Informatica Q3 2007 Earnings Call Transcript

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 |  About: Informatica Corporation (INFA)
by: SA Transcripts

Operator

Good day, ladies and gentlemen,and welcome to the Third Quarter 2007 Informatica Earnings Conference Call.  My name is Akia, and I will be your operatorfor today.  At this time, allparticipants are in a listen-only mode.  Wewill conduct a question-and-answer session toward the end of the conference.  If at any time during the call you requireassistance, please press "*" followed by "0" and thenoperator will be happy to assist you.

As a reminder, this call is beingrecorded for replay purposes.

I would now like to turn thepresentation over to your host for today's call, Ms. Stephanie Wakefield,Senior Director of Investor Relations.  Pleaseproceed ma'am.

Stephanie Wakefield - Senior Director of Investor Relations

Good afternoon and thank you forjoining us today.  I'm here with SohaibAbbasi, CEO and Earl Fry, CFO, of Informatica to discuss our Q3 2007 resultsand to talk about our outlook for the business.  Some of the comments we will make today areforward-looking statements, including statements concerning our projectedfinancial results for future periods, our opportunity for growth in the dataintegration market, the planned use of our products by some customers for morethan traditional data warehousing projects, the strength of our customer demandfor our products, efforts being conducted with strategic partners, and ourexpectations regarding future industry trends.

All forward-looking statementsare based upon current expectations and beliefs. However, actual results coulddiffer materially.  There are manyreasons why actual results may differ from our current expectations.  These forward-looking statements should not berelied upon as representing our views as of any subsequent date, andInformatica undertakes no obligation to update forward-looking statements toreflect events or circumstances after the date that they are made.

Please refer to our recent SECfilings, including the 2006 Form 10-K and the 2007 second quarter 10-Q, for adetailed description of the risk factors that may affect our results.  Copies of these documents may be obtained fromthe SEC or by contacting our Investor Relations Department.

During this afternoon'sdiscussion, we will be using GAAP and non-GAAP numbers.  Our GAAP results and the reconciliation of theGAAP results to the non-GAAP results are contained in the earnings pressrelease and in the Supplemental Metrics Section of our Informatica InvestorRelations website.

Before I hand it off to Sohaib,I'd like to remind you all that this call is being webcast and will also beavailable for replay at www.informatica.com/investor. I would also like to askyou when we get to the Q&A period to please confine yourself to just onequestion.  We will allow additionalquestions if time permits.  Thanks.  At this point, I'll turn it over to Sohaib.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thank you, Stephanie.  I am very pleased to report that in Q3, totalrevenue grew by 22% year over year to an all-time record of $96 million.  License revenue grew by 22% year over year to$41 million.  With non-GAAP operating marginof 18%, we delivered the most profitable third quarter ever.

I would like to recognize andcommend the Informatica team for attaining these record results.

We continue to benefit fromstrong customer demand in all major geographic regions.  Continual product innovations have notablyadvanced our competitive position and further expanded our opportunities beyondour traditional markets.  And ourpartnerships continue to contribute to our results.

In Q3, we achieved the bestnon-Q4 quarterly results in each major geographic region.  Verily, our team's operational discipline inexecuting our strategy to expand beyond our primary geographic markets isdriving record results.

In the Americas,we continue to benefit from strong demand in all the key industry segments,including financial services and public sector.  For example, Banc of America selectedInformatica to consolidate eight payment systems into a single modern payment hub,being build to support the new ISO 20022-UNIFI Standard. Also in Americas,as part of its post-merger integration with Burlington Resources,Conoco-Phillips chose Informatica to migrate data to an SAP application.

In Europe,we are pleased with record results from the ongoing improvements in operationalmanagement.  Our marketing leadgeneration campaigns initiated earlier this year are growing the pipeline ofworldwide sales opportunities and particularly in Europe.

Campaigns to promote use ofInformatica beyond data warehousing contributed to Q3 results.  As an example, Dutch Ministry of Defense orMOD, selected Informatica for two key projects, data migration to a new SAPimplementation and the creation of a new Data Quality Competency Center.  As one of MOD's key IT initiatives, thepurpose of this newly established center is to help improve the quality of alldata within the Ministry.

Also in Europe,the financial services leader, Credit Suisse, selected Informatica and plans toestablish a new Integration Competency Center for most of theirenterprise-wide data integration projects.

In Asia-Pacific, we benefitedfrom the combination of strong customer demand, competitive products, andimproved execution to attain all-time record quarterly results. A leadingJapanese regional bank replaced IBM Essential with Informatica for theirregulatory compliance IT initiative, as our products demonstrated substantiallybetter performance.

And in the Philippines,Globe Telecom, a leading telecommunications company, chose Informatica to builda data warehouse that will deliver timely information for improved decision making. With year-to-date success at 43 newcustomers in Asia-Pacific, we are better positioned than ever for sustainedgrowth in this region.

As these regional highlightsunderscore, our success beyond our primary geographic regions is contributingsignificantly to our record results.  Asin prior quarters, we continue to gain from our strategy to grow beyond thetraditional data warehousing market and pursue the larger data integrationmarket.

In fact, in Q3, 43% of thelicensed transactions over $100,000 were with customers that plan to use Informaticafor projects beyond data warehousing.  Inaddition, year-to-date, 65% of our professional services fees were fromconsulting engagements beyond traditional data warehousing projects.

The latest product releases inboth the data integration and data quality categories are driving our licensegrowth.  In the data integrationcategory, almost all Q3 license transactions over $300,000 included the newPowerCenter 8.1 release.  Equallyimportant, 70% of these customers licensed new incrementally priced PowerCenter8.1 options.

