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Informatica (NASDAQ:INFA)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Stephanie Wakefield - Vice President of Investor Relations

Sohaib Abbasi - Chairman, Chief Executive Officer and President

John McGee - Executive Vice President of Worldwide Field Operations

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

Thomas Ernst - Deutsche Bank AG, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Chris Koh - Stifel, Nicolaus & Co., Inc., Research Division

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

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

Pinjalim Bora - Piper Jaffray Companies, Research Division

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

Stewart Materne - Evercore Partners Inc., Research Division

Shawn Yuan - Roth Capital Partners, LLC, Research Division

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Steven R. Koenig - Wedbush Securities Inc., Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

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

Operator

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Stephanie Wakefield, Vice President of Investor Relations. Ms. Wakefield, you may begin.

Stephanie Wakefield

Good afternoon, and thank you for joining us today. I'm here with Sohaib Abbasi, our CEO; Earl Fry, our CFO; and John McGee, our EVP of Worldwide Sales to discuss our Q3 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'll make today are forward-looking statements, including statements concerning our projected financial results for future periods, our growth and operational strategies, our initiatives to address recent challenges in improving performance, 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 the demands for our products and services, including product upgrades, new releases and new products, the expected use of and benefits from our products and services, the expected benefits of our partnerships and acquisitions, our effective tax rate and income tax provisions, our pipeline conversion rates, hiring plans, our international and public sector businesses, as well as our takeover offer for Heiler Software AG, the timing of the offer and overall process and any associated integration benefits or potential synergies, the impact of Heiler on our future financial results and our expectations regarding industry trends and macroeconomic development.

All forward-looking statements are based upon current expectations and beliefs. However, the 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 for the quarter ended June 30, 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. For additional information on the takeover offer for Heiler Software AG, please refer to the www.informatica-offer.com.

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 at www.informatica.com/investor.

Before I hand it off to Sohaib, I'd like to remind you that this call is being webcast and also will be available for replay on the Informatica Investor Relations website. [Operator Instructions]

With that, I'll turn it to Sohaib.

Sohaib Abbasi

Thank you, Stephanie. Our top priority is to regain our operational discipline with an intense sense of urgency and attain our financial guidance goals. This afternoon, I will outline both our recent challenges and our aggressive steps to improve performance in each region.

Next, John McGee, Executive Vice President of Worldwide Sales, will provide his perspective and elaborate on our confidence to address these issues and successfully scale the organization. Then after Earl's review of our financial performance, I will discuss upcoming developments that reinforce our continued conviction in the long-term opportunity.

In the U.S, our results reflected organizational stabilization and some improvement compared to our second quarter 2012 results due to better operational discipline. Even though the effects of the recent changes in our sales organization are taking longer than expected, compared to Q2, we are beginning to obtain results that are closer to our expectations.

In particular, the U.S. vertical segment of our business continues to deliver consistent results led by public sector in Q3. We have identified specific areas of improvement and are broadly applying practices and experiences exemplified by our U.S. verticals team. We continue to benefit from broader customer demand across industry verticals to enable top business imperatives.

As an example, in Q3, a leading retailer selected Informatica for its 10-year IT modernization initiative. Using Informatica, they expect to reduce their IT expenses by millions of dollars across a variety of projects, including data migration to SAP, data synchronization between the legacy and modern applications and data replication to the analytics appliance, Netezza.

With solid year-over-year growth, our result in Asia Pacific reflected growing demand showcased by strategic customer decisions. For example, China Power Southern Grid, a Global 500 energy supplier, selected Informatica MDM as its enterprise standard. Using the unique multidomain capability, China Power Southern Grid plans to optimize the deployment of enterprise assets by managing mass data across several domains including suppliers, contracts, equipment, customers, employee, location and account data.

Informatica MDM will serve as a key data infrastructure technology to develop our smart grid of the firm to gain a competitive advantage. Our performance in EMEA, however, continues to be a major disappointment as we experienced a notably lower pipeline conversion rate compared to Q2. While macroeconomic uncertainty continues to be challenging in Europe, our results underscore the need for greater rigor, better operational discipline and stronger leadership. We are taking aggressive steps to address these issues and pursue our market opportunities. As evidence that our customer value proposition remains compelling, in Q3, a major European car manufacturer selected Informatica for its connected car global initiative. As an example of the big data initiative, using Informatica, the customer will continuously transmit device sensor data and integrate it into Teradata. Leveraging sensor data from embedded mobile devices will enable well-differentiated offerings to provide predictive maintenance, improved fuel efficiency and offer better roadside assistance.

To sum up, Q3 results in the U.S. and Asia-Pacific regions reflected operational improvements compared to Q2, and our disappointing results in Europe indicated need for stronger leadership. We are taking aggressive steps to both better prepare for the opportunities and address the challenges across the regions.

Now I will turn it over to John McGee to provide his perspective and to elaborate on our key measures aimed to effectively scale the organization. After John's and Earl's comments, I will discuss upcoming developments that reinforce our continued conviction in the long-term opportunity. John?

