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INFA > SEC Filings for INFA > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for INFORMATICA CORP

Form 10-Q for INFORMATICA CORP


8-Aug-2013

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, subscription services, and from sales of services, which consist of maintenance, consulting, and education services.
We receive software 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 also receive an increasing amount of software revenues from our customers and partners under subscription-based licenses for a variety of cloud and address validation offerings. 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. Most of our international sales have been in Europe, the Middle East, and Africa ("EMEA"). Revenues outside of EMEA and North America comprised approximately 11% of total consolidated revenues during the first half of 2013, 10% during 2012, and less than 10% during 2011. During the first quarter of 2013, we performed a review of the presentation of certain of our revenue categories and adopted a revised presentation, which we believe more accurately reflects our evolving product and service offerings. A change was made to rename other revenues to subscription revenues and present subscription revenues and license revenues as software revenues. Other revenues were previously presented in services revenues. A corresponding change was made to present cost of license revenues and cost of other revenues as cost of software revenues. This change in presentation will not affect our total revenues, total cost of revenues or total gross margin. Conforming changes have been made for all prior periods presented. Subscription revenues of $6.7 million and $12.5 million for the three and six months ended June 30, 2012, respectively were reclassified from service revenues to software revenues. Cost of subscription revenues of $1.3 million and $2.0 million for the three and six months ended June 30, 2012, respectively were reclassified from cost of service revenues to cost of software revenues.
We license our software and provide services to many industry sectors, including, but not limited to, automotive, energy and utilities, entertainment/media, financial services, healthcare, high technology, insurance, manufacturing, public sector, retail, services, telecommunications, and travel/transportation. Financial services remains our largest vertical industry sector.
Total revenues in the second quarter of 2013 increased by 17% to $222.4 million compared to $190.5 million for the same period in 2012. Software revenues increased by 18% in the second quarter of 2013 from the same period in 2012 due to a 13% increase in license revenues and a 70% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended June 30, 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the second quarter of 2013 from the same period in 2012 due to a 13% growth in maintenance revenues and a 28% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.


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In the first half of 2013, total revenues increased by 13% to $436.7 million from $386.5 million in the comparable period a year ago. Software revenues increased by 10% in the first half of 2013 from the same period in 2012 due to an increase of 5% in license revenues and a 69% increase in subscription revenues. The increase in license revenues reflected an increase in the number of transactions partially offset by a decrease in the average transaction size of license orders in the first half of 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 15% in the first half of 2013 from the same period in 2012 due to a 12% growth in maintenance revenues and a 27% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.
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 in Europe, continue to experience uncertainty driven by varying macroeconomic conditions. Although some of these economies have shown signs of improvement, including in the United States, 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. In particular, economic concerns continue with respect to the European sovereign debt markets and potential ramifications of any U.S. debt, income tax and budget issues, including future delays in approving the U.S. budget or reductions in government spending. Such uncertainty and associated conditions have also resulted in volatility in several of our 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 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. The first half of 2013, and the first and fourth quarters of 2012 followed these seasonal trends. However, license revenues in the second and third quarters of 2012 were lower as compared to the first quarter of 2012. The uncertain macroeconomic conditions and recent changes in our sales organization, particularly the recent transition in our EMEA sales leadership, 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.


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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 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 generation and management capabilities, the reliability of our pipeline estimates and our pipeline conversion rates. In addition to the sales leadership transitions, including the recent change in our EMEA sales organization, we have also implemented pipeline generation and management initiatives and 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.
For further discussion regarding these and related risks, see Risk Factors in

Part II, Item 1A of this Report.
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 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 year ended December 31, 2012.
There have been no changes in our critical accounting policies since the end of 2012.
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 1. Summary of Significant Accounting Policies 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 six months
ended June 30, 2013 and 2012 as a percentage of total revenues:
                                               Three Months Ended             Six Months Ended
                                                    June 30,                      June 30,
                                              2013            2012           2013           2012
Revenues:
Software                                        41  %            41  %         41  %           42  %
Service                                         59               59            59              58
Total revenues                                 100              100           100             100
Cost of revenues:
Software                                         1                1             1               1
Service                                         16               16            16              16
Amortization of acquired technology              3                3             3               3
Total cost of revenues                          20               20            20              20
Gross profit                                    80               80            80              80
Operating expenses:
Research and development                        19               18            19              18
Sales and marketing                             40               38            39              36
General and administrative                       8                8             9               8
Amortization of intangible assets                1                1             1               1
Facilities restructuring and facility
lease termination costs                          -                -             -               -
Acquisitions and other charges                   -                -             -               -
Total operating expenses                        68               65            68              63
Income from operations                          12               15            12              17
Interest income                                  -                1             -               -
Interest expense                                 -                -             -               -
Other expense, net                               -                -             -               -
Income before income taxes                      12               16            12              17
Income tax provision                             4                5             4               5
Net income                                       8  %            11  %          8  %           12  %

Revenues
Total revenues in the second quarter of 2013 increased by 17% to $222.4 million compared to $190.5 million for the same period in 2012. Software revenues increased by 18% in the second quarter of 2013 from the same period in 2012 due to a 13% increase in license revenues and a 70% increase in subscription revenues. The increase in license revenues reflected increases in the average transaction size of license orders and number of transactions in the quarter ended June 30, 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 16% in the second quarter of 2013 from the same period in 2012 due to a 13% growth in maintenance revenues and a 28% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.