Customers such as Credit Suisse,the U.S. Department of Homeland Security, and Globe Telecom selected theenterprise grid option for cost-effective scalability.  Customers including Rewards Network Servicesand Merck licensed add-on options for real-time data integration.

With distinctly innovativeproduct capabilities for better integrating unstructured data, we are nowpursuing new opportunities to enable business-to-business data exchange betweentrading partners.

Banc of America selectedInformatica over several alternatives, including IBM; to utilize our newcomplex data exchange for their straight-through processing of payments,including exchanging NACHA-based B2B messages.

Paramount Pictures licensedInformatica CDE to orchestrate B2B data exchange related to orders with theirtrading partners.  And our success in thedata quality market continues.

In Q3, 60% of the transaction is over$1 million and a third of the transactions over $300,000, included data qualityproducts.  Therefore, leading enterpriseschose Informatica Data Quality including Credit Suisse, the PennsylvaniaDepartment of Transportation, and Merck.

Last quarter, we further expandedour partner ecosystem.  With our proventrack record of platform neutrality, our partners regard Informatica as themost trusted provider of data integration and data quality software.

Last month, we announced a newOEM agreement with Cognos.  Cognos willnow sell Informatica Data Quality and Informatica Data Explorer as an integralpart of its performance management applications portfolio.  Our strategic partnership with Cognos willinclude go-to-market programs for our field organizations to jointly offer acomplete best-in-class offering including our leading data integrationproducts.

Finally, working together withour partners, we won several key customer decisions in Q3.  At Natexis in France,we partnered with Accenture and Unilog to win over IBM.  At the Dutch Ministry of Defense, we partneredwith Atos Origin to win over IBM.  And atSafeco, ConocoPhillips, and the BG Group in the US,we partnered with Accenture.

To sum up, we are very pleasedwith our record third quarter results, attaining our second consecutive quarterof all-time record revenues.  We continueto benefit appreciably from the combination of our team's remarkable operationaldiscipline and sustain customer demand in all the major geographic regions.  Continual product innovations have notablyadvanced our competitive position, and further expanded our opportunitiesbeyond our traditional market.  And ourpartnerships continue to contribute to our results.

Now, I'll turn it over to Earl togive you more details on our financial results.

Earl Fry - Executive Vice President and Chief Financial Officer

Thanks, Sohaib.  To echo Sohaib's sentiments, I feel very goodabout our financial performance in Q3.  AsSohaib mentioned, total revenues were an all-time record at $96 million, up 22%on a year-over-year basis, up 2% sequentially, and above our guidance range of$92 to $94 million.

License revenues were a thirdquarter record at $41 million, up 22% year-over-year and down just 2%seasonally.

Service revenues were anotherall-time record at $55 million, up 21% year-over-year, and up 5% sequentially.  Of the total service revenues, maintenancerevenues were a record $38.3 million, up 18% year-over-year and up 4%sequentially, while consulting and education revenues were $16.7 million, up29% year-over-year and up 8% sequentially.  License revenues were 43% of total revenue.

Our deal metrics were strongacross the board.  Existing customerscontributed 83% of our license orders value, compared to 72% in the secondquarter of 2007 and 79% a year ago.  Wedid business with 194 existing customers, and more importantly, added 53 newcustomers in Q3.  We booked fivetransactions over $1 million compared to four a year ago, and we closed a thirdquarter record, 44 deals over $300,000, up from 27 in the year-ago, thirdquarter.

Transaction sizes wereparticularly strong, with our average transaction size for orders over $100,000coming in at $321,000, and average transaction size for orders over $50,000coming in at $245,000 in Q3.

75% of our license orders camefrom our direct reps, and 25% of our orders were from the indirect channels,compared to 74% direct and 26% indirect a year ago.  An additional 18% of our orders in Q3 wereinfluenced by partners or resellers.

The overall total of indirect andinfluenced orders was 43% compared to 47% a year ago.

License revenue from our directbusiness was 74% in Q3, with 26% of our license revenue coming from theindirect channel.

Looking at the geographic mix,for the second quarter in a row, we had strong contribution from ourinternational teams, as our recent changes in investments are beginning to pay-off.

International orders outside of North America as a percentage of total license bookings were a thirdquarter record 38%, up from 36% a year ago and seasonally down from 42% in thesecond quarter.

International revenue outside of North America was an all-time record 36% of total revenue in Q3, up from32% a year ago.  Year over year, thirdquarter total revenues grew 15% in North America and 36%internationally.

The vertical sectors thatcontributed most to our Q3 orders were financial services, public sector whichincludes federal agencies, as well as, international and state and localgovernmental entities and high (inaudible).

Non-GAAP gross profit, whichexcludes $726,000 in amortization of acquired technology and $385,000 ofshare-based comp, came in at $78.4 million or 81.7% in Q3, slightly better thanthe high end of our target range of 79% to 81% of total revenue.

License margins were 98% in Q3,consistent with Q2, and up from 97% a year ago.  Service margins were 69% in Q3, up from 68%last quarter and down slightly from 70% a year ago.

Excluding the $4.7 million ofcharges for share-based payments, facilities restructuring, and amortization ofacquired technology and intangibles, Q3 non-GAAP operating expenses were $61.3million, down sequentially by about $0.5 million due to seasonally lowermarketing expenditures.  Q3 non-GAAPoperating expenses as a percentage of revenue improved sequentially by 168basis points and improved year over year by 138 basis points.

As a reminder, for a detailed,line-by-line reconciliation of GAAP to non-GAAP results, please see the SupplementalMetrics section of our Investor Relations website.

