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INFA > SEC Filings for INFA > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for INFORMATICA CORP


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the federal securities laws, particularly statements referencing our expectations relating to the productivity of our sales force, license revenues, service revenues, international revenues, deferred revenues, cost of license revenues, cost of service revenues, operating expenses, amortization of acquired technology, share-based compensation, and provision for income taxes; the growth of our customer base and customer demand for our products and services; the sufficiency of our cash balances and cash flows for the next 12 months; our stock repurchase programs; investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; market risk sensitive instruments, contractual obligations; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "intends," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in this Report under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date of the filing of this Report, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ. The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto appearing in Part I, Item 1 of this Report.
Overview
We are the leading independent provider of enterprise data integration and data quality software and services. We generate revenues from sales of software licenses for our enterprise data integration software products, including product upgrades that are not part of post-contract services, and from sales of services, which consist of maintenance, consulting, education, and subscription services.
We receive license revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. We receive service revenues from maintenance contracts, consulting services, and education services that we perform for customers that license our products either directly or indirectly. We also receive an increasing amount of service revenues from our customers and partners under subscription-based licenses for a variety of cloud and address validation offerings. Most of our international sales have been in Europe. Revenues outside of Europe and North America have comprised less than 10% of total consolidated revenues during the past three years, except in the first half of 2012 when revenues outside of North America and Europe comprised approximately 10%.
We license our software and provide services to many industry sectors, including, but not limited to, energy and utilities, financial services, healthcare, high technology, insurance, manufacturing, public sector, retail, services, telecommunications, and transportation. Financial services remains our largest vertical industry sector.
In the third quarter of 2012, continued changes in our sales organization to address recent challenges in sales execution adversely affected our pipeline conversion rate, as well as our pipeline management capabilities and the reliability of our pipeline estimates, particularly in Europe. In addition, macroeconomic uncertainty in portions of North America and Europe and increased competition for the allocation of our customers' IT budget dollars contributed to a delay in customer purchasing decisions and stricter customer purchasing controls and approval processes. As a result, our total revenues in the third quarter of 2012 slightly decreased by 3% to $190.3 million compared to $195.9 million for the same period in 2011. License revenues decreased by 21% to $65.9 million in the third quarter of 2012 compared to $83.7 million for the same period in 2011. The decline in license revenues reflected a reduced number of license transactions in the quarter ended September 30, 2012 compared to the same period in 2011. Services revenues increased by 11% in the third quarter of 2012 from the same period in 2011 due to a 12% growth in maintenance revenues and a 7% increase in consulting, education, and subscription services. The maintenance revenue growth was attributable to the increased size of our installed customer base, and the increase in consulting, education, and subscription services was due to higher customer demand and increased subscriptions. Our operating income as a percentage of revenues decreased to 13% in the third quarter of 2012 from 19% in the third quarter of 2011.

In the first nine months of 2012, we grew our total revenues by 4% to $576.8 million from $556.6 million in the comparable period a year ago, and license revenues decreased by 10% to $216.9 million from $241.6 million on a year-over-year basis. The decline in license revenues for the nine months ended September 30, 2012 compared to the prior year was primarily due to a decrease in the number of license transactions as a result of lower pipeline conversion rate in certain geographies and vertical sectors, partially offset by an increase in the average size of license transactions. Service revenues increased by 14% in the first


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nine months of 2012 compared to the same period in 2011 due to a 16% growth in maintenance revenues and a 9% increase in consulting, education, and subscription services. The maintenance revenue growth was attributable to the increased size of our installed customer base, and the increase in consulting, education, and subscription services was due to higher customer demand and increased subscriptions. Our operating income as a percentage of revenues decreased to 16% in the nine-month period ended September 30, 2012 from 19% in the nine-month period ended September 30, 2011.
Due to our dynamic market, we face both significant opportunities and challenges, and as such, we focus on the following key factors:
Macroeconomic Conditions: The United States and many foreign economies, particularly Europe, continue to experience uncertainty driven by varying macroeconomic conditions. Although some of these economies have shown signs of improvement, macroeconomic recovery remains uncertain and uneven. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in extreme volatility in credit, equity, and foreign currency markets, particularly with respect to the European sovereign debt markets and potential ramifications of U.S. debt issues, income tax and budget concerns, and future delays in approving the U.S. budget. Such uncertainty and associated conditions have also resulted in volatility in various vertical markets, particularly the financial services and public sectors. These conditions have also adversely affected the buying patterns of customers and our overall pipeline conversion rate, as well as our revenue growth expectations. Furthermore, we have made incremental investments in Asia-Pacific and Latin America, and have continued investing in Europe, the Middle East, and Africa ("EMEA"). There are significant risks with overseas investments, and our growth prospects in these regions are uncertain.

