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Executives

Stephanie Wakefield - Vice President of Investor Relations

Sohaib Abbasi - Chairman, Chief Executive Officer and President

Earl E. Fry - Chief Financial Officer, Chief Administration Officer, Principal Accounting Officer, Executive Vice President of Global Customer Support and Secretary

Analysts

Brent Thill - UBS Investment Bank, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Karl Keirstead - BMO Capital Markets U.S.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Informatica (INFA) Q2 2012 Earnings Call July 26, 2012 5:00 PM ET

Operator

Good afternoon. My name is Christian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Thank you. I'll now turn over the call over to our host, Ms. Stephanie Wakefield. Madam, you may begin your conference.

Stephanie Wakefield

Good afternoon, and thank you for joining us today. I'm here with Sohaib Abbasi, our CEO; and Earl Fry, our CFO, to discuss our Q2 2012 results and to talk about our outlook for the business. I'll read the Safe Harbor and then hand it over to Sohaib for his comments. Some of the comments we will make today are forward-looking statements, including statements concerning our projected financial results for future periods, our growth and operational strategies, our key initiatives to address recent operational challenges, our marketing growth opportunities, our ability to scale our business, our technology leadership and product development, our product portfolio and product opportunities, customer adoption of and demand for our products and services, including product upgrades, new releases and new products, the expected use of and benefits of our products and services, the expected benefits from our partnerships and acquisitions, the effective tax rates and income tax provisions, our pipeline conversion rates, our hiring plans, our international and public sector businesses, and our expectations regarding industry trends and macroeconomic developments. All forward-looking statements are based upon current expectations and beliefs. However, actual results could differ materially. There are many reasons why actual results may differ from our current expectations. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and Informatica undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date that they are made. Please refer to our recent SEC filings, including our quarterly report on Form 10-K and Q for our quarter ended March 31, 2012, 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 attached in the earnings press release and are also available in the Supplemental Metrics section of the Informatica Investor Relations website. Before I hand it off to Sohaib, I'd like to remind you that this call is being webcast and will also be available for replay at www.informatica.com/investor [Operator Instructions] Sohaib?

Sohaib Abbasi

Thank you, Stephanie. As we reported earlier this month, after 31 consecutive quarters of consistent results, we fell well short of our own expectations in Q2. This afternoon, I will outline the key reasons for the disappointing Q2 results and the aggressive steps we are taking. I will then comment on the key measures to effectively scale the organization to the next level and discuss reasons for our continued conviction in the long-term opportunity.

In EMEA, we clearly did not fully anticipate the increasing impact of the macroeconomic uncertainty on purchasing cycles of our customers. Partly due to the leadership transition in EMEA, we did not exhibit the level of rigorous multi-quarter pipeline management discipline required to adapt rapidly to the changing environment.

As a consequence to the sales, pipeline conversion rate was lower than expected in Q2. With stricter purchasing controls, deals took longer than expected. A evidence that our customer value proposition remains compelling, even though deals are taking longer, deals are getting done.

In Q2, we closed a large deal with a major European government agency after a multi-quarter sales cycle. Informatica products will play a critical role for this agency's imperative to provide better citizen services while reducing fraud. By centralizing information for its systems, the agency will be able to offer a more efficient payment system for work incentives.

In the U.S., our results reflected the collateral impact of the European macroeconomic uncertainty, as well as changes in our sales organization. We saw several customers begin scrutinizing their purchasing cycles, with additional steps for approvals and diligence, as well as downsizing or deferring purchases. And we now recognize that the Q1 changes in our sales organization to increase distribution capacity for growth and customer success, including changing sales territory assignments took longer than expected and affected the quality of our business pipeline.

Despite these operational challenges, customers continue to view Informatica as the most strategic partner for their top business imperatives. As an example, in Q2, a life sciences leader expanded their adoption of our product portfolio by selecting additional licenses of Informatica MDM, Data Quality and PowerCenter.

Based on their past success with Informatica MDM, this long-term customer will use Informatica MDM to deliver a single view of physicians and [ph] patents to comply with the Sunshine Act regulatory requirements, one of their top business imperatives. In addition, they expanded their use of PowerCenter to enable their hybrid IT infrastructure by integrating data managed by the cloud vendor, VIVA.

Our results in Asia Pacific were consistent with our expectations, signifying disciplined execution by our sales team, increasing customer demand and growing adoption of the Informatica products.

To sum up, our Q2 shortfall was due to macroeconomic uncertainty, exacerbated by our internal operational challenges. Now, I'll turn it over to Earl to give you more details on our financial results. After Earl's comments, I'll discuss our key initiatives to effectively scale the organization to the next level, and the key reasons for our continued conviction.

