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 Informatica Corp. (NASDAQ:INFA)

Q3 2007 Earnings Call

October 18, 2007, 5:00 p.m. ET

Executives

Stephanie Wakefield - Senior Director of Investor Relations

Sohaib Abbasi - Chairman and CEO

Earl Fry - Executive Vice President and Chief Financial Officer

Analysts

Thomas Ernst - Deutsche Bank

Mark Murphy – Broadpoint Capital

Vik Churamani - Lehman Brothers

Tom Roderick - Thomas Weisel

Nabil Elsheshai - Pacific Crest Securities

Brendan McCabe - CIBC World Markets

Frank Sparacino - First Analysis

Sasa Zorovic - Goldman Sachs

Daniel Cummins - Banc of America

Derrick Wood - Pacific Growth Equities

Brent Thill - Citi

Nathan Schneiderman - Roth Capital Partners

Patrick Walravens - JMP

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 operator for today.  At this time, all participants are in a listen-only mode.  We will conduct a question-and-answer session toward the end of the conference.  If at any time during the call you require assistance, please press "*" followed by "0" and then operator will be happy to assist you.

As a reminder, this call is being recorded for replay purposes.

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

Stephanie Wakefield - Senior Director of Investor Relations

Good afternoon and thank you for joining us today.  I'm here with Sohaib Abbasi, CEO and Earl Fry, CFO, of Informatica to discuss our Q3 2007 results and to talk about our outlook for the business.  Some of the comments we will make today are forward-looking statements, including statements concerning our projected financial results for future periods, our opportunity for growth in the data integration market, the planned use of our products by some customers for more than traditional data warehousing projects, the strength of our customer demand for our products, efforts being conducted with strategic partners, and our expectations regarding future industry trends.

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

Please refer to our recent SEC filings, including the 2006 Form 10-K and the 2007 second quarter 10-Q, for a detailed description 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 contained in the earnings press release and in the Supplemental Metrics Section of our Informatica Investor Relations website.

Before I hand it off to Sohaib, I'd like to remind you all 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 when we get to the Q&A period to please confine yourself to just one question.  We will allow additional questions 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, total revenue 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 margin of 18%, we delivered the most profitable third quarter ever.

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

We continue to benefit from strong customer demand in all major geographic regions.  Continual product innovations have notably advanced our competitive position and further expanded our opportunities beyond our traditional markets.  And our partnerships continue to contribute to our results.

In Q3, we achieved the best non-Q4 quarterly results in each major geographic region.  Verily, our team's operational discipline in executing our strategy to expand beyond our primary geographic markets is driving 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 selected Informatica 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 operational management.  Our marketing lead generation campaigns initiated earlier this year are growing the pipeline of worldwide sales opportunities and particularly in Europe.

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

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

In Asia-Pacific, we benefited from the combination of strong customer demand, competitive products, and improved execution to attain all-time record quarterly results. A leading Japanese regional bank replaced IBM Essential with Informatica for their regulatory compliance IT initiative, as our products demonstrated substantially better performance.

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

As these regional highlights underscore, our success beyond our primary geographic regions is contributing significantly to our record results.  As in prior quarters, we continue to gain from our strategy to grow beyond the traditional data warehousing market and pursue the larger data integration market.

In fact, in Q3, 43% of the licensed transactions over $100,000 were with customers that plan to use Informatica for projects beyond data warehousing.  In addition, year-to-date, 65% of our professional services fees were from consulting engagements beyond traditional data warehousing projects.

The latest product releases in both the data integration and data quality categories are driving our license growth.  In the data integration category, almost all Q3 license transactions over $300,000 included the new PowerCenter 8.1 release.  Equally important, 70% of these customers licensed new incrementally priced PowerCenter 8.1 options.

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

With distinctly innovative product capabilities for better integrating unstructured data, we are now pursuing new opportunities to enable business-to-business data exchange between trading partners.

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

Paramount Pictures licensed Informatica CDE to orchestrate B2B data exchange related to orders with their trading partners.  And our success in the data quality market continues.

