Informatica Corporation Q2 2008 Earnings Call Transcript

Informatica Corporation (INFA)

Q2 2008 Earnings Call

July 17, 2008 5:00 pm ET

Executives

Stephanie Wakefield - Senior Director, Investor Relations

Sohaib Abbasi - Chairman and Chief Executive Officer

Earl E. Fry - Executive Vice President and Chief Financial Officer

Analysts

Tom Roderick - Thomas Wiesel Partners

Tom Ernst - Deutsche Bank Securities

Alan Cooke - Merrill Lynch

Nabil Elsheshai - Pacific Crest Securities

Daniel Cummins - Soliel-Lime Rock Research

Nathan Schneiderman - Roth Capital Partners

Bradley Whitt - Broadpoint Capital

Sasa Zorovic - Goldman Sachs

Derrick Wood - Pacific Growth Equities

Mark Murphy - Piper Jaffray

Brian Denyeau - Oppenheimer & Co.

Presentation

Operator

Welcome to the Q2 2008 Informatica earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Stephanie Wakefield, Senior Director of Investor Relations.

Stephanie Wakefield

I’m here with Sohaib Abbasi, CEO, and Earl Fry, CFO of Informatica to discuss our Q2 2008 results.

Some of the comments we will make today are forward-looking statements, including statements concerning our being well-positioned to pursue our growth strategy, our projected financial results for future periods, opportunities for growth in the data integration market, the expected benefits to our customers and products of the acquisition of Identity Systems, our integration of Identity Systems, it’s employees and its technology, the planned use of our products by some customers for more than traditional data warehousing projects, the strength of customer demand for our products, 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 2007 Form 10-K and the first quarter 2008 Form 10-Q for detailed descriptions of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by contacting our Investor Relations department.

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

Before I hand it off to Sohaib, I would like to remind you that this call is being webcast and will also be available for replay at www.informatica.com/investor.

I would also like to ask you when we get to the Question-and-Answer period, to please confine yourself to just one question. We will try to allow additional questions if, and only if, time permits.

Sohaib Abbasi

We are very pleased to report that we achieved record second quarter revenues and record second quarter operating income in Q2 2008. Total revenue grew by 21% year-over-year to $113.8 million. License revenue grew by 16% year-over-year to $48.5 million. Total non-GAAP operating income grew by 44% year-over-year with non-GAAP operating margin of 19.1%, our most profitable second quarter to date.

Q2 results further highlights that our Value Proposition for IT organizations to do more with us has promoted broader customer adoption of our products and services in the current macro economic environment. I would like to recognize the Informatica team for their outstanding operational discipline to consistently pursue our three-prong growth strategy: First, diversification beyond our primary geographic market; second, growth of our aggressful market beyond the traditional date-warehousing segment; and third, advancement of our technology leadership beyond the traditional ETL category.

With our geographic diversification strategy in Q2 our results reflected growing contribution by international regions, particularly Asia/Pacific. International regions represented 42% of total orders. We believe this diversification positions us better for sustained growth in the current environment.

In Asia/Pacific we attained our best ever quarterly results by winning key customer decisions. As an example, the Australian Government Attorney General’s Department, AGD, has standardized on Informatica as their data integration platform. The comprehensive Informatica platform will help automate various steps in the data integration process, including access to unstructured data, data profiling, data quality, data masking, and meta-data management.

In Europe a leading logistics provider, Deutsche Post World Net, has adopted Informatica across all three lines of business: DHL, the German mail system, and Post Bank. Deutsche Post adopted Informatica to expedite results across a broad range of projects, including consolidation of customer applications and data quality projects.

In the Americas a bulge-bracket bank selected Informatica as the standard across almost all business lines, including equities, fixed income, and asset management. Their goals are to reduce operational costs and expedite time to results across a variety of projects, including regulatory compliance and customer relationship management initiatives.

Also in Americas Shell, the energy and petrochemicals giant, chose Informatica for the regulatory compliance initiative mandated by Federal Energy Regulation Commission for interstate transmission of energy.

As showcased by these impressive customer wins, we continue to diversify beyond our primary geographic region and successfully grow our aggressful market beyond the traditional data warehousing segment. As a consequence of the ongoing macro economic uncertainty, IT organizations are assigning much higher priority to projects that facilitate operational efficiency and our Value Proposition to do more with us have promoted even broader usage of our products.

As a result of this growing trend, 48% of our deals over $100,000 were with customers that plan to use Informatica for more than data warehousing. In addition, in Q2 69% of our professional services fees were from consulting engagements beyond traditional data warehousing, primarily data migration projects. Based on our unique Value Proposition in each of the four technology categories we won important customer decisions in Q2.