Earl E. Fry

Thanks, Sohaib. Total revenues for the second quarter were $190.5 million, down 1% compared to a year ago and consistent with the preliminary estimate range of $188 million to $190 million that we provided on July 5.

License revenues were $70.9 million, down 18% year-over-year, and within our preliminary estimate range of $70 million to $72 million. Service revenues were $119.6 million, up 12% year-over-year. And breaking down the components of service revenues, maintenance revenues were $88.4 million, up 14% year-over-year, while consulting, education and subscription revenues were $31.1 million, up 8% year-over-year, with the entire year-over-year increase being driven by an increase in subscription revenue.

Moving to deal metrics. Existing customers contributed 79% of our license order value compared to 84% a year ago. We booked 15 transactions over $1 million, up from 13 a year ago, and we booked 70 deals over $300K, down from 79 a year ago. Our average transaction size for orders over $100,000 came in at $425,000 and the average transaction size for orders over $50,000 was $318,000, both down from year-ago levels of $462K and $336K, respectively.

From a channel perspective, 24% of our license and subscription orders came from the indirect channel, and an additional 44% of our direct orders in Q2 were referred by partners or resellers. The overall total of indirect and referred orders was 68% compared to 55% a year ago and 59% in Q1.

Moving to geographic mix. License orders for North America as a percentage of total license orders was 65%, consistent with a year ago, and the license orders from EMEA and the rest of the world was also consistent year-over-year at 35%. Revenue from North America was 67% of total revenue in Q2, consistent with a year ago, and revenue from EMEA and the rest of the world was also consistent year-over-year at 33% of total revenue.

From a vertical industry perspective, financial services, health care and public sector were our top contributors to new license orders. Non-GAAP gross profit, which excludes $5.4 million in amortization of acquired technology and $1 million of stock comp, came in at $158.7 million or 83% in Q2, down slightly from 85% a year ago at 84% in Q1, due mostly to the smaller license contribution.

License margins were 98% in Q2, compared to 99% in both the prior and year-ago quarters. Service margins, driven by better than 95% maintenance renewal rates and increasing contribution from our subscription services were 74%, relatively consistent with our prior quarter at 75% and the year ago quarter at 73%.

Excluding charges for stock comp amortization of intangibles and facilities, restructuring and acquisition-related adjustments totaling $11.3 million, Q2 non-GAAP operating expenses were $112.8 million, up slightly from the first quarter and a year-ago quarter.

As a percentage of revenue, non-GAAP operating expenses were 59% of revenue, up from 57% in the year-ago quarter. Non-GAAP operating income as a percentage of revenue was 24.1%, compared to 27.2% in Q2 last year. GAAP net income for the second quarter 2012 was $0.18 per diluted share, including the after-tax impact of amortization of intangibles and acquired technologies, facilities, acquisition-related adjustment and stock-based comp. Excluding these items, non-GAAP net income was $0.29 per diluted share, slightly better than our preliminary estimate of $0.27 to $0.28 per diluted share, as our effective tax rate came in slightly better than the rate assumed in our preliminary estimate.

Consistent with our previous expectations, we added 119 employees during the quarter, and ended the second quarter with a total of 2,693 employees with the majority of these new hires in customer-facing and revenue-generating roles. Sales and marketing headcount ended the quarter at 916, an increase of 44 from the end of Q1 and an increase of 108 from a year ago. We expect to continue hiring in the second half of the year, but at a more moderate rate than we did in Q2.

Turning to the balance sheet. We ended the quarter with $565 million in cash and investment, a slight decrease from Q1 as we repurchased 688,000 shares of our stock for $29.7 million during the second quarter. We generated $28.1 million in cash flow from operations in Q2, and over the past 12 months, have generated over $179 million in cash flow from operations. DSOs were 67 days in Q2, just outside our target DSO range of 55 to 65 days.

Deferred revenue balances increased to $236.7 million, and are comprised of $226.8 million in current deferred and $9.9 million in long-term deferred. Deferred revenues are up almost $2 million sequentially and up $40 million from a year ago. And this increase was achieved despite a currency headwind of about $9 million on a year-over-year basis, and a headwind of about $3 million on a quarter-over-quarter basis.

Based on our Q2 orders, our potential future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken to revenue, as of June 30, was a record $257.3 million, up over $5 million sequentially, and up over $31 million from a year ago.