In Q3, 60% of the transaction is over $1 million and a third of the transactions over $300,000, included data quality products.  Therefore, leading enterprises chose Informatica Data Quality including Credit Suisse, the Pennsylvania Department of Transportation, and Merck.

Last quarter, we further expanded our partner ecosystem.  With our proven track record of platform neutrality, our partners regard Informatica as the most trusted provider of data integration and data quality software.

Last month, we announced a new OEM agreement with Cognos.  Cognos will now sell Informatica Data Quality and Informatica Data Explorer as an integral part of its performance management applications portfolio.  Our strategic partnership with Cognos will include go-to-market programs for our field organizations to jointly offer a complete best-in-class offering including our leading data integration products.

Finally, working together with our 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 partnered with Atos Origin to win over IBM.  And at Safeco, ConocoPhillips, and the BG Group in the US, we partnered with Accenture.

To sum up, we are very pleased with our record third quarter results, attaining our second consecutive quarter of all-time record revenues.  We continue to benefit appreciably from the combination of our team's remarkable operational discipline and sustain customer demand in all the major geographic regions.  Continual product innovations have notably advanced our competitive position, and further expanded our opportunities beyond our traditional market.  And our partnerships continue to contribute to our results.

Now, I'll turn it over to Earl to give 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 good about our financial performance in Q3.  As Sohaib 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 third quarter record at $41 million, up 22% year-over-year and down just 2% seasonally.

Service revenues were another all-time record at $55 million, up 21% year-over-year, and up 5% sequentially.  Of the total service revenues, maintenance revenues were a record $38.3 million, up 18% year-over-year and up 4% sequentially, while consulting and education revenues were $16.7 million, up 29% year-over-year and up 8% sequentially.  License revenues were 43% of total revenue.

Our deal metrics were strong across the board.  Existing customers contributed 83% of our license orders value, compared to 72% in the second quarter of 2007 and 79% a year ago.  We did business with 194 existing customers, and more importantly, added 53 new customers in Q3.  We booked five transactions over $1 million compared to four a year ago, and we closed a third quarter record, 44 deals over $300,000, up from 27 in the year-ago, third quarter.

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

75% of our license orders came from 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 were influenced by partners or resellers.

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

License revenue from our direct business was 74% in Q3, with 26% of our license revenue coming from the indirect channel.

Looking at the geographic mix, for the second quarter in a row, we had strong contribution from our international 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 third quarter record 38%, up from 36% a year ago and seasonally down from 42% in the second quarter.

International revenue outside of North America was an all-time record 36% of total revenue in Q3, up from 32% a year ago.  Year over year, third quarter total revenues grew 15% in North America and 36% internationally.

The vertical sectors that contributed most to our Q3 orders were financial services, public sector which includes federal agencies, as well as, international and state and local governmental entities and high (inaudible).

Non-GAAP gross profit, which excludes $726,000 in amortization of acquired technology and $385,000 of share-based comp, came in at $78.4 million or 81.7% in Q3, slightly better than the 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 of charges for share-based payments, facilities restructuring, and amortization of acquired technology and intangibles, Q3 non-GAAP operating expenses were $61.3 million, down sequentially by about $0.5 million due to seasonally lower marketing expenditures.  Q3 non-GAAP operating expenses as a percentage of revenue improved sequentially by 168 basis 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 Supplemental Metrics section of our Investor Relations website.

Non-GAAP operating income was an all-time record, $17.2 million.  As a percentage of revenue, non-GAAP operating income was 17.9%, which is up over 160 basis points year over year and reflects improving operating leverage in our 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 had a small FX translation gain which contracted to prior quarters, where we typically experienced FX translation losses.

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

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

Our non-GAAP earnings, which exclude share-based payments, facilities, restructuring charges, and the amortization of acquired technology and intangibles, came in $0.02 above the high end of our range, and we generated non-GAAP diluted EPS of $0.19.  This is up from the $0.16 in the year-ago third quarter.