John McGee

Thank you, Sohaib. I'm excited to be part of the Informatica team. As I am taking on leadership and responsibility for our worldwide sales efforts starting this fourth quarter, I want to take this opportunity to highlight the changes we are implementing in our sales organization to improve results and scale for growth.

Having spent the last 3 months traveling to all major international and domestic offices to meet with our sales teams, talking to customers and analyzing sales data from every angle, I am confident that we have the market opportunity, products, customers and team in place to deliver on our goals and take advantage of the opportunities in front of us.

Throughout my career, I have proven success in developing high-growth sales organizations at industry-leading software companies by evaluating every facet of the sales process and adjusting or rebuilding, as necessary, with minimum disruption to the team. I am confident that I can optimize this sales organization to deliver strong results and scale for growth as well.

To help us expand in each of these major geographies, I am pleased to announce 2 changes in sales leadership, one in the U.S. and one in Europe. In the U.S., as Sohaib said, while results were better, there remains room for improvement. I'm excited to announce the promotion of Frank Fallon to Head of North America. Since his arrival a year ago, Frank has led the U.S. vertical team to top performance across the company. Secondly, I have asked Paul Hoffman to head up Europe on an interim basis. He has relocated and while it will take some time, I am confident that he will provide the needed support to get that region back on track.

To drive more consistent results, we are also implementing a more rigorous sales process, driven by 90 days sales cadence. As a result, we have begun aligning non-sales resources that are critical to the sales process to each opportunity much early in the quarter. Additionally, we are proactively planning future sales capacity development, implementing multi-quarter pipeline assessments, enforcing stricter qualification on deals and aligning territory opportunity with resources.

Lastly, to ensure success in all of our opportunities, we integrated the subject matter experts into the sales organization in July. And with more engaged specialists, we are beginning to see better qualification and progress of our IOM and MDM deals in our pipeline. The changes that I have outlined will enable us to continue to effectively cross-sell our newer products and sell our core products into newer, big data use cases.

With proven leaders in our 2 largest regions, more rigorous sales cadence and planning, and with the progress that we've made over the past quarter, we are well positioned to scale for growth.

With that, I'll turn it over to Earl.

Earl E. Fry

Thank you, John. The total revenues for the quarter were $190.3 million, down compared to a year ago and consistent with the preliminary estimate range of $189 million to $191 million that we've provided on October 4. On a constant currency basis, total revenues were up just slightly year-over-year. License revenues were $65.9 million, down 21% year-over-year and within our preliminary estimate range of $65 million to $67 million. Service revenues were $124.4 million, up 11% year-over-year.

Breaking down the components of service revenues, maintenance revenues were $91.9 million, up 12% year-over-year. While consulting education and subscription revenues were $32.6 million, up 7% year-over-year with the entire year-over-year increase being driven by an increase in subscription revenues.

Moving to deal metrics. Existing customers contributed 86% of our license order value compared to 85% a year ago. We booked 13 transactions over $1 million, down from 18 a year ago and 15 in Q2. We booked 75 deals over $300,000, up from 71 a year ago and 70 in Q2. And our average transaction size orders over $100,000 came in at 443K, and the average transaction size for orders over $50,000 was 333K with both metrics up nicely, both on a year-over-year and sequential basis.

From a channel perspective. 37% of our license and subscription orders came from the indirect channel, and an additional 31% of our direct orders in Q3 were referred by partners or resellers. The overall total of indirect and referred orders was 68%, up from 64% a year ago and consistent with Q2.

Moving to geographic mix. Our continued weakness in Europe significantly skewed our international order and revenue mix. License orders as a percentage of total license orders from North America were 74%, up from 68% a year ago and 65% last quarter, while license orders from EMEA and the rest of the world were 26%, down significantly from 32% a year ago and 35% last quarter.

North America represented 71% of total revenue in Q3, up from 68% last year and 67% last quarter, while EMEA and the rest of the world represented 29% of total revenue, down from 32% a year ago and 33% last quarter. Most notably, our EMEA license orders were down over 40% sequentially and down nearly 50% on a year-over-year basis, while EMEA total revenue was down 15% sequentially and down nearly 20% on a year-over-year basis.

We clearly have some work to do to get our European contribution back on track. From a vertical industry perspective, public sector, financial services and communications for our top contributors to new license orders in Q3. Non-GAAP gross profit, which excludes $5.2 million in amortization of acquired technology and $1.1 million of stock-based comp, came in at $159.8 million or 84% in Q3, consistent with last year and up slightly from 83% in Q2.

License margins were 99% in Q3 compared to 99% last year and 98% in Q2. Service margins, driven by better than 95% maintenance renewal rate and increased contribution from our subscription services, were 76%, up from 74% in both the year ago and prior quarters.

