Sunday, August 26, 2012

Where Next for Informatica?

Informatica (NASDAQ: INFA) became the latest technology company to warn and this was no gentle reduction in guidance. It announced preliminary second quarter results and shocked the market with a forecast of Q2 revenues of $188-190 million where analyst estimates had been at $217 million. If this wasn’t bad enough, the conference call that followed the announcement was so largely devoid of company-specific "color" as to raise more questions than the management attempted to answer.

The key take-away from the conference call was that management believed it could generate year-on-year revenue growth in Q3 and Q4 and that it would "at least maintain" EPS numbers. Putting these statements together indicates a full year non-GAAP EPS figure of at least 143c which is flat on last year. However, it was way below the recent analyst forecast of 161c.

This is a significant miss, but why did it happen?

 Informatica Not Giving Information

It is rather ironic that a company engaged in selling Master Data Management (MDM) solutions couldn’t be more specific on the reasons for the miss. When questioned, management claimed this was a broad-based phenomenon that wasn’t specific to any industry vertical. Problems appear to have accelerated in June and were largely a consequence of European weakness and the collateral effects of Europe on North American customers. In almost rote like fashion, analysts were informed that customers were delaying orders, requiring further sign-offs and lowering threshold approval levels.

These are the classic early signs of what CEOs do when they want to raise the drawbridge on spending in the face of a slowdown. They are also excuses that customers give when they do not want to buy your product. The reasons for the latter could be coming from a multitude of sources and investors should realize that Informatica is a small company competing against some of the largest companies in tech.

Informatica in the MDM Marketplace

Oracle (NASDAQ: ORCL) and its mortal rival, SAP (NYSE: SAP), compete aggressively in the MDM space as does another tech behemoth, IBM (NYSE: IBM). Oracle offers a number of differentiated solutions to the MDM market with which it tries to generate sales from different sorts of customers. Whilst its Siebel UCM product is currently its largest single MDM product, in the future, it will try and establish Oracle Fusion MDM as its lead MDM solution.
Meanwhile IBM has integrated its three MDM products into a unified offering with which it hopes to offer greater functionality to its customers. This is essential because competitors like SAP or Oracle can offer an integrated solution that carries across myriad business applications from those two companies.
So there is a case for Informatica being squeezed out by some very high powered competition. However, I want to focus on another company in a related space, namely Tibco Software (NASDAQ: TIBX).

Tibco Tells a Different Story

This company gave results at the end of June that were largely in line with analyst expectations. Tibco is relevant because – although its MDM product revenues are very small -- its solutions encompass the kind of business optimization and real time intelligence markets that Informatica’s solutions also tailored too. In other words, I simply don’t believe that Informatica’s solutions would be subject to order delays and greater sign-off approval (as Informatica claimed) whilst Tibco’s would be immune from such a process.

The curious thing is that did Tibco did quite well in Europe and, in fact, it was execution issues in North America that the company cited as causing missed opportunities. Indeed, the company changed its Americas leadership and role of its Senior VP Americas for core infrastructure sales in an effort to better capitalize on opportunities.

With regards to the specific part of its business that relates to Informatica, Tibco stated that business optimization was only marginally up, but was a key factor in most of its larger deals. After a string of growth quarters and a very good  Q1, Spotfire showed less growth in Q2, but continued to show strong pipeline growth and is up over 43% year-to-date. Business Events was down on the quarter, but this belied its central role in enabling many of Tibco’s infrastructure applications.

Put another way, Tibco was saying that business optimization growth moderated but what it didn’t say was that orders were falling off a cliff thanks to Europe. In fact, when asked about it, management said that it had not seen any change in European conditions from a quarter ago. Again, Tibco said this at the end of June, which was a month into the period where Informatica had said the weakness began. Interesting.

Where Next For Informatica?

Clearly investors need to see that this is a macro-issue and not largely a company-specific one. It is indisputable that European concerns will weigh over CEO decision-making and it would be no surprise if it did cause a slowdown. However, these issues have been there for a while and most companies have adjusted. In addition, if companies can turn the tap off quickly, then they can also switch them back on swiftly too.

There are too many imponderables here and I think investors should be cautious before reading sector-wide weakness just because life got tougher for Informatica.

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