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

Total headcount was 1,326 at the end of September, an increase of 60 from the end of Q2, with sales and marketing 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 on ramping up 2008 sales capacity.

Overall cash and investment balances increased by $6.8 million during the third quarter, and we ended the quarter with over $447 million of cash and investments.  We generated $8.8 million in cash from operations in the third quarter, and during the quarter, we spent a little less than $1 million of property and equipment, generated $7.1 million in cash and stock option exercises, and used $14.6 million to repurchase 1,050,000 shares of our stock.

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

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

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

Now, while this is down $1 million sequentially, it is up by $22.4 million or 24% on a year-over-year basis.  And, as I just mentioned, the license 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 our targets 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 and setting our non-GAAP EPS target between $0.21 and $0.23 per share.  As we have previously mentioned, as a result of our increasing profitability and full utilization of our historical net operating losses, our income tax rate will take the one-time step function increase in 2008.

In 2008, we continue to expect an increase in our GAAP tax rate to approximately 30%.  From a non-GAAP tax rate perspective due to our increasing profitability, we now have to fully tax effect the non-GAAP amortization of intangibles and facilities restructuring charge add-backs which has 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 now expect our non-GAAP tax rate to increase to approximately 29%.  With taxes in mind and set aside now, we are targeting total revenue for 2008 to be in the $435 to $450 million range and targeting non-GAAP earnings per share in the range of $0.68 to $0.75 despite the $0.04 per share impact of the increase in the non-GAAP tax rate.  Our goal is to increase non-GAAP operating income to 20% of revenue on a sustained basis by the second half of 2008.

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

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

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

Sohaib Abbasi - Chairman and Chief Executive Officer

Thank you, Earl.  Last quarter's record results are clear evidence of the strong global customer demand and of the operational leadership in all the major geographic regions.  Our sustained results are a good indicator of our customers' success in their adoption and use of our market leading products.

This month we plan to further advance our technology leadership with yet another innovative product release.  PowerCenter 8.5 will feature new capabilities to enable the real-time integration competency center, by establishing centralized integration competency centers, also known as ICC, our customers benefit from best practices and economies of scale.  Simply put, ICCs promise to deliver more for less.  To enable the real-time ICC, PowerCenter 8.5 offers real-time change data capture for high performance, ICC-grade role-based security, and an enterprise integration catalog to facilitate collaboration between IT and business users.  Equally important, our recent release of Informatica Data Quality 8.5 offers several innovations for business users, including unique capability for proactively improving data quality by validating data at the point of entry.

Last month, we launched the second Informatica On-Demand, Software-as-a-Service data quality assessment for salesforce.com.  Customers can now simply assess the quality of their data maintained by salesforce.com using only a web browser, making the simple, affordable online service available to any organization is critical, because data quality is cited by customers as one of the top barriers to success of their IT projects.

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

Today Informatica is well positioned.  Sustained customer demand, effective operational leadership in all major geographic regions, and our most competitive product set with even more product releases later this month, we are poised to maintain the momentum and increase operating profits in the quarters to come.

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- or two-part questions.  Thank you.  Operator, may we have the first question?

Question-and-Answer Session

Operator

Sure.  Your first question comes from the line of Thomas Ernst from Deutsche Bank.  Please proceed.

Thomas Ernst - Deutsche Bank

Good afternoon, gentlemen.  Thank you.

Sohaib Abbasi - Chairman and Chief Executive Officer

Thanks, Tom.

Thomas Ernst - Deutsche Bank

Sohaib, I wanted to ask you about SAP partnership.  Last quarter you told us about a significant extension of the partnership, and I guess a couple of points to the question here, do you anticipate that this partnership will continue through the proposed acquisition of Business Objects, even though they have some overlapping capabilities through their acquisition of Acta, the previous acquisition?  And secondly, maybe though the way behind it, you made the points here on this call, I think, about the extensive use of Data Quality in the Informatica product, so is that something that's part of the SAP OEM deal?  Why might 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 with SAP as a very healthy strategic partnership.  I do not expect our partnership to change in the near term.  We have partnered with SAP for a long period of time.  A number of our key transactions in the recent quarter were for customers that are migrating over to SAP application, and those customers value our neutrality.  In much the same way as we have maintained our partnership with Oracle despite the fact that there may be some overlap, they value our neutrality as does SAP, particularly in the case of migration.