Non-GAAP operating income as a percentage of revenue was 23.7%, down from 27.3% a year ago but relatively consistent with Q2. GAAP net income for the third quarter 2012 was $0.14 per diluted share including the after-tax impact of amortization of acquired technology and intangible assets facility to acquisition-related adjustments, acquisition and other expenses and share-based compensation. Excluding these items, non-GAAP net income was $0.27 per diluted share, which is at the high end of our preliminary estimate of $0.25 to $0.27 per diluted share. We added 121 employees during Q3 and ended the quarter with headcount totaling 2,814. Sales and marketing headcount ended the quarter at 982, up by 76 from Q2 and up by 145 from a year ago. While we do still plan to hire in targeted areas, we have significantly tempered our hiring plans for at least the next few months.

Turning to the balance sheet. We ended the quarter with $584 million in cash and investments, up from $565 million in Q2. We repurchased 915,000 shares of our stock for $29.1 million in the third quarter, and we still have $118 million remaining under our stock repurchase authorization.

From a cash flow perspective, in Q3, we generated $42.8 million in cash flow from operations. And over the past 12 months, we've generated nearly $185 million in cash flow from operations. DSOs were 58 days in Q3, well within our target DSO range of 55 to 65 days.

Deferred revenue balances were $227 million and are comprised of $218 million in current deferred and $9 million in long-term deferred. Deferred revenues are up over $27 million from a year ago but down almost $10 million sequentially as continued growth in renewal maintenance orders unfortunately was more than offset by the shortfall in new license and first year maintenance orders over what we had experienced over the past couple of quarters.

Based on Q3 orders, our potential future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken to revenue, as of September 30, was $251.5 million, up nearly $29 million from a year ago and down $6 million sequentially, with the entire sequential decline due to the decline in deferred maintenance revenues.

We ended the quarter with 111.8 million shares outstanding on a fully diluted basis. Our continued revenue shortfall in Europe has caused a significant increase in our expected tax rate, and we now expect our tax rate to be approximately 34% on both a GAAP and non-GAAP basis for the year 2012 before the impact of certain discrete items. As a result of these revised expectations, we booked a 39% GAAP tax rate for the third quarter to bring our year-to-date tax rate in line with our expectations. We expect our tax rate will continue to be very sensitive to our quarterly geographic mix of earnings.

In October, we announced a voluntary takeover offer for all the outstanding shares of Heiler Software AG. The offer period began just this past Monday on October 22 and will continue through November 21, 2012. If all goes well, we expect to begin consolidating Heiler's financial results with our own results beginning late in the fourth quarter, after the closing of the current offer period.

Please note that this takeover offer period is only the first step in the multi-quarter process to acquire and integrate Heiler's business. We expect that we will not begin to realize the benefits of fully integrating Heiler's business with ours, or any potential synergies from the transaction, before sometime in late 2013 after we have taken further integration steps under German law. Until then, we expect Heiler to contribute several million dollars of revenue per quarter and to be dilutive to our earnings by about $0.01 per share per quarter through at least the first 3 quarters of 2013.

Turning to guidance. Even though we have historically provided the following year revenue and earnings guidance on our third quarter earnings call, because of our recent sales execution challenges, the recent sales changes we have implemented and continued macroeconomic uncertainty, we will be deferring our view on 2013 guidance to our fourth quarter earnings call.

We expect to make some progress on our sales execution issues in Q4 and assume that we will consolidate about 1 month's worth of Heiler's results in Q4. We expect only a couple of million dollars of revenue contribution from Heiler in Q4 and expect EPS dilution of about $0.01 per share from Heiler in the quarter.

With these assumptions, we are setting Q4 revenue guidance in the range of $210 million to $225 million and setting Q4 non-GAAP earnings per share guidance in a range of $0.35 to $0.39.

For the year 2012, we are now targeting total revenue in a range of $787 million to $802 million and non-GAAP EPS in a range of approximately $1.26 to $1.30. Please remember that our non-GAAP EPS targets do not include the after-tax impact of an estimated $0.04 plus per share per quarter charge for the amortization of intangibles and acquired technology. The tax affected impact the stock-based 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. Our mission remains the same: to establish Informatica as the clear leader in data integration while expanding our addressable market. Our three-pronged growth strategy also remains the same. First, expand across all major geographic regions, as you heard from John McGee; second, grow beyond data warehousing; and third, advance our product leadership.

To continue to grow beyond data warehousing and advance our product leadership, we recently announced 3 new innovations to further expand our product offering: PowerCenter Big Data Edition, Informatica Cloud MDM and an expansion of Informatica MDM with our announced takeover offer for Heiler Software, an early pioneer in the MDM category of product information management or PIM.

To promote our partnerships and products in big data, I recently co-hosted events with Mike Olson, CEO of Cloudera, one of the early Hadoop pioneers in Boston and New York, as part of our world tour. The enthusiastic response from attendees clearly highlighted growing interest in big data. And the early Hadoop adopters are beginning to recognize the challenges of lack of interoperability with traditional data management infrastructure and the lower productivity and lack of available skills of yet another programming language, MapReduce.

In other words, to enable data to flow easily across all of their systems, companies must execute the same data processing on all existing systems as well as on Hadoop. Furthermore, organizations are looking to leverage existing ITE development resources as they adopt Hadoop.