Competition: Inherent in our industry are risks arising from competition with existing software solutions, including solutions from IBM, Oracle, and SAP, technological advances from other vendors, and the perception of cost savings by solving data integration challenges through customer hand-coding development resources. Our prospective customers may view these alternative solutions as more attractive than our offerings. Additionally, the consolidation activity in our industry pose challenges as competitors market a broader suite of software products or solutions and bundled pricing arrangements to our existing or prospective customers. Moreover, because of current macroeconomic uncertainty, there is increased competition for the allocation of customers' IT budget dollars.

Product Introductions and Enhancements: To address the expanding data integration and data quality needs of our customers and prospective customers, we introduce new products and technology enhancements on a regular basis, including products we acquire. The introduction of new products, integration of acquired products and enhancement of existing products, is a complex process involving inherent risks, and to which we devote significant resources. We cannot predict the impact of new or enhanced products on our overall sales and we may not generate sufficient revenues to justify their costs.

Quarterly and Seasonal Fluctuations: Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends and are likely to do so in the future. Specifically, it is normal for us to recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks or days of each quarter, though such fluctuations are mitigated somewhat by recognition of backlog orders. In recent years, the fourth quarter has had the highest level of license revenues and license orders, and we generally have weaker demand for our software products and services in the first and third quarters of the year. Each quarter of 2011 and the first quarter of 2012 followed these seasonal trends. However, license revenues for the second and third quarters of 2012 were lower as compared to the first quarter of 2012 and the second and third quarters of 2011. The uncertain macroeconomic conditions and continued changes in our sales organization make our future results more difficult to predict based on historical seasonal trends.

We focus on a number of key initiatives to address these factors and other opportunities and challenges. These key initiatives include certain cost containment measures, the strengthening of our partnerships, the broadening of our distribution capability worldwide, the enablement of our sales force and distribution channel to sell both our existing products and technologies as well as new products and technologies, the alignment of our worldwide sales and field operations with company-wide initiatives and the implementation of a more rigorous sales process, and strategic acquisitions of complementary businesses, products, and technologies. If we are unable to execute these key initiatives successfully, we may not be able to continue to grow our business at our historic growth rates.
We concentrate on maintaining and strengthening our relationships with our existing strategic partners and building relationships with additional strategic partners. These partners include systems integrators, resellers and distributors, and strategic technology partners, including enterprise application providers, database vendors, and enterprise information integration vendors, in the United States and internationally. For example, we are partners with Cloudera, Dun & Bradstreet, EMC, Hewlett-Packard, Intel, Microsoft, MicroStrategy, NetSuite, Oracle, salesforce.com, SAP, and Symantec, among others. See "Risk Factors - We rely on our relationships with our strategic partners. If we do not maintain and strengthen these relationships, our ability to


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generate revenue and control expenses could be adversely affected, which could cause a decline in the price of our common stock" in Part II, Item 1A of this Report.
We have broadened our distribution efforts, and we have continued to expand our sales both in terms of traditional data warehousing products and more strategic data integration solutions beyond data warehousing, including enterprise data integration, data quality, master data management, B2B data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration. We also operate the Informatica Marketplace, which allows buyers and sellers to share and leverage data integration solutions. To address the risks of introducing new products or enhancements to our existing products, we have continued to invest in programs to help train our internal sales force and our external distribution channel on new product functionalities, key differentiators, and key business values. These programs include user conferences for customers and partners, our annual sales kickoff conference for all sales and key marketing personnel, "webinars" and other informational seminars and materials for our direct sales force and indirect distribution channel, in-person technical seminars for our pre-sales consultants, the building of product demonstrations, and creation and distribution of targeted marketing collateral.
We continue to implement changes in our worldwide sales and field operations to address recent sales execution challenges and improve performance, particularly with respect to our pipeline management capabilities, the reliability of our pipeline estimates and our pipeline conversion rates. In addition to the sales leadership transitions, we are also implementing more rigorous sales planning and processes. Additionally, we have expanded our international sales presence in recent years by opening new offices, increasing headcount, and through acquisitions. As a result of this international expansion, as well as the increase in our direct sales headcount in the United States, our sales and marketing expenses have increased. In the long term, we expect these investments to result in increased revenues and productivity and ultimately higher profitability. As we continue to implement further changes, we may experience increased sales force turnover and additional disruption to our ongoing operations. These changes may also take longer to implement than expected, which may adversely affect our sales force productivity. If we experience an increase in sales personnel turnover, do not achieve expected increases in our sales pipeline, experience a decline in our sales pipeline conversion ratio, or do not achieve increases in sales productivity and efficiencies from our new sales personnel as they gain more experience, then it is unlikely that we will achieve our expected increases in revenue, sales productivity, or profitability. In the third quarter of 2012, we extended our master data management offerings through our acquisition of Data Scout Solutions Group Limited. Data Scout designs, markets and supports a cloud based master data management application for salesforce.com customers. Also in the third quarter of 2012, we extended our application information lifecycle management offerings with our acquisition of TierData, Inc. TierData develops and markets software that improves database application performance.
For further discussion regarding these and related risks, see Risk Factors in