And like with the deferred balances, this increase was achieved despite a currency headwind of almost $10 million on a year-over-year basis, and almost $4 million on a quarter-over-quarter basis. We ended the quarter with 113 million shares outstanding on a fully diluted basis. Our tax rate for the second quarter was about 30.5%. And assuming the R&D tax credit is not renewed, we still continue to expect our 2012 effective tax rate to be approximately 32% on both a GAAP and non-GAAP basis before the impact of certain discrete tax items.

Our tax provision will continue to have variability and will continue to be very sensitive to our quarterly geographic mix of earnings. Looking ahead. During the second half of 2012, we will be focused on rectifying our execution challenges in this uncertain macroeconomic environment. We are assuming that we will not see a dramatic change in our pipeline conversion rates in Q3, and do expect some benefit in our public sector business from the federal government September year end. The low end of the guidance range we are setting is consistent with the preliminary outlook we provided on July 5.

So for Q3, we are setting a revenue target range of $196 million to $206 million and a non-GAAP EPS target of approximately $0.34. For the year 2012, we are targeting total revenue in a range of $812 million to $832 million and a non-GAAP EPS target of approximately $1.45. Our non-GAAP EPS targets do not include the after-tax impact of an estimated $0.04 per share per quarter charge for the amortization of intangibles and acquired technology, the tax affected impact of stock comp of approximately $0.08 per share per quarter, and any major acquisition costs and expenses.

With that, let me turn it back over to Sohaib.

Sohaib Abbasi

Thanks, Earl. For 31 consecutive quarters prior to Q2, we delivered consistent results. To help regain our momentum and effectively scale to the next level to $1 billion dollars of revenue and beyond, we took an important new step. I am very pleased to welcome John McGee as EVP Worldwide Field Operations. John is well prepared to help scale Informatica to the next level, based on his broad track record of success at both industry leaders and pioneers. Most recently, John was President and COO of Thunderhead, a U.K.-based multichannel communication software vendor. Prior to that, as Vice President of Americas Field Operations at Adobe, John implemented a disciplined metrics-driven sales capacity, development methodology to grow their enterprise business. Prior to his role at Adobe, John held sales management roles to grow the business at EMC Software, Documentum and Dun & Bradstreet. I look forward to working with John and our sales leadership team to effectively scale our organization to the next level.

I would like to thank Paul Hoffman for his continuing dedication and for his commitment to ensure a successful leadership transition over the coming months. To effect a smooth transition and address the recent operational challenges, I will next outline what will remain the same, and what will be new.

Our mission remains the same, to establish Informatica as the clear leader in data integration, while expanding our addressable market. Our growth strategy also remains the same: First, expand across all major geographic regions; second, grow beyond data warehousing; and third, advance our market leadership.

To more effectively pursue our three-pronged growth strategy, I will outline 3 new initiatives for operational improvement. To expand across all major geographic regions, earlier this year, we implemented changes to both continue to deepen our relationships with our top customers through dedicated account management, and to broaden our reach to new customers through our partnering ecosystem [ph]. These customer segmentation and related sales territory changes have taken longer than planned. However, having gained experience with the sales territory assignments with this customer segmentation model, we are now better-positioned going into the second half of the year. And to expedite further expansion, we will be implementing a more disciplined and agile approach for future sales capacity development.

To grow within and beyond data warehousing, we have adapted our internal processes for more rigorous multi-quarter pipeline generation and management. By expanding our current working operational reviews, to include multi-quarter planning, we will now be better prepared to adapt quickly and improve the quality and conversion rates of our business pipeline.

And to advance our market leadership, we have augmented product, solutions and industry knowledge within our sales organization. As we discussed at the start of the year, we staffed the new role of subject matter expert, SMEs, with solution-specific and industry-specific knowledge in our product business units. For better alignment, in July, we consolidated these SMEs under 1 leader within our sales organization. Now we will be better positioned to cross sell our newer products and more effectively advance our market leadership.

Finally, the 3 reasons for our continued conviction are: First, the broader role of our top ranked core products for the next-generation analytics platform; second, the growing adoption of our top-rated newer products, including Informatica Cloud; and third, operational improvements that I already outlined.

As a reminder, in our core product category, a leading industry analyst ranked Informatica as the clear leader. These Informatica core products including ETL can play an even broader role to leverage the much richer next-generation analytics platform. The technology infrastructure for analytics is evolving from traditional data warehousing databases, to the next-generation platform that includes traditional data warehousing databases, deals for purpose analytic databases, in-memory query optimizers, agile business intelligence and the latest rapid [ph] use based technologies, such as Hadoop. This is the first next-generation analytics platform with technologies from multiple vendors is beginning to open up new opportunities for the core Informatica products.