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

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

Thomas Ernst - Deutsche Bank

Thank you.  One quick follow-up, if you permit it.  Is there a contractual obligation on either side as part of the OEM in terms of time, a time frame?

Sohaib Abbasi - Chairman and Chief Executive Officer

We have an agreement with them, a multi-year agreement with them in terms of embedding our product capability.  And we would expect that, that will continue on 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 from the line of Mark Murphy.  Please proceed.

Mark Murphy - Broadpoint Capital

Thank you.  I am curious what did you experience in the financial services vertical, and were there any oscillations in terms of close rates or pipeline development or anything you can glean as far as signals moving forward?

Sohaib Abbasi - Chairman and Chief Executive Officer

We had a very strong quarter in financial services, 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 customers in financial services using our products for the traditional data warehousing projects, but increasingly, they're using Informatica technology beyond data warehousing.  I cited one, the Banc of America project in which they are using Informatica for processing a B2B data exchange NACHA-based data exchange, and that's an example where we're helping our financial services companies apply Informatica in new and more innovative ways.  In this particular instance, they are replacing multiple payment systems with a new payment hub.  They're using Informatica for it.  Credit Suisse, as I also singled out, have standardized Informatica as part of their newly -- soon-to-be-established integration competency centers.

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

Earl Fry - Executive Vice President and Chief Financial Officer

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

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

So, I think to the degree that you'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 probably seeing have always been reflected in our results over the last couple of quarters.  But because of the diversification and the fact that we're seeing good strength globally, the overall 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 either one of you that feels like taking this.  Just at a high level, what are your thoughts as you look around and see this massive pace of consolidation that's occurring before our eyes in the software industry?  I would imagine every software company has had discussions about this.  How do you respond to it?  And what do you think it means through the opportunity as an independent and agnostic player?

Sohaib Abbasi - Chairman and Chief Executive Officer

There are two trends that we've observed.  One is, clearly the consolidation is occurring in the more mature segments within information technology.  And at the same time, we're also seeing a new segment emerge where there is considerable growth, software service and open source being two of them.

The consolidation certainly has created a lot of uncertainty for our partners as well as our customers, and our neutrality offers our customers with a way to better cope with the uncertainty.  Our neutrality ensures that we would assist 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 well as our partners.  All this uncertainty has 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 and Oracle and we've also announced new partnership with Cognos, our partnership with 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 a reminder, please press "* 1" for questions and I would like to ask if you can limit your questions to one.  And your 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 some color on what sort of license growth should be expected?  Whether it's low double digits, or is in the mid-teens? And then also, in terms of tax rate, the tax rate has been kind of bouncing around for '08 in terms of the expectations.  Is 29% pretty much ironclad or is there any bigger room there in terms of for someone foreseeing the ramps that cause you to kind of change that?  And also, just on the tax rate, what should we expect for '09?  Should we look at 29% or should that be sort of a different number?  And then I have one follow up.

Sohaib Abbasi - Chairman and Chief Executive Officer

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

We also have about 70% of our installed base that is upgraded to version 8 of our products, and that has opened up a lot of new opportunities for us to sell them new add‑on options.  As we've commented in the past, the list price of all the products and the options with version 8 is about 2.5 times that was available 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 to fuel the product license revenue.

And I'll turn it to Earl to comment on 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 talked about, and one thing that I had reasonable visibility and it's a 30% GAAP tax rate. So, we've talked about that, that's still the same, that's still how we're viewing things.  We view that as a one-time step function as a result of using our NOLs and valuing our deferred tax 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, I don't see the tax rate moving dramatically past the step function we take in '08.

