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Informatica Corporation (INFA)

Q2 2010 Earnings Call Transcript

July 22, 2010 5:00 pm ET

Executives

Stephanie Wakefield – VP, IR

Sohaib Abbasi – Chairman and CEO

Earl Fry – CFO, Chief Administration Officer and EVP, Global Customer Support

Analysts

Thomas Ernst – Deutsche Bank

Mark Murphy – Piper Jaffray

Tom Roderick – Stifel Nicolaus

Jonathan Doros – Raymond James

Nathan Schneiderman – Roth Capital Partners

Mitesh Dhruv – Banc of America/Merrill Lynch

Nabil Elsheshai – Pacific Crest Securities

Bradley Whitt – Gleacher & Company

Brent Williams – Benchmark Capital

David Kaczorowski – Wedbush Morgan Securities

Frank Sparacino – First Analysis Corporation

Patrick Walravens – JMP Securities

Brad Sills – Barclays Capital

Operator

Good afternoon. My name is Morgan and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Q2 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) Thank you.

Ms. Wakefield, you may begin your conference.

Stephanie Wakefield

Good afternoon and thank you for joining us today. This is Stephanie Wakefield investor relations and CC at Informatica. I am here with Sohaib Abbasi, our CEO and Earl Fry, our CFO to discuss our Q2 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 projected financial results for future periods, the pursuit of our growth strategy, opportunities for growth in our positioning and the data integration market, the expected benefits to our customers from the use of our products, the expected benefits to customers from our partnerships and the informatica marketplace, our integration and acquisitions and, their employees and technology, the planned use of our products and services by some customers for more than traditional data warehousing projects, the strength of customer demand for our products; customer adoption of the latest products and services 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 current 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 March 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.

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 at www.informatica.com/investor.

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 and only if time permits. Thank you. Sohaib?

Sohaib Abbasi

Thank you, Stephanie. I am delighted to announce that in Q2 2010 we obtained all-time record quarters for total revenue and record second-quarter license revenues. This afternoon I will highlight some of the business drivers for our record second quarter results. After Earl's presentation of our financial results I will comment on the next phase of Informatica’s growth roadmap.

Total revenues grew by 33% year-over-year to a $156 million. New license revenues grew by 44% to $17 million. These growth rates are even more remarkable as Informatica unlike other enterprise software companies has grown year-over-year every quarter for six consecutive years.

Total and non-GAAP operating income grew by 41% with non-GAAP operating margins of 24%. With non-GAAP EPS of $0.25 we achieved the most profitable second quarter to date.

The record Q2 results underscore our confidence in advancing Informatica as a more strategic technology partner for our customers.

Despite the uneven economic recovery, Informatica is increasingly benefiting from our strongest ever product portfolio and the teams’ exceptional operational discipline within each of the major graphic regions.

In the Americas, the broad-based record results reflect the growing contribution of our strongest ever product portfolio. Within EMEA our sustained strong results in Northern Europe reflect the exceptional operational discipline of the team.

In Asia-Pacific we attained record quarterly license results. Across all the major geographic regions, both the choppy economic recovery and the lessons of the great recession shape the primary business priorities of our customers. As a reminder, these business priorities include increasing revenue through customer centricity, and agility, reducing costs through operational efficiencies, diversifying through globalization, scaling with industry consolidation and complying with all regulatory routines.

By enabling these business imperatives, data integration is now more business critical than ever before as illustrated by our customer wins around the world. In the US, one of the 10 largest banks selected Informatica to help increase revenues by offering a differentiated product featuring corporate and government charge cards. The bank has a GFA GSA SmartPay to contract provide charge card to US government agencies.

Using Informatica the bank will offer its government and corporate customer a service to better enforce policies for reimbursement of travel and entertainment expenses. Enabled by Informatica’s CEP the event process notification service will detect any policy violation or suspicious use of these charge cards.

By automating the review process of millions of charge card transactions to identify high-risk ones, the bank expects to help its customers reduce their labor costs and mitigate risk of abuse or frauds.

In Europe, one of the top three leaders in the pharmaceutical industry, selected Informatica for its most strategic IT initiatives to improve the effectiveness and efficiency of its clinical trials process. Informatica MDM will enable a multi domain data hub for 12 key master entities including investigator, site, compound, trial and location.

With Informatica enabled data hub, this pharmaceutical leader expects to save more than $10 million a year by reducing IT costs and mitigating risks associated with regulatory compliance.

In Asia-Pacific, the Singapore Immigration and Checkpoints Authority or ICA selected HP to implement Informatica towards border watch system. Using Informatica ICA will better pursue its mission to ensure security of Singapore’s border against the entry of undesirable persons and cargo through any checkpoint.