Informatica's data integration capabilities uniquely empower organizations to overcome these challenges and realize the promise of Hadoop. Specifically, PowerCenter Big Data Edition will deliver interoperability between traditional data management infrastructure and Hadoop, as one that support data integration processing on Hadoop commodity customers. In other words, customers will now be able to leverage the scalability of Hadoop to gain business value from almost all their existing data, from transaction data and business applications to interaction data in social media services and device centers, using the proven universal connectivity of PowerCenter and PowerExchange.

And with the new PowerCenter on Hadoop, powered by the unique Informatica virtual data machine, customers can execute any existing or new data integration task on low-cost commodity hardware Hadoop commodity clusters without coding or even learning MapReduce. Customer will continue to benefit from the productivity of the familiar declarative visual no-coding development environment of PowerCenter.

Most importantly, unlike other alternatives, customers can develop once and deploy it anywhere, both on traditional computing architectures and on Hadoop computing architectures with the Informatica virtual data machine or VDM. The Informatica VDM ensures that the same data integration task without any recoding can execute on traditional, middleware computing platforms, including a grid or in the database using push down and on Hadoop clusters as well. In other words, the unique Informatica VDM enables customers to both enhance productivity by developing once and more importantly, leverage effectively all their computing resources by deploying anywhere.

Last month, as an expansion of Informatica Cloud, we announced our Informatica Cloud MDM offering designed specifically for Salesforce.com customers on the force.com platform. Informatica Cloud MDM will help increase sales productivity and help customer service with an authoritative single view of customer data, including account and opportunity data within and across multiple organizations represented in Salesforce.com.

In addition, earlier this month, cloud category leaders, NetSuite and Ultimate Software, announced availability of Informatica cloud embedded within their offerings. And earlier this month, we announced our public take off -- takeover offer for all outstanding shares of Heiler Software AG. The combination of Informatica's proven multidomain MDM platform and Heiler Software's best-in-class PIM solution will deliver unique value to our customers.

Hundreds of customers rely on Informatica's multidomain MDM platform to manage mass data, including cross-domain relationships and synchronize accurate mass data across operation and analytic systems. Customers around the world rely on Heiler Software's PIM solution to manage the entire product data life cycle of multichannel commerce. The combination would deliver unique value to analyze relationships between products, customers, vendors and locations to optimize multichannel commerce.

With social computing and mobile computing transforming commerce over the coming years, we are uniquely positioned to capture this growth opportunity together. Our innovations continue to grow customer adoption of our newer products. The usage of our newer products has increased consistently from 4% in 2007 to 42% of the active projects in Q3 2012.

Finally, the dedication of the Informatica team, particularly our services organization, continues to drive customer satisfaction and loyalty. According to the independent survey firm, TNS, for the seventh consecutive year, Informatica led our peers in customer satisfaction and customer loyalty. 93% of our customers stated that they intend to purchase additional products from Informatica. Almost 90% stated that they regarded Informatica as being well aligned with their future vision and needs.

To reiterate, Informatica provides a compelling value proposition in the era of big data and cloud computing, maximize return on data and do more with less. With our track record of continual innovation, coupled with our measures of more rigor and better operational discipline, Informatica is now better prepared to pursue this growth opportunity.

So with that, I will open it up to your question. [Operator Instructions] Operator, may we have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Earl, just on EMEA, can you just give us a sense of where your assumptions are and your close rate for Q4, given what's happened the last couple quarters in terms of what you're expecting there? And I guess from that perspective, are you comfortable that you have a good handle on what's happening in EMEA go-to-market issues? Is this more a go-to-market or you think there are some competitive issue that may be different in Europe than you're seeing in the U.S?

Earl E. Fry

No, I think from a close rate perspective, we're taking obviously a fairly conservative view as we're going into Q4, and that's one of the major reasons why we are deferring our guidance for 2013 until next quarter's call. So clearly, we do have some more work to do there, that's probably the -- I'll say the part of the forecast, but maybe we're handicapping the hardest. As far as kind of some of the things that we're looking at going forward, let me ask Sohaib to comment, and then perhaps John will jump in with a couple of his observations.

Sohaib Abbasi

Brent, let me just say that we were very disappointed to see the execution issues. It was -- the performance in Europe was well below our standard. It was simply unacceptable. The issues are fixable, and we will fix those, and let me ask John to comment on that.

John McGee

Yes, sure. So, Brent, I've been here 90 days and the first assessment that came clear to me is that the rigor and operational discipline that I have expected to see, I have not seen in Europe. And that was one of the reasons my decision to have Paul Hoffman lead Europe on an interim basis. Paul is credible, he's trustworthy, he has the confidence of the field and he has my confidence to assess and address the situation. I also believe that with the operational cadence that we're instituting globally, we're going to be seeing better results from Europe. However, like other companies, we are fighting tough macro conditions and I think we'll take several quarters to stabilize the business. I will put in one other comment, and that is, I did live and work in Europe, and I think that provides me insight in terms of the market and I also have confidence that we will be able to find a top-tier full-time replacement shortly.