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

Vik Churamani - Lehman Brothers

So, is it reasonable to say if we look 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 enough information here to work it, Vik, where the add-backs should be exactly as I laid it out in the script, which is you should expect to see roughly $0.005 per share per quarter benefit for intangibles and $0.005 per share per quarter benefit for restructuring, and plus or minus, and about a $0.03 per share per quarter 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 at this quarter?  And then just lastly, on Q4 as you look at your guidance, sequentially, seasonally, it's a little bit more conservative than what you've done in the past.  Is it fair to say that there's some assumption baked in there for some uncertainty around the financial services vertical, or if maybe perhaps you can handicap that?  And lastly, congratulations on a very good quarter.

Earl Fry - Executive Vice President and Chief Financial Officer

So, Vik, just a reminder that when we just talked about the tax rate, we're feeling a $0.01 drag or change because we're now more profitable, so that is baked into our Q4 guidance as well.  So, I think that's probably the biggest delta for Q4.  Then I'll let Sohaib want to have any comment on the PowerCenter 8.

Sohaib Abbasi - Chairman and Chief Executive Officer

We are very pleased with the uptake of our PowerCenter 8 options.  As I commented on, 70% of the transactions over $300,000 included add-on options. We do not break out specific revenue numbers associated with individual options.  However, the top three options were enterprise grid for cost-effective scalability, partitioning, which is also for high performance, and real-time data integration.  Those were the two most popular options, but we 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 from the 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 some of the new Software-as-a Service initiatives that you've taken with some of the connectors.  Can you just go into a little bit of detail around some of the more successful deployments or maybe a couple 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 the uptake of PowerCenter, as well as our PowerCenter Connector for salesforce.com by some of our key customers.  We share some key customers with salesforce.com.  They are using Informatica for mostly enterprise data integration with the availability of our connector.  They're not expanding their use of Informatica technology for doing cross-enterprise data integration as well.  We've commented in the past about some of the customers that we shared are networking leader, uses Informatica in order to integrate not just the on-premise data, but also the data stored in salesforce.com.

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

Operator

And your next question comes from the line of Nabil Elsheshai.  Please proceed.

Nabil Elsheshai - Pacific Crest Securities

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

Sohaib Abbasi - Chairman and Chief Executive Officer

70% of our installed base has upgraded to PowerCenter 8.

Nabil Elsheshai - Pacific Crest Securities

Okay, great.

Sohaib Abbasi - Chairman and Chief Executive Officer

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

Nabil Elsheshai - Pacific Crest Securities

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

Sohaib Abbasi - Chairman and Chief Executive Officer

We did not compete that often against Business Objects.  Now, let me just remind you that the majority of the deals continue to be -- and can testify any commercial competitor, and that's a sign of an early-stage market.  In the more recent quarters, we would encounter Business Objects in less than 5% of the opportunities, and we would win the majority of them, the majority of the deals against them.  The situations where we have seen Business Objects are ones where the customers have standardized on Business Intelligence for the BI stack, and it is typically for departmental level deployments.  We win against them in any enterprise-wide deployment.

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

Operator

And your next question comes from the 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 a little bit this quarter, and Earl you spoke a little bit about the declining interest rate environment, and there's a lot of cash on the balance sheet.  I was wondering if you could kind of go through and prioritize the usage of cash?

Earl Fry - Executive Vice President and Chief Financial Officer

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

Operator

And your next question comes from the 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 would assume item field was a key component there.  I'm also just wondering when you look at that marketplace, the B2B and, I guess, sort of traditional EDI market, how large an opportunity is that for Informatica?  And who are you competing against?

Sohaib Abbasi - Chairman and Chief Executive Officer

At Banc of America, the Itemfield technology clearly was involved, in fact, that gave us the competitive advantage over the alternatives that were being considered by Banc of America.  I named IBM as one of the alternatives they had considered.  The advantages that our technology offered to Complex Data Exchange previously offered by Itemfield was very simply that we provide better support for XML messages and a more adaptable framework for partners to exchange XML messages than the alternatives.  And we were able to demonstrate that at Banc of America, where they selected Informatica over the alternatives.