Informatica identity resolution will enable ICA to match structured information from multiple databases as well as unstructured information from law enforcement reports to identify and prevent entry of undesirable persons and cargo. These representative customer win showcase our success in enabling business critical IT projects while expanding our addressable market beyond the traditional data warehousing category.

By enabling multiple people business critical IT projects instead of a single discretionary IT key project, Informatica now performs an even more mission-critical IT role. As a result of this growing trend 59% of our deals over $100,000, will reach customers that plan to use Informatica for more than data warehousing.

In addition, in Q2, more than 79% of our professional services fees were from consulting engagements beyond traditional data warehousing.

Guided by our (inaudible) and expansive technology vision, we accelerated our roadmap with complementary technology acquisitions. Each product category in our portfolio has not only generated new opportunity, but it has also elevated Informatica's role within the IT projects.

As an indicator of our success, last quarter, we closed at least one deal for more than $1 million in each of the following seven software categories. Enterprise data integration, data quality, B2B data exchange, application information lifecycle management, complex event processing, Master Data Management and ultra-messaging.

And we achieved our best ever quality results in top computing data information. In other words, by selecting Informatica as a standard in multiple software segments, customers now regard Informatica as more mission critical than ever for their IT operations.

In the data integration and data quality category we are in the early stages of benefiting from the Informatica 9 product cycle with upgrades of 13% of active customer projects. Among the early adopters of Informatica 9, our Alliance Energy, Banco Central do Brasil and Aviva.

Based on our experience with prior product releases the recent delivery of the first maintenance release 9.0 .1 will help accelerate adoption by our customers.

As heralded by the early successes, the best is yet to come from Informatica 9. We had no quality customer wins in each of the five American categories of B2B data exchange, application information, life cycle management, complex event processing, Master Data Management and ultra-messaging. In Q2, more than 20% of our transactions over $100,000, included products in these new categories.

In the ultra-messaging category, we obtained encouraging results with a notable win over IBM to replace a handcoded messaging at a leading financial services firm. Our MDM products continue to exceed our expectations and more importantly our aggressive internal target.

Last quarter, a leading high-end fashion retailer chose Informatica MDM to gain a comprehensive profile of their customers aggregating data from 20 district sources representing stores, its online Web store, the credit card division, and point-of-sale systems. With this customer data hub the retailer expects to improve customer service, and drive incremental revenues by more effectively cross selling and up selling additional products.

In the cloud data integration category, we further advanced our pioneering technology leadership and obtained our best quarterly results. The latest Informatica cloud services Summer 2010 edition features new plugins for data quality and B2B data transformation.

With the new data quality service, data can be validated and sent as an integral step within a data synchronization test. With the new B2B data transformation service, information can be flexibly shared with suppliers, training partners and training networks.

In Q2, we obtained our internal targets with customer wins at Tribune Company and Linksys to name a few. Now, more than 850 companies use Informatica cloud to integrate off-premise data and on-premise data.

Finally, we continue to strengthen and expand our partnership with industry leaders. With our broadest ever product portfolio, we have more opportunities than ever to partner. Notably in Q2, we announced one of our most strategic partnerships with EMC.

As part of EMC select program, EMC will resell and embed Informatica ILM and MDM products to further expand and extend the value of EMCs intelligence tiered storage, archiving and enterprise content management platforms. Together EMC and Informatica will enable customers to dramatically lower their data management costs and gain more value from the information captured.

To sum up, our record Q2 results underscore the increasingly mission-critical and business critical role of Informatica for our customers and our partners.

Now, I will turn it over to Earl to give you details on our financial results. After Earl's comments, I will discuss the next phase of our growth roadmap.

Earl Fry

Thank you, Sohaib. Our Q2 total revenues came in at an all time record $155.7 million, up 33% on a year-over-year basis and over $10 million above the high end of our guidance rates.

License revenues for Q2 record $70 million, up 44% year-over-year. Service revenues were a record $85.6 million up 25% year-over-year. Breaking down the components of service revenues maintenance revenues were record $61.3 million up 18% year-over-year while consulting, education and subscription revenues came in at a record $24.4 million, up 45% year-over-year reflecting continued recovery in our consulting and education business as well as continued growth in our subscription levels.

Our deal metrics were strong across the board. Existing customers contributed 83% of our license order value compared to 85% in the first quarter and 78% the year ago. We did license business with 351 existing customers and added 68 new customers during the quarter.

We booked an all-time record 14 transaction over $1 million up from nine in the year ago second quarter. And, more significantly we closed a second-quarter record 79 deals over 300,000 an 80% increase compared to 44 deals over 300,000 in the year ago second quarter.