Operator

Your next question will come from the line of Tom Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

This is actually for Sohaib. Sohaib, so you mentioned that you started a roadshow with some of your key partners. And it came as kind of a surprise for some of us that -- I mean, having -- seeing you on the road show, so it's looks like you probably got a better sense of customers this time, both large and small. Can you give us a sense of what are the adoption basis of some of these you products, like Hadoop, within your products?

Sohaib Abbasi

Well, clearly, as I've commented on, I have had an opportunity to meet with our customers on a regular quarterly basis. This particular roadshow was to promote big data. And accompanying me was the CEO of Cloudera, one of the Hadoop pioneers. There is a growing interest in big data. Many of our customers are recognizing the challenges of adopting a new technology, and Hadoop is turning into a, yet, another island within the IT infrastructure. And our value proposition is to bridge Hadoop with the traditional infrastructure, or in other words, realize the promise of Hadoop. And as I've said, the response was very encouraging, and we are thrilled to announce the PowerCenter Big Data Edition that will address that demand.

Operator

Your next question will come from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Research Division

Maybe a question for John, again. If you look at -- so Europe was obviously weak. But if I look at the performance in the U.S. and we still are declining in terms of the license revenue there, can you try and talk a little bit about your observation? I mean, obviously, we talked to people in the fields and they kind of talk about some still issues to settling down the sales force under the new structure. But what were your observation there? And how comfortable are you with the situation in the U.S?

John McGee

Sure. Thanks for the question. I continue to see bright spots in the U.S, particularly in U.S. verticals. In Q3, you saw the results from the public sector. Over the last year, the vertical story has been a growth story for Informatica. That's been under the leadership of Frank Fallon, and that's the reason why I promoted him to run North America. Certainly, the results speak for themselves, but most importantly, there is alignment between how Frank ran his business with the rigor and operational excellence that I expect, and also his performance-oriented leadership style. By making that change, I'm expecting to have the results that we had in the vertical now being transformed over to the entire North American theater. So I have confidence in the move and I also have the confidence that -- you saw the increase in business going from Q2 to Q3 and as indications we're on the right track.

Operator

Your next question will come from the line of Rick Sherlund with Nomura.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Sohaib, I've heard from a number of people that they think Hadoop is actually negative to your business, and I'm kind of struggling to understand that. It would seem that it is an island, you need to bridge it. Is there another side to Hadoop that we should be thoughtful about that might be less beneficial to the business?

Sohaib Abbasi

Rick, the other side of Hadoop, of course, is the programming language called MapReduce. And as we have been promoting over the years, the value proposition of Informatica continues to be, do more with less, buy instead of build, and that message is resonating for 2 reasons: It is not particularly productive to write in another programming language, and they don't have -- there aren't enough skilled developers that know MapReduce. Now what the new innovation allows Informatica to do is deploy the data integration processing itself on Hadoop clusters. And if you step back a little, the innovation behind Hadoop was lower cost computing platform, paralyzing and running it on commodity boxes, and now, Informatica will help our customers realize that promise. Remarkably, without requiring any recoding. In other words, anything that people have built using Informatica for the past several years will now work without any modification, any recoding on commodity hardware, dramatically reducing the cost of the computing resources.

Operator

Your next question will come from the line of Tom Roderick with Stifel, Nicolaus.

Chris Koh - Stifel, Nicolaus & Co., Inc., Research Division

This is Chris Koh in Tom. So quick question for Earl. In terms of us getting a sense of how much conservatism you've baked into EMEA assumptions, is it a situation where if you look at -- if it were to perform similarly on a year-over-year basis in Q4 for Europe, that you feel like you can still hit the low-end of guidance? Or do you -- is some kind of improvement necessary? And then, if I may, a quick follow-up for John. On the sales team, looks like you guys hired quite a bit. Is that an anticipation of turnover? Or do you feel like the organization, as it stands, is enough to turn it around?

Earl E. Fry

Yes. We think we've been reasonably conservative with our Q4 assessment, not only for EMEA, but with kind of every spot in the business. So baked into that guidance is an assumption that there is a year-over-year decline in EMEA. There is also baked into that assumption that there is some uplift from a seasonal standpoint going from Q3 to Q4. So again, I think, we've -- obviously, we didn't quite get it right in our guidance for Q3, I think we've been extra conservative going into Q4.

Sohaib Abbasi

Let me make a comment or 2 about what's happening before I turn it over to John. We have been very disciplined ensuring that we're aligning our resources where the opportunities are. Clearly, with the performance that we have seen in Europe, we are being very prudent in terms of where we allocate the resources. We continue to ensure that we've got the appropriate level of specialization in our field of [ph organization, and we will continue to invest in line with the opportunities in front of us.

Operator

Your next question will come from the line of Ed Maguire with CLSA.

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

I was wondering if you could comment on the MDM product. You've mentioned that there has been some good motion there, but just more broadly now with MDM in the cloud, how that's figuring in your sales cycles? And also, with John coming on board, is there any thoughts of changing the broader sales process and approach around MDM?