However, the applicability of the technology 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 healthcare partners, providers as well as carriers, are utilizing HL7 and HIPAA, there are many uses of our technology.  In fact, the other example that I highlighted was Paramount Pictures, where they are exchanging order information in XML format with their trading partners.  It provides us with a differentiated offering suitable for B2B data exchange across multiple industries.

In terms of competitors, what we address is a problem that is currently being addressed mostly by hand coding.  So, in much the same way as we took the data warehousing market from, in the very early days from build to buy, and we've been more recently been taking the enterprise data integration market from build to buy, we are similarly offering the opportunity for our customers to have an alternative to build, which is that we will provide the technology that will enable B2B data exchange.  But there are no direct competitors as such, but other than the traditional competitors that we go up against.  Thank you.

Earl Fry - Executive Vice President and Chief Financial Officer

Thanks, Frank.

Operator

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

Sasa Zorovic - Goldman Sachs

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

Sohaib Abbasi - Chairman and Chief Executive Officer

We are clearly very pleased with the results that we achieved in Q3.  Q3, as you correctly note, is seasonally a softer quarter in technology, as was evident in the earnings statements of some of the other companies.  However, we are very pleased with the results that 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 of seasonality, as you might expect, in Q3, and you can see that in just a very modest sequential dip in license revenues.  But overall, I think we felt very good, as Sohaib said, about our execution kind of across the geographic areas in Q3.  So, I would say, if anything, it was a typical Q3 seasonally, but as we started showing earlier in the year, starting in Q2, I think our international operation is executing better, actually help to mitigate some of that seasonality in Q3.

In regard to sales cycle, not really a lot of change there at all, pretty consistent, as we've seen over the last several quarters and last couple of years, quite frankly.

Sasa Zorovic - Goldman Sachs

Thank you.

Operator

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

Daniel Cummins - Banc of America

Thank you.  I just wanted to start with the miscellaneous financial questions.  Maybe Earl, if you could come back with growth at constant currency for revenue overall, and specifically for the European region.  But what I really want to drill in on is the comment that you have low single-digit revenue growth year-to-date in U.S. financial vertical.  Is that a reflection of the pricing there or the buying power commanded on the customer's side?  Or does PowerCenter 8 show less than average penetration in that vertical?  Can you add some more color to that?

Earl Fry - Executive Vice President and Chief Financial Officer

So I think the color, the only thing I meant to imply from that is because of the well‑publicized issues in primarily 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 regional people, you would see a little bit of impact.  So, the only thing I meant to imply there is that, yes, that probably impacted us at the margin a little bit in, since the start of this year, which is why the domestic growth rate is not as high as the international growth rate.  But overall financial services is strong and it's up kind of 16% year over year. So, that's meant to imply that I think we have got good balance and diversification in that customer base, nothing more.  And relative to currency 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 hundred thousand on the bottom line.  And that's year over year.  And most of that was from Europe.  Thanks, Dan.

Operator

And your next question comes from the 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 expected with the notable softness in government. This quarter, you posted a little bit of an improvement, 15% growth.  Can you just talk about how North America was this quarter relative to expectations and kind of what changed from the developments that you saw last quarter?

Earl Fry - Executive Vice President and Chief Financial Officer

I think it came in pretty much as we expected.  We executed better in North America.  Government was our second-largest vertical.  Now, that's worldwide, but clearly, the federal as well as other state and local pieces of government actually helped us in Q3 and was up more meaningfully than other parts of the business from Q2 to Q3, which all is kind of in line with our expectations.  So, I hate to say it was kind of boring, but it came in right where we thought it would, and our execution was better, and we had better closure rates, and we continue to build pipeline.  So, I think we feel good about, not only how things are positioned and set up in North America, but also I think now that we've got two data points coming out of our international operations, I think we feel like the efforts that we've put into lead generation, some of the investments that we've made over the last year and a half, we're starting to see traction on.  Thanks, Derrick.