Customer adoption of the latest Informatica data integration release continues to grow. Hasbro, the leading toy maker, selected Informatica for our proven high performance and cost effective scalability. Electrolux, premier manufacturer of appliance, chose Informatica for their universal data access required by their project to migrate data into an SAP application from 20 systems, including JD Edwards, and custom applications that store data in Oracle, Sequel Server, DB2, IMS, and DSAP.

In the data integration category, all license transactions over $300,000 with our flagship product, PowerCenter, included the latest product releases, 8.5 and 8.6. 57% of those customers licensed new incrementally-priced PowerCenter 8 options.

In Q2 we benefited from growing customer adoption of our latest product lines, B2B Data Exchange, Data Integration Software-as-a-Service, and Data Quality, including Identity Resolution.

An increasing number of customers are adopting B2B Data Exchange, previously known as CDE, to access unstructured data and enable business-to-business data exchange. As an example, Ensenda, a leading carrier management and last-mile logistics company, selected Informatica B2B Data Exchange. With Informatica B2B Data Exchange, Ensenda intends to support 3,000 different EDI formats required to on-board their partners and exchange data with all the suppliers and customers.

In Q2 a number of customers, including Areva and Deutsche Post, licensed our cross enterprise connecter with SalesForce.com to integrate our premise and on-premise data. In addition, several customers including Viaggio and Florida Family Insurance, subscribed to our On-Demand data integration Software-as-a-Service offerings.

Finally, in the Data Quality category we believe we continue to be the fastest growing leader. Data Quality is acknowledged as an important component of our customers’ IT initatives. As a result, an increasing number of customers, including AMD, Station’s Casino, and EDF license our Data Quality products. In Q2 80% of the transactions over $1 million and more than 40% of the transactions over $300,000 included Data Quality products.

During Q2 we completed our acquisition of Identity Systems, a pioneer in identity resolution technology. Identity Systems delivers distinctly compelling technology to enable precise identity search and matching of all information for an individual or organization. The initial customer response and growing adoption of this innovative technology has been very encouraging. In Q2 a number of customers, including AGD, Equifax, and the British Revenue and Customs Service licensed the latest identity resolution products for their IT initiatives.

Finally, our partnerships are further strengthening our competitive position. In Q2 53% of our revenue was influenced by our partners. Working with our partners, we won several key customers in Q2. At Deutsche Post in Germany we partnered with Teradata. At Transocean we partnered with Wipro as part of their new Informatica-based data migration practice. At Woolworth’s we partnered with Hewlett Packard and at Electrolux we partnered with Accenture to win over IBM.

To sum up, we are very pleased with the record future results we obtained despite the current macro economic uncertainty. Now, I will turn it over to Earl to give you more detail on our financial results.

Earl E. Fry

Q2 was another solid quarter. Total revenues for Q2 were a second-quarter record, $113.8 million, up 21% on a year-over-year basis, up 10% sequentially, and better than our guidance range of $108 million to $111 million.

License revenues were a second-quarter record at $48.5 million, up 16% year-over-year. Service revenues were an all-time record at $65.2 million, up 24% year-over-year and up 10% sequentially. Of total service revenues, maintenance revenues were all all-time record $45.5 million, up 23% year-over-year and up 10% sequentially, while consulting and education revenues were an all-time record $19.8 million, up 28% year-over-year and up 9% sequentially. License revenues were 43% of total revenue.

Our yield metrics were excellent and reflect the strength of our Value Proposition, especially in these tougher economic times.

Existing customers contributed 76% of our license orders value, compared to 85% in the first quarter and up from 72% in the second quarter of 2007.

We did business with 239 existing customers and added 68 new customers during the quarter. In addition, we added 219 new customers to our install base as a result of the Identity Systems acquisition.

We booked six transactions over $1 million versus eight in the year-ago quarter. But more importantly, we closed a second-quarter record 54 deals over $300K, up from 35 in the year-ago second quarter. Our average transaction sizes for orders over $100,000 came in at $310K and the average transaction size for orders over $50,000 came in at $215K, relatively consistent with the $306K and $227K average transaction sizes from a year ago.

76% of our license orders came from our direct reps and 24% of our orders were from the indirect channel compared to 70% direct and 30% indirect a year ago. In addition to the 24% sold indirectly, we had 29% of our direct orders in Q2 influenced by partners or resellers in the U.S. The overall total of indirect and influenced orders was 53% compared to 63% a year ago. Licensed revenue from our direct business was 81% in Q2 with 19% of our license revenue coming from the indirect channel.