Non-GAAP operating income was anall-time record, $17.2 million.  As apercentage of revenue, non-GAAP operating income was 17.9%, which is up over160 basis points year over year and reflects improving operating leverage inour financial model.  We generated about$3.8 million of net interest and other income in the third quarter.  And during the third quarter, we actually hada small FX translation gain which contracted to prior quarters, where wetypically experienced FX translation losses.

We recorded a tax provision of $709,000in the third quarter, which resulted in a GAAP tax rate of 5%.  This lower tax provision was caused by twonon-recurring events.  A reversal evaluationallowances, which was then partially offset by an increase in buy-in paymentsfor our overseas entities.  The neteffect of these two items ended up benefiting our EPS in Q3 by little over$0.01 per share.  We expect both our GAAPand non-GAAP tax rates to be roughly 15% to 18% for the remainder of 2007.

We delivered all-time record GAAPnet income of $14.4 million and achieved GAAP fully diluted EPS of $0.15 in thethird quarter.

Our non-GAAP earnings, whichexclude share-based payments, facilities, restructuring charges, and theamortization of acquired technology and intangibles, came in $0.02 above thehigh end of our range, and we generated non-GAAP diluted EPS of $0.19.  This is up from the $0.16 in the year-agothird quarter.

On a non-GAAP basis, we ended thequarter with just under 104 million shares outstanding on a fully diluted ifconverted basis.  And looking forward, weexpect shares outstanding to increase only modestly for the next few quarters,and we expect to generate approximately $3 million of net interest and otherincome per quarter as interest rates have already started to decline.

Total headcount was 1,326 at theend of September, an increase of 60 from the end of Q2, with sales andmarketing headcount ending September at 463, up 17 from the end of Q2. Overall,we expect to add another 50 to 75 people by the end of 2007, as we focus onramping up 2008 sales capacity.

Overall cash and investmentbalances increased by $6.8 million during the third quarter, and we ended thequarter with over $447 million of cash and investments.  We generated $8.8 million in cash fromoperations in the third quarter, and during the quarter, we spent a little lessthan $1 million of property and equipment, generated $7.1 million in cash andstock option exercises, and used $14.6 million to repurchase 1,050,000 sharesof our stock.

DSOs were 54 days in Q3, upslightly from 53 days reported in Q2 and better than the 56 days reported ayear ago, and better than our target DSO range of 55 to 65 days.

Total deferred revenue increasedsequentially by $1.4 million to $98.3 million and is comprised of $91 millionin current deferreds and $7.3 million in long-term deferreds.  The license component of deferred revenueincreased by over $3 million during the third quarter.

Based on our Q3 orders, ourfuture revenues disclosure, which includes deferred revenue balances as well aslicense orders not yet taken to revenue, as of September 30th will be $115.7million.

Now, while this is down $1million sequentially, it is up by $22.4 million or 24% on a year-over-yearbasis.  And, as I just mentioned, thelicense component of deferred revenues is up by $3 million from Q2 to Q3.

Turning now to guidance.  For the full year 2007, we are raising ourtargets for both revenue and non-GAAP EPS.  We are now targeting full-year 2007 revenue of$383 to $387 million, and targeting non-GAAP earnings in the range of $0.71 to$0.73 per share.  This means that for Q4,we are setting our revenue target between $106 million and $110 million andsetting our non-GAAP EPS target between $0.21 and $0.23 per share.  As we have previously mentioned, as a resultof our increasing profitability and full utilization of our historical netoperating losses, our income tax rate will take the one-time step functionincrease in 2008.

In 2008, we continue to expect anincrease in our GAAP tax rate to approximately 30%.  From a non-GAAP tax rate perspective due toour increasing profitability, we now have to fully tax effect the non-GAAPamortization of intangibles and facilities restructuring charge add-backs whichhas the effect of reducing non-GAAP EPS by about $0.01 per share per quarter,or $0.04 for the year.

And another way for 2008, we nowexpect our non-GAAP tax rate to increase to approximately 29%.  With taxes in mind and set aside now, we aretargeting total revenue for 2008 to be in the $435 to $450 million range andtargeting non-GAAP earnings per share in the range of $0.68 to $0.75 despitethe $0.04 per share impact of the increase in the non-GAAP tax rate.  Our goal is to increase non-GAAP operatingincome to 20% of revenue on a sustained basis by the second half of 2008.

Please remember our non-GAAP EPStargets do not include the after-tax effects of amortization of intangibles ofabout $1.5 per share per quarter, facilities restructuring charges of roughly $1.5per share per quarter, and stock option expense of approximately $0.03 pershare per quarter.

So, in summary, Q3 was anothervery solid quarter, and our improving performance across all geographies setsus up very well for a seasonally strong Q4.

With that, I'll turn it over toSohaib for a few additional remarks.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thank you, Earl.  Last quarter's record results are clearevidence of the strong global customer demand and of the operational leadershipin all the major geographic regions.  Oursustained results are a good indicator of our customers' success in theiradoption and use of our market leading products.

This month we plan to further advanceour technology leadership with yet another innovative product release.  PowerCenter 8.5 will feature new capabilitiesto enable the real-time integration competency center, by establishingcentralized integration competency centers, also known as ICC, our customersbenefit from best practices and economies of scale.  Simply put, ICCs promise to deliver more forless.  To enable the real-time ICC,PowerCenter 8.5 offers real-time change data capture for high performance, ICC-graderole-based security, and an enterprise integration catalog to facilitate collaborationbetween IT and business users.  Equallyimportant, our recent release of Informatica Data Quality 8.5 offers severalinnovations for business users, including unique capability for proactivelyimproving data quality by validating data at the point of entry.

Last month, we launched thesecond Informatica On-Demand, Software-as-a-Service data quality assessment forsalesforce.com.  Customers can now simplyassess the quality of their data maintained by salesforce.com using only a webbrowser, making the simple, affordable online service available to anyorganization is critical, because data quality is cited by customers as one ofthe top barriers to success of their IT projects.