Our average transaction sizes for orders over $100,000 came in at 409,000 and the average transaction size for orders over $50,000 came in at 289,000 both up strongly from year ago levels from 344 and 243,000 respectively.

From a channel perspective, 22% of our license orders came from the indirect channels and an additional 37% of our direct orders in Q2 were referred by partners or resellers. The overall total of indirect and referred orders was 59% compared to 67% a year ago and 63% last quarter.

Licensed revenue from our direct business was 81% in Q2 and 19% of our license revenue came from the indirect channels in Q2.

Moving to geographic mix. North America orders as a percentage of total license orders were 64% compared to 63% a year ago and 62% in Q1, the mix of orders from EMEA and the rest of the world was 36% compared to 37% a year ago and 38% in Q1. North America revenue was 67% of total revenue in Q2 relatively consistent with 66% a year ago and 65% in Q1.

Revenue from EMEA and the rest of the world was 33% of total revenue in Q2 relatively consistent with 34% from a year ago and 35% in Q1.

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

Non-GAAP gross profit which excludes 3.6 million and amortization of acquired technology and 650,000 of stock-based comp came in at $130.1 million or 84% in Q2 relatively consistent with 84% a year ago and 83% in Q1.

Licensed margins were 98% in Q2 consistent with the prior quarter to down just slightly from 99% a year ago of second quarter.

Service margins, driven by continued 95% maintenance, maintenance renewal rates were 72%. The same as the prior quarter though down from 74% in the year ago quarter and reflects continued recovery in our consulting and education revenues this year.

Excluding charges for stock comp amortization of intangible assets and facilities restructuring and acquisition related adjustments totaling $7.6 million, Q2 non-GAAP operating expenses were $92.8 million up from 81.6 million in the first quarter and up from 72.4 million in the year ago second quarter.

As a percentage of revenue, non-GAAP operating expenses were 60% of revenue in the second quarter the same as last quarter and better than 62% in the year ago quarter. We generated $37.3 million in non-GAAP operating income up 41% from a year ago.

Non-GAAP operating income as a percentage of revenue was 24% up 137 basis points from a year ago. Net interest and other income continues to be impacted by trapping investment deals and as a result we had a net expense of $0.7 million in the quarter.

Our tax provision was 29.6% on a GAAP and 29.7% on a non-GAAP basis.

Bottom line, we delivered a record second quarter with gap up EPS of $0.17 and non-GAAP fully diluted earnings per share of $0.25 which was a full $0.02 per share better than the high end of our guidance.

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 30th. We'll be at all-time record $176.3 million up by almost $7 million sequentially and up by $34.2 million compared to a year ago. Our largest every year-over-year increase.

Our total headcount was 1960 at the end of Q2, an increase of 43 from Q1 and up 265 from a year ago. Sales and marketing headcount was 688 at the end of Q2, an increase of 23 from the end of Q1 and 77 from a year ago.

We ended the quarter with over 363 million in cash and investments $8.7 million increase from Q1 and during the second quarter we repurchased 434,000 shares of our stocks for $10.7 million.

We generated $16.4 million from cash flow from operations in Q2 compared to 43.2 million generated in Q1 and $19.1 million generated in Q2 a year ago. Over the past 12 months, we have generated over $104 million in cash flow from operations.

DSO's were 63 days in Q2 compared to 52 days in Q1, 61 days a year ago and within our DSO range of 55, DSO target range of 55 to 65 days. Similar to Q4 of last year our DSOs and cash flows were impacted by the strong step up in revenue growth. And as a result, I would expect Q3 similar to what we saw in Q1; expect Q3 to be particularly strong from a cash flow generation perspective.

Our deferred revenue balance increased to 151.4 million and it is comprised of 147.4 million in current deferred and 3.9 million in long-term deferred.

Deferred revenues in total were up $23.4 million from a year ago and up 2.1 million sequentially. We ended the quarter with 108 million shares outstanding on a fully diluted if-converted basis.

Looking forward, 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 by about half a cent per share per quarter.

While our income tax provision will continue to be a very sensitive to our geographic mix of earnings, we continue to expect our effective tax rate will be no more than 30% on both the GAAP and non-GAAP basis before the impact of certain discrete tax items. So, as we enter the second half of 2010 we are encouraged by customers increasing interests in our broadening portfolio of products.

Now, while we continue to expect the macroeconomic environment to be choppy at best, we continue to see evidence that data integration is becoming an increasingly high priority investment for our customers and prospects. Based on these indicators and expectations, we are raising our revenue guidance for the full year 2010 to a range of 615 to 630 million and raising our non-GAAP EPS guidance to a range of $1.03 to a $1.08.

