Interactive Intelligence Reports Third-Quarter 2012 Financial Results

INDIANAPOLIS--(BUSINESS WIRE)--Interactive Intelligence Group Inc. (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced operating results for its three and nine months ended Sept. 30, 2012.

“We continue to execute well against our operating plan”

“We continue to execute well against our operating plan,” said Interactive Intelligence founder and CEO, Dr. Donald Brown. “We are successfully moving up-market, winning business with some of the world’s largest global companies, and continuing to take advantage of the market shift toward cloud-based contact center deployments. The number of new cloud-based customers in the third quarter of 2012 was the highest in our company’s history and it’s growing at a rate that’s significantly outpacing the market.

“The shift to our cloud model is accelerating and will continue to result in more revenues being deferred to future quarters leading to greater overall growth of recurring revenues,” continued Brown. “We remain committed to investing in our sales, marketing and development infrastructure to accelerate the momentum in the business, which we expect to lead to further market share gains and increased shareholder value. Given our strong and growing pipeline of opportunities worldwide in the fourth quarter, we now expect cloud-based orders to represent more than 35 percent of total orders in 2012, up from our previous expectation of 30 to 32 percent. We are maintaining our full-year total order growth target of 20 percent.”

Third-Quarter 2012 Financial Highlights:

Orders: Total orders grew by 18 percent from the third quarter of 2011, while cloud-based orders were up 53 percent over the same quarter last year and comprised 41 percent of total orders. The company signed 37 contracts over $250,000 including nine over $1.0 million, up from 17 and three, respectively, in the third quarter of 2011.
Revenues: Total revenues were $59.3 million, an increase of 14 percent over the third quarter of 2011. Recurring revenues, which include both maintenance and support from perpetual license agreements and cloud-based revenues, increased 18 percent to $29.2 million and accounted for 49 percent of total revenues. Cloud-based revenues increased 46 percent to $5.4 million. Product revenues were $22.3 million and services revenues were $7.8 million, compared to $21.6 million and $5.8 million, respectively, for the same quarter last year.
Total Deferred Revenues: Deferred revenues increased to $83.2 million as of Sept. 30, 2012, from $65.7 million as of Sept. 30, 2011. In addition, the amount of future unbilled cloud-based revenues as of Sept. 30, 2012 increased to $60.4 million from $29.5 million as of Sept. 30, 2011. The combination of deferred revenues and future unbilled cloud-based revenues was $143.6 million, up 51 percent from $95.2 million as of Sept. 30, 2011.
Operating Income: GAAP operating loss was $915,000 for the third quarter of 2012, compared to $4.7 million of GAAP operating income in the same quarter last year. Non-GAAP* operating income was $1.5 million for the third quarter of 2012, compared to $6.6 million in the third quarter of 2011.
Net Income: GAAP net loss for the third quarter of 2012 was $445,000, or $0.02 per diluted share based on 19.3 million weighted average diluted shares outstanding. This compares to GAAP net income for the same quarter last year of $3.3 million, or $0.16 per diluted share based on 19.9 million weighted average diluted shares outstanding.

Non-GAAP net income for the third quarter was $1.9 million, or $0.10 per diluted share. This compares to non-GAAP net income of $5.8 million, or $0.29 per diluted share for the same quarter last year.

Cash, Cash Equivalents and Investments: As of Sept. 30 2012, Interactive Intelligence had cash, cash equivalents and investments of $75.8 million.
Cash Flows: During the third quarter of 2012, the company generated $7.9 million in cash flow from operations and used $11.3 million for an acquisition and $5.8 million for capital expenditures.