Sohaib Abbasi

We have seen some very significant wins with our MDM product. In fact, 30% of our top 10 deals included MDM. In fact, more than that. 30% of them were led by MDM. I cited one particular one, China Power Southern Grid, but there were many such examples, and those are strategic partnerships that we are now having with our customers of managing their most important and strategic information assets. MDM tends to be a higher-priced product, tends to have a longer sales process, requires us to engage not only with the IT, with business. We have talked in the past about how we continue to staff with subject matter experts. Many of them have come up to speed and are engaging very well with our field. And let me we also ask John to talk a little bit more about how the SMEs are beginning to make a difference.

John McGee

Sure. Sohaib, thanks. The SMEs are making a difference in this sense to providing the wider context, the support and the right prequalification for our sales team. It also makes sense to me to outline some of my core beliefs, which is segment, focus and execute. And then we take a look in terms of how to be able to take the most of the MDM opportunity in front of us. So those were the guiding principles that we have going into next year, particularly in terms of how we go after the uniqueness and the opportunity in front of us of being able to leverage our technology, both from a business and an IT level.

Operator

Your next question will come from the line of Steve Ashley with Robert W. Baird.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

This is Chaitanya Yaramada for Steven Ashley. Could you provide some color on what we can expect in terms of the magnitude of change in the sales force, maybe the beginning of next year or at the end of last quarter, in terms of the change in the number of personnel, turnover, comp plans, et cetera? And maybe further color of Europe versus other geos would be helpful.

Sohaib Abbasi

Well, let me provide you with my perspective, and then I'll also ask John to elaborate on that. We have a much stronger leadership with the changes that John has already outlined. And we will be very, very disciplined in terms of ensuring that we do not have any of the same kind of changes that disrupted our pipeline last year or early this year. We've gone through a very elaborate process that I'll ask John to elaborate -- to tell you a little bit more about, of ensuring that we work very closely with all of the first-time managers, get them involved in the planning process. So going into 2013, I believe we are much better prepared than we have been in the past.

John McGee

Thanks, Sohaib. Two comments. One, is I have experienced, with this type of situation before, and over the last 90 days, myself, along with an extended team, have gone around the world and has sufficiently dug into nearly every single aspect of the sales and sales operations, and we believe we have the right priorities. And we were not making change for change's sake, we're making the right surgical change, with most of it coming in at the leadership level and the operational cadence for the leadership team to provide the best support for our account managers. In terms of territory accounts, compensation, there will be nearly no change from that perspective. And we're going to be focusing in on how we can become much more operationally effective, efficient and have much more of a cadence that surrounds and supports the account manager going into next year.

Operator

Your next question will come from the line of Mark Murphy with Piper Jaffray.

Pinjalim Bora - Piper Jaffray Companies, Research Division

This is Pinjalim for Mark. You mentioned in the Q3 pre-announcement, I think, that orders increased sequentially from Q2 to Q3, but revenue did not. Could you please help us understand that better a little bit?

Earl E. Fry

I'm not sure that we mentioned it in those terms. Obviously, revenue -- license revenues did decline relative from Q2 to Q3. I think we -- if you look at our future revenues disclosure which we've just disclosed off of this call, that is in reasonably healthy shape as we go into Q4.

Operator

Your next question will come from the line of Michael Turits with Raymond James.

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

A couple of things. One is, maybe it's -- you did -- I know you're planning and probably rightly some [ph] management in Europe, but we did just have a change in management there. So what happened in terms of the process? So we had one change, granted it was one that you had to do in order to replace somebody leaving, and then we had to make another change so quickly.

Sohaib Abbasi

Clearly, we did not make the right choice in terms of what the leadership was that we needed at this point in the growth of our European organization. In Paul Hoffman, we have an individual who is a proven leader, who actually grew Informatica sales from $200 million to $800 million, successfully managed through the recession. I believe, in Paul, we have someone who will ensure that we get much better results.

Operator

Your next question will come from the line of Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Maybe just two quick ones for John. John, and I realize you've just been there 90 days. But the U.S. verticals business seems to have been doing fairly well on a relative basis, and probably on an absolute basis over the last year or two. Is that something you need to think about implementing in Europe in order to get deeper with your customers to really get them to buy off on the broader vision? I'm sure Sohaib might have some thoughts on that, too. And then I guess just secondly, you mentioned that you've been through this before. I guess can you just give us maybe some of your thoughts around the likelihood of higher sales force turnover? As you go through these years, obviously, sometimes that sort of begets higher rates of change, and your comfort around you being able to manage that.

Sohaib Abbasi

Let me provide you a little bit of my perspective about the lessons learned and the success we've had in the U.S. verticals that we will apply more broadly. And then, of course, you'll hear from John as well. We have had great success, both in the public sector and in financial services, ensuring that we end up with the more strategic partnerships with our largest customers and ensure that we're working very closely with our partners. And those are lessons that we are going apply more broadly across all of the verticals, across all of the North American region. And of course in Europe, it's complicated a little bit because of the fact that the macroeconomic environment is also uncertain. Now there are a lot of lessons that Informatica itself has learned having grown, even during the recession, that we will apply more broadly in Europe as well. So -- and with the changes that John has outlined from a cadence perspective operational discipline and the leadership perspective, I believe, we will be in much better position for stronger results in Europe. John?

