Interactive Intelligence Reports Fourth-Quarter and Full Year 2012 Financial Results

INDIANAPOLIS--(BUSINESS WIRE)--Interactive Intelligence Group Inc. (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced financial results for the fourth quarter and full year ended Dec. 31, 2012.

“While continuing to add some of the most recognized global companies as customers, we remain committed to maintaining our pace of innovation, with several new products scheduled for release this year”

“Our strong performance during the fourth quarter led to a record year for orders and revenues,” said Interactive Intelligence founder and CEO, Dr. Donald Brown. “In 2012, we have further extended our product leadership position and gained even more momentum in cloud-based offerings, which is the fastest growing segment of the contact center market. The number of our new cloud-based customers reached record levels in the fourth quarter and the total dollar amount of contracts continues growing at a rate significantly higher than the overall market.

“While continuing to add some of the most recognized global companies as customers, we remain committed to maintaining our pace of innovation, with several new products scheduled for release this year,” continued Brown. “Looking forward, given our strong global pipeline of opportunities, we are reaffirming our 2013 total order growth forecast of 20 percent and expect cloud-based orders to represent approximately 50 percent of total 2013 orders. We remain focused on innovation, product leadership and cloud-based growth and are confident in our long-term financial profile, which will be driven by growth in recurring revenues.”

Fourth Quarter 2012 Financial Highlights:

Orders: Total orders grew by 119 percent from the fourth quarter of 2011, while cloud-based orders were up 311 percent over the fourth quarter of 2011 and comprised 39 percent of total orders. The company signed 68 contracts over $250,000, which included 19 orders over $1.0 million, up from 37 and six, respectively, in the fourth quarter of 2011.
Revenues: Total revenues were $70.5 million, an increase of 22 percent over the fourth quarter of 2011. Recurring revenues, which include both maintenance and support from perpetual license agreements and cloud-based revenues, increased 31 percent to $33.1 million and accounted for 47 percent of total revenues. Cloud-based revenues increased 47 percent to $6.6 million. Product revenues were $27.2 million and services revenues were $10.2 million, compared to $26.5 million and $6.0 million, respectively, in the fourth quarter of 2011.
Total Deferred Revenues: Deferred revenues increased to $91.9 million as of Dec. 31, 2012, from $75.4 million as of Dec. 31, 2011. In addition, the amount of unbilled future cloud-based revenues as of Dec. 31, 2012 increased to $89.5 million from $34.6 million as of Dec. 31, 2011. The combination of deferred revenues and unbilled future cloud-based revenues was $181.4 million, up 65 percent from $110.0 million as of Dec. 31, 2011.
Operating Income: GAAP operating income was $3.5 million for the fourth quarter of 2012, compared to $6.5 million in the fourth quarter of 2011. Non-GAAP* operating income was $5.9 million for the fourth quarter of 2012, with a non-GAAP operating margin of 8.4 percent, compared to $8.7 million and a non-GAAP operating margin of 15.0 percent in the fourth quarter of 2011. The year-over-year decline in operating income resulted from the deferral of revenues due to an increase in cloud-based orders, certain premises-based orders received in the fourth quarter of 2012 for which revenues were deferred to future periods, 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 income for the fourth quarter of 2012 was $2.3 million, or $0.11 per diluted share based on 20.3 million weighted average diluted shares outstanding. This compares to GAAP net income for the same quarter in 2011 of $4.6 million, or $0.23 per diluted share based on 19.9 million weighted average diluted shares outstanding.

Non-GAAP net income for the fourth quarter of 2012 was $5.7 million, or $0.28 per diluted share. This compares to non-GAAP net income of $7.3 million, or $0.37 per diluted share for the same quarter in 2011.

Cash, Cash Equivalents and Investments: As of Dec. 31, 2012, we had cash, cash equivalents and investments of $80.6 million.
Cash Flows: During the fourth quarter of 2012, the company generated $3.6 million in cash flow from operations and used $2.9 million for capital expenditures, which included expansion of its cloud infrastructure.