For the third quarter, we are targeting revenue of 154 to $159 million with non-GAAP EPS in a range of $0.24 to $0.26. As a reminder, our non-GAAP EPS targets do not include the after tax impact of an estimated $0.03 to $0.04 per share per quarter charge for the amortization of intangibles and acquired technology, the facilities restructuring charge of roughly half a cent per share per quarter.

The tax affected impact of stock comp of approximately $0.04 per share per quarter and any major acquisition costs and expenses.

So with that I will turn it back over to Sohaib.

Sohaib Abbasi

Thanks, Earl. Our focused growth strategy guided by our singular mission to drive the tedious phase of informatics as growth roadmap from 219 million in 2004 to 500 million in 2009, despite the great recession. Revenue growth of 28% in the first half of 2010 bodes well for the next phase of Informatica's growth roadmap from 500 million, to $1 billion.

We are even better positioned for this next phase as a result of four promising developments: our mission critical IT role, business critical product portfolio, strongest ever partnerships, and the new community-based Informatica marketplace.

First, with the broadest ever usage, data integration is now an integral component of the core IT infrastructure much like databases and application servers.

Our award-winning customer services and open platform are has shown our customers that Informatica is more prepared for their mission-critical IT projects. And with our focus on customer success, Informatica ranked number one in customer loyalty for the past four consecutive years as measured in surveys by TNS customer research an independent research firms. Second, by enabling top business imperatives with our strongest ever product portfolio Informatica is regarded as more business critical than ever by our customers.

Based on our relentless pace of innovation, Informatica continues our leadership in multiple technology categories. In fact, the industry analysts Gartner most recently acknowledged our advances as one of the top leaders in the data quality category.

Third, our track record of neutrality, IT leaders rely on Informatica as the trusted partner for data integration. In fact our new strategy is the best insurance against the increased uncertainty of this next phase of industry consolidation. Software companies acquiring computer hardware companies and computer hardware companies acquiring services companies.

With Informatica, our customers are assured that they are not locked into a single vendor and more importantly are not locked out of their single most value IT asset, their data. And this strongly positions Informatica to further strengthen our partnerships.

And fourth, by leveraging the existing community of nearly 100,000 developers Informatica marketplace will offer our customers a broader choice of data integration solutions. Our customers will benefit from innovative products and services offered by a broad community of suppliers. The suppliers will gain from better access to more customers than ever.

By promoting an open marketplace we will further strengthen the Informatica platform with compelling offerings from a growing community. Together, we will offer the most comprehensive data integration solutions to our customers.

With our mission critical IT role, business critical product portfolio, strongest ever partnership and the new marketplace Informatica is well-prepared for this next phase of our growth roadmap.

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

Thank you. Operator, may we have the first question?

Question-and-Answer Session

Operator

Our first question comes from Thomas Ernst with Deutsche Bank.

Thomas Ernst – Deutsche Bank

Good afternoon. Thanks for taking my question.

Sohaib Abbasi

Hi, Tom.

Earl Fry

Hi, Tom.

Thomas Ernst – Deutsche Bank

So strong, strong growth acceleration and a positive outlook. Can you remind us again, Earl how much was the organic growth in the quarter and as you think about this year looking for organic growth.

Sohaib Abbasi

Tom let me comment a little bit about our growth and then I will turn it over to earl. We are very pleased by the strong growth that we saw in our core product categories data integration and data quality. In fact we have not seen that kind of growth in data integration for some time. And that growth has been driven by broader usage; our products have been deployed in more projects. And – we are also seeing great results as a result of expanding our data quality offering by the addition of MDM product.

MDM products provide a more complete solution; they embed a number of our data quality offerings. So together, we are very pleased with the results that we obtained in our core foundational flagship products data integration and data quality.

Earl Fry

And I guess another way to look at it, Tom, I think we had really strong growth. And I quite frankly we haven't bought anybody big enough in the last year to try that kind of 44% license growth. That said, you know, we did have something under 5% of our license is kind of first year maintenance growth came from products that we have acquired in the last 12 months which were sold on a standalone basis.

So, I think obviously some of those positions we are getting the pull through with both data integration, data quality, so we have, we have a lot of transactions where we are selling multiple products or where data integration or data quality is embedded in some of the with some of the newer technology.

Thomas Ernst – Deutsche Bank

Okay. Good. And maybe one follow-up to Earl. I think the market appreciates that you at Informatica take a, I think, comprehensive conservative approach to guidance. So the market is not expecting companies to raise guidance in this environment – do you feel like you are being appropriately cautious on the topline productivity that we can get, as this year goes on particularly if the environment is weaker than we have seen in the first half?