First Nine Months 2012 Financial Highlights:

Orders: Total orders increased 17 percent compared to the first nine months of 2011, while cloud-based orders were up 50 percent over the same period last year. The company signed 90 contracts over $250,000 including 23 over $1.0 million, up from 76 and 11, respectively, in the same period last year.
Revenues: Total revenues were $166.8 million, an increase of 10 percent over the first nine months of 2011. Recurring revenues increased 25 percent to $85.2 million. Cloud-based revenues increased 58 percent year-over-year to $15.4 million. Product revenues were $61.4 million and services revenues were $20.2 million, compared to $66.2 million and $17.4 million, respectively, in the same quarter last year.
Operating Income: GAAP operating loss was $2.4 million for the first nine months of 2012, compared to $15.1 million of operating income in the same period last year. Non-GAAP operating income was $4.3 million for the first nine months of 2012, compared to $20.6 million in the first nine months of 2011. The year-over-year decline in operating income resulted from revenues being deferred to future quarters and the increased investment in sales, marketing, and research and development to expand the company’s product leadership and share in the cloud-based market.
Net Income: GAAP net loss was $1.4 million, or $0.07 per diluted share, based on 19.2 million weighted average diluted shares outstanding. This compares to GAAP net income for the first nine months of 2011 of $10.2 million, or $0.51 per diluted share based on 19.9 million weighted average diluted shares outstanding. The expected annual effective tax rate is 31 percent, including one-time current period benefits recorded in the third quarter of 2012 related to completing 2011 tax returns.

Non-GAAP net income was $4.3 million, or $0.23 per diluted share compared to non-GAAP net income for the first nine months of 2011 of $17.6 million, or $0.88 per diluted share.

* A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included with this press release. An explanation of these measures is also included below under the heading “Non-GAAP Measures.”

Additional Third-Quarter 2012 and Recent Highlights:

Interactive Intelligence received Frost & Sullivan’s Company of the Year, Contact Center Systems North America, 2012 Award and the 2012 Nemertes Research IP Contact Center PilotHouse Award.
Interactive Intelligence released an upgraded version of Interaction Process Automation^™ (IPA), which was designed for faster business process development, reduced costs and improved ease of use.
Software Magazine named Interactive Intelligence among the World's Top 500 Software and Service Providers.
Interactive Intelligence received Joint Interoperability Test Command (JITC) certification for the latest versions of its Customer Interaction Center^™(CIC) software suite. This certifications ensures compliance with certain Department of Defense standards, while helping speed government sales cycles and reduce deployment time.
Effective Aug. 1, 2012, Interactive Intelligence acquired Bay Bridge Decision Technologies, a leading U.S. supplier of contact center forecasting, capacity planning and strategic analysis technology. The acquisition enables Interactive Intelligence to bridge the gap between its basic workforce management features and the advanced forecasting and planning capabilities in the Bay Bridge products to offer a strategic solution for mid-size and large contact centers.

Interactive Intelligence will host a conference call today at 4:30 p.m. Eastern time (EDT) featuring Dr. Brown and the company's CFO, Stephen R. Head. A live Q&A session will follow opening remarks.

To access the teleconference, please dial 1 877.324.1969 at least five minutes prior to the start of the call. Ask for the teleconference by the following name: “Interactive Intelligence third-quarter earnings call.” The teleconference will also be broadcast live on the company's investor relations' page at http://investors.inin.com. An archive of the teleconference will be posted following the call.

About Interactive Intelligence
Interactive Intelligence Group Inc. (Nasdaq: ININ) is a global provider of contact center automation, unified communications, and business process automation software and services. The company's unified IP business communications solutions, which can be deployed on-premise or via the cloud, are ideal for industries such as financial services, insurance, outsourcers, collections, and utilities. Interactive Intelligence was founded in 1994 and has more than 4,500 customers worldwide. The company is among Forbes Magazine's 2011 Best Small Companies in America and Software Magazine's 2012 Top 500 Global Software and Service Providers. It employs more than 1,300 people and is headquartered in Indianapolis, Indiana. The company has offices throughout North America, Latin America, Europe, Middle East, Africa and Asia Pacific. Interactive Intelligence can be reached at +1 317.872.3000 or info@inin.com; on the Net: www.inin.com.