Part II, Item 1A of this Report.
Recent Developments
On October 1, 2012, we announced our decision to make a voluntary public takeover offer to acquire all the outstanding shares of Heiler Software AG, through an indirect wholly-owned subsidiary. Heiler Software provides enterprise product information management, master data management and procurement solutions that enable retailers, distributors and manufacturers to manage product information across channels and data sources. The consideration offered to all shareholders of Heiler Software is 7.04 Euro per share in cash, or approximately 80.8 million Euro for the total number of outstanding shares (excluding treasury shares). Based on the exchange rate in effect on October 1, 2012, the total consideration to be offered is approximately $103.8 million US dollars. The acceptance period for the takeover offer commenced on October 22, 2012 and is expected to end on November 21, 2012. If the takeover offer is successful and we achieve a certain minimum ownership threshold, we will begin consolidating Heiler Software's financial results with our financial results in the fourth quarter of 2012 based on our relative ownership percentage, excluding the non-controlling interest owned by Heiler Software's continuing stockholders. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States, which require us to make estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these assumptions, judgments, and estimates are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Any material differences between these estimates and actual results will impact our consolidated financial statements. On a regular basis, we evaluate our estimates, judgments, and assumptions and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the estimates, judgments, and assumptions involved in the accounting for revenue recognition, income taxes, impairment of goodwill and intangible assets, business combinations, share-based compensation, and allowance for doubtful accounts have the greatest potential impact on our


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consolidated financial statements, so we consider these to be our critical accounting policies. The critical accounting estimates associated with these policies are discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
On January 1, 2012, we adopted an accounting pronouncement on fair value measurements that are estimated using significant unobservable (Level 3) inputs. As discussed below, on January 1, 2012, we also adopted an accounting pronouncement on the presentation of other comprehensive income. There have been no other changes in our critical accounting policies since the end of fiscal year 2011.
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 15. Recent Accounting Pronouncements of Notes to Condensed Consolidated Financial Statements in

Part I, Item 1 of this Report.


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Results of Operations
The following table presents certain financial data for the three and nine
months ended September 30, 2012 and 2011 as a percentage of total revenues:
                                               Three Months Ended             Nine Months Ended
                                                 September 30,                  September 30,
                                              2012            2011           2012            2011
Revenues:
License                                         35  %            43  %         38  %            43 %
Service                                         65               57            62               57
Total revenues                                 100              100           100              100
Cost of revenues:
License                                          -                1             1                1
Service                                         16               16            16               16
Amortization of acquired technology              3                2             2                2
Total cost of revenues                          19               19            19               19
Gross profit                                    81               81            81               81
Operating expenses:
Research and development                        19               18            18               18
Sales and marketing                             39               36            37               36
General and administrative                       8                7             8                7
Amortization of intangible assets                1                1             1                1
Facilities restructuring and facility
lease termination costs (benefit), net           -                -             -                -
Acquisitions and other charges (benefit)         1                -             1                -
Total operating expenses                        68               62            65               62
Income from operations                          13               19            16               19
Interest income                                  -                1             -                -
Interest expense                                 -                -             -                -
Other income (expense), net                      -                -             -                -
Income before income taxes                      13               20            16               19
Income tax provision                             5                6             5                6
Net income                                       8  %            14  %         11  %            13 %