Beyond loading traditional data warehousing databases, Informatica core products integrate data from multiple operational systems for ingestion by a broad range of analytical offerings including data warehousing databases, like Teradata, build-for-purpose analytic databases like EMC Green Thumb, in-memory query optimizers like SAP HANA, agile business intelligence like QlikTech and low-cost commodity commuting clusters supporting by Hadoop vendors.

As one such example of this emerging use case, Lexis Nexis has selected Informatica technology to integrate their high-performance computing cluster or HPCC platform in order to perform high-volume content transformations. The HPCC, also known as data analytics supercomputer, is a data-intensive computing system originally developed by Lexis Nexis risk solutions. That HPCC platform leverages community, commodity, computing clusters and provides high-performance parallel processing for applications utilizing big data.

For the next-generation analytics platform, our customer value proposition remains the same: do more with less. Instead of expensive, labor-intensive and error-prone hand coding using programming languages, like attributes [ph], Informatica offers higher productivity, faster time to resolve, and better manageability. We continue to benefit from cross-selling our newer product as customer usage of these products has increased consistently from 4% in 2007 to 39% of the active projects in Q2 2012.

In Q2, we won important cross-sell opportunities in the newer categories including Opera messaging, application information lifecycle management and mass data management as our products are acknowledged by industry analysts as either leaders or pioneers. Finally, with the growing adoption of cloud computing as a business-critical and versatile platform, Informatica is enabling customers to retain control over their most important IT assets, their data, both on-premise and in the cloud. In a major architectural win to enable hybrid IP, a pharmaceutical leader choose our award-winning Informatica Cloud to extend their existing integration center of excellence across 6 global business units. And with the new Informatica Cloud connector for Google, big player and age process support for Amazon, an elastic method [ph] use, Informatica now enables cloud-based big data analytics as a service.

In addition, we announced the partnership with NEC, to offer a subscription offering for customers in Japan, to leverage the core Informatica data integration products. To reiterate, Informatica provides a compelling value proposition, maximized return on data.

As the largest independent leader in data integration, with a track record of continual innovation and our redoubled focus on rigorous operational discipline, I am confident that Informatica is now better positioned to pursue this growth opportunity.

So we that, I will open it up for your questions. [Operator Instructions] Thank you. Operator, may we have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

When you look at the sales execution issues, is that what you basically account to the problems in Q2? And specifically, if you could just talk about the deals in your pipeline. Do you feel that those deals were just delayed due to the sales execution issues? Or is there some new competitive force at work that we should be paying more attention to?

Sohaib Abbasi

Brent, the reason for our short fall was twofold: there is the macroeconomic environment, had an impact, and our sales execution issues had an impact as well. In terms of the deals, the deals were taking longer than we had planned. There is no change in terms of the competitive landscape. We continue to have very high win rates, in fact, our win rate against our tier 1 competitors was close to 80%. So we continue to have a very strong competitive offering. The deals are just taking a little bit longer. I had cited one particular example of a European public sector deal that took us a little longer than expected. And similarly, I expect that we will continue to successfully pursue some of those opportunities, even though it may take a little longer.

Operator

Our next question comes from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Earl, I wanted to ask you. Looking at the international mix, I believe you said it was consistent year-over-year, both for orders and for revenue. And so, obviously, we can understand some level of collateral impact in the U.S. But I guess, it appears that Europe and North America were equally impacted during the quarter. So I guess, just, am I looking at that right? And do you have any insights into that?

Earl E. Fry

Yes, there's one little bit of an anomaly. If you'll recall last year, particularly in the first -- in the second quarter, in particular, but first 3 quarters throughout last year. We're not executing particularly well in domestic financial services. So we actually had good performance in financial services this quarter, particularly in the U.S. Europe was down, we did have a lower contribution from EMEA. We had much better contribution on a percentage basis from Asia-Pac than we did a year ago. So that's -- the Asia-Pac contribution is probably the biggest delta on a year-over-year basis.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Okay. And then Earl, also, just any preliminary thoughts with respect to 2013? I realize this isn't exactly when you want to give formal guidance, but at a high-level, you should enter the year with substantially more distribution capacity. I think the 9.5 release could be ramping pretty well entering next year. So just any sense of whether it could be a double-digit growth year or better or worse? And did you -- what is your level of comfort with where the new consensus has gone to for next year?

Earl E. Fry

Yes, I think it's a little early as you call out, Mark, to be talking about 2013. We do have some things that we are working on from an execution standpoint through the back half of this year. I do think we will work through most of those issues by the end of this year, so that we can start to see better growth going into 2013. But it's a little early for us to be setting those targets or expectations at this point.