In addition, we announced asubscription-priced Informatica Integration Pack, a comprehensive suite tointegrate our premise data managed by salesforce.com with on-premise data.  We continue to advance our cost enterprise on-demandproduct roadmap to help our customers gain more business value from all theirdata, including off-premise data managed by software service vendors.

Today Informatica is wellpositioned.  Sustained customer demand,effective operational leadership in all major geographic regions, and our mostcompetitive product set with even more product releases later this month, weare poised to maintain the momentum and increase operating profits in thequarters to come.

So with that, I will open it upfor your questions.  As Stephanie saidearlier, we would appreciate it if you could confine yourselves to one- ortwo-part questions.  Thank you.  Operator, may we have the first question?

Question-and-Answer Session

Operator

Sure.  Your first question comes from the line ofThomas Ernst from Deutsche Bank.  Pleaseproceed.

Thomas Ernst - Deutsche Bank

Good afternoon, gentlemen.  Thankyou.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thanks, Tom.

Thomas Ernst - Deutsche Bank

Sohaib, I wanted to ask you aboutSAP partnership.  Last quarter you toldus about a significant extension of the partnership, and I guess a couple ofpoints to the question here, do you anticipate that this partnership willcontinue through the proposed acquisition of Business Objects, even though theyhave some overlapping capabilities through their acquisition of Acta, the previousacquisition?  And secondly, maybe though theway behind it, you made the points here on this call, I think, about theextensive use of Data Quality in the Informatica product, so is that somethingthat's part of the SAP OEM deal?  Whymight it be secure or why might you suspect that there's some risk there?

Sohaib Abbasi - Chairman and Chief Executive Officer

We regard our partnership withSAP as a very healthy strategic partnership.  I do not expect our partnership to change inthe near term.  We have partnered withSAP for a long period of time.  A numberof our key transactions in the recent quarter were for customers that are migratingover to SAP application, and those customers value our neutrality.  In much the same way as we have maintained ourpartnership with Oracle despite the fact that there may be some overlap, theyvalue our neutrality as does SAP, particularly in the case of migration.

Now, more recently, we expandedour partnership with SAP, where they had an extensive evaluation of all thedata integration technologies that were available on the market.  That took several quarters, and theirconclusion was that Informatica was the technology to embed as part of their MDMoffering, as part of their performance management application.  I expect that we will continue to have astrong partnership with SAP, as our joint customers value our neutrality.

Data Quality was not part of theOEM agreement with SAP.  However, we havea number of joint customers that are using Informatica Data Quality to ensurethe quality of data that is stored not just in SAP, but in fact in all of thedifferent applications within the customers' application portfolio.  Thank you very much, Tom.

Thomas Ernst - Deutsche Bank

Thank you.  One quickfollow-up, if you permit it.  Is there acontractual obligation on either side as part of the OEM in terms of time, atime frame?

Sohaib Abbasi - Chairman and Chief Executive Officer

We have an agreement with them, amulti-year agreement with them in terms of embedding our product capability.  And we would expect that, that will continueon for several quarters for a number of years to come.

Thomas Ernst - Deutsche Bank

Thank you again.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thank you.

Operator

And your next question comes fromthe line of Mark Murphy.  Please proceed.

Mark Murphy - Broadpoint Capital

Thank you.  I am curious what did you experience in the financialservices vertical, and were there any oscillations in terms of close rates orpipeline development or anything you can glean as far as signals movingforward?

Sohaib Abbasi - Chairman and Chief Executive Officer

We had a very strong quarter in financialservices, and we've had strong quarters in financial services for some time.  In the U.S.,it was strong, and internationally it was even stronger.  What we have found is that not only our customersin financial services using our products for the traditional data warehousingprojects, but increasingly, they're using Informatica technology beyond datawarehousing.  I cited one, the Banc ofAmerica project in which they are using Informatica for processing a B2B dataexchange NACHA-based data exchange, and that's an example where we're helpingour financial services companies apply Informatica in new and more innovativeways.  In this particular instance, theyare replacing multiple payment systems with a new payment hub.  They're using Informatica for it.  Credit Suisse, as I also singled out, have standardizedInformatica as part of their newly -- soon-to-be-established integrationcompetency centers.

I'll turn to Earl for a littlemore for his perspective on financial services.

Earl Fry - Executive Vice President and Chief Financial Officer

As far as market financialservices continues to be our largest vertical.  We had very consistent contribution from financialservice on an overall basis.  Thisquarter, I think it was, three of our top 10 transactions came out of financialservices.  But it's interesting, over thelast several quarters, and if you even look at year over year, there has been aslight shift in kind of where we're seeing some of that strength in financialservices.  While we're kind of up yearover year about 16% in financial services year-to-date, it's interesting thatthe U.S. fees is up only marginally, that's kind of low single-digitpercentages.

The international fees of financialservices is up over 30% for us year-over-year.  And I think that was kind of reflected in, asI mentioned, three of our top 10 deals were with financial services, which isreasonably typical, two of those three were international, only one wasdomestic.

So, I think to the degree thatyou've seen some questions about subprime markets and that having an impact,particularly on U.S.-based banks, I would guess that the margin we're probablyseeing have always been reflected in our results over the last couple ofquarters.  But because of thediversification and the fact that we're seeing good strength globally, theoverall contribution from FinServe continues to be very strong.

Mark Murphy - Broadpoint Capital

Thanks a lot, Earl.  That's very helpful.  And just a quick follow up, I guess for eitherone of you that feels like taking this.  Justat a high level, what are your thoughts as you look around and see this massivepace of consolidation that's occurring before our eyes in the softwareindustry?  I would imagine every softwarecompany has had discussions about this.  Howdo you respond to it?  And what do youthink it means through the opportunity as an independent and agnostic player?