Non-GAAP Measures
The non-GAAP measures shown in this release include revenue which was not recognized on a GAAP basis due to purchase accounting adjustments and exclude non-cash stock-based compensation expense for stock options, the amortization of certain intangible assets related to acquisitions by the company and non-cash income tax expense. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included with the financial information included in this press release. These measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by other companies. Stock-based compensation expense and amortization of intangibles related to acquisitions are non-cash and certain amounts of income tax expense are non-cash. Management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to management and investors regarding financial and business trends related to the company's results of operations. Further, management believes that these non-GAAP measures improve management's and investors' ability to compare the company's financial performance with other companies in the technology industry. Because stock-based compensation expense, non-cash income tax expense amounts and amortization of intangibles related to acquisitions can vary significantly between companies, it is useful to compare results excluding these amounts. Management also uses financial statements that exclude stock-based compensation expense related to stock options, non-cash income tax amounts and amortization of intangibles related to acquisitions for its internal budgets.

Forward Looking Statements
This release may contain certain forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: rapid technological changes in the industry; the company's ability to maintain profitability; to manage successfully its growth; to manage successfully its increasingly complex third-party relationships resulting from the software and hardware components being licensed or sold with its solutions; to maintain successful relationships with certain suppliers which may be impacted by the competition in the technology industry; to maintain successful relationships with its current and any new partners; to maintain and improve its current products; to develop new products; to protect its proprietary rights adequately; to successfully integrate acquired businesses; and other factors described in the company's SEC filings, including the company's latest annual report on Form 10-K.

Interactive Intelligence is the owner of the marks INTERACTIVE INTELLIGENCE, its associated LOGO and numerous other marks. All other trademarks mentioned in this document are the property of their respective owners.



Interactive Intelligence Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2012			2011			2012			2011
Revenues:
	Product		$	22,322		$	21,616		$	61,419		$	66,248
	Recurring			29,186			24,759			85,223			68,177
	Services			7,766			5,765			20,181			17,426
		Total revenues		59,274			52,140			166,823			151,851
Costs of revenues:
	Product			5,935			6,689			17,587			19,277
	Recurring			8,096			6,479			23,174			17,574
	Services			6,298			4,158			16,072			11,789
	Amortization of intangible assets			35			35			105			105
		Total cost of revenues		20,364			17,361			56,938			48,745
Gross profit				38,910			34,779			109,885			103,106
Operating expenses:
	Sales and marketing			19,920			15,223			56,598			44,700
	Research and development			11,950			9,243			33,296			26,104
	General and administrative			7,579			5,326			21,410			16,445
	Amortization of intangible assets			376			302			1,027			760
		Total operating expenses		39,825			30,094			112,331			88,009
Operating income (loss)				(915	)		4,685			(2,446	)		15,097
Other income:
	Interest income, net			216			165			565			300
	Other income (expense)			26			172			(66	)		262
Total other income				242			337			499			562
Income (loss) before income taxes				(673	)		5,022			(1,947	)		15,659
Income tax expense (benefit)				(228	)		1,741			(583	)		5,456
Net income (loss)			$	(445	)	$	3,281		$	(1,364	)	$	10,203
Other comprehensive income (loss):
	Foreign currency translation adjustment		$	9		$	(176	)	$	(774	)	$	(176	)
	Net unrealized investment gain			172			105			354			62
Comprehensive income (loss)			$	(264	)	$	3,210		$	(1,784	)	$	10,089


Net income (loss) per share:
Basic			$	(0.02	)	$	0.17		$	(0.07	)	$	0.55
Diluted				(0.02	)		0.16			(0.07	)		0.51

Shares used to compute net income (loss) per share:
Basic				19,283			18,816			19,199			18,648
Diluted				19,283			19,946			19,199			19,890



Interactive Intelligence Group, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
(unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011

Recurring revenue, as reported		$	29,186		$	24,759		$	85,223		$	68,177
Purchase accounting adjustments			144			64			344			162
Non-GAAP recurring revenue		$	29,330		$	24,823		$	85,567		$	68,339

Recurring revenue gross profit as reported		$	21,090		$	18,280		$	62,049		$	50,603
Purchase accounting adjustments			144			64			344			162
Non-cash stock-based compensation expense			135			119			388			328
Non-GAAP recurring revenue gross profit		$	21,369		$	18,463		$	62,781		$	51,093
Non-GAAP recurring revenue gross margin			72.9	%		74.4	%		73.4	%		74.8	%