Operator

Our next question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Research Division

I'm still slightly confused, I have to say, because like, we went through -- started the year with the pipeline and the message I got is, is now that we have some sales force execution issues and macro didn't help, but you still say it's only a deal slippage. But what happened to the pipeline that we started there that we kind of talked about in Q1? And at what point during the quarter did you see things were not going right and hence, what actions were taken at that point in time?

Sohaib Abbasi

Raimo, the reasons are slightly different in terms of what we saw in EMEA, and what we saw in North America. In both cases, there clearly was an impact of the macroeconomic uncertainty. In EMEA, due to the leadership changes, we did not have the discipline for multi-quarter pipeline management that we needed in order to adapt quickly to the changing macroeconomic uncertainty. And in North America, in -- we had sales, go-to-market changes that took a little longer. In terms of the pipeline conversion, the pipeline conversion rates were lower in EMEA. And in terms of the sales execution challenges that I outlined in North America, those again affected the results that we saw in Q2. Now as I commented on earlier, we do have a good understanding of what we need in order for us to gain [ph] Informatica and we've got an intense focus and aggressive measures to address those. And I am confident that with the better understanding, and with the intense focus, we will be better positioned for the second half of the year.

Operator

Our next question comes from the line of Ed Maguire with CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

I was wondering -- I'd like to just flip the question around a little bit in terms of understanding the characteristics of the deals that you slipped. From the standpoint of customers, has it -- has your end-user, the buyers that need to sign the approvals, has that profile changed, and what I'm getting at here is that because you're -- because the scope of the problems that you address is expanding, are you going beyond for instance, IT to different lines of business users? And in managing this, do you feel that you've got a handle on the different processes that are necessary to kind of get deals over the goal line with these different constituencies?

Sohaib Abbasi

Well, in terms of the broader product portfolio, clearly, we have a value proposition that resonates not just with IT, but also with business, and that is an evolution that our sales organization has been making over the last several years and we've had some very good success in showcasing the value of some of our products, business value of our products, like MDM, as an example. The change that we saw in Q2, and I'll cite 2 examples, because I met with some of these customers in Europe. And when I met with one of the customers, they informed me that they had changed their purchasing approval processes by lowering the threshold for an additional step by 50%. And as a result of it, they required one additional step that would take them anywhere from 30 to 60 days. So that's an example of an additional approval step that was required because of the, possibly the impact of the macroeconomic environment. An example in North America, was unlike the customary purchasing processes, this particular customer, instead of just requiring a POC, required hard dollar return in investment from the sponsors of that project. And we are now working with them to ensure that they have that data. So those are 2 examples of either an additional step that is required, or additional justification that's required. And that, I believe, we began to see more frequently in Q2.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

And just a question on the contribution from indirect and referrals from partners, that looks like that's jumped up pretty significantly year-over-year. Is it -- was that just a function of a higher contribution from indirect because of the direct sales force issues?

Earl E. Fry

I think that's part of it, Ed, and the other part is, that, we did have slightly higher contribution. If I look at our top deals, the vast majority in almost 90% of our deals over $1 million had some sort of partner involvement, or in some cases were from OEM partners. So I'm not sure that I would flat call that a particular trend. I'm happy with the partner contribution, on the other hand, I think it also highlights the place that we fell short within existing customers where we have our own footprint, which I think points to some of the sales execution challenges that Sohaib talked about.

Operator

Our next question comes from Tom Roderick with Stifel, Nicolaus.

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Earl, I was hoping you could shed some insight into the guidance and some of the things that go around the visibility there. I guess if I look at the guidance, it effectively suggests a license will be up quarter-on-quarter, which is not a seasonal -- typical seasonal trend. So I'll guess I'll ask you the annoying question of what did you know and when did you know it on the quarter? But can you help us out with, when was it clear to you that the quarter wasn't going to meet your expectations? What sort of actions did you take to preserve the pipeline at that point when you had that information? And then as you've gotten into this quarter, have you had any, lot of cleaning up some of those deals that slipped out of the quarter?

Earl E. Fry

Yes, so as you noticed, this is enterprise software, so their, the linearity is, something we all aspire to and rarely achieve. So as you might guess, even going into the last couple of weeks of the quarter, we still felt like we had a shot to get to our targets, and it was really the closer rates in the last, really week or so that disappointed us. So from that perspective, we do have sales rates, conversion rates were lower than we had seen in prior quarters, which does infer that there's more slippage than we usually get crossing from the end of one quarter going into the next quarter. That said, I would still be a little cautious as I think about -- we are being cautious as we think about Q3, in large part because, especially in Europe, that's, it's always a tough quarter because you don't have a lot of visibility in the first couple of months of the quarter due to various European holidays. And then from a seasonality standpoint, if you're inferring -- the inference on the guide, obviously is that revenues will be up sequentially, our license revenue is up sequentially from Q2 to Q3. I would argue that our Q2 performance is definitely not your typical seasonality. So take Q2 as the atypical data point, and we hope to get back to, while not normalcy, but back to making progress in Q3.