Now, looking at the geographic mix, for the fourth quarter in a row we had strong contribution from our international team. International orders, as a percentage of total license bookings were 42%, consistent with 42% a year ago and up from 36% in the first quarter, while international revenue was 31% of total revenue in Q2, up from 30% a year ago and down slightly from 33% in the first quarter.

The vertical sectors that contributed most to our Q2 orders were financial services, government, energy and utilities, and communications. And for the first in more than a year, domestic financial services license orders were slightly more than international financial services orders.

Non-GAAP gross profit, which excludes $951K in amortization of acquired technology and $493K of share-based comp, came in at $92 million, or 81% of total revenue in Q2, within our target range of 80%-82%.

License margins were 98% in Q2, consistent with prior quarter and year-ago quarter. And service margins were 68% in Q2, also consistent with the prior and year-ago quarter.

Now, excluding $5.6 million of charges for share-based payments, facilities restructuring, and amortization of intangibles and purchase in process R&D, our Q2 non-GAAP operating expenses were $70.3 million, up $5 million from $65.3 million in the first quarter. As in the second quarter, we absorbed the incremental cost from the acquisition of Identity Systems as well as had the seasonal cost from our annual user conference.

As a percentage of revenue non-GAAP operating expenses were 62% of revenue for the second quarter, down from 63% in Q1 and measurably improved from 65% in the year-ago second quarter.

And as Stephanie mentioned, for a detailed line-by-line reconciliation of GAAP and non-GAAP results, please see the Supplemental Metrics section of our Investor Relations website.

We generated a second-quarter record $21.7 million in non-GAAP operating income, up 44% from a year ago and reflecting continued strong leverage in the business model. As a percentage of revenue non-GAAP operating income was 19%, more than a full 300 basis points better than the 16% operating income reported a year ago.

We generated about $1.8 million of net interest and other income in the second quarter as investment yield declined significantly, and we spent approximately $80 million for the acquisition of Identity Systems. We recorded a tax provision of $4.9 million in the second quarter, resulting in a GAAP tax rate of about 30%.

We delivered second-quarter record GAAP net income of $11.5 million and achieved GAAP fully-diluted EPS of $0.12 in the second quarter. Excluding adjustments for share-based payments, facilities restructuring charges, and the amortization of acquired technology and intangibles, we came in above the high end our earnings range and generated non-GAAP diluted EPS of $0.17. This is up from $0.16 in the year-ago second quarter, and that only demonstrates continued operating leverage in our model despite the year-over-year step function increase in our tax rate.

Based on our Q2 orders, our future revenues disclosure, which includes preferred balances as well as orders not yet taken as revenue, as of June 30, will be $139.5 million. This is an increase of $22.8 million, or 20%, above the level of a year ago and up $3 million from the first quarter. And please remember that the license portion of deferred revenues on the balance sheet continues to be about $10 million higher in Q2 2008 than it was in Q2 2007.

Total head count was 1,532 at June 30, an increase of 73 from the end of Q1. The acquisition of Identity Systems accounted for 48 of the 73 employees added in Q2. Sales and marketing head count ended the quarter at 552, an increase of 30, 28 of whom joined us from Identity Systems.

We generated $12.8 million in cash from operations in Q2. We spent $850,000 on property and equipment, generated $5 million in cash from stock option exercises and employee stock purchase plan purchases and used approximately $9.5 million during the quarter to repurchase 576,000 shares of our stock. Overall cash and investments balances decreased by $72 million as we spent approximately $80 million on the Identity Systems acquisition. We ended the quarter with about $463 million in cash and investments.

DSOs were 50 days in Q2, up seasonally from 40 days in Q1, similar and consistent with 53 days reported a year ago and better than our target DSO range of 55 days to 65 days.

Total deferred revenue increased sequentially by $2.7 million to $121.8 million and is comprised of $110.3 million in current deferred and $11.5 million in long-term deferreds. On a non-GAAP basis we ended the quarter with 104.9 million shares outstanding on a fully-diluted-if-converted basis.

Now, looking forward to Q3 and the remainder of 2008, from a share count perspective, we expect shares outstanding to remain relatively flat for the remainder of 2008. Now, due to lower interest rates and use of cash this past quarter for the Identity Systems acquisition, we expect to generate between $1.4 million to $1.7 million of net interest and other income per quarter for the remainder of 2008.

While our income tax provision will remain very heavily dependent on our geographic mix of earnings, we continue to expect our GAAP tax rate to be roughly 30% on a GAAP basis and approximately 29% on a non-GAAP basis, excluding the affect of any discrete tax items. And this could increase by about a point if the R&D tax credit is not extended in 2008.

