broadly as well as this broader adoption of the products we offer across multiple segments.

Earl Fry

So Nat, I guess the way I would characterize it is, sales cycles are generally staying relatively consistent and you obviously see the increase in the number of transactions, over a 300K transactions, over $1 million. Those aren’t necessarily taking any longer than to do a $100,000 kind of upgrade transaction. So I think net sales cycles staying relatively consistent is actually very good.

The one other from the geographic standpoint, we mentioned that we are seeing more consistent results internationally, in Europe, in Asia, so I think the threat that we are seeing in the recovery is particularly good.

Nathan Schneiderman – Roth Capital Partners

Thank you

Operator

Our next question comes from Mark Murphy with Piper Jaffray.

Mark Murphy – Piper Jaffray

Thank you. Looking at the Q1 revenue growth of 24%, is there any way you can help us to think about the growth for the data warehousing piece versus the operational data integration piece. In terms of how big do you think the spread is, for example, is it a 10% growth versus 60% growth or just anyway to characterize the growth of the two different segments?

Sohaib Abbasi

Mark, it would be difficult for us to provide you with a very good measure of it primarily because our products are being utilized by customers across a variety of the projects. So when I sighted the 58% of our deals over $100,000 beyond data warehousing, that indicates that there were customers that were using our products for a variety of projects including data warehousing. And the example I sighted over Akbank in Turkey, that’s a data warehousing example where they built an enterprise data warehouse.

The best indicators that we have got are some of the independent data warehousing database vendors such as Natisa and Teradata and as well as Oracle’s exit data product. And based on the numbers that are being reported by our partners, the data warehousing market is very strong. And clearly we are benefiting from it, but we are also benefiting from broader usage of our products.

Mark Murphy – Piper Jaffray

Okay. And then Earl, just as a follow-up, if we look at the acquisition payments on your – in your financial statements in the quarter, that is reflecting presumably Siperian and 29West at this point. Is that correct?

Earl Fry

Yes, that’s correct. It’s – the both of the acquisitions and net of a cash acquired on the balance sheet which was nominal but still some amount. So that $167 million in the cash flow statement reflects both acquisitions.

Mark Murphy – Piper Jaffray

Okay, and then – and right, so the purchase price on the 29West then in rough numbers is around $30 million or a little over $30 million.

Earl Fry

It’s probably a little over $40 million.

Mark Murphy – Piper Jaffray

Little over $40 million, okay. And then just one last quick one Sohaib, just at a high level if the economy doesn’t double dip and if you executive the way that you hope to, in your mind, do you have a year that you are targeting as far as when the company would reach a billion in revenue?

Sohaib Abbasi

Well, we certainly have an internal plans that we have been working towards and we have had this plan for the past five years. The team has done an outstanding job executing to that plan. And as a result of the great recession, we are about a year behind in the plan. Our – and we have commented in prior calls that there is no reason why we cannot continue to grow at the same pace as we have over the last several years.

Mark Murphy – Piper Jaffray

Thank you very much.

Sohaib Abbasi

Thank you.

Operator

Our next question comes from Jonathan Doros with Raymond James.

Jonathan Doros – Raymond James

You guys had a some great license and revenue growth during the quarter. In regards to the impact from acquisitions, roughly how many points in 1Q license revenue and total revenue was driven from inorganic revenue?

Earl Fry

So the – we had most of the majority of the revenue came from organic growth. Less than 50% came from acquisitions that were done in the last year and that’s both for the total line as well as for the license line.

Sohaib Abbasi

And that’s specifically license growth not license revenue the most of the growth came from.

Earl Fry

Right, that’s correct.

Jonathan Doros – Raymond James

Like mid teens organic and – is that a good number to use?

Earl Fry

Yes, low teens, low-to-mid teens organic and then kind of low barely single digit in organic. They are barely double digits in organic.

Jonathan Doros – Raymond James

Thank you.

Operator

Our next question comes from the Nabil Elsheshai with Pacific Crest Securities.

Elsheshai – Pacific Crest Securities

Hi guys, thanks for taking my question. I wanted to follow-up on 29West and Ultra Messaging. First, I was wondering if you guys had done any joint selling or in terms of used cases or projects, is there overlap with data integration? Two, does this signal maybe a little bit more of a move into an area that – in the area that was traditional called application integration?

Sohaib Abbasi

Nabil, as you know, we have been executing on our roadmap that we laid out. In fact, publicly last year at our financial analyst event where we showed the roadmap of expanding our product portfolio with more datacenter technologies and more integration-centric technologies. MDM Siperian was a very good example of more data-centric technologies and 29West with Ultra Messaging was a very good example of more integration-centric technology. So this is another way for us to accelerate our roadmap.

We are particularly excited with the acquisition of 29West and that they have pioneered a niche category Ultra Messaging, which in many ways redefines the high-end of messaging. And the analogy I would use is a much in the same way as in the early 80’s there were a number of database vendors, there was a new technology that defined a niche category called relational databases.