Operator

Our next question comes from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Guys, one of the things that you talked about back at the Analyst Day was that the post sales hiring that you did and particularly how that was necessary to get some of these deals pushed through and implemented and then to open up the pipeline for selling more, especially around MDM. But where have you gone with that post sale hiring, is it having that desired impact, and could that be a positive for the rest of the year?

Earl E. Fry

That post sales hiring has gone very well, that's a big part of some of the professional services and subject matter experts, the technical architecture managers that we've hired and promoted in the first half of the year. The -- as we're tracking customer go lives, we had a strong increase in customer go lives Q2 '12 versus Q2 '11. So I think from that perspective, Michael, we feel better about what that bodes going forward, for especially some of the newer product areas and our ability over the next year to be just starting to generate greater follow-on business than we may have been generating over the last 6 to 9 months.

Michael Turits - Raymond James & Associates, Inc., Research Division

And then if I can get a follow-up in a different direction. I'll just ask the competitive question again. I know that in you remarked that there's no change in win rates against "tier 1 competitors," but a lot of question has been, people have asked whether or not if you're seeing increased competition from open-source or smaller competitors. And I would add whether or not, maybe people are hesitating even to commit to particular data architectures given the changes that are taking place in people's data deployments for their some [ph] analytics or big data. So are any of these more fundamental factors, whether its architecture or competition with potentially smaller vendors. Isn't it conceivable that this had some impact also?

Sohaib Abbasi

I do not believe that any of the competitive consideration has affected our performance. There are open-source vendors that are targeting a very different market, departmental being equation [ph]. And of course, we can go into a lot of details in terms of the architectural approach they've taken and why that would not scale to the enterprise level. So I do not believe that there are any commercial competitors, open-source or otherwise, that we're seeing anymore than we did in prior years. In terms of new technology, as I commented on, the next-generation analytics platform is a very diverse platform. And there are multiple vendors, each making their own unique claims, from in [indiscernible] query optimizers, like SAP HANA, to Agile, business intelligence like QlikTech, a variety of Hadoop vendors. Build-for-purpose analytic databases including [indiscernible] Astrodata, Vertica and others. And that bodes well for Informatica. In fact, one of the financial services leader commented that their adoption of Hadoop has led to a 35% increase in their use of Informatica.

Operator

Our next question comes from Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Earl, I understand there is, in general been some shift towards more license fees within deferred revenue on the balance sheet. So I was hoping you might be able to share with us how much license fees were in deferred this quarter and what was it the prior quarter?

Earl E. Fry

Yes, Nate, that is not something that we've ever provided any kind of detail or color on. You can infer that it's been relatively consistent. I will say that most of the deferred increase, as you might guess, is coming from deferred maintenance, but we also -- as you also might guess, are seeing an increase in deferreds from our subscription offerings as well, and the deferred license piece remains as a kind of rough as a proportion to the license revenue remains reasonably consistent, kind of on a year-over-year basis. But it does, obviously, will fluctuate a bit quarter-to-quarter, but we -- that's not something that we're prepared to or have ever disclosed.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. And then just maybe as is a follow-up. There were obviously a lot of deals that slipped out of Q2. Can you speak to whether any or much of that came in during the first part of July that was perhaps not part of your -- embedded within your future's disclosure?

Earl E. Fry

Yes, I think we have a typical amount of deal slippage and as I was, sort of commenting earlier, I would expect that Q3 linearity would be not too dissimilar for what we would have seen in the past and the -- with the only caution being that I think we're looking at -- we're taking a fairly conservative look from a linearity perspective at to what to expect, what we're expecting out of Europe.

Operator

Our next question comes from Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Earl, I appreciate you guys are taking a pretty conservative view on conversion rates after this quarter. I guess just how much time have you all had to go back through the pipeline and scrub that so that you feel confident about the quality of the pipeline, both from sort of an aggregate point of view, as well as how it's been set up in terms of timing so that those lower conversion rates aren't being applied against a pipeline that's not sized effectively. I realize there's a lot of sales changes that have gone on. So I guess just how do you feel on that? Sounds like you guys feel pretty confident that the business is there. But I'd just love to hear you, maybe address that.