While we believe it is best to be prudent, given the current macro economic environment, we are please with the consistency of our performance in the first half and optimistic about our prospects in the second half of the year. So we are maintaining the high end of our guidance and increasing the lower end of our guidance for the year.

We expect total revenue for the year 2008 to be in a range or $455 million to $465 million and 2008 non-GAAP earnings per share to be in a range of $0.70-$0.75.

In addition we are setting Q3 2008 revenue targets between $111 million to $114 million, with non-GAAP EPS expected between $0.16-$0.18 for Q3. Now, remember that our non-GAAP EPS targets do not include the after-tax impact of an estimated $0.015 per share per quarter charge for the amortization of intangibles, the facilities restructuring charge of approximately $0.005 per share per quarter, and the tax-affected impact of stock option expense of approximately $0.03 per share per quarter.

With that I will turn it back over to Sohaib.

Sohaib Abbasi

Last quarter’s record results are further evidence of the strong customer demand globally. More importantly, our sustained results are a good indicator of our customer success and customer satisfaction. A recent survey of customers by PNS, an independent third-party research firm, concluded that Informatica retained the number one customer loyalty ranking among vendors that offer data integration technology. In fact, a full 86% of customers surveyed recognized Informatica as the technology leader and more than 60% of them regard Informatica as a corporate standard. I am pleased to report that 94% of the Informatica customers surveyed intend to purchase more products from us.

In June we hosted our annual Informatica Customer Conference with record number of attendees in Las Vegas. This highly-rated event provided a timely forum to showcase our latest 8.6 product release.

Informatica 8.6 delivers the industry’s first comprehensive unified and open platform for data integration. Informatica 8.6 features the best in fast technology in each of the following four categories: First, data integration supporting the entire continuum of timeliness or latency requirements from batch all the way to real time; second, on demand data integration to retain control over off-premise data; third, cross enterprise integration to flexibly exchange data with partners; and finally, fourth, data quality solutions to gain confidence in all the data.

The new product release, 8.6, offers the first unified data integration platform to significantly enhance developer productivity and reduce the total cost of ownership. Finally, the open Informatica platform enables near-universal access to all data, structured and unstructured, on premise, and even off premise. Informatica 8.6 further advances our technology leadership by delivering world-differentiated and compelling value to our customers.

To sum up, our results are further evident of sustained customer demand, even in these times of macro-economic uncertainly. To pursue this promising opportunity, our growth strategy remains the same: diversification beyond our primary geographic region, growth of our aggressful market, and continual technology and innovation in all four categories, data integration, B2B data exchange, on demand, and data quality.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Roderick - Thomas Wiesel.

Tom Roderick - Thomas Wiesel Partners

Earl, last quarter you talked a little bit about the close of the quarter. I think things got a little tighter at the end and the environment was a little bit tighter than you might have anticipated going in. Can you offer any commentary at what you saw at the close of Q2, what the business trends looked like out there? Obviously you hit the number that posted some upside. And can you give us some sense as to, for the back half of the year, are you expecting, within your guidance, a similar sort of successful performance from the international market?

Sohaib Abbasi

We commented in our Q1 calls that we had seen some different patterns in the buying behavior of our customers and we took steps in order for us to adjust our processes and our organization and the team has done an exceptional job having the discipline to have much better linearity in Q2.

At our analyst day event we commented on the fact that we had set regular weekly targets and it went a long way in ensuring that we had a better linearity. And we closed the deals throughout the quarter. And that is a great testament to the Value Proposition, that our customers didn’t wait until the very end of the quarter in order to actually get the deals done. In fact, we closed some of the larger transactions much earlier in the quarter.

And we expect that our customers will continue to have a little more scrutiny in terms of the purchasing process. However, as our Value Proposition is for customers to do more with us. We find that our customers find that to be particularly appealing in times like this where they are looking for operational efficiency.

And now I’ll ask Earl to comment some more on what we saw in the last few quarter.

Earl E. Fry

I think, Tom, like Sohaib says, it is very similar to what we saw in March. I think you can say that environment has persisted throughout the second quarter and clearly it is something that is kind of persisting throughout our guidance and how we are viewing our pipeline and everything going forward.

That said, I think the other place where you can start seeing some of the impact is where the number of large transactions is not as high this quarter as it was a year ago, yet our overall transaction sizes, the number of deals over $300K continues to increase very nicely.

So what we’re finding, and this is probably especially true in the financial services vertical where people are continuing to buy add-on functionality for existing programs, existing projects, which is where we’re seeing a lot of transactions in the kind of $100K-$400/500K range. Not as much maybe in the big mega projects, but that, I think we would expect to see going forward.