Services revenue, as reported		$	7,766		$	5,765		$	20,181		$	17,426
Purchase accounting adjustments			-			-			-			48
Non-GAAP services revenue		$	7,766		$	5,765		$	20,181		$	17,474

Services revenue gross profit as reported		$	1,468		$	1,607		$	4,109		$	5,637
Purchase accounting adjustments			-			-			-			48
Non-cash stock-based compensation expense			44			36			120			71
Non-GAAP services revenue gross profit		$	1,512		$	1,643		$	4,229		$	5,756
Non-GAAP services revenue gross margin			19.5	%		28.5	%		21.0	%		32.9	%

Total revenue, as reported		$	59,274		$	52,140		$	166,823		$	151,851
Purchase accounting adjustments			144			64			344			210
Non-GAAP total revenue		$	59,418		$	52,204		$	167,167		$	152,061

Gross profit		$	38,910		$	34,779		$	109,885		$	103,106
Purchase accounting adjustments			179			99			449			315
Non-cash stock-based compensation expense			179			155			508			399
Non-GAAP gross profit		$	39,268		$	35,033		$	110,842		$	103,820
Non-GAAP gross margin			66.1	%		67.1	%		66.3	%		68.3	%

Operating income (loss), as reported		$	(915	)	$	4,685		$	(2,446	)	$	15,097
Purchase accounting adjustments			647			476			1,719			1,482
Non-cash stock-based compensation expense			1,734			1,411			5,026			4,004
Non-GAAP operating income		$	1,466		$	6,572		$	4,299		$	20,583
Non-GAAP operating margin			2.5	%		12.6	%		2.6	%		13.5	%


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Net income (loss), as reported		$	(445	)	$	3,281		$	(1,364	)	$	10,203
Purchase accounting adjustments:
Increase to revenues:
	Recurring		144			64			344			162
	Services		-			-			-			48
Reduction of operating expenses:
	Customer relationships		331			257			892			625
	Technology		35			35			105			105
	Non-compete agreements		45			45			135			135
	Acquisition costs		92			75			243			407
	Total		647			476			1,719			1,482
Non-cash stock-based compensation expense:
	Cost of recurring revenues		135			119			388			328
	Cost of services revenues		44			36			120			71
	Sales and marketing		606			458			1,708			1,283
	Research and development		505			392			1,375			1,196
	General and administrative		443			406			1,435			1,126
	Total		1,734			1,411			5,026			4,004
Non-cash income tax expense (benefit)			(28	)		636			(1,039	)		1,912
Non-GAAP net income		$	1,908		$	5,804		$	4,342		$	17,601

Diluted EPS, as reported		$	(0.02	)	$	0.16		$	(0.07	)	$	0.51
Purchase accounting adjustments			0.03			0.02			0.09			0.07
Non-cash stock-based compensation expense			0.09			0.07			0.26			0.20
Non-cash income tax expense (benefit)			(0.00	)		0.04			(0.05	)		0.10
Non-GAAP diluted EPS		$	0.10		$	0.29		$	0.23		$	0.88



Interactive Intelligence Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands)


			September 30,			December 31,
			2012			2011
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	29,438		$	28,465
	Short-term investments			30,102			40,589
	Accounts receivable, net			55,442			56,331
	Deferred tax assets, net			11,340			8,952
	Prepaid expenses			14,658			11,474
	Other current assets			5,667			4,966
		Total current assets		146,647			150,777
Long-term investments				16,238			23,415
Property and equipment, net				25,336			18,304
Long-term deferred tax assets, net				132			-
Goodwill				35,777			22,696
Intangible assets, net				23,136			15,029
Other assets, net				3,044			2,581
Total assets			$	250,310		$	232,802

Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities		$	21,907		$	16,545
	Accrued compensation and related expenses			8,273			8,870
	Deferred product revenues			4,836			3,870
	Deferred services revenues			62,650			57,423
		Total current liabilities		97,666			86,708
Long-term deferred revenues				15,711			14,141
Deferred tax liabilities, net				-			1,688
Other long-term liabilities				287			291
Total liabilities				113,664			102,828