Sohaib Abbasi

As you would expect, we have had an intense focus on ensuring that we have a good understanding of the pipeline, and we had gone through and scrubbed the pipeline, had follow-up calls on the top opportunities. So we believe we have a much better understanding of the pipeline. However, the impact that the macroeconomic environment has continues to be hard to predict. And for that reason, we are continuing to track the pipeline progression very, very closely.

Operator

Our next question comes from Karl Keirstead with BMO Capital Markets.

Karl Keirstead - BMO Capital Markets U.S.

Earl, you mentioned that the financial services vertical was your strongest. I guess that seems a little counter intuitive given all the negative news out of the banking industry. So I just wanted to ask you, is that primarily because the year-over-year compare is easy? Or are you actually seeing good, sort of sustainable demand coming out of the U.S. banking vertical? A little color might be helpful.

Earl E. Fry

Sure, financial services continued to be our largest overall vertical as it has been for a lot of quarters. My comment in particular was related to domestic financial services, was an area of strength and consistent performance in Q2. Consistent on an absolute basis and yes, consistent -- or much better than it was on a relative basis a year ago. That said, international financial services were weak as you might guess, and particularly weak in Europe, where we were actually in -- European financial service is down sequentially, as well as down year-over-year. So that financial services comment is meant to be more around North America, U.S.-based banking. The other area of good consistent performance for us this past quarter and has been for the past few quarters is in the health care area.

Karl Keirstead - BMO Capital Markets U.S.

And Earl, if I could ask a follow-up, would you expect the U.S. financial services vertical to outgrow the overall corporate performance in the second half as well?

Earl E. Fry

That would be my expectation at this point. If I look back over the last 5 or 6 years, we typically have about a 50-50 mix between U.S. and international financial services. This past quarter, it was tilted very hard over to U.S. I would continue to expect well over half of our mix of financial services to come out of the U.S.

Operator

Our next question comes from Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

I was wondering, Sohaib, if there was any uniformity or which products, were there any specific products or grouping of products that was most affected in the slowdown? And were there any certain verticals that were hit a little bit harder other than Financial Services?

Sohaib Abbasi

I would not single out any particular product that was impacted more than the others. We saw consistent results in terms of the mix of the product revenue. In terms of verticals, other than health care that Earl already commented on that stood out in terms of their very strong performance, the rest of them were proportionally in line with what we've seen in prior quarters. Now going into Q3, as Earl commented on earlier, we do expect Public Sector, particularly in the U.S., to be strong. And other than that, I don't see anything unusual in terms of the mix of verticals.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And then just one follow-up, if I may, on the leadership transition. You made a leadership change in Europe about a quarter or 2 ago. I was just wondering if that leadership change is largely complete? And then also, about how long do you expect until John McGee can take over and then really make the changes that are necessary to turn things around? How, about how long do you think that would take?

Sohaib Abbasi

In EMEA, we changed the leadership -- EMEA leadership, Steven Rose joined us in -- on April 1, so clearly he has had more experience. I spent a week in EMEA, and I believe that we have a better understanding of both the macroeconomic environment, and the changes we need to make for us to adapt much more quickly to the changing environment. In terms of the worldwide field leadership, Paul Hofmann will continue on leading our sales organization in Q3 as John McGee transitions into that role. John has started, and I expect that he will spend his time meeting the team, coming up to speed and planning 2013. And I am confident that we will have a very successful transition.

Operator

Our next question comes from Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I just had one question. I know earlier in the year, you had some focus on IOM and MDM and made some specific go-to-market investments behind that. I don't know if you consider those specialist or not, but can you just update us on the thinking there, and sort of whether the productivity cycle, when that should you come online? And if that is something that you expect here to continue maybe in the back half or Q4 if that opportunity's pushed out a little bit to '13?

Sohaib Abbasi

As I commented on earlier, the product mix has remained consistent with our quarters [ph]. MDM continues to be one of our most successful products outside of our core products. We also saw good traction of ILMs, particularly for our largest transactions that included ILM. We invested in subject matter experts in our product business units, and in order to get even more leverage from that product knowledge and solutions knowledge and industry knowledge, we have consolidated all of the -- our subject matter experts under one leader in the sales organization. And with that change, I expect that we will benefit even more in the second half of this year.

Operator

Our next question comes from Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Sohaib and Earl, in the prior recession, Informatica was one of the few technology companies that did a very nice job navigating through the recession. Your value stood out pretty clearly among your customers. And if you look at that, that ability for Informatica to get through that recession versus the weakness that we're seeing in the market today, what is different about the current environment besides just the sales execution that you seem to be running into it? That you didn't [ph] quite see to this magnitude in -- back in 2009?