Internationally we continue to see good growth. The strongest growth is coming out of, really some of the distribution areas, in terms of whether it’s Eastern Europe, whether it’s Latin America, some parts of Asia/Pac. And you can also see that in one of the metrics that I cited where for the first time in over a year domestic financial services was actually just slightly higher, a percentage of the mix of financial services, than international. So, I think, from my perspective we learned a lot of lessons, I think, coming out of the March quarter and that was very consistent with what we saw throughout Q2.

Operator

Your next question comes from Tom Ernst - Deutsche Bank.

Tom Ernst - Deutsche Bank Securities

Earl, it is curious to see the strong bounce back from financial services. So you mentioned smaller deals. Is there something tactical you’ve done to induce that, with your sales organization, or perhaps the financing structure for the banks, do you see that sustainable? And then, finally, is this something you might be applying more broadly in your business?

Earl E. Fry

It’s nothing that we are driving, kind of, from the top, so we have made no change in our financing strategies, we have made no change in our incentive or compensation system. I think our deal sales team is smart enough to recognize that we are in a different environment, they’re selling what the customer needs, not pushing what the customer doesn’t need, and what they’re looking to do is they are looking to make their operations more efficient. They are a little more cautious, they’re not wanting to take as many big bets. Yet they are looking to ensure that they are able to continue with their existing projects and looking for ways to, again, run their operations more efficiently.

So I think this is where the Value Proposition, as Sohaib mentioned, is doing more with less and using basically the existing technology that Informatica has provided over the number of year in broader forms of integration, it’s something that fits that very well. So we are please with the prioritization that we are seeing in terms of IT spend, maybe coming our way, in this environment.

Tom Ernst - Deutsche Bank Securities

Is this something that you think is strongly footed in terms of the back log of business as well as pipeline so we should expect that financial services is once again one of your strongest verticals?

Earl E. Fry

Tom, it was our strongest vertical in terms of percentage of business and that kind of 15%-20% range. On an overall year-over-year basis it grew kind of consistent with the overall business. Now, let’s not forget that last year, in Q2 of 2007, was when we saw a big drop off in domestic financial services, so domestic financial services had the benefit this quarter of an easier year-over-year compare.

That said, I’m actually pleased with the balance, not only domestic, international. Also pleased with the international mix because we’re starting to see getting more traction in that international mix outside of Continental Europe. We’re seeing some of that in Australia and the rest of Asia/Pac. So, I feel like there’s good breadth there.

Operator

Your next question comes from Alan Cooke - Merrill Lynch.

Alan Cooke - Merrill Lynch

Could you talk about your sales pipeline, how it compares to a quarter ago and a year ago? How are you feeling about that? And also sales cycles, are they roughly the same as they were a quarter ago and a year ago or have they changed?

Sohaib Abbasi

We are very pleased with the results that we have attained in terms of building the sales pipeline. We rolled out several marketing initiatives, several campaigns, one of which is focused on regulatory compliance and risk mitigation. Another one is focused on some of the real time technologies. And we have been very disciplines in terms of cultivating the lead to our systems. The pipeline is strong. And we obviously have benefited from having a stronger pipeline year-over-year in the prior two quarters, and we similarly have a very strong pipeline going into Q3.

Alan Cooke - Merrill Lynch

And in terms of sales cycles are you seeing a lengthening or they pretty much the same as they have been in the past few quarters?

Sohaib Abbasi

It would be very difficult to actually make a general statement. Clearly we are aware of certain transactions that, due to increased scrutiny end up taking a little bit longer. We commented on some of them in Q1. However, the major change that we have observed in certain verticals is the one that Earl commented, that we are now doing many more transactions over $300,000 that we did in the past. Even though there are fewer $1 million deals.

And of course, it varies by industry, however, across the board there would not be any particular trend in terms of lengthening the sales cycles. In fact, as a result of our discipline we are able to attain much better linearity. We introduced some of the changes in our process of having weekly targets that the sales management team has done a very good job of tracking to those. And that has resulted in getting a lot more of our business done earlier in the quarter.

Operator

Your next question comes from Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

First, the retirement of Girish Pancha. Is there any impact in terms of the re-org that you guys did last year and plans going forward?

Sohaib Abbasi

Let me first of all recognize the contributions that Girish has had over a decade. And one of those contributions is to build a very strong organization. We re-organized a little over a year ago to pursue the four technology category opportunities, data integration, data quality, B2B, on demand. And we appointed very strong leaders, some of whom have very long tenures at Informatica who have done an amazing job.