We believe that Ultra Messaging is the high growth segment within messaging, which is the mature market. But what we are particularly excited about is the synergy between messaging and our data integration platform where we would enable zero latency data integration, we are expanding from a batch through a near real-time and now instant data integration with zero latency. So we expect that there will be a lot of synergy with – we have a lot of a common customers that have committed on their intentions and plans to use a combination of our products.

Thanks Nabil.

Nabil Elsheshai – Pacific Crest Securities

I don’t know if I am still on. Earl, just real quick, if it’s on the guide, is that $10 million increase in guide is that how we should look at the contribution from 29West?

Earl Fry

The majority of that increase you should look at it is coming from 29West and not quite all of it.

Nabil Elsheshai – Pacific Crest Securities

Okay, great. Thanks for taking my question.

Earl Fry

But we will obviously have purchase accounting and deferred revenue adjustments which will have to kind of eat through here in the next couple of quarters and that’s also why I made the comment that 29West would have the impact of a very slightly dilutive in Q2 in the kind of and more or less neutral for the remainder of the year.

Nabil Elsheshai – Pacific Crest Securities

Okay, great. Thank you.

Operator

Our next question comes from Brad Whitt with Broadpoint.

Brad Whitt – Broadpoint

Hi guys, thanks for taking my question. Can you – give us some colors as to how you are structuring the sales force with all these different products. I think historically you kind of kept the sales force separate when you have done an acquisition. Just curious whether you have consolidated across some of the previous acquisitions and kind of what the plans are going forward for the more recent acquisitions?

Sohaib Abbasi

We have mainstreamed some of our products and the models that we have commented (inaudible) at the earlier calls that for new segments. We retain the specialist that help our field in those particular opportunities. And as our fields come up – comes up to speed and we are pleased with the performance of the product line, we have mainstreamed the product and no longer have that specialist overlay organization. We have done that with many of our earlier acquisitions and we will continue to ensure that we have the right balance of skills and capacity that is needed for us attain our results. Thank you.

Operator

Our next question comes from Brent Williams with Benchmark Company.

Brent Williams – Benchmark Company

Hi guys, I wanted to sort of drill in a little bit more on the 29West deal and maybe also on Siperian. And following up Brad’s question just now, what – now that you have sort of been kicking this around for a little while, what is really the plan to integrate 29West with the core products, is it really standalone or is there plans, for example to integrate with – I mean disintegrate with mainframe stuff on power exchange or is there anything like that or is this going to just really remain standalone for maybe a little longer than say the data quality products? And I have a couple of –

Sohaib Abbasi

Our goal is actually to have the best of both worlds. 29West has had a great success. And I will take one example that perhaps could illustrate the value that some of the customers are realizing from them. One of the largest exchanges in the U.S., Direct Edge, used 29West in order to attain an order of magnitude improvement. They are getting five times the throughput using half the original hardware. So that's a tenfold improvement. And in addition to that, they are getting 75% lower latency, four times faster and great resilience. So this is a very unique value that they have been delivering to their customers. They have 140 customers that are gaining their value and we will continue to position those – the technology for those Ultra Messaging opportunities. The 29West has world-class team that is focused on that market category, the pioneer in the market category and we will continue to retain that focus.

At the same time, we have over 4000 customers, we exceeded, we attained the amounts on this last quarter by having more than 5000 of the largest organizations relying Informatica. So we will provide our ways and incentives for our own field to assist in positioning 29West in more opportunities. We have identified some vertical beyond financial services that we will be looking at such as public sector. We have identified certain product integration with our data integration in our platform as well as with our B-to-B. In fact, there are certain customers that are looking at use of our B-to-B technology and 29West for doing intent price B-to-B data exchange.

So we have a roadmap that would allow us to leverage this scale and scope of Informatica’s distribution channel as well as the product line but at the same time we will retain our focus to ensure that we continue to advance their leadership in their huge category of Ultra Message.

Brent Williams – Benchmark Company

Great, and then relatively as far as getting since this Ultra Messaging stuff, I actually look for some of the white papers and it is a radically different approach to doing networking than a lot of the sort standard well proven UNIX stuff and LINUX networking. And so, as far as training the sales guys, since I think this Siperian acquisition and the 29West came really just shortly after your sales kickoff, how are you going to get everybody out there and (inaudible)? Are you really just going to focus on overlay Salesforce or are you going to be able to get the broader sales organization into the fold in what kind of time?

Sohaib Abbasi

We actually have organized the – on the product side as well as on the sales side for us to manage expansion of our product portfolio in two dimensions. Specifically with master data management, we had many years to prepare for our entry into master data management, dating back to 2006 when we entered the data quality market with our acquisition of Similarity. We augmented that over the years with Identity Systems and it happens that Siperian embeds the same Identity System. In other words, our field has been positioning master data management positioning Informatica products for master data management opportunities for many years.

So we have had a lot of experience pursuing master data management opportunities and we have retained the Siperian sales organization as an overlay. Now, in addition to that with 29West, we have retained all of the people that were part of the team and in fact in some cases, we have augmented that with additional resources required for attaining the product integration and that's one of the reasons why Earl commented that it was slightly dilutive.

We are making investments in order for us to leverage that and at the same time, we recognize that in order to pursue Ultra Messaging, we need the specialized knowledge that that team has and they have done a very impressive job for a company of their size that has the kind of marquee customers that are now relying on them.