Sohaib Abbasi - Chairman and Chief Executive Officer

There are two trends that we'veobserved.  One is, clearly theconsolidation is occurring in the more mature segments within informationtechnology.  And at the same time, we'realso seeing a new segment emerge where there is considerable growth, softwareservice and open source being two of them.

The consolidation certainly hascreated a lot of uncertainty for our partners as well as our customers, and ourneutrality offers our customers with a way to better cope with the uncertainty. Our neutrality ensures that we wouldassist our customers to move their data from any system to any other system,and that commands a significant premium in the eyes of our customers, as wellas our partners.  All this uncertaintyhas certainly opened up a lot of opportunities for us to partner.  And interestingly enough, our partnership,partner ecosystem, is the strongest ever.  We enjoy strong partnerships with SAP andOracle and we've also announced new partnership with Cognos, our partnershipwith the system integrators are stronger than ever.  It has created new opportunities for us.

Mark Murphy - Broadpoint Capital

Thank you very much.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thank you, Mark.

Operator

Ladies and gentlemen, as areminder, please press "* 1" for questions and I would like to ask ifyou can limit your questions to one.  Andyour next question comes from the line of Vik Churamani of Lehman Brothers.  Please proceed.

Vik Churamani - Lehman Brothers

Hi, Sohaib and Earl.  Congratulations on a good quarter.  Just a couple of questions.  On '08 or could you perhaps you give us somecolor on what sort of license growth should be expected?  Whether it's low double digits, or is in themid-teens? And then also, in terms of tax rate, the tax rate has been kind ofbouncing around for '08 in terms of the expectations.  Is 29% pretty much ironclad or is there any biggerroom there in terms of for someone foreseeing the ramps that cause you to kindof change that?  And also, just on thetax rate, what should we expect for '09?  Should we look at 29% or should that be sortof a different number?  And then I haveone follow up.

Sohaib Abbasi - Chairman and Chief Executive Officer

Vik, thank you.  Let me comment a little bit and I'll turn itto Earl to provide you with a little more color on it.  We are very optimistic about our productbusiness.  We reported 22% year-over-yeargrowth in our product license revenue.  Thereare two drivers for that, one is our customers that are using us in more waysthan ever before.  We have talked aboutbroader data integration, and in this quarter, we actually illustrated a fewexamples that go far beyond that in terms of B2B data exchange.  Our customers are using us much more broadlythan ever before.  It was a recordquarter, 43% of our customers using Informatica for more than data warehousing. I expect that trend will continue.

We also have about 70% of our installedbase that is upgraded to version 8 of our products, and that has opened up alot of new opportunities for us to sell them new add‑on options.  As we've commented in the past, the list priceof all the products and the options with version 8 is about 2.5 times that wasavailable when we had our last major release.  With the new version that's coming out, 8.5,we are very optimistic that there will be additional opportunities for us tofuel the product license revenue.

And I'll turn it to Earl to commenton the tax.

Earl Fry - Executive Vice President and Chief Financial Officer

So, on the tax rate, Vik.  The tax rate, I think we've always talkedabout, and one thing that I had reasonable visibility and it's a 30% GAAP taxrate. So, we've talked about that, that's still the same, that's still howwe're viewing things.  We view that as aone-time step function as a result of using our NOLs and valuing our deferredtax assets this year.  And that, I think,is a one-time step.  So, as I look out to'09, even though I think my tax people will cringe looking out that far, Idon't see the tax rate moving dramatically past the step function we take in'08.

Relative to the non-GAAP tax rateat 29%, that is purely a function of having to tax effect the two add-backs foramortization of intangibles and the restructuring charges.  So, and we lose almost $0.05 per share perquarter for each of, by tax affecting each of those two line items.  So, that really is the only change in howwe're viewing taxes going forward, and that change actually happens thisquarter, if you want to kind of take a look at our Q3 GAAP to non-GAAPreconciliation and compare that to what we had in Q2, you'll notice that thereis a $0.01 reduction, even in our Q3 numbers, because we've had to apply thatto the amortization of intangibles and restructuring in Q3.  So that's already hurt, in a sense, ourresults in Q3.

Vik Churamani - Lehman Brothers

So, is it reasonable to say if welook at '09, maybe non-GAAP tax ratio, probably were back to maybe like 25%?  Or should it be more like 29-ish or so?

Earl Fry - Executive Vice President and Chief Financial Officer

I think you've got enoughinformation here to work it, Vik, where the add-backs should be exactly as I laidit out in the script, which is you should expect to see roughly $0.005 pershare per quarter benefit for intangibles and $0.005 per share per quarterbenefit for restructuring, and plus or minus, and about a $0.03 per share perquarter benefit GAAP to non-GAAP on stock-based comp.

Vik Churamani

Good.  Just one last follow up, if I may.  Just on PowerCenter 8 options, Earl or Sohaib. What percentage of license revenue was atthis quarter?  And then just lastly, onQ4 as you look at your guidance, sequentially, seasonally, it's a little bitmore conservative than what you've done in the past.  Is it fair to say that there's some assumptionbaked in there for some uncertainty around the financial services vertical, orif maybe perhaps you can handicap that?  Andlastly, congratulations on a very good quarter.

Earl Fry - Executive Vice President and Chief Financial Officer

So, Vik, just a reminder thatwhen we just talked about the tax rate, we're feeling a $0.01 drag or changebecause we're now more profitable, so that is baked into our Q4 guidance aswell.  So, I think that's probably thebiggest delta for Q4.  Then I'll letSohaib want to have any comment on the PowerCenter 8.