We have been increasing our revenue 20% year-over-year for several years and I would attribute that to the strength of the team. They have also done a remarkable job in delivering profitability every quarter for about the last 13 consecutive quarters.

We have very strong leaders that are in charge of the business units and we also have a very strong management team under Girish that are managing our data integration business unit. And as the announcement indicated, Girish will be working with us for the rest of this year and I expect it will be a very smooth transition.

Nabil Elsheshai - Pacific Crest Securities

And on Europe, obviously another strong quarter in Europe. There has been some talk of Europe, as a whole, starting to slow down. What are you expectations, or have you seen any change in Europe in terms of the macro?

Sohaib Abbasi

I do not believe that it would be fair for us to have a general comment about all of Europe. Now, within Europe we continue to benefit from very strong performance in Germany. We have commented in some of the prior earnings calls about some of the changes that we made at the Pan-European level as well as in some of the regions. We are very pleased with the consistent performance that we have attained in Southern Europe, primarily in France. We are also very pleased with the progress we have made in Germany.

In terms of the macro economic impact, we have not seen that across all of Europe. Clearly we have not seen any of that in any of the Eastern European economies. The closest that we have seen any signs that there might be an impact would be in the UK. However, overall, Europe continues to do extremely well for us.

Operator

Your next question comes from Daniel Cummins - Soliel.

Daniel Cummins - Soliel-Lime Rock Research

We talked over the last couple of years about how market share shifts at the application and data base tiers benefit Informatica. I am curious if you could give us any color on any recent benefits you’ve been getting. For example, either from shifts between Oracle and SAP or the business intelligence acquisitions. I guess those would be more of a one time in nature. But also the gain in market share by the hosted vendors. I’m curious for color around this idea.

Sohaib Abbasi

Let me make a couple of observations. One is that the majority of our deals remain uncontested by any commercial vendor. And we have made this observation in the past that it is an early-stage market. We are convincing our customers that buying our software is a much better alternative to building their own solutions for data integration. And with more and more references, we are even better positioned to convince our customers of that.

Now, in terms of the minority of the deals where we do see a competitor, our new strategy has allowed us to distinguish ourselves. Electrolux is an example of a customer that chose Informatica over other alternatives and they chose it primarily because we provided the near-universal access that they required, that they needed to move from Oracle-based customer applications over to SAP. Our new strategy has allowed us to distinguish ourselves.

And in fact, in a lot of cases we provide our customers the assurance that with the uncertainties as a result of the industry consolidation, that they would not be locked out of their data. As an example, it is very likely that IBM’s acquisition of Cognos would bias that technology fact, whereas the IBM data base and away from Oracle, Informatica provides them neutrality.

Now, the last comment that I wanted to highlight was that we continue to partner very closely with some of the key leaders. In fact, Oracle invests in Informatica as part of hyperion, as part of CBO, as part of mantas. SAP includes Informatica’s B2B Data Exchange technology as part of NetWeaver. It is branded conversion agent.

And in addition to that, of course, our neutrality has allowed us to continue to strengthen our partnership with all of the global system integrators. We have benefited as a result of the industry consolidation and our neutrality continues to give us a very big competitive advantage.

Daniel Cummins - Soliel-Lime Rock Research

Two years ago I know you were talking about anticipating a benefit from the software service vendors, their big gains in the market. Are you seeing that now where you can really see it in numbers? Then I just have a quick question for Earl on the currency benefit.

Sohaib Abbasi

The software service trend was one that we were the first among the data integration of vendors to recognize. And in fact, we are years ahead of our competition. No one else has even articulated a strategy to provide integration of the service. Not only have we delivered products, extensions to our flagship products, that are now being used by over 55 customers. Some of the largest customers that are using software service offerings from vendors like SalesForce.com now rely on Informatica to retain control over that data.

But we went a step beyond that. We actually now have delivered the third integration as a service. I commented on a few customers that have subscribed to it and there is a huge interest in the third service that we announced, called Data Loader, which provides bi-directional integration between SalesForce.com and any other source, including Google docks. And that is generating a lot of excitement.

In terms of the contribution to our business, as we have commented in the past, given that the integration of the service is based on a subscription, the revenue ramp will obviously reflect that. However, it has already had an indirect impact on our business because it gives us a very tier differentiation versus every other data integration vendor. We are the only one that provides a complete enough solution to integrate both on-premise as well as off-premise data.

Daniel Cummins - Soliel-Lime Rock Research

Earl, I may have missed your comments on FX benefits, as a licensing total.