So we will continue to leverage that and in addition to that, we will train our sales organization to source a lot of those opportunities. Thank you very much.

Operator

Our next question comes from Brad Sills with Barclays Capital.

Brad Sills - Barclays Capital

Just a question on the indirect channel contribution was strong this quarter at 28%, that's up from I think 21% last quarter. Can you comment on what's driving that? Are there any programs in place that are gaining traction now or should we kind of expect that going forward as well?

Sohaib Abbasi

Well, we have commented over the last several quarters that our neutrality has allowed us to continue to strengthen our partnership, that we partner very closely with all the major system integrators, both global system integrators, offshore system integrators, we partner with leading category leaders. And all of that has contributed to the indirect number.

Earl Fry

That said, I think Q1 is a little bit of an anomaly because we have particularly strong contribution from parts of Asia-Pac as well as the regional markets growth in EMEA. So all of those run through third party distributors. So that tended to check the percentage of slightly higher than our normal expected probably higher than it will be in the next couple of quarters.

Brad Sills - Barclays Capital

You mentioned some of the non-data quality options performing well, MDM, ALM, etcetera. Could you comment on which one specifically you are seeing more traction with, with the Informatica cycle, how that's driving it and are there any verticals that are driving some of these attach rates?

Sohaib Abbasi

Each of the product line is doing very well. I commented specifically on the MDM and data quality. There is a lot of interest in the information lifecycle management, application information lifecycle management in order to actually reduce the database capacity and the storage capacity. So we are very optimistic about all of our product lines. And in a lot of cases, our customers are relying on Informatica for the platform. We are winning over our competition by providing a more complete solution than any of our other competitors. Thank you.

Operator

Our next question comes from Mitesh Dhruv with Bank of America.

Mitesh Dhruv - Bank of America

Sohaib, you just mentioned that you are going to be positioning 29West above and beyond the financial sector into public services what have you. So you can look at your install base of 4000 plus customers, roughly what percentage of your customers would be lending themselves well to this kind of a product?

Sohaib Abbasi

Well, we remain focused for the foreseeable future on financial services. And what I was laying out was a longer term roadmap that we plan to leverage the technology more broadly for more verticals. Our view is that there is a lot of requirement for having low latency messaging infrastructure in public sector in certain other verticals including energy. So we will look at those other verticals but for the time being we will remain very much focused on financial services.

Mitesh Dhruv - Bank of America

And that is about what, 10% of your – that contributes about 10% of your total customer base?

Earl Fry

Our financial services typically has been plus or minus about 20% of our business and actually was better than a little over 20% of our new license orders in Q1, a stronger quarter for our financial services in Q1.

Mitesh Dhruv - Bank of America

Just one follow-up up for you, Earl. As you are significantly ramping up investments and sales capacity, can you just give us some puts and takes on the operating leverage in the model here?

Earl Fry

So I think what you saw in Q1 was reflective of where we probably will be for the next couple of quarters. And as I had mentioned, over the medium term, we are looking at, as we are looking at accelerating revenue growth, we are looking for ways to grow absolute earnings as fast, which means you are going to see slightly lower leverage or increase in operating income as a percent of revenue this year than you have seen in the past couple of years and that was reflected in Q1 where we are 69 basis points better than we were a year ago. Now that still reflects some dilution for – meaningful dilution from the early stages of Siperian and 29West acquisitions.

So as we get through – as we start getting towards the end of the year and to next year, I think you can see leverage amounts – leverage start to get a little better but I think for the next couple of quarters, I wouldn't expect a lot of year-over-year operating leverage increase.

Operator

Our final question comes from the line of Derrick Wood with Wedbush Morgan Securities.

Derrick Wood - Wedbush Morgan Securities

Couple of questions around Siperian. Can you just give us some feedback how the acquisition has been tracking and maybe relative to internal expectations and what the feedback has been? And then I assume you haven't changed your expectations for revenue and earnings contribution for the year.

Sohaib Abbasi

We are making very good progress with Siperian and we are very pleased with the results we attained. In fact, we attained the internal goals that we set for Siperian. And there continues to be a very enthusiastic response by our customers, there is great demand for Siperian’s MDM offering. And there are unique capabilities that Siperian offers like the multi-domain capabilities that I highlighted earlier, where a customer is able to build both a customer hub and product hub. So we are very pleased with both the results that we have attained as well as the amount of interest that is generating.

In addition to that, Siperian has allowed Informatica to become a much more strategic partner for our customers and it is a great way for us to position the entire Informatica platform.

Operator

That’s all the time we have for questions. I will now turn it back over to Sohaib for any closing remarks.

Sohaib Abbasi

For the remainder of 2010 and beyond, our mission remains the same, advance Informatica as the clear leader in one of the highest growth enterprise software markets, data integration. We are well prepared to pursue our strategy and increase operating income in the quarters to come. Thank you.

Operator

Ladies and gentlemen, this does conclude Informatica Corporation first quarter earnings conference call. You may now disconnect.

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Source: Informatica Corp. Q1 2010 Earnings Call Transcript
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