In the first half of 2013, total revenues increased by 13% to $436.7 million from $386.5 million in the comparable period a year ago. Software revenues increased by 10% in the first half of 2013 from the same period in 2012 due to an increase of 5% in license revenues and a 69% increase in subscription revenues. The increase in license revenues reflected an increase in the number of transactions partially offset by a decrease in the average transaction size of license orders in the first half of 2013, compared to the same period in 2012. The increase in subscription revenues was due to growth in the installed customer base and higher customer demand of subscription offerings. Services revenues increased by 15% in the first half of 2013 from the same period in


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2012 due to a 12% growth in maintenance revenues and a 27% increase in consulting and education services. The maintenance revenues growth was attributable to the increased size of our installed customer base, and the increase in consulting and education services revenues was primarily due to an increase in consulting revenues due to higher customer demand.
The following table and discussion compare our revenues by type for the three and six months ended June 30, 2013 and 2012 (in thousands, except percentages):

                                    Three Months Ended June 30,                         Six Months Ended June 30,
                                                              Percentage                                        Percentage
                                2013              2012          Change             2013             2012          Change
Software revenues:
License                  $     80,095          $  70,936           13 %      $    158,227        $ 151,044            5 %
Subscription                   11,333              6,670           70 %            21,107           12,453           69 %
Total software revenues        91,428             77,606           18 %           179,334          163,497           10 %
Service revenues:
Maintenance                    99,701             88,435           13 %           195,604          174,473           12 %
Consulting and education       31,310             24,451           28 %            61,801           48,542           27 %
Total service revenues        131,011            112,886           16 %           257,405          223,015           15 %
Total revenues           $    222,439          $ 190,492           17 %      $    436,739        $ 386,512           13 %


Software Revenues
License Revenues

Our license revenues increased to $80.1 million (or 36% of total revenues) and $158.2 million (or 36% of total revenues) for the three and six months ended June 30, 2013, respectively, from $70.9 million (or 37% of total revenues) and $151.0 million (or 39% of total revenues) for the three and six months ended June 30, 2012, respectively. The increase in license revenues of $9.2 million (or 13%) for the three months ended June 30, 2013 compared to the same period in 2012 was primarily due to increases in the average transaction size of license orders and the number of transactions in the quarter ended June 30, 2013, compared to the same period in 2012. The increase in license revenues of $7.2 million (or 5%) for the six months ended June 30, 2013 compared to the same period in 2012 was primarily due to an increase in the number of transactions partially offset by a decrease in the average transaction size of license orders.
The average transaction amount for orders greater than $100,000 in the second quarter of 2013, including upgrades for which we charge customers an additional fee, increased to $441,000 from $425,000 in the second quarter of 2012. The average transaction amount for orders greater than $100,000 for the six months ended June 30, 2013, including upgrades for which we charge our customers an additional fee, decreased to $426,000 from $451,000 in the same period of 2012. The number of transactions greater than $1.0 million was 15 each in both the second quarters of 2013 and 2012. The number of transactions greater than $1.0 million increased to 34 for the six months ended June 30, 2013 from 26 in the same period of 2012. The total number of new customers that we added in the second quarter and first half of 2013, including the number of customers added through acquisitions, was 76 and 202, respectively, compared to 76 and 123, respectively, in the same periods of 2012. We had license transactions with 296 and 543 existing customers in the second quarter and first half of 2013, respectively, compared to 284 and 534, respectively, in the same periods of 2012.
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. Subscription Revenues
Subscription revenues, which primarily represent revenues from customers and partners under subscription-based licenses for a variety of cloud and address validation offerings, increased to $11.3 million (or 5% of total revenues) for the three months ended June 30, 2013 compared to $6.7 million (or 4% of total revenues) for the three months ended June 30, 2012. Subscription revenues increased to $21.1 million (or 5% of total revenues) for the six months ended June 30, 2013 compared to $12.5 million (or 3% of total revenues) for six months ended June 30, 2012. The increases of $4.7 million (or 70%) and $8.7 million (or 69%) in subscription revenues for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012 were primarily due to an increase in the installed base of subscription customers and higher customer demand.


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For the remainder of 2013, we expect our revenues from subscriptions to increase from the comparable 2012 levels primarily due to our growing installed customer base and an anticipated increase in demand for subscription offerings. Service Revenues
Maintenance Revenues . . .

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