Earl E. Fry

Compared to a year ago, a little over $2.5 million on the top line and a very modest drag, actually, on the bottom line.

Daniel Cummins - Soliel-Lime Rock Research

And how about to license?

Earl E. Fry

The license fees, I don’t have that in front of me. It should be in roughly the same mix, though, to license versus service mix. So I would assume that it would be roughly $1 million or so on the license side.

Operator

Your next question comes from Nathan Schneiderman - Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

I was wondering how many deals you had that exceeded $5 million?

Earl E. Fry

There were no deals over $5 million. All the deals over $1 million were between $1 million to $2 million.

Nathan Schneiderman - Roth Capital Partners

And on Identity Systems, how much did that impact revenue and EPS this quarter and what do you see currently as the impact on Q3, Q4?

Earl E. Fry

Identity Systems came in just about as we expected for Q2. We had a little less than $1 million help on the top line and it was a drag on earnings by about $0.01 a share. Actually a little less than $0.01 on the operating line and then with the effect of the lost interest income that puts it a little over $0.01.

The expectation for the year remains the same, that we had back when we announced the transaction, which is for the year we would expect it to contribute between $8 million to $10 million in revenue and that it would be basically roughly neutral to EPS, with the notion that it is probably going to be very, very modestly negative dilutive in Q3 and then modestly positive in Q4.

Nathan Schneiderman - Roth Capital Partners

When you look at your Q3 and compare it to last year, last year was virtually flat on the revenue side. I’m just wondering if you view that as a tough comp, an easy comp, or a normal with the five seven-figure deals last year? For the Q3.

Earl E. Fry

I think it’s going to be pretty typical, quite frankly. My expectation is that we had fewer million deals this quarter than we did a year ago, yet we’re doing many, many more $300K transactions, which I think to some degree is a function of the macro environment that we’re in. So I have no reason to believe that that’s going to be significantly different as we go into Q3. So my expectation is that I would expect a fairly typical Q3 seasonality.

Operator

Your next question comes from Brad Whitt - Broadpoint Capital.

Bradley Whitt - Broadpoint Capital

I have a question about the deferred revenue. Can you just kind of remind us the make up of deferred revenue, whether that’s primarily maintenance, and how you would expect that to trend in the next several quarters.

Earl E. Fry

The total deferred revenue is primarily maintenance, that is the lion’s share of it. However, we do have a meaningful component, or the next largest component is deferred license revenue. As I did mention in the call, that deferred license piece year-over-year is more than $10 million larger than it was a year ago. And then there is some smaller component, smaller than the deferred license fees, a smaller component of deferred education and consulting services, as well. But the lion’s share is, as you would expect, deferred maintenance.

Also, because of that I would expect that deferred revenues should tick up basically every quarter although we typically see a bigger lift in Q4 than in other quarters.

Operator

Your next question comes from Sasa Zorovic - Goldman Sachs.

Sasa Zorovic - Goldman Sachs

Could you tell us more specifically how much financial services did contribute in the quarter?

Earl E. Fry

We typically talk about the license, the bookings mix, and the contribution was in that 15%-20% range, probably pushing towards the higher end of that range. And that did show growth that was pretty much consistent with what we saw for the overall business in general.

So, I guess the way I would characterize it, Sasa, is that despite kind of the headline news in the papers is that we saw, especially in the U.S., a good degree of stabilization and basically renewed growth domestically. And where we saw the biggest kind of percentage growth, or incremental growth, quite frankly, was international, outside of [inaudible].

Sasa Zorovic - Goldman Sachs

When you look at the guidance you have provided for the remainder of the year, does it anticipate, in essence, similar vertical splits or other certain verticals that are kind of more represented than others?

Earl E. Fry

I think you should expect it to be relatively typical. Again, when we talk about our vertical contribution, it does vary a little bit quarter to quarter. For example, I might expect Q3 to be slightly stronger from a government standpoint as you might usually see it. Last few quarters we’ve seen healthcare be reasonably strong. I would look for maybe more of the same.

So I don’t see any major changes other than kind of the mix of financial services and financial services over the last couple of years coming down from call it that 25% contribution level to less than 20%. I think we’re at a reasonably stable level in terms of vertical contributions.

Operator

Your next question comes from Derrick Wood - Pacific Growth Equities.

Derrick Wood - Pacific Growth Equities

You are seeing some pretty strong growth in professional services and maintenance. Just curious how that flows to the second half of this year. Should it be pretty linear or do you see some seasonality in Q3 on the professional services side?

