Interactive Intelligence Reports 2011 Third-Quarter Operating Results

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Revenues increase 25 percent and cloud-based contracts more than double

INDIANAPOLIS--(BUSINESS WIRE)-- Interactive Intelligence Group Inc. (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced operating results for the three and nine months ended Sept. 30, 2011.

The company reported revenues of $52.1 million, an increase of 25 percent over the third quarter of 2010. On a generally accepted accounting principles (GAAP) basis, 2011 third-quarter operating income was $4.7 million, net income was $3.3 million, and diluted earnings per share (EPS) was $0.16, compared to operating income of $5.6 million, net income of $3.5 million, and EPS of $0.19 in the same quarter last year.

On a non-GAAP* basis, operating income was $6.6 million, net income was $5.8 million, and EPS was $0.29 in the third quarter of 2011, compared to operating income of $6.7 million, net income of $7.0 million, and EPS of $0.37 in the third quarter of 2010.

Non-GAAP operating income, net income, and EPS in the 2011 third quarter excluded the following: purchase accounting adjustments of $476,000, or EPS of $0.02; charges for stock-based compensation of $1.4 million, or EPS of $0.07; and non-cash income tax expense of $636,000, or EPS of $0.04. For the third quarter of 2010 these results excluded charges for stock-based compensation of $1.0 million, or EPS of $0.06; and non-cash income tax expense of $2.4 million, or EPS of $0.12.

Cloud-based orders received during the quarter more than doubled from the 2010 third quarter, increasing to 31 percent of total orders from 18 percent in the same quarter last year. Cloud-based transactions were entered into with 23 customers, up from nine in the 2010 third quarter. If the mix of premise- and cloud-based contracts had been the same in the third quarter of 2011 as it was in the third quarter of 2010, financial results for the third quarter of 2011 would have shown increases in reported results of approximately $4 million in revenues, $3 million in operating income, and $0.15 in EPS.

“There is clearly a market shift toward cloud-based contact centers and we are focused on extending our leadership position in the high end of this segment,” said Interactive Intelligence founder and CEO, Dr. Donald E. Brown. “We manage our business based on winning a customer and the long-term value of that customer. We look beyond the short-term revenue recognition effects of these transactions as we continue the strategy of building an increasing recurring revenue stream.

“We signed the largest deal in the company’s history during this third quarter, a $10 million five-year cloud contract with a peak of 4,200 agent seats and additional opportunities for expansion. We view this transaction with a recognized world-class vendor as yet another demonstration of both the breadth and architectural strength of our offering, particularly at the upper end of the market.”

Cash and investment balances as of Sept. 30, 2011 were $91.0 million. The company has no debt. During the quarter, the company used cash of $9.3 million to acquire CallTime Solutions, a reseller of the Interactive Intelligence solutions throughout Australia and New Zealand.

Deferred revenues increased to $65.7 million and unrecognized future cloud contracts increased to over $29.5 million at Sept. 30, 2011 from $62.1 million in recorded deferred revenues and $22.0 million in future cloud revenues at June 30, 2011.

Results for the first nine months of 2011 included:

• Total revenues of $151.9 million, a 31 percent increase from $115.7 million in 2010.
• GAAP operating income of $15.1 million, up from $14.3 million in 2010.
• Non-GAAP operating income of $20.6 million, compared to $17.3 million in 2010.
• GAAP net income of $10.2 million or EPS of $0.51, compared to $7.8 million, or EPS of $0.42 in 2010.
• Non-GAAP net income of $17.6 million, or EPS of $0.88, compared to $16.1 million, or EPS of $0.86 in 2010.

For the first nine months of 2011, non-GAAP net income and EPS excluded charges for purchase accounting adjustment of $1.5 million, or EPS of $0.07; stock-based compensation of $4.0 million, or EPS of $0.20; and non-cash income tax expense of $1.9 million, or EPS of $0.10. For the first nine months of 2010, non-GAAP net income and EPS excluded charges for stock-based compensation of $3.0 million, or EPS of $0.16; and non-cash income tax expense of $5.2 million, or EPS of $0.28.

In the third quarter of 2011 research firm, Frost & Sullivan, honored Interactive Intelligence with its “Company of the Year, Contact Center Systems, North America, 2011” award.

