Informatica reported solid first-quarter results with revenue growth slightly exceeding expectations, as increased hiring and investment weighed on margins.  The firm grew revenue 9.3% from the year-ago period to $214.3 million, 5% ahead of our model. Informatica changed the way it reports revenues by giving more details, which we find helpful. Service revenue was strong, gaining 14.8% year over year to $126.4 million.

The Consulting and Education Services component was the primary growth driver due to a higher proportion of consulting revenue from a recent acquisition. Software (formerly License) revenue increased 2.3% to $87.9 million as a 2% decline in License revenue was more than offset by a 69% increase in Subscription revenue. Overall, strong revenue growth in North America more than offset weakness in the rest of the world, especially Europe. With the recent significant sales force restructuring in Europe combined with that region’s weak macro environment, we believe it will take time to see improved results in Europe.

On the profitability front, gross margin of 79.5% matched our model, while non-GAAP operating margin of 22.5% was below our model (25.3%) and the year-ago period (28.9%). The decline in profitability resulted from increased investment in products and personnel as the firm builds a broader product line and a more specialized sales force–all of the added head count since the fourth quarter was in Sales and Marketing. Non-GAAP EPS was $0.31, $0.01 below our model and $0.04 below last year. EPS were affected by a recent acquisition, which was dilutive by$0.01.

Looking ahead, management provided second-quarter revenue guidance of $215 million-$225 million with non- GAAP EPS of $0.29-$0.32. Management increased revenue guidance for 2013 to $885 to $925 million, but kept non- GAAP EPS unchanged at $1.31-$1.46. Although EPS guidance was unchanged, we are raising our fair value estimate as we expect these investments in sales force and product to pay off in the longer term.