Sohaib Abbasi

You know, I think as we look at that over the past two years, one thing that I think we are increasingly confident in is the strategy and the fact that our technologies, while basically while not recession resistant it is pretty close to us. Because we address a number of needs in helping customers not only, get new sources of revenue, but really to become more efficient.

So, the fact that we have broadened our portfolio significantly – look at how we have generated pipeline over the first half of the year. Look at really kind of the adoption of Informatica 9 quite frankly that part is still to come over the next year and a half.

It is hard not to look at what we have delivered in the first half of the year and say, you know, we should be able to do very well going forward.

Thomas Ernst – Deutsche Bank

Okay, thanks again.

Sohaib Abbasi

Okay, thanks, Ernst.

Operator

(Operator instructions) Our next question comes from the line of Mark Murphy with Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes, thank you. Sohaib, the results are unusually strong, I think the volume of $300,000 yields feels more or like a Q4 than a Q2. I am wondering if you can help us understand how much of it you think is company specific momentum versus the entire data integration market heating up because I think we can see that – (inaudible) is also doing well but I think we have seen some of the other vendors like Acta have disappeared and we can’t tell if some of the other products like data stage or (inaudible) or maybe being lost in the shuffle as part of the larger companies.

I guess I am wondering, in a deal bake-off that you are cornering, are you seeing more or less of a competitive presence out there in the marketplace?

Sohaib Abbasi

The competitive landscape has really not changed. As we have commented in the past quarters, we believe that it is an early-stage market majority of our deals are not contested by our commercial competitor and Q2 was no different. We are evangelizing the value of buying instead of build. But also keep in mind as the leader, as the largest independent leader in data integration, Informatica has advanced frontiers of data integration effectively every year with another category of technology.

So having the broadest product portfolio, we are in a unique position that we are able to actually benefit from the increasing customer demand the customer demand for having the most relevant trustworthy and timely data that they need for their – business revival strategies or last year's business survival strategies. So given that the customer demand is higher than ever, and we have got used to recession in order for us to broaden an extra rate of roadmap.

We find ourselves in a unique position where we obviously in the first half the year we are growth which is 28%.

Mark Murphy – Piper Jaffray

Okay. And then, Sohaib just a second one on the Informatica marketplace I am wondering if there is a certain model, will they resemble the Apple app store or the salesforce.com applications or is there really something different and just as something as part of that what is the financial model or mechanism for monetizing the offerings that we will find out there?

Sohaib Abbasi

The primary purpose of the marketplace is for us to advance Informatica platform. And the model that would be the closest to what would – for comparison purposes would be that of salesforce app exchange.

Unlike in the case of Apple iTunes where they focus on that as a revenue generator, we will make it economically feasible for anyone to promote their products and services on the Informatica marketplace for a nominal fee. So we are using it to encourage innovation as a means to provide our customers with a broader solution.

Mark Murphy – Piper Jaffray

Okay. Great. Hey just one last one for Earl on the – can you talk about Europe, what did you see in terms of the interquarter linearity and then as you look at the pipeline for your – for Q3 any early sense of how it might trend, you are going into the seasonally slow period?

Earl Fry

We had strong performance from all of our geographies, even the current scene notwithstanding. So it is just very good to see. Linearity was very good across all of our regions and particularly in Europe in Q2. And, you know, notwithstanding what you would normally expect to see in terms of seasonality in Europe which we fully expect and are building into our looking at guidance. I would expect that we would continue to execute well there. And slight differences may be between northern and southern Europe as we had in the past. But, again, good performance from EMEA this past quarter.

Mark Murphy – Piper Jaffray

Okay. Thank you very much.

Sohaib Abbasi

Thank you.

Operator

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

Tom Roderick – Stifel Nicolaus

Thanks, good afternoon.

Sohaib Abbasi

Hey, Tom.

Tom Roderick – Stifel Nicolaus

So, it was I guess very impressive list of successes you had there on the seven-figure deals across multiple product lines. And so I guess my question here is what role if any did Informatica 9 play in those product wins as you talked about master data management B2B data exchange and some of these other product lines.

Were any of those, outsold on top of Informatica 9 and then as you look at the second half of this year and into next year and more and more customers begin to adopt the product upgrade cycle here, do you anticipate that we should expect seeing more of those kind of product upsells to your customers set?

Sohaib Abbasi

The Informatica 9 launch was instrumental in the results that we reported. We had over 7000 participants in events. The registrants in the event that we held over 15 different cities. It was a great demand generation program.

It not only resulted in demand for Informatica data quality as well as data integration products, but in fact it was a venue for us to promote the broader platform. In terms of the adoption of PowerCenter 9 and data quality 9 which is a metric that I communicated earlier 13% sharing from a revenue contribution of those products, the best is yet to come.