Interactive Intelligence will host a conference call Oct. 24, 2011 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 IntelligenceInteractive Intelligence Group Inc. (Nasdaq: ININ) is a global provider of unified business communications solutions for contact center automation, enterprise IP telephony, and business process automation. The company’s solutions, which can be deployed via an on-premise or hosted model, include vertical-specific applications for insurance and collections. Interactive Intelligence was founded in 1994 and has more than 4,000 customers worldwide. The company is among Forbes Magazine’s 2011 Best Small Companies in America, and Software Magazine’s 2011 Top 500 Global Software and Services Suppliers. It employs approximately 1,000 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 [email protected]; on the Net: www.inin.com.

*Non-GAAP MeasuresThe 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 income tax expense is primarily 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.

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)
Unaudited
							Three Months Ended							Nine Months Ended
							September 30,							September 30,
							2011			2010				2011			2010
Revenues:
	Product						$	22,190		$	20,671			$	67,451		$	54,772
	Recurring							24,185			16,595				66,974			48,842
	Services							5,765			4,565				17,426			12,051
		Total revenues						52,140			41,831				151,851			115,665
Costs of revenues:
	Product							6,689			6,198				19,277			16,499
	Recurring							6,479			4,302				17,574			11,768
	Services							4,158			2,465				11,789			6,783
	Amortization of intangible assets							35			16				105			48
		Total cost of revenues						17,361			12,981				48,745			35,098
Gross profit								34,779			28,850				103,106			80,567
Operating expenses:
	Sales and marketing							15,223			12,106				44,700			33,938
	Research and development							9,243			7,193				26,104			20,563
	General and administrative							5,326			3,935				16,445			11,784
	Amortization of intangible assets							302			9				760			28
		Total operating expenses						30,094			23,243				88,009			66,313
Operating income								4,685			5,607				15,097			14,254
Other income (expense):
	Interest income, net							165			120				300			229
	Other income (expense)							172			337				262			(1,028	)
Total other income (expense)								337			457				562			(799	)
Income before income taxes								5,022			6,064				15,659			13,455
Income tax expense								1,741			2,561				5,456			5,629
Net income							$	3,281		$	3,503			$	10,203		$	7,826
Net income per share:
Basic							$	0.17		$	0.20			$	0.55		$	0.45
Diluted								0.16			0.19				0.51			0.42
Shares used to compute net income per share:
Basic								18,816			17,524				18,648			17,431
Diluted								19,946			18,695				19,890			18,731

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,
						2011			2010				2011			2010
Net income, as reported						$	3,281		$	3,503			$	10,203		$	7,826
Purchase accounting adjustments:
Increase to revenues:
	Recurring						64			-				162			8
	Services						-			1				48			4
Reduction of operating expenses:
	Customer Relationships						257			9				625			27
	Technology						35			16				105			48
	Non-compete agreements						45			-				135			-
	Acquisition Costs						75			-				407			-
	Total						476			26				1,482			87
Non-cash stock-based compensation expense:
	Cost of recurring revenues						119			68				328			159
	Cost of services revenues						36			18				71			69
	Sales and marketing						458			332				1,283			974
	Research and development						392			285				1,196			881
	General and administrative						406			326				1,126			922
	Total						1,411			1,029				4,004			3,005
Non-cash income tax expense							636			2,410				1,912			5,198
Non-GAAP net income						$	5,804		$	6,968			$	17,601		$	16,116
Operating income, as reported						$	4,685		$	5,607			$	15,097		$	14,254
Purchase accounting adjustments							476			26				1,482			87
Non-cash stock-based compensation expense							1,411			1,029				4,004			3,005
Non-GAAP operating income						$	6,572		$	6,662			$	20,583		$	17,346
Diluted EPS, as reported						$	0.16		$	0.19			$	0.51		$	0.42
Purchase accounting adjustments							0.02			0.00				0.07			0.00
Non-cash stock-based compensation expense							0.07			0.06				0.20			0.16
Non-cash income tax expense							0.04			0.12				0.10			0.28
Non-GAAP diluted EPS						$	0.29		$	0.37			$	0.88		$	0.86