Operator

And your next question comes from the line of Brent Thill of Citi.  Please proceed.

Brent Thill - Citi

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

Earl Fry - Executive Vice President and Chief Financial Officer

If what we saw in Q3 was an example of a slowdown, I guess I'll take it.  So, I think we feel good about our own execution.  As Sohaib mentioned, we feel very good about where we are from a product cycle standpoint, and especially with our upcoming product releases.  The technology acquisitions that we've made over the last year and a half are starting to contribute in meaningful ways to the business, that's driving kind of across the board, higher-level discussions with our customers.  You can see that in the average transaction sizes and kind of the breadth of the average transaction size increase, not just the $1 million deal.

But I think the combination of all 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 the moment, what's clear is they're still spending for critical projects.  And as you continue to have, whether it's M&A activity, whether it's increased regulatory scrutiny, they need to spend money on key aspects of the business.  And a lot of things that we touch with data integration are becoming more and more important and relevant to them.  And so I've mentioned, if you throw consolidation and uncertainty in terms of who their software vendors are going to be, then that puts an even greater premium on how they think about their infrastructure technology and their integration technologies.

We are very optimistic that there is significant room for us to grow, and the three dimensions of our growth strategy are international growth, broader usage by our customers, and more products.  Given those three drivers, we are very optimistic that we will maintain the growth momentum.  Thank you.

Operator

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

Nathan Schneiderman - Roth Capital Partners

Hi!  Thanks very much, couple of quick questions for you.  Earl, you gave us some of the FX 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 a Q2 to Q3 basis?

Earl Fry - Executive Vice President and Chief Financial Officer

The Q2 to Q3 lift, actually don't have it in front of me, but it was much smaller, so it was plus or minus, I think $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 earlier comments 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 going to 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 a number of years.  In terms of actual deal participation, their field has not been necessarily involved with a lot of the deals, that have been influenced by that was part of our SAP partnership.  In other words, the endorsement that we got from SAP as a result of their selection of Informatica has helped us position Informatica for broader data integration projects.  We have a long-track record of working with their customers.  In our conversations with SAP, they have reiterated that they believe that this is an area where their customers demand choice.  Their customers prefer choice in terms of how they migrate their data into an SAP application, and they are just as committed as we are to ensure that this partnership continues to prosper.  Thanks, Nathan.

Operator

And your next question comes from the line of Patrick Walravens of JMP.  Please proceed.

Patrick Walravens - JMP

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

Sohaib Abbasi - Chairman and Chief Executive Officer

We have an internal plan, a long-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're in, we're in the data integration market that Gartner has now projected 17% annual compound growth rate, compound annual growth rate for the foreseeable future.

We are also a leader in the Data Quality market, which co-incidentally is also projected to grow by 17%.  We are a pioneer in the On-Demand data integration markets that no one yet has come up with any estimates, but the closest there is, is that the Software-as-a-Service market is growing at 30%.  And now we are also a key player in the B2B data exchange where there is good reason for us to believe that that market will end up also growing at a very healthy pace.  Given that we are the established leader in many growth markets, given that our neutrality has allowed us to strengthen our partnership and very clearly differentiate our strategy with that of other competitors, with the demonstrated execution discipline across all the different regions, the fact that we have been executing on a strategy that has been proven to be sound, and now we've shown the operational discipline for us to pursue that strategy, we have great optimism and confidence that we will maintain the growth momentum.  Thank you.

Operator

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

Sohaib Abbasi - Chairman and Chief Executive Officer

In closing, Informatica is well prepared to maintain the momentum and continue to increase operating profits in the quarters to come.  Thank you.

Operator

Thank you for your participation in today's conference.  This concludes the presentation.  You may now disconnect, and have a great day.

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Source: Informatica Q3 2007 Earnings Call Transcript
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