John McGee

Thanks, Sohaib. So the U.S. vertical is a success story. And it will continue to be part of our go-to-market plan in the future. But I also believe that the primary reason that we've had this success was because of the rigor and the operational excellence that was shown by that leadership team. And that's the area that we are going to be focusing on in Europe. And it's that type of rigor that also gets linked back to the second part of your question, which is the turnover. The competitive advantage that my team can bring to the organization is the agility and the intensity in terms of how we get our organization and our account managers in the right place for success. And there's a lot of moving parts that's associated with that, but that's been my experience in terms of how you get the alignment, the speed, the agility through operational excellence, and you get the leaders that lead from the fronts once that's in place. And that's going to be the theme and the aspects I'll be working on going out to the future.

Operator

Your next question will come from the line of Nathan Schneiderman with Roth Capital Partners.

Shawn Yuan - Roth Capital Partners, LLC, Research Division

This is Shawn Yuan for Nathan. On the big deal side, the last -- last Q4, you did 22 $1 million deals and 128 deals over $300,000 deals. Do you think that's a tough comp? And how would you plan to manage those big deal risks? Because it seems like it's issued as hurting in this quarter.

Earl E. Fry

So just to make sure we've got -- we're working with the right numbers. Last Q3, we did $18 million deals and 71 deals over 300K. This quarter, we did 13 deals over $1 million and 75 deals over 300K. So good comps on the 300K-sized deals, obviously down on the $1 million transaction. I think the numbers that you cited are Q4 2011 large deal counts, and those are going to be tough comps. I think our guidance contemplates that we may not get to those record level comps that we had in Q4 '11. But I do expect that we will have better or more $1 million and 300K deals in Q4 than we did -- than we've had at Q3 just due to normal seasonality.

Operator

Your next question will come from the line of Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

For Earl, I know you want to defer the guidance for 2013 until next quarter. But just how should we think, conceptually, about next year growth versus profitability? Will it be more important, do you think, to maintain the margin structure of 2012? Or will you guys be going for a little bit of faster growth and may potentially eat into margin a little bit?

Earl E. Fry

I think, as our top priority, and this is the same priority that we had in -- as we're talking over the last couple of months, is to make sure that we do everything we can to solve the execution issues and get back on the growth path that we're used and that we believe our markets are growing at. So that is going to be absolutely the job one going forward over the next couple of quarters. So that means that we have to temper our expectations for margin growth for a short period of time, then that's what it'll be. Past that, I don't want to get too much further than that in terms of we will have, obviously, be able to give much better color on that and when we do give our guidance in the quarter.

Operator

Your next question will come from the line of Steve Koenig with Wedbush.

Steven R. Koenig - Wedbush Securities Inc., Research Division

I just want to revisit the question of Q4 guidance. I just want to start with the observation that if -- the sequential comps actually looked pretty good in terms of the guidance you've given considering that Heiler's not going to add that much in Q4. And it implies to me that, sequentially, licenses are up pretty good, maybe even better than last year, yet, you're being conservative about Europe. So maybe -- and maybe this is for you, Earl or John, can you comment on where are you seeing strength? What's going into that guidance to give you that good sequential jump? And is it easy comparison from the Q3? Is it visibility? Is it certain geographies? What is it?

Earl E. Fry

Yes. So I do think we've set a new low watermark in terms of sequential comparisons with our European performance in Q3, so we should be able to do better than that in Q4. Let's not forget that, I think, what we're overlooking in some of this is some very strong performance and consistent performance coming out of some of our emerging areas, particularly around Asia-Pac. We've talked about how we've seen consistency and growth and it's double-digit growth in the verticals segment, so we feel good about the pipeline and our ability to close on that pipeline going into Q4. We've made some changes. John has made some changes that -- where we think we will get better and at least have better performance through the rest of North America and EMEA going into Q4. Although I think we are buying ourselves a little bit of time recognizing that it's not -- this is not a one quarter turnaround, particularly in EMEA. This will take a few quarters to get back to the kind of productivity that we're used to. That said, there are a number of things that are executing well and we have turned the corner on, and that gives us some degree of confidence going into Q4.

Operator

Your next question will come from the line of Patrick Walravens with JMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

Oh, great. I'd like to talk about the competition a little more. I mean, who -- as your growth has slowed over the last year, who has been gaining share at Informatica's expense? And what do you want to do to compete more effectively against them going forward?

Sohaib Abbasi

Pat, as you know, in terms of our competitive incident rates, those have really not changed over a long period of time. Now there are things that we could do in order for us to ensure that we are participating in a lot more opportunities, that we could be a lot more proactive in pursuing a lot more opportunities. However, if I were to look at the metrics that we do have, which is the majority of the deals continue to be uncontested by commercial competitors, including when it comes to Hadoop, the primary competition continues to be people writing in MapReduce. Our opportunity is to take that market from build to buy. And overall, the competitive metrics have not changed. With the Informatica PowerCenter Big Data Edition, I believe, we will be in a much more stronger position to pursue the opportunities around Hadoop. Where we now have the ability for our customers to deploy data integration job on low-cost commodity Hadoop customers. So I expect that we will continue to benefit from that growth opportunity.