Interactive Intelligence Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
							September 30,					December 31,
							2011					2010
							(unaudited)
Assets
Current assets:
	Cash and cash equivalents						$	24,629				$	48,300
	Short-term investments							44,162					37,582
	Accounts receivable, net							43,020					36,130
	Deferred tax assets, net							4,333					5,499
	Prepaid expenses							12,292					7,456
	Other current assets							4,258					4,989
		Total current assets						132,694					139,956
Long-term investments								22,230					-
Property and equipment, net								13,898					10,336
Deferred tax assets, net								1,580					2,765
Goodwill								23,914					11,371
Intangible assets, net								15,171					11,001
Other assets, net								1,091					803
Total assets							$	210,578				$	176,232
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities						$	16,017				$	16,364
	Accrued compensation and related expenses							7,191					6,553
	Deferred product revenues							5,826					3,350
	Deferred services revenues							49,867					43,281
		Total current liabilities						78,901					69,548
Long-term deferred revenues								9,963					7,420
Other long-term liabilities								350					-
Total liabilities								89,214					76,968
Shareholders' equity:
	Preferred stock							-					-
	Common stock							189					182
	Additional paid-in-capital							115,841					103,837
	Accumulated other comprehensive loss							(404	)				(290	)
	Retained earnings (accumulated deficit)							5,738					(4,465	)
		Total shareholders' equity						121,364					99,264
Total liabilities and shareholders' equity							$	210,578				$	176,232

Interactive Intelligence Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
							Nine Months Ended
							September 30,
							2011					2010
Operating activities:
Net income							$	10,203				$	7,826
Adjustments to reconcile net income to net cash
	provided by operating activities:
	Depreciation, amortization and other non-cash items							4,968					3,219
	Stock-based compensation expense							4,004					3,002
	Tax benefits from stock-based payment arrangements							(1,658	)				(4,528	)
	Deferred income tax							828					(56	)
	Accretion of investment income							(1,261	)				(407	)
	Changes in operating assets and liabilities:							-					-
		Accounts receivable						(4,011	)				(325	)
		Prepaid expenses						(4,802	)				(1,778	)
		Other current assets						623					(1,104	)
		Other assets						(288	)				(82	)
		Accounts payable and accrued liabilities						760					7,143
		Accrued compensation and related expenses						(2,597	)				723
		Deferred product revenues						2,445					(717	)
		Deferred services revenues						7,410					4,309
Net cash provided by operating activities								16,624					17,225
Investing activities:
Sales of available-for-sale investments								55,596					15,565
Purchases of available-for-sale investments								(83,083	)				(34,678	)
Purchases of property and equipment								(7,439	)				(3,540	)
Acquisition, net of cash								(13,376	)				-
Net cash used in investing activities								(48,302	)				(22,653	)
Financing activities:
Proceeds from stock options exercised								5,962					1,830
Proceeds from issuance of common stock								387					261
Tax benefits from stock-based payment arrangements								1,658					4,528
Net cash provided by financing activities								8,007					6,619
Net increase (decrease) in cash and cash equivalents								(23,671	)				1,191
Cash and cash equivalents, beginning of period								48,300					48,497
Cash and cash equivalents, end of period							$	24,629				$	49,688
Cash paid during the period for:
Interest							$	2				$	1
Income taxes								2,539					716
Other non-cash item:
Purchases of property and equipment payable at end of period							$	14				$	22