Earl E. Fry

I would expect to see some seasonality on the professional services side. Obviously we will see some impact on European professional services, we’ll get impacted by typical seasonality there. And even domestically, that will be the time when customers will go on vacation for a while. So, we typically see that, we get impacted a little bit in Q3 because of that.

Derrick Wood - Pacific Growth Equities

Given kind of the continued difficult environment in the U.S., do you guys see the need to make any cost cutting measures or slow down in hiring or is it pretty status quo? Can you give us any outlook on what the hiring expectations are on the sales front?

Sohaib Abbasi

I would characterize our view as prudent optimism. Earl’s guidance reflected that. Looking at our own performance, we are very optimistic about the opportunity. We have validated our strategy, we have repeatedly demonstrated the operational discipline, we have confirmed the customer demand, we have diversified our business across the geographic regions, we have diversified it across the various verticals. We have the strongest product line that we have had, ever, with the 8.6. And all of those things give us a lot of reason to be optimistic.

However, the macroeconomic uncertainty clearly provides reason to be prudent. And we are continuing to add head count. We will continue to hire where required, however, we will be prudent in making those investments. We are looking at other ways that we could actually reduce the expenses without loosing the flexibility of taking advantage of any up tick in the macro economic environment.

Operator

Your next question comes from Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

Earl, do you have any estimate of the impact to the future revenues disclosure from the acquisition of Identity Systems, if any?

Earl E. Fry

Effectively nothing, it might be $100K or so with some little bit of deferred maintenance but I don’t even know if it rounds up to $100K.

Mark Murphy - Piper Jaffray

And how about the deferred revenue impact on the balance sheet from acquiring Identity Systems?

Earl E. Fry

I think that’s what I’m addressing. It’s almost nothing.

Mark Murphy - Piper Jaffray

So Identity Systems basically doesn’t have deferred revenue, is that what we’re saying?

Earl E. Fry

This is where you have to do the purchase accounting adjustment, so we basically bring over very little of that and basically we can’t recognize revenue. We only recognize a small portion of what they had sitting in deferred revenue and we can’t put on new deferred revenue until after the acquisition and we start billing for new contract renewals and such.

Mark Murphy - Piper Jaffray

Do you have any estimate of the dollar value of deals closed that had slipped out of Q1 and into Q2, or perhaps the number of deals that you were able to successfully close versus those that might still be in the pipeline?

Sohaib Abbasi

It would be actually interesting to talk about the deals because clearly we have talked a little bit about how in certain cases that there was greater scrutiny in terms of the deals. But again, there were deals that took us a little bit longer in much the same way that there were deals that us a little bit longer and in fact we’re off to a very fast start in Q3.

Mark Murphy - Piper Jaffray

We have heard a lot of excitement around this version 8.6 product. Can you maybe talk a little bit about when you would expect to see the peak traction point in terms of adoption of that product cycle?

Sohaib Abbasi

8.6 is a very comprehensive offering and the various elements of those have already started to get growing at option. 8.6 of our flagship data integration products features real time data integration. We’ve already had good uptake of that. In fact, real time, as an option, is now included in over 20% of our deals. Close to 24% of the deals includes real time. B2B Data Exchange, Ensenda was one example. There were many examples of customers that have now adopted it.

I commented on earlier, Data Quality, we continue to be the fastest growing Data Quality vendor. There are a lot of new capabilities in terms of integration with PowerCenter.

And finally, across the On-Demand offering. So, across the board I would expect that it will continue to contribute to our growth in the coming quarters.

Operator

Your final question comes from Brian Denyeau - Oppenheimer & CO.

Brian Denyeau - Oppenheimer & Co.

About financial services based in the U.S. Earl, you’ve talked for a while now about how starting in Q2 of 2007 that business kind of fell on hard times and decelerated meaningfully and you’ve seen that for about a year now. You’ve bounced back here. What I’m wondering is, over that year where it was weak, did it kind of go down in Q2 and plateau from there, or did it get noticeably weaker over time? So we’ll be seeing comps actually getting easier domestically over the next few quarters.

Earl E. Fry

It actually fell pretty dramatically in Q2 of last year and my guess is we had some deal slippage in Q2 to Q3. So the comps, I think, over the next three or four quarters will be not as easy as Q2 of 2008. It will still be pretty easy, especially relative to what we’ve seen over the last year. So it’s not like it dropped, and then dropped, and dropped, and dropped. It kind of dropped and then maybe you had kind of a bounce, and then just kind of stayed there for a while.

Operator

There are no further questions.

Sohaib Abbasi

In summary, our Q2 results again demonstrate that our strategy and the team’s operational discipline are delivering consistent record results. Our growth strategy remains the same. Thank you.

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