And I expect that with the delivery of the initial maintenance release that a number of customers before, we should see the adoption rate accelerate and by the end of the year, I would imagine that 40% or so of – would have upgraded to Informatica 9. But to date Informatica 9 has helped promote the entire platform.

Tom Roderick – Stifel Nicolaus

Great. Quick one for Earl. In terms of the guidance for Q3 earl, how should we think about what the right mix of license revenue is within the context of your guidance? This quarter, clearly, outperformance on the license find and then not only relative to historical Q2, Q3 in terms of total percentage of revenue. Should we expect that that percentage of license to, you know, closer to the mid-40s or closer to the low 40s where historically it is in the middle quarters of the year?

Earl Fry

Yeah, I think my expectation is that you we would expect to see typical historical patterns in terms of going from Q2 to Q3 where, you know, revenue is kind of flat to up sequentially in total and license revenue is kind of flattish or flat to maybe even slightly down from Q2 to Q3. But, again that's, I think that’s whether you have the high end or low end of the guidance. You will dial licenses accordingly.

Tom Roderick – Stifel Nicolaus

But, no particular fall off that is really meaningful from this big outperformance in Q2 here?

Earl Fry

No, I would not expect that at all.

Tom Roderick – Stifel Nicolaus

Okay, thank you.

Earl Fry

Sure.

Operator

(Operator instructions) Our next question comes from the line of Michael Turits with Raymond James.

Jonathan Doros – Raymond James

It is Jon Doros for Michael. So look at the midpoint of 2010 guidance roughly, 24% growth. And out of that growth how much do you think is inorganic?

Earl Fry

Like Sohaib mentioned before, I think, we are looking at this and I was going to push back a little harder on the organic versus inorganic because of the type of acquisitions that we are doing which is, which are earlier stage companies that are tightly integrated with the core platform.

So, as I mentioned, about 4% a little less than 5% of our growth, in the second quarter came from products that we acquired in the past 12 months that were so standalone not integrated with any other part of the Informatica platform.

So I think you can think about those kinds of rough numbers in the low single digit percentage as a way to think about in the first year, what kind of deals are not going to be attached to the core data integration or data quality platforms.

Jonathan Doros – Raymond James

And then some of the technology vendors are talking about a pullback in federal spending, do you guys see anything like that or is anything like that based into your 3Q guidance?

Earl Fry

So, Federal – the public sector spend was not one of our top three verticals that contributed less than 10% of our new license orders in Q2. But what we are seeing in a number of areas is, I think as a general statement there's a – public sectors spend is down however there are particular segments where our products play particularly well and where, you know, as Sohaib mentioned in this case of Singapore immigration service, where we would expect to continue to see a good activity and we do could have could pipeline in certain parts of public sectors or anything that is tied to some of their forms, intelligence, homeland security and even so I don't believe that austerity programs will greatly affect the level of public sector contribution from where we have – where we have it today or where we saw that in the second quarter.

Jonathan Doros – Raymond James

Any deals over 5 million?

Earl Fry

Of the 14 transactions over 1 million we had three transactions in the 3 to 5 million range, the rest were under that.

Jonathan Doros – Raymond James

Thanks.

Operator

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

Nathan Schneiderman – Roth Capital

Hi, thanks very much and nice job on the quarter very impressive. In looking at your big and medium-sized deals during the quarter, I was curious how this varied across geographies? Was it pretty similar to the overall mix or was it heavily skewed for example, very skewed towards the US, how would you describe that in general?

Sohaib Abbasi

It was – it would – in terms of the mix and in terms of the principal drivers of the projects, in the US, we saw a number of our products being deployed for projects that were associated with business imperatives dealing with increasing revenues. Building a customer (inaudible) get better insights from opportunities And that of course included many of our products the oldest, what is the new, Europe, it was a mix of operational efficiency type of initiatives what they were looking at ways that they could reduce expenses as well as starting to how they could enhance revenue.

Asia-Pacific, the business has been consistent for a number of quarters. The mix in terms of the deals and by deal size, would be – would reflect what the overall mix was of revenue.

Nathan Schneiderman – Roth Capital

Okay. And just a quick follow-up I was hoping that – if I recall financial services, was not one of your top verticals, this quarter I was just hoping you could speak to that in some more detail and in any major differences you are seeing there, US versus Europe, thanks very much.

Sohaib Abbasi

Financial services was our number 1 vertical and we saw very very strong growth in financial services, both in the US as well as internationally. And I will ask earl to make comments on that bit more – bit more on that.

Earl Fry

Yeah, so it was our largest vertical. It did contribute, as it has in the past couple of quarters over 20% of the business, a really good balance between domestic and international and that international not only would be in EMEA but also in Asia Pac as well.