Sohaib Abbasi

Clearly, the contrast between our track record of 31 consecutive quarters of growth and the results in Q2 underscores that we were not as well prepared for the changes in the macroeconomic environment. And I would attribute the difference between the 2 to the operational challenges that I outlined. And I would once again reiterate that we have a good understanding of how we scale Informatica, and we have an intense focus and aggressive measures to address those issues.

Operator

Our next question comes from Derrick Wood with Susquehanna International.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Earl, you did mention that the low end of today's guidance was what you had guided during the preannouncement. Are you actually lifting your guidance a bit from what you provided a few weeks ago? Is there anything to read into that?

Earl E. Fry

I don't know that there's anything to read into that other than what we said on July 5, with those are kind of minimum levels that we're guiding to, and where we're setting our target. So I think I'm just reinforcing the point that we made in July, on July 5 and also recognizing the fact that it may take another couple of quarters to get through all of the execution challenges and given a continued uncertain macroenvironment.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Okay. And you guys had a lot of field manager changes over the last few quarters. Has that caused any incremental sales turnover that you need to backfill? Just trying to get a sense of the stability of the sales force that you're looking at right now.

Sohaib Abbasi

I refer to some of the sales changes that we made, and I believe that going into second half, we do have a lot more experience with the new go-to-market model, and we will be able to have a more stable organization going forward.

Operator

Our next question comes from the line of Shaul Eyal with Oppenheimer Inc.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

I apologize in advance if my question has been asked already. Sohaib, back in -- on July 5, you indicated that some of the fields then some of your customers in Europe have indicated to you that they will continue and procure the company's products. What's the current update that you can provide us with? I don't know if you've visited in Europe since -- but kind of any, basically kind of still the same tones coming out of that region?

Sohaib Abbasi

I did comment that I did meet with several customers in June, and in Europe. And the common theme was that they do recognize that they need to invest more in data technologies, that they aspire to become more data centric. However, they were taking a much more cautious view, and that they -- in some of those cases outlined additional steps that they needed in their approval process and that has not changed. I believe that we continue to have good opportunities to have even more strategic relationship with our customers, and I've not seen a change in the tone either, that they continue to be cautious, and they continue to require a little more diligence. But at the same time, we do have a good opportunity in front of us at -- in Europe as well as elsewhere.

Operator

Our next question comes from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Just a couple of questions from investors. With the appointment of John, you turned that hire pretty quick, Sohaib, from the time of the preannouncement to now. And I guess there's just some questions around the level of due diligence and how long you were talking with him, and maybe give us a sense of why you thought he'd be the best fit to run the company.

Sohaib Abbasi

Brent, as you would expect, we have -- as a routine exercise, succession planning for some of the key executive positions, for all executive positions. So in terms of the selection process, we had an opportunity to meet with several very strong candidates. And in the end, we believe we had an opportunity to make the right decision in terms of what we require. I outlined some of the challenges that we encountered, as well as the opportunity for us to scale to the next level, having disciplined sales capacity development, having a rigorous multi-quarter discipline, and having the specialization required for the product platform. So looking at what we need in order to scale to the next level, I have no doubt that John was the strongest candidate for Informatica.

Brent Thill - UBS Investment Bank, Research Division

Okay. And just as a quick follow-on to that. You've had a number of questions just about other sales changes and it seems like anyone -- we all worry when you bring a new head of field ops in that there's going to be more changes that will ripple through. But I guess your feeling is that there's not going to be drastic changes in terms of the architecture of the sales force, it's at this point in your opinion more of a fine tune?

Sohaib Abbasi

We are very intensely focused to ensure we have a smooth transition. And as I said earlier, Paul Hoffman will continue to lead our sales organization in Q3. John has joined, he will be transitioning into that role, he will have a chance to meet with our sales leadership, participate in all the forecast calls, all the planning. And I expect that with the intense focus we've got to ensure that we have a successful hand-off, we'll be able to have a smooth transition. Now recognize that we do plan to have the aggressive measures that I outlined earlier, for us to actually scale Informatica, but we will do it in a manner that ensures that we continue to deliver.

Operator

There seem to be no further questions at this time. Please proceed with any closing remarks.

Sohaib Abbasi

For the remainder of 2012 and beyond, our singular mission remains the same, advance Informatica as the clear leader in data integration by redoubling our operational discipline and obtain our financial guidance goals. With secular mega trends such as big data, cloud computing, and social computing, elevating the importance of both our compelling value proposition and our expansive product portfolio, I am confident that Informatica is well-positioned to grow beyond $1 billion. Thank you.

Operator

Ladies and gentlemen, this does conclude today's Informatica Second Quarter 2012 Earnings Release Conference Call. You may now disconnect.

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