Revenues
Our total revenues decreased to $190.3 million for the three months ended September 30, 2012 compared to $195.9 million for the three months ended September 30, 2011, representing a decline of $5.6 million (or 3%), primarily as a result of a decrease in license revenues due to a reduced number of license transactions offset by increased maintenance revenues as a result of growth in our customer installed base. Our total revenues increased to $576.8 million for the nine months ended September 30, 2012 compared to $556.6 million for the nine months ended September 30, 2011, representing a growth of $20.1 million (or 4%). The increase for the first nine months of 2012 was due to increased maintenance revenues driven by the growth in our customer installed base which is partially offset by a decrease in license revenues due to a lower volume of license transactions as a result of a decline in our pipeline conversion rate.


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The following table and discussion compare our revenues by type for the three and nine months ended September 30, 2012 and 2011 (in thousands, except percentages):

                             Three Months Ended September 30,                 Nine Months Ended September 30,
                                                        Percentage                                      Percentage
                            2012            2011          Change            2012            2011          Change
License                $      65,891     $  83,736          (21 )%     $     216,935     $ 241,580          (10 )%
Service revenues:
Maintenance                   91,872        81,666           12  %           266,345       229,571           16  %
Consulting, education,
and other                     32,555        30,485            7  %            93,550        85,495            9  %
Total service revenues       124,427       112,151           11  %           359,895       315,066           14  %
Total revenues         $     190,318     $ 195,887           (3 )%     $     576,830     $ 556,646            4  %

License Revenues
Our license revenues decreased to $65.9 million (or 35% of total revenues) and $216.9 million (or 38% of total revenues) for the three and nine months ended September 30, 2012, respectively, from $83.7 million (or 43% of total revenues) and $241.6 million (or 43% of total revenues) for the three and nine months ended September 30, 2011, respectively. The decreases in license revenues of $17.8 million (or 21%) for the three months ended September 30, 2012 compared to the same period in 2011 and $24.6 million (or 10%) for the nine months ended September 30, 2012 compared to the same period in 2011 were primarily due to a decreases in the number of license transactions as a result of a decline in our pipeline conversion rate, particularly in Europe, due to the factors discussed above in the "Overview" section. However, in both the three and nine month periods ended September 30, 2012, we experienced an increase in the average transaction size of license orders.
We offer two types of upgrades: (1) upgrades that are not part of the post-contract services for which we charge customers an additional fee, and
(2) upgrades that are part of the post-contract services that we provide to our customers at no additional charge, when and if available. The average transaction amount for orders greater than $100,000 in the third quarter of 2012, including upgrades for which we charge customers an additional fee, increased to $443,000 from $413,000 in the third quarter of 2011. The average transaction amount for orders greater than $100,000 in the nine-month period ended September 30, 2012, including upgrades for which we charge customers an additional fee, increased to $448,000 from $426,000 in the same period of 2011. The number of transactions greater than $1.0 million decreased to 13 in the third quarter of 2012 compared to 18 in the third quarter of 2011. The number of transactions greater than $1.0 million was 39 in the nine-month period ended September 30, 2012 compared to 44 in the comparative period in 2011. Service Revenues
Maintenance Revenues
Maintenance revenues increased to $91.9 million (or 48% of total revenues) for the three months ended September 30, 2012 compared to $81.7 million (or 42% of total revenues) for the three months ended September 30, 2011. Maintenance revenues increased to $266.3 million (or 46% of total revenues) for the nine months ended September 30, 2012 compared to $229.6 million (or 41% of total revenues) for the nine months ended September 30, 2011. The increase of $10.2 million (or 12%) and $36.8 million (or 16%) in maintenance revenues for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011 was primarily due to the increasing size of our installed customer base.
For the remainder of 2012, we expect maintenance revenues to increase from the comparable 2011 levels due to our growing installed customer base. Consulting and Education, and Other Services Revenues Consulting, education, and other services revenues increased to $32.6 million (or 17% of total revenues) for the three months ended September 30, 2012 compared to $30.5 million (or 15% of total revenues) for the three months ended September 30, 2011. Consulting, education, and other services revenues increased to $93.6 million (or 16% of total revenues) for the nine months ended September 30, 2012 compared to $85.5 million (or 16% of total revenues) for the nine months ended September 30, 2011. The increases of $2.1 million (or 7%) and $8.1 million (or 9%) in consulting, education, and other services revenues for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011 was primarily due to an increase in subscription revenues.

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