So, you know, financial services was strong and one of the reasons, not just proportionately strong I guess.

Sohaib Abbasi

Thanks, Nate.

Operator

Our next question comes from the line of Mitesh Dhruv with Banc of America/Merrill Lynch.

Mitesh Dhruv – Banc of America/Merrill Lynch

Thank you so much for taking my question. Just wanted to drill into the cloud business, if you can talk about the ramp in terms of the customers there you have about kind of about 850 customers so what was the ramp like from Q1 and from last year and also if you can mention, Earl what are the contributions of the cloud business to the services line item, more specifically the subscription revenues?

Earl Fry

We had set aggressive internal targets for the business and the first half we have been very pleased with how that businesses have been performing. We have a cloud service that has been used by 850 companies. We added dozens of new logos that are not cloud services to intimate salesforce.com and we are seeing a very very strong interest from a number of cloud vendors that want Informatica to provide – connect to these with their cloud offerings. By being an already pioneer we are in a unique position of both innovating and delivering differentiated technologies to get more customers as well as being in a unique position to sign up new partners. And I would expect there would be significant announcements in the coming quarters.

Sohaib Abbasi

And you know it is – we don't break that out specifically the test, but it is our fastest growing kind of category of revenue. However it is started from a very small base and we should think about that but it is still a very low single digit kind of percentage contributor to total revenue.

Operator

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

Nabil Elsheshai – Pacific Crest Securities

Hey guys, thank you for taking my question. I guess on the go to market with all the new products, I know you guys have been very successful over the last few years as selling bundled with PowerCenter strategy.

Are you increasing your focus on selling more standalone whether it is data quality or MDM outside of PowerCenter and what does that do for your kind of market opportunity and go to market if that is an approach you guys are looking at?

Sohaib Abbasi

Nabil, as you know our approach has been to expand our product offerings in synergistic way and with every technology, acquisition we have identified not only how that provides new growth opportunity for us but also how it complements our core products.

So with every single one of those new product categories, we look for ways that we could combine it with other products. Now, with as broad a portfolio as we now have, our customers are beginning to deploy some of the technologies and then later they are broadening the adoption to include other product areas. And I would expect that that will continue that our customers will try some of the newer technologies. And then include some of the other products as well as existing in part kind of customers will broaden their usage and leverage all of our products.

And the reason for it is because we have a unified strategy and we have remained very focused on expanding our data information platform.

Operator

Our next question comes from the line of Bradley Whitt with Gleacher & Company.

Bradley Whitt – Gleacher & Company

Thanks, guys. First request, I am only going to ask one question. I am just curious as to what kind of success, obviously you're having a lot of success selling the diversified portfolio but outside the core integration platform what kind of success are you having with the channel partners? I know you mentioned the new EMC partnership with lifecycle management the DDM – MDM.

But, I am wondering what kind of success you're having with those types of modules outside the direct sales force?

Sohaib Abbasi

We have enjoyed a very strong partnering system for several quarters. The total partnering revenue was around 59% of the total. In the current quarter it was about the same perhaps a little bit higher.

And part of the reason is with the growing uncertainty as a result of industry consolidation, that is a great opportunity for Informatica. The partnership with EMC is a reflection that as other software companies combined with hardware companies, the other independent leaders in other categories look at ways that they would be better positioned competitively. And that is opening up a lot of opportunities for Informatica to partner with EMC and others. But overall we are very pleased with our partnering position. Never been stronger. Thank you.

Operator

Our next question comes from the line of Brent Williams with Benchmark Capital.

Brent Williams – Benchmark Capital

Hi, just wanted to go into master data management. It seems like you guys have really done a pretty good job there, especially in the face of competitive offerings from the large app vendors. And I understand that the key selling proposition there is neutrality.

Now, with over the last quarter or so has there been any change in the competitive set that you are dealing with in terms of you know the two large application vendors offerings versus the number of times you faced perhaps smaller more focused vendors in master data management type offerings. In other words, are they about the same, the big guys or are they slowing down?

Sohaib Abbasi

Well, we have been in the MDM market for a number of years. We took a three-step approach first by offering a data quality products and then by offering an identical resolution product and then recently by expanding it with an MDM offering (inaudible) that included some of our other core products. So in other words, our field has already been preparing and selling MDM solutions for a number of years.

In terms of the competitive landscape – we have been competing with some of the same vendors in the past, now we have a much broader product portfolio. Now, the unique advantage that we offer is not just the neutrality that you referred to but also having a coherent and unified architecture.

We offer a single data quality offering with a single identity resolution offering, uniquely dealing with multiple languages and in fact that particular technology is embedded by other MDM application vendors. So we have a differentiated technology and with a coherent unified architecture and we want – one against other major MDM vendors in retail and pharma in financial services.