Sohaib Abbasi - Chairman and Chief Executive Officer

We are very pleased with theuptake of our PowerCenter 8 options.  AsI commented on, 70% of the transactions over $300,000 included add-on options.We do not break out specific revenue numbers associated with individualoptions.  However, the top three optionswere enterprise grid for cost-effective scalability, partitioning, which isalso for high performance, and real-time data integration.  Those were the two most popular options, butwe also had very good uptake of all the other options.

Vik Churamani - Lehman Brothers

Great.  Thank you very much.

Operator

And your next question comes fromthe line of Tom Roderick of Thomas Weisel.  Please proceed.

Tom Roderick - Thomas Weisel

Hi, good afternoon.  Thank you.  Sohaib, you talked certainly a lot about someof the new Software-as-a Service initiatives that you've taken with some of theconnectors.  Can you just go into alittle bit of detail around some of the more successful deployments or maybe acouple of the larger deployments you've seen on that side of your business?

Sohaib Abbasi - Chairman and Chief Executive Officer

We are very pleased with theuptake of PowerCenter, as well as our PowerCenter Connector for salesforce.comby some of our key customers.  We sharesome key customers with salesforce.com.  Theyare using Informatica for mostly enterprise data integration with theavailability of our connector.  They'renot expanding their use of Informatica technology for doing cross-enterprise dataintegration as well.  We've commented inthe past about some of the customers that we shared are networking leader, usesInformatica in order to integrate not just the on-premise data, but also thedata stored in salesforce.com.

The usage cases that are the mostcommon were customers using salesforce.com for their sales automation,integrate that data with their order management application in order to havevisibility from, all the way from marketing campaign to cash, to measure theeffectiveness of it, but there are a lot of other examples of it.  We also, in addition to delivering all theextensions to PowerCenter with the connector, we've also introduced aSoftware-as-a-Service, in fact; we now have two Software-as-a-Service offerings. We have over 100 different customersthat have signed up to try out the service, and we're very optimistic on theprospects of both the Software-as-a-Service and the positive impact that it hason our overall core business.  Thank you,Tom.

Operator

And your next question comes fromthe line of Nabil Elsheshai.  Pleaseproceed.

Nabil Elsheshai - Pacific Crest Securities

Hey guys!  Just to follow up on that real quick.  You've talked about in the past the percent ofyour installed base has gone to 8.  Doyou have a number on that that you think that have upgraded now?

Sohaib Abbasi - Chairman and Chief Executive Officer

70% of our installed base hasupgraded to PowerCenter 8.

Nabil Elsheshai - Pacific Crest Securities

Okay, great.

Sohaib Abbasi - Chairman and Chief Executive Officer

Now, that 70% includes customersthat are deploying PowerCenter 8 either in production or in development.  So the vast majority of our customers are nowutilizing PowerCenter 8.

Nabil Elsheshai - Pacific Crest Securities

Okay.  And then on the competitive front, with regardto the Business Objects acquisition, how much did you guys really compete withtheir data integrator, and what do you think that impact will have from acompetitive perspective now that they're being acquired?  And then, following up to that, is there anyimpact on the lawsuit that you have with Business Objects, given theacquisition?

Sohaib Abbasi - Chairman and Chief Executive Officer

We did not compete that oftenagainst Business Objects.  Now, let mejust remind you that the majority of the deals continue to be -- and cantestify any commercial competitor, and that's a sign of an early-stage market.  In the more recent quarters, we wouldencounter Business Objects in less than 5% of the opportunities, and we wouldwin the majority of them, the majority of the deals against them.  The situations where we have seen BusinessObjects are ones where the customers have standardized on Business Intelligencefor the BI stack, and it is typically for departmental level deployments.  We win against them in any enterprise-widedeployment.

In terms of the litigation, asyou know, the jury awarded us $25 million and found that Business Objects hadwillfully infringed on the patents. As a result of the AT&T and Microsoft,the award has been reduced.  However, thejudge has issued a permanent injunction against sales of the product thatinfringes on our feature, and that is a critical feature for anyenterprise-wide deployment.  The featureaffects the reusability of the objects within the data integration project.  And without that, it's actually only suitablefor very limited, small-scale projects.  We,just to summarize, we do not encounter Business Objects that frequently, andwhen we do, we win the vast majority of those deals.  Thanks, Nabil.

Operator

And your next question comes fromthe line of Brendan McCabe of CIBC World Markets.  Please proceed.

Brendan McCabe - CIBC World Markets

How are you doing, guys?  It looks like repurchase has picked up alittle bit this quarter, and Earl you spoke a little bit about the declininginterest rate environment, and there's a lot of cash on the balance sheet.  I was wondering if you could kind of gothrough and prioritize the usage of cash?

Earl Fry - Executive Vice President and Chief Financial Officer

I think usage of cash continuesto be opportunistic in terms of over the last couple of years, we have donesome smaller acquisitions.  As we'vestated before that we do have back in April the board authorized a $50 millionshare buyback.  You're right.  We were more aggressive with that repurchaseprogram, particularly in the month of August, as you might guess.  So, I think we'll continue to utilize therepurchase program.  Some of it isrelated to where the share price is, but some of it, quite frankly, is just tomake sure that we can mitigate any effects from any share dilution.  So, I don't think there's a hard and fast setof priorities, quite frankly, for the cash, but those are some of the main, youhighlight two of the main uses.

Operator

And your next question comes fromthe line of Frank Sparacino of First Analysis.  Please proceed.

Frank Sparacino - First Analysis

Hi!  Just one question for Sohaib.  Sohaib, on the Banc of America deal, I wouldassume item field was a key component there.  I'm also just wondering when you look at thatmarketplace, the B2B and, I guess, sort of traditional EDI market, how large anopportunity is that for Informatica?  Andwho are you competing against?