Shareholders' equity:
	Preferred stock			-			-
	Common stock			193			190
	Additional paid-in-capital			128,097			119,644
	Accumulated other comprehensive loss			(613	)		(193	)
	Retained earnings			8,969			10,333
		Total shareholders' equity		136,646			129,974
Total liabilities and shareholders' equity			$	250,310		$	232,802



Interactive Intelligence Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


			Nine Months Ended
			September 30,
			2012			2011

Operating activities:
Net income (loss)			$	(1,364	)	$	10,203
Adjustments to reconcile net income to net cash
	provided by operating activities:
	Depreciation, amortization and other non-cash items			6,718			4,388
	Stock-based compensation expense			5,027			4,004
	Tax benefits from stock-based payment arrangements			(204	)		(1,658	)
	Deferred income tax			(4,784	)		827
	Amortization (accretion) of investment premium (discount)			641			(1,261	)
	Gain on disposal of fixed assets			25			-
	Changes in operating assets and liabilities:
		Accounts receivable		2,800			(2	)
		Prepaid expenses		(3,011	)		(3,706	)
		Other current assets		(684	)		623
		Other assets		(463	)		(288	)
		Accounts payable and accrued liabilities		6,348			(2,873	)
		Accrued compensation and related expenses		(967	)		(2,597	)
		Deferred product revenues		423			2,445
		Deferred services revenues		4,922			6,519
Net cash provided by operating activities				15,427			16,624

Investing activities:
Sales of available-for-sale investments				43,487			55,596
Purchases of available-for-sale investments				(26,111	)		(83,083	)
Purchases of property and equipment				(12,609	)		(7,439	)
Acquisitions, net of cash				(22,651	)		(13,376	)
Unrealized gain on investment				1			-
Net cash used in investing activities				(17,883	)		(48,302	)

Financing activities:
Proceeds from stock options exercised				2,989			5,962
Proceeds from issuance of common stock				489			387
Employee taxes withheld for restricted stock units				(253	)		-
Tax benefits from stock-based payment arrangements				204			1,658
Net cash provided by financing activities				3,429			8,007

Net increase (decrease) in cash and cash equivalents				973			(23,671	)
Cash and cash equivalents, beginning of period				28,465			48,300
Cash and cash equivalents, end of period			$	29,438		$	24,629

Cash paid during the period for:
Interest			$	-		$	2
Income taxes				5			2,539

Other non-cash item:
Purchases of property and equipment payable at end of period				(615	)		(14	)



Supplemental Data
(Dollars in thousands)
(unaudited)


		2011															2012
		Q1			Q2			Q3			Q4			Total			Q1			Q2			Q3
Margins (GAAP):
	Product		70.2	%		73.6	%		69.1	%		78.7	%		73.4	%		70.9	%		69.5	%		73.4	%
	Recurring		74.5	%		74.0	%		73.8	%		74.5	%		74.0	%		73.8	%		72.4	%		72.3	%
	Services		40.3	%		28.0	%		27.9	%		22.7	%		29.9	%		19.7	%		22.6	%		18.9	%
	Overall		68.1	%		68.9	%		66.7	%		71.1	%		68.8	%		66.8	%		65.2	%		65.6	%

Year-over-year Revenue Growth (GAAP):
	Product		31.5	%		33.7	%		7.3	%		9.0	%		18.7	%		-4.8	%		-18.8	%		3.3	%
	Recurring		30.3	%		35.1	%		45.7	%		22.8	%		33.0	%		31.1	%		27.2	%		17.9	%
	Services		87.7	%		30.4	%		26.3	%		4.3	%		31.6	%		-8.4	%		23.5	%		34.7	%
	Overall		36.3	%		33.9	%		24.6	%		13.9	%		26.0	%		10.6	%		5.4	%		13.7	%

Orders:
	Over $1 million		3			5			3			6			17			6			8			9
	Between $250,000 and $1 million		24			27			14			31			96			11			28			28

Number of new customers			65			81			55			104			301			60			67			65

Average new customer order:
	Overall	$	275		$	240		$	314		$	256		$	267		$	237		$	349		$	408
	Cloud-based		488			282			2,820			599			678			748			557			820