We were very pleased with the performance of the MDM products this last quarter. Thank you.

Operator

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

David Kaczorowski – Wedbush Morgan Securities

Hi, this is David Kaczorowski standing in for Derrick. Can you go into little bit more the EMC partnership and what products are being developed there, when we can expect to see that revenue hit your revenue stream?

Sohaib Abbasi

As part of that agreement, EMC did make a financial commitment when we assigned the agreement. They, we are working with them training their sales organization of several thousand sales reps to sell our ILM products.

The entire sales organization will be incented to sell Informatica’s ILM products and they will be reselling it starting immediately. As part of the agreement, they also are planning to embed the MDM products with some of their contact management products. And I would expect that that would also contribute but it would likely to contribute in a few quarters.

I expect that we would have a very strong partnership around ILM immediately and over the coming quarters with our MDM products. Thank you.

Operator

Our next question comes from the line of Frank Sparacino with First Analysis Corporation.

Frank Sparacino – First Analysis Corporation

Hi, guys. If you look at products cycles – historically they haven’t been material from a license revenue perspective and the upgrade cycle tends to be very elongated given the nature of the products and so I am curious with respect to 9, what is different and when you look at the percentages when you look throughout 13% and 14% how does that compare with the 8 products for example.

Sohaib Abbasi

The way to look at Informatica 9 and we talked about that earlier from a revenue contribution perspective we are internally measuring it in terms of both the upgrade in PowerCenter and data quality which is the measure that we have used in some of the prior releases.

And I expect now that we have gotten the maintenance release we will very soon catch up with the rate that we had with some of the earlier releases. But what is more significant now, than ever before is the fact that we have a very broad product portfolio with six new categories beyond data integration and data quality. Whereas what we delivered first in version 8 the PowerCenter products were the only ones that would generate the revenue and the best way to look at revenue potential was with that.

With Informatica 9, we are able to actually promote the entire platform and that is the reason why we report 44% license revenue growth in Q2 because we happen to not only have very competitive data integration, data quality products but also have six other product categories.

And I would expect that both the breadth of our product offerings as well as the new versions of data integration and quality will contribute in the second half and in the case of data integration, data quality increasingly so in the second half. Thank you.

Operator

Our next question comes from the line of Patrick Walravens with JMP Securities.

Patrick Walravens – JMP Securities

Thank you. So Earl, it looks like if I'm doing my math right we got a 140 basis points of year-over-year operating margin expansion in this quarter, what should we expect going forward?

Earl Fry

That is the one line quite frankly, Pat, that is going to be a tougher compare in the back half if you look at the absolute percentages. So, that was quite frankly Q2 was a little richer than I think we were originally planning to. So, obviously we had a nice uptick, nice step function uptick in revenue as we have said before as we get more confident in showing that accelerated revenue growth, we believe there are a number of things that we should be doing and can very profitably invest in both from a development perspective as well as strengthening and building out distribution capacity. So, I expect that you know we are well on our way to making good process on the upper margin line this year in a year that I thought would be particularly tough. But, I would I would temper by expectations on the out margin percentage growth relative you know kind of to what we did in Q2. We are still going to make progress, but recognize that the expectation for significantly faster revenue growth we see opportunities to invest behind that. Thanks, Pat.

Operator

Our last question comes from Brad Sills with Barclays Capital.

Brad Sills – Barclays Capital

Hey, guys. Thanks for taking my question just a quick one on the option, it sounds like data quality, master data management, ILM all these things are doing well. Is there any one option that is kind of surprised you to the upside whether it is Informatica 9 related or just stand alone, seeing stronger demand for the solution set?

Sohaib Abbasi

We are very pleased that every single one of our product lines the seven product lines contributed to at least $1 million dollar deal. And that is a very important in that as a customers adopt Informatica as a standard in multiple categories we are becoming much more mission critical than ever. The one product category that I did single out earlier, was MDM and we are very pleased with MDM and the related data quality products, the customer adoption is going very well and there is a great deal of interest and clarity and we are very optimistic about the contribution from the entire Informatica 9 platform in the second half of this year and beyond. Thank you.

Operator

There are no further questions at this time. Mr. Abbasi, do you have any closing remarks?

Sohaib Abbasi

For the remainder of 2010 and beyond our mission remains the same, advanced Informatica is the cheer leader in one of the highest growth enterprise software markets data integration. We are well prepared to pursue this next phase of our growth roadmap. Thank you.

Operator

This does conclude today's conference call you may now disconnect. Thank you for your participation.

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Source: Informatica Corporation Q2 2010 Earnings Call Transcript
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