Sohaib Abbasi - Chairman and Chief Executive Officer

At Banc of America, the Itemfieldtechnology clearly was involved, in fact, that gave us the competitive advantageover the alternatives that were being considered by Banc of America.  I named IBM as one of the alternatives theyhad considered.  The advantages that ourtechnology offered to Complex Data Exchange previously offered by Itemfield wasvery simply that we provide better support for XML messages and a moreadaptable framework for partners to exchange XML messages than thealternatives.  And we were able todemonstrate that at Banc of America,where they selected Informatica over the alternatives.

However, the applicability of thetechnology is not limited to just financial services.  In fact, in healthcare and other verticals,we've also seen great traction of that technology.  In healthcare, where more and more healthcarepartners, providers as well as carriers, are utilizing HL7 and HIPAA, there aremany uses of our technology.  In fact,the other example that I highlighted was Paramount Pictures, where they areexchanging order information in XML format with their trading partners.  It provides us with a differentiated offeringsuitable for B2B data exchange across multiple industries.

In terms of competitors, what weaddress is a problem that is currently being addressed mostly by hand coding.  So, in much the same way as we took the datawarehousing market from, in the very early days from build to buy, and we'vebeen more recently been taking the enterprise data integration market frombuild to buy, we are similarly offering the opportunity for our customers to havean alternative to build, which is that we will provide the technology that willenable B2B data exchange.  But there areno direct competitors as such, but other than the traditional competitors thatwe go up against.  Thank you.

Earl Fry - Executive Vice President and Chief Financial Officer

Thanks, Frank.

Operator

And your next question comes fromthe line of Sasa Zorovic of Goldman Sachs.  Please proceed.

Sasa Zorovic - Goldman Sachs

Thank you.  So, just a couple of really quick questionshere.  The first one would be if you wereto look in terms of the seasonality in the quarter, was it basically in keepingwith the seasonality in the third quarter in the prior year, so was there anychanges, given, how large financial services are and sort of the impact thatthey could have had on them intra-quarter? And then secondly, if you havenoticed any changes to the sales cycle?

Sohaib Abbasi - Chairman and Chief Executive Officer

We are clearly very pleased withthe results that we achieved in Q3.  Q3,as you correctly note, is seasonally a softer quarter in technology, as wasevident in the earnings statements of some of the other companies.  However, we are very pleased with the resultsthat we were able to achieve this last quarter.  Let me have Earl comment some as well.

Earl Fry - Executive Vice President and Chief Financial Officer

Yes, there's a little bit ofseasonality, as you might expect, in Q3, and you can see that in just a verymodest sequential dip in license revenues.  But overall, I think we felt very good, asSohaib said, about our execution kind of across the geographic areas in Q3.  So, I would say, if anything, it was a typicalQ3 seasonally, but as we started showing earlier in the year, starting in Q2, Ithink our international operation is executing better, actually help to mitigatesome of that seasonality in Q3.

In regard to sales cycle, notreally a lot of change there at all, pretty consistent, as we've seen over thelast several quarters and last couple of years, quite frankly.

Sasa Zorovic - Goldman Sachs

Thank you.

Operator

And your next question comes fromthe line of Daniel Cummins of Banc of America.  Please proceed.

Daniel Cummins - Banc of America

Thank you.  I just wanted to start with the miscellaneousfinancial questions.  Maybe Earl, if youcould come back with growth at constant currency for revenue overall, andspecifically for the European region.  Butwhat I really want to drill in on is the comment that you have low single-digitrevenue growth year-to-date in U.S.financial vertical.  Is that a reflectionof the pricing there or the buying power commanded on the customer's side?  Or does PowerCenter 8 show less than averagepenetration in that vertical?  Can youadd some more color to that?

Earl Fry - Executive Vice President and Chief Financial Officer

So I think the color, the onlything I meant to imply from that is because of the well‑publicized issues inprimarily the U.S. Financial Services markets around the subprime mortgages,it's not surprising that at the low end of the market or with certain regionalpeople, you would see a little bit of impact.  So, the only thing I meant to imply there isthat, yes, that probably impacted us at the margin a little bit in, since thestart of this year, which is why the domestic growth rate is not as high as theinternational growth rate.  But overall financialservices is strong and it's up kind of 16% year over year. So, that's meant toimply that I think we have got good balance and diversification in that customerbase, nothing more.  And relative tocurrency changes, it did help us on the top‑line by about $1.8 million or so,and very marginally, just a couple of hundred thousand or so, a few hundredthousand on the bottom line.  And that'syear over year.  And most of that wasfrom Europe.  Thanks,Dan.

Operator

And your next question comes fromthe line of Derrick Wood of Pacific Growth Equities.  Please proceed.

Derrick Wood - Pacific Growth Equities

Hi! Thanks.  Last quarter you reported 13% growth in North America, and you had mentioned that it was weaker than expectedwith the notable softness in government. This quarter, you posted a little bitof an improvement, 15% growth.  Can youjust talk about how North America was this quarterrelative to expectations and kind of what changed from the developments thatyou saw last quarter?

Earl Fry - Executive Vice President and Chief Financial Officer

I think it came in pretty much aswe expected.  We executed better in North America.  Government was oursecond-largest vertical.  Now, that'sworldwide, but clearly, the federal as well as other state and local pieces ofgovernment actually helped us in Q3 and was up more meaningfully than otherparts of the business from Q2 to Q3, which all is kind of in line with ourexpectations.  So, I hate to say it waskind of boring, but it came in right where we thought it would, and ourexecution was better, and we had better closure rates, and we continue to buildpipeline.  So, I think we feel goodabout, not only how things are positioned and set up in North America, but alsoI think now that we've got two data points coming out of our internationaloperations, I think we feel like the efforts that we've put into leadgeneration, some of the investments that we've made over the last year and ahalf, we're starting to see traction on.  Thanks, Derrick.