Full Year 2012 Financial Highlights:

Orders: Total orders increased 48 percent in 2012 compared to 2011, while cloud-based orders were up 123 percent year-over-year. The company signed 158 contracts over $250,000, which included 42 orders over $1.0 million, up from 113 and 17, respectively, in 2011. Cloud-based orders were 35 percent of total orders, up from 23 percent in 2011.
Revenues: Total revenues were $237.4 million in 2012, an increase of 13 percent over 2011. Recurring revenues increased 27 percent to $118.3 million. Cloud-based revenues increased 54 percent year-over-year to $22.0 million. Product revenues were $88.6 million and services revenues were $30.4 million in 2012, compared to $92.8 million and $23.4 million, respectively, in 2011.
Operating Income: GAAP operating income in 2012 was $1.1 million, compared to $21.6 million in 2011. Non-GAAP operating income in 2012 was $10.2 million, with a non-GAAP operating margin of 4.3 percent, compared to $29.3 million and a non-GAAP operating margin of 13.9 percent in 2011. The year-over-year decline in operating income resulted from deferral of revenues due to an increase in cloud-based orders, certain premises-based orders received in 2012 for which revenues were deferred to future periods, 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 income was $906,000, or $0.04 per diluted share based on 20.2 million weighted average diluted shares outstanding. This compares to GAAP net income in 2011 of $14.8 million, or $0.74 per diluted share based on 19.9 million weighted average diluted shares outstanding. The annual effective tax rate was 46 percent and includes a tax reserve on certain tax positions of the company, offset by one-time benefits recorded in 2012 principally related to a change in the company’s treatment of its officer compensation.

Non-GAAP net income was $10.1 million, or $0.50 per diluted share, compared to non-GAAP net income in 2011 of $24.9 million, or $1.25 per diluted share.

Cash Flows: During the full year of 2012, the company generated $20.0 million in cash flow from operations, used $22.7 million for acquisitions, and used $15.6 million for capital expenditures, which included expansion of its cloud infrastructure.

* 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 Fourth-Quarter 2012 and Recent Highlights:

Interactive Intelligence was honored with a 2012 Cloud Computing Excellence Award from TMC’s Cloud Computing Magazine.
Interactive Intelligence launched Interaction Mobilizer^™ for Windows 8, a software platform that enables mid-size to large contact centers and enterprises to rapidly deploy customer service applications for tablets and other mobile devices.
Interactive Intelligence released Interaction Dialer^® version 4.0, a major predictive dialer software upgrade which was designed to improve ease-of-use, simplify management, and help contact centers more effectively execute dialing campaigns.
The company launched an e-commerce website, the Interactive Intelligence Marketplace^℠, giving customers and resellers fast and easy access to products that complement the vendor’s all-in-one IP communications software suite.

Interactive Intelligence will host a conference call today at 4:30 p.m. Eastern time (EST) 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 fourth-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, 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 5,000 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 approximately 1,400 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, 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 Income
(in thousands, except per share amounts)



			Three Months Ended						Year Ended
			December 31,						December 31,
			2012			2011			2012			2011
			(unaudited)			(unaudited)			(unaudited)
Revenues:
	Product		$	27,207		$	26,538		$	88,626		$	92,786
	Recurring			33,120			25,186			118,343			93,363
	Services			10,215			5,951			30,396			23,377
		Total revenues		70,542			57,675			237,365			209,526
Costs of revenues:
	Product			6,742			5,818			24,329			25,095
	Recurring			9,053			6,227			32,227			23,801
	Services			6,796			4,600			22,868			16,389
	Amortization of intangible assets			58			35			163			140
		Total cost of revenues		22,649			16,680			79,587			65,425
Gross profit				47,893			40,995			157,778			144,101
Operating expenses:
	Sales and marketing			23,172			18,339			79,770			63,039
	Research and development			12,386			9,522			45,682			35,626
	General and administrative			8,312			6,284			29,722			22,729
	Amortization of intangible assets			494			306			1,521			1,066
		Total operating expenses		44,364			34,451			156,695			122,460
Operating income				3,529			6,544			1,083			21,641
Other income:
	Interest income, net			207			134			772			434
	Other income (expense)			(123	)		(118	)		(189	)		144
Total other income				84			16			583			578
Income before income taxes				3,613			6,560			1,666			22,219
Income tax expense				1,343			1,965			760			7,421
Net income			$	2,270		$	4,595		$	906		$	14,798
Other comprehensive income:
	Foreign currency translation adjustment		$	129		$	710		$	(645	)	$	(73	)
	Net unrealized investment gain (loss)			(191	)		(89	)		163			93
Comprehensive income			$	2,208		$	5,216		$	424		$	14,818


Net income per share:
Basic			$	0.12		$	0.24		$	0.05		$	0.79
Diluted				0.11			0.23			0.04			0.74

Shares used to compute net income per share:
Basic				19,367			18,908			19,241			18,714
Diluted				20,308			19,850			20,162			19,885

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

	Three Months Ended						Year Ended
	December 31,						December 31,
	2012			2011			2012			2011