Operator

Your next question will come from the line of Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Sohaib, you have spent quite a bit of time on the call talking about Hadoop and the bigger term -- bigger picture of longer-term, also at the same time, trying to connect the dots from the thoughts from the previous quarterly conference call where it seemed like it was more of a operational fix. And I probably wanted to drill a little bit more into the tactical steps that the company is taking, while I certainly appreciate that you're trying to position the company for the bigger turns ahead of big data, I was looking to get a little bit more clarity and detail on what exactly are you doing with the sales force. And I think you pointed out in the last call that you expected the sales force to be able to sell the return on investment, the value a little bit better. You also talked about moving the sales force in a generalist-type direction and moving away from the specialty. How is that coming along? Are there any changes to that reorganization that are being contemplated as John McGee takes over? I just want to drill more into the brass tacks and the finer details as opposed to the big picture.

Sohaib Abbasi

Sure. As John elaborated, we have made changes for the better. In order for us to have a greater rigor, in order for us to have better operational discipline, I have, as you know, I sit in on a weekly forecast call with our sales leaders and I have seen a significant improvement in the quality of the conversations that we're having and the qualifications of some of the deals that we're discussing. In terms of specific changes, I do believe that there are immediate opportunities that we will be able to pursue with the 3 product announcement -- the 2 product announcements that I highlighted, our PowerCenter Big Data Edition. Because beyond Hadoop, many of our customers are deploying a variety of different analytic solutions, whether it's in memory clearing [ph] optimizers like Hana and Exalytics, or Agile BI like [indiscernible] and others, or built-for-purpose analytic databases like Greenplum. And Informatica Big Data Edition will support any and all of those, not just Hadoop. On the sales front, the specialization that we've talked about with the SMEs is clearly making a difference in terms of our ability to win those premium-priced products, opportunities like MDM. And at the same time, it free up some of the bandwidth of our sales reps to be able to pursue the data integration and Data Quality core product business.

Operator

Your next question will come from the line of Aaron Schwartz with Jefferies.

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

I think we can appreciate a lot of the changes you made in the search for stability. But I guess if you look at Europe, you're on the, I guess, third leader there and it will be going into a fourth sales leader at some point. How do you ensure, I guess internally first, your employees, that another change in sales leadership here, there won't be a domino effect and more changes? And how do you convey that sort of externally to the customers as well?

Sohaib Abbasi

Well, externally, we have given that a lot of thought. We do have a capable individual that knows Informatica extremely well. Paul Hoffman, these individuals all reported to Paul Hoffman. So from that perspective there, it's not that big a change for the organization. And he is now physically in Europe, spending a lot of his time in Europe. And of course, we are taking a lot of steps in order for us to ensure that we continue to build a strong team. And let me ask John to comment on that as well.

John McGee

Sure. Thanks, Sohaib. From a customer perspective, as I travel around the world and have customer conversations, the passion and the support and the appreciation for the innovation in Informatica exists as strong today as it ever was. And that innovation will continue going out to the future. In terms of the actual -- the stability of Europe with the leadership, as we start making these changes, there's a lot of receptivity, there's a lot of support for the changes. I've seen it from the leadership to the account management level, that the entire organization is behind it. I also believe that we have a much cleaner perspective of what it takes to be successful from a leadership -- from a field leadership perspective. We have existing benchmarks in North American vertical, we have a clear understanding of the rigor and the discipline, as well as what it means to lead from the front. And by having those characteristics, I have a lot of confidence we're going to be able to get the right leader for the long-term in the not-too-distant future.

Operator

Your final question will come from the line of Steve Ashley with Robert W. Baird.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

This is Chaintanya Yaramada. Just wanted to get a sense for what's happening with the deals that didn't close in the pipeline. Are they still -- I mean, are most of them still in the pipeline? Are they being canceled, going to competition, et cetera? It would be helpful to have that color.

Sohaib Abbasi

Like most quarters, we do have deals that slipped into the next quarter, and this was no different. We have commented in prior quarters that we did observed and experienced, and particularly in Europe, that there were some extra steps of scrutiny in the purchasing cycle given the macroeconomic uncertainty. And those are still opportunities that we are pursuing. So from an overall environment, it is consistent with what we've seen in the past, and clearly, at most quarters, I mean there are certainly, deals that end up going across quarter boundaries, and this is no different.

Operator

I would now turn the conference back over to Sohaib for any closing remarks.

Sohaib Abbasi

For the remainder of 2012 and beyond, I want to reiterate our top priority. Regain our operational discipline with an intense sense of urgency and obtain our financial guidance goals. With the secular megatrends such as big data and cloud computing elevating the importance of both our compelling value proposition and our expansive product portfolio, I am confident that Informatica is better prepared to grow beyond $1 billion. Thank you.

Operator

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

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