Operator

And your next question comes fromthe line of Brent Thill of Citi.  Pleaseproceed.

Brent Thill - Citi

Good afternoon.  Earl, maybe you can just characterize yourvisibility into 2008 and some of the revenue estimates you provided.  There certainly has been some concern that thetech market may start to witness a slowdown after what we've seen so far thisyear, so I'm just curious as to any other metrics you can help us frame up whatyou're giving for '08.

Earl Fry - Executive Vice President and Chief Financial Officer

If what we saw in Q3 was anexample of a slowdown, I guess I'll take it.  So, I think we feel good about our ownexecution.  As Sohaib mentioned, we feelvery good about where we are from a product cycle standpoint, and especiallywith our upcoming product releases.  Thetechnology acquisitions that we've made over the last year and a half arestarting to contribute in meaningful ways to the business, that's driving kindof across the board, higher-level discussions with our customers.  You can see that in the average transactionsizes and kind of the breadth of the average transaction size increase, notjust the $1 million deal.

But I think the combination ofall of that says, yeah, we read the papers.  We understand that you've got banks taking,whether it's mortgage loan or investment banking division write-offs at themoment, what's clear is they're still spending for critical projects.  And as you continue to have, whether it'sM&A activity, whether it's increased regulatory scrutiny, they need tospend money on key aspects of the business.  And a lot of things that we touch with dataintegration are becoming more and more important and relevant to them.  And so I've mentioned, if you throwconsolidation and uncertainty in terms of who their software vendors are goingto be, then that puts an even greater premium on how they think about theirinfrastructure technology and their integration technologies.

We are very optimistic that thereis significant room for us to grow, and the three dimensions of our growthstrategy are international growth, broader usage by our customers, and moreproducts.  Given those three drivers, weare very optimistic that we will maintain the growth momentum.  Thank you.

Operator

And our next question comes fromthe line of Nathan Schneiderman of Roth Capital Partners.  Please proceed.

Nathan Schneiderman - Roth Capital Partners

Hi!  Thanks very much, couple of quick questionsfor you.  Earl, you gave us some of theFX impacts year over year, but there were pretty sharp moves intra-quarter.  Can you tell us how much that lifted revenue?  And how much that lifted expenses, just on aQ2 to Q3 basis?

Earl Fry - Executive Vice President and Chief Financial Officer

The Q2 to Q3 lift, actually don'thave it in front of me, but it was much smaller, so it was plus or minus, Ithink $1 million on the revenue line, and it's nominal.  It's less than couple of hundred on the bottom line.

Nathan Schneiderman - Roth Capital Partners

Okay.  And then just to clarify some of the earliercomments that you made, with SAP's intended acquisition of Business Objects,how did that affect your guidance for Q4 and for 2008?  You're suggesting not at all, that it's goingto help you or that it's going to hurt you, and to what extent?

Sohaib Abbasi - Chairman and Chief Executive Officer

We have partnered with SAP for anumber of years.  In terms of actual dealparticipation, their field has not been necessarily involved with a lot of thedeals, that have been influenced by that was part of our SAP partnership.  In other words, the endorsement that we gotfrom SAP as a result of their selection of Informatica has helped us positionInformatica for broader data integration projects.  We have a long-track record of working withtheir customers.  In our conversationswith SAP, they have reiterated that they believe that this is an area wheretheir customers demand choice.  Theircustomers prefer choice in terms of how they migrate their data into an SAPapplication, and they are just as committed as we are to ensure that thispartnership continues to prosper.  Thanks,Nathan.

Operator

And your next question comes fromthe line of Patrick Walravens of JMP.  Pleaseproceed.

Patrick Walravens - JMP

Thank you.  So, looks like you've got your first $100million quarter coming up, so that's a nice milestone.  Sohaib, when you look out, can we see thisever being a $1 billion company?  And ifso, how do we get there?

Sohaib Abbasi - Chairman and Chief Executive Officer

We have an internal plan, along-term plan to grow the company to over $1 billion.  There's significant room for us to grow.  If we look at the various markets that we'rein, we're in the data integration market that Gartner has now projected 17%annual compound growth rate, compound annual growth rate for the foreseeablefuture.

We are also a leader in the DataQuality market, which co-incidentally is also projected to grow by 17%.  We are a pioneer in the On-Demand dataintegration markets that no one yet has come up with any estimates, but theclosest there is, is that the Software-as-a-Service market is growing at 30%.  And now we are also a key player in the B2Bdata exchange where there is good reason for us to believe that that marketwill end up also growing at a very healthy pace.  Given that we are the established leader inmany growth markets, given that our neutrality has allowed us to strengthen ourpartnership and very clearly differentiate our strategy with that of othercompetitors, with the demonstrated execution discipline across all thedifferent regions, the fact that we have been executing on a strategy that hasbeen proven to be sound, and now we've shown the operational discipline for usto pursue that strategy, we have great optimism and confidence that we willmaintain the growth momentum.  Thank you.

Operator

And that is all the time we havefor questions today.  I would like toturn the presentation back over to Sohaib Abbasi.  Please proceed, sir.

Sohaib Abbasi - Chairman and Chief Executive Officer

In closing, Informatica is wellprepared to maintain the momentum and continue to increase operating profits inthe quarters to come.  Thank you.

Operator

Thank you for your participationin today's conference.  This concludesthe presentation.  You may nowdisconnect, and have a great day.

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