Recurring revenue, as reported	$	33,120		$	25,186		$	118,343		$	93,363
Purchase accounting adjustments		178			309			522			471
Non-GAAP recurring revenue	$	33,298		$	25,495		$	118,865		$	93,834

Recurring revenue gross profit as reported	$	24,067		$	18,959		$	86,116		$	69,562
Purchase accounting adjustments		178			309			522			471
Non-cash stock-based compensation expense		135			89			523			422
Non-GAAP recurring revenue gross profit	$	24,380		$	19,357		$	87,161		$	70,455
Non-GAAP recurring revenue gross margin		73.2	%		75.9	%		73.3	%		75.1	%

Services revenue, as reported	$	10,215		$	5,951		$	30,396		$	23,377
Purchase accounting adjustments		-			6			-			54
Non-GAAP services revenue	$	10,215		$	5,957		$	30,396		$	23,431

Services revenue gross profit as reported	$	3,419		$	1,351		$	7,528		$	6,988
Purchase accounting adjustments		-			6			-			54
Non-cash stock-based compensation expense		27			35			147			101
Non-GAAP services revenue gross profit	$	3,446		$	1,392		$	7,675		$	7,143
Non-GAAP services revenue gross margin		33.7	%		23.4	%		25.3	%		30.5	%

Total revenue, as reported	$	70,542		$	57,675		$	237,365		$	209,526
Purchase accounting adjustments		178			315			522			525
Non-GAAP total revenue	$	70,720		$	57,990		$	237,887		$	210,051

Gross Profit	$	47,893		$	40,995		$	157,778		$	144,101
Purchase accounting adjustments		178			315			522			525
Operating expenses		58			35			163			140
Non-cash stock-based compensation expense		162			124			670			523
Non-GAAP gross profit	$	48,291		$	41,469		$	159,133		$	145,289
Non-GAAP gross margin		68.3	%		71.5	%		66.9	%		69.2	%

Operating income, as reported	$	3,529		$	6,544		$	1,083		$	21,641
Purchase accounting adjustments		769			849			2,487			2,331
Non-cash stock-based compensation expense		1,650			1,294			6,677			5,298
Non-GAAP operating income	$	5,948		$	8,687		$	10,247		$	29,270
Non-GAAP operating margin		8.4	%		15.0	%		4.3	%		13.9	%

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

		Three Months Ended				Year Ended
		December 31,				December 31,
		2012		2011		2012		2011
Net income, as reported		$	2,270	$	4,595	$	906	$	14,798
Purchase accounting adjustments:
Increase to revenues:
	Recurring		178		309		522		471
	Services		-		6		-		54
Reduction of operating expenses:
	Customer Relationships		449		261		1,341		886
	Technology		58		35		163		140
	Non-compete agreements		46		45		180		180
	Acquisition Costs		38		193		281		600
	Total		769		849		2,487		2,331
Non-cash stock-based compensation expense:
	Cost of recurring revenues		135		89		523		422
	Cost of services revenues		27		35		147		101
	Sales and marketing		543		394		2,250		1,677
	Research and development		510		374		1,886		1,570
	General and administrative		435		402		1,871		1,528
	Total		1,650		1,294		6,677		5,298
Non-cash income tax expense			1,039		522		-		2,434
Non-GAAP net income		$	5,728	$	7,260	$	10,070	$	24,861

Diluted EPS, as reported		$	0.11	$	0.23	$	0.04	$	0.74
Purchase accounting adjustments			0.04		0.04		0.12		0.12
Non-cash stock-based compensation expense			0.08		0.07		0.34		0.27
Non-cash income tax expense			0.05		0.03		-		0.12
Non-GAAP diluted EPS		$	0.28	$	0.37	$	0.50	$	1.25

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

			Year Ended
			December 31,
			2012			2011
Assets			(unaudited)
Current assets:
	Cash and cash equivalents		$	45,057		$	28,465
	Short-term investments			23,816			40,589
	Accounts receivable, net			68,409			56,331
	Deferred tax assets, net			16,600			8,952
	Prepaid expenses			15,565			11,474
	Other current assets			5,958			4,966
		Total current assets		175,405			150,777
Long-term investments				11,757			23,415
Property and equipment, net				26,816			18,304
Goodwill				38,723			22,696
Intangible assets, net				22,676			15,029
Other assets, net				6,419			2,581
Total assets			$	281,796		$	232,802

Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable		$	8,795		$	5,434
	Accrued liabilities			23,008			11,111
	Accrued compensation and related expenses			13,640			8,870
	Deferred product revenues			5,999			3,870
	Deferred services revenues			67,893			57,423
		Total current liabilities		119,336			86,708
Long-term deferred revenues				18,000			14,141
Deferred tax liabilities, net				99			1,688
Other long-term liabilities				244			291
Total liabilities			$	137,679		$	102,828

Shareholders' equity:
	Preferred stock			-			-
	Common stock			194			190
	Additional paid-in-capital			133,359			119,644
	Accumulated other comprehensive loss			(675	)		(193	)
	Retained earnings			11,239			10,333
		Total shareholders' equity		144,117			129,974
Total liabilities and shareholders' equity			$	281,796		$	232,802

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


			Year Ended
			December 31,
			2012			2011
			(unaudited)
Operating activities:
Net income			$	906		$	14,798
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation			7,975			5,669
	Amortization			1,776			1,209
	Other non-cash items			(757	)		37
	Stock-based compensation expense			6,676			5,298
	Tax benefits from stock-based payment arrangements			(1,586	)		(3,336	)
	Deferred income tax			(12,311	)		(524	)
	Amortization (accretion) of investment income			846			(1,165	)
	Loss (gain) on disposal of fixed assets			(74	)		4
	Changes in operating assets and liabilities:
		Accounts receivable		(10,166	)		(13,313	)
		Prepaid expenses		(3,918	)		(2,888	)
		Other current assets		(975	)		(85	)
		Other assets		(3,838	)		(1,778	)
		Accounts payable		5,071			(7,700	)
		Accrued liabilities		11,941			6,918
		Accrued compensation and related expenses		4,400			(918	)
		Deferred product revenues		1,190			489
		Deferred services revenues		12,850			18,675
Net cash provided by operating activities				20,006			21,390

Investing activities:
Sales of available-for-sale investments				58,234			73,118
Purchases of available-for-sale investments				(30,348	)		(98,205	)
Purchases of property and equipment				(15,554	)		(13,280	)
Acquisitions, net of cash				(22,651	)		(13,376	)
Unrealized gain (loss) on investment				(138	)		1
Net cash used in investing activities				(10,457	)		(51,742	)

Financing activities:
Proceeds from stock options exercised				5,030			6,671
Proceeds from issuance of common stock				680			510
Employee taxes withheld for restricted stock units				(253	)		-
Tax benefits from stock-based payment arrangements				1,586			3,336
Net cash provided by financing activities				7,043			10,517
Net increase (decrease) in cash and cash equivalents				16,592			(19,835	)
Cash and cash equivalents, beginning of period				28,465			48,300
Cash and cash equivalents, end of period			$	45,057		$	28,465

Cash paid during the period for:
Interest			$	5		$	3
Income taxes				3,213			2,835

Other non-cash item:
Purchases of property and equipment payable at end of period				44			70

Supplemental Data
(Dollars in thousands)
(unaudited)

		2011					2012
		Q1	Q2	Q3	Q4	Total	Q1	Q2	Q3	Q4	Total
Margins (GAAP):
	Product	70.2%	73.6%	69.1%	78.1%	73.4%	70.9%	69.5%	73.4%	75.2%	72.5%
	Recurring	74.5%	74.0%	73.8%	75.3%	74.0%	73.8%	72.4%	72.3%	72.7%	72.8%
	Services	40.3%	28.0%	27.9%	22.7%	29.9%	19.7%	22.6%	18.9%	33.5%	24.8%
	Overall	68.1%	68.9%	66.7%	71.1%	68.8%	66.8%	65.2%	65.6%	67.9%	66.5%

Year-over-year Revenue Growth (GAAP):
	Product	31.5%	33.7%	7.3%	9.0%	18.7%	-4.8%	-18.8%	3.3%	2.5%	-6.2%
	Recurring	30.3%	35.1%	45.7%	22.8%	33.0%	31.1%	27.2%	17.9%	31.5%	29.1%
	Services	87.7%	30.4%	26.3%	4.3%	31.6%	-8.4%	23.5%	34.7%	71.7%	30.0%
	Overall	36.3%	33.9%	24.6%	13.9%	26.0%	10.6%	5.4%	13.7%	22.3%	13.3%

Orders:
	Over $1 million	3	5	3	6	17	6	8	9	19	42
	Between $250,000 and $1 million	24	27	14	31	96	11	28	28	49	116

Number of new customers		65	81	55	103	304	60	67	65	110	302

Average new customer order:
	Overall	$ 275	$ 240	$ 314	$ 259	$ 267	$ 240	$ 349	$ 409	$ 623	$ 440
	Cloud-based	488	282	3,691	642	693	761	557	822	1,134	866