Condensed Consolidated Statements of Income - GAAP
(in thousands, except per share amounts)
(unaudited)
						2010																					2011
						Q1				Q2				Q3				Q4				Total					Q1				Q2				Q3				Total
Revenues:
	Product					$	15,786			$	18,315			$	20,671			$	25,045			$	79,817				$	20,766			$	24,495			$	22,190			$	67,451
	Recurring						15,925				16,322				16,595				19,898				68,740					20,746				22,043				24,185				66,974
	Services						3,312				4,174				4,565				5,707				17,758					6,218				5,443				5,765				17,426
	Total revenues						35,023				38,811				41,831				50,650				166,315					47,730				51,981				52,140				151,851
Costs of revenues:
	Product						4,799				5,502				6,198				7,369				23,868					6,196				6,392				6,689				19,277
	Recurring						3,423				4,043				4,302				5,223				16,991					5,282				5,813				6,479				17,574
	Services						2,174				2,144				2,465				3,005				9,788					3,712				3,919				4,158				11,789
	Amortization of intangibles						16				16				16				35				83					35				35				35				105
	Total cost of revenues						10,412				11,705				12,981				15,632				50,730					15,225				16,159				17,361				48,745
Gross profit							24,611				27,106				28,850				35,018				115,585					32,505				35,822				34,779				103,106
Operating expenses:
	Sales and marketing						10,352				11,480				12,106				13,134				47,072					14,157				15,320				15,223				44,700
	Research and development						6,425				6,945				7,193				7,786				28,349					8,147				8,714				9,243				26,104
	General and administrative						3,836				4,013				3,935				4,800				16,584					5,095				6,024				5,326				16,445
	Amortization of intangibles						9				9				9				184				211					184				274				302				760
	Total operating expenses						20,622				22,447				23,243				25,904				92,216					27,583				30,332				30,094				88,009
Operating income							3,989				4,659				5,607				9,114				23,369					4,922				5,490				4,685				15,097
Other income (expense):
	Interest income, net						42				67				120				111				340					43				92				165				300
	Other income (expense)						(775	)			(590	)			337				(118	)			(1,146	)				(166	)			256				172				262
Total other income (expense)							(733	)			(523	)			457				(7	)			(806	)				(123	)			348				337				562
Income before income taxes							3,256				4,136				6,064				9,107				22,563					4,799				5,838				5,022				15,659
Income tax expense							1,388				1,680				2,561				2,033				7,662					1,704				2,011				1,741				5,456
Net income						$	1,868			$	2,456			$	3,503			$	7,074			$	14,901				$	3,095			$	3,827			$	3,281			$	10,203
Net income per share:
Basic						$	0.11			$	0.14			$	0.20			$	0.39			$	0.85				$	0.17			$	0.20			$	0.17			$	0.55
Diluted							0.10				0.13				0.19				0.37				0.79					0.16				0.19				0.16				0.51
Shares used to compute net income per share:
Basic							17,320				17,445				17,524				17,956				17,563					18,417				18,707				18,816				18,563
Diluted							18,708				18,772				18,695				19,302				18,894					19,780				19,933				19,946				19,860
Supplemental Data
(Dollars in thousands)
Margins (GAAP):
	Product						69.6	%			70.0	%			70.0	%			70.6	%			70.1	%				70.2	%			73.9	%			69.9	%			71.4	%
	Recurring						78.5	%			75.2	%			74.1	%			73.8	%			75.3	%				74.5	%			73.6	%			73.2	%			73.8	%
	Services						34.4	%			48.6	%			46.0	%			47.3	%			44.9	%				40.3	%			28.0	%			27.9	%			32.3	%
	Overall						70.3	%			69.8	%			69.0	%			69.1	%			69.5	%				68.1	%			68.9	%			66.7	%			67.9	%
Year-over-year Revenue Growth (GAAP):
	Product						20.7	%			10.6	%			32.5	%			38.5	%			26.0	%				31.5	%			33.7	%			7.3	%			97.8	%
	Recurring						18.8	%			23.2	%			15.7	%			34.4	%			23.2	%				30.3	%			35.1	%			45.7	%			107.7	%
	Services						10.7	%			35.0	%			41.6	%			91.3	%			44.5	%				87.7	%			30.4	%			26.3	%			132.8	%
	Overall						18.8	%			18.0	%			26.1	%			41.2	%			26.6	%				36.3	%			33.9	%			24.6	%			105.7	%
Orders:
	Over $1 million						3				2				9				5				19					3				5				3				11
	Between $250,000 and $1 million						11				18				16				26				71					24				27				14				65
Number of new customers							71				62				48				77				258					65				81				54				200
Average new customer order:
	Overall					$	135			$	178			$	318			$	225			$	206				$	275			$	245			$	316			$	272
	Cloud-based						535				446				617				139				401					488				282				3,691				733

GAAP to Non-GAAP Reconciliation
(in thousands, except per share amounts)
(unaudited)
						2010																2011
						Q1			Q2			Q3			Q4			Total				Q1			Q2			Q3			Total
Net income, as reported						$	1,868		$	2,456		$	3,503		$	7,074		$	14,901			$	3,095		$	3,827		$	3,281		$	10,203
Purchase accounting adjustments:
Increase to revenues:
	Recurring						7			1			-			80			88				59			39			64			162
	Services						2			1			1			-			4				31			17			-			48
Reduction of operating expenses:
	Customer Relationships						9			9			9			139			166				139			229			257			625
	Technology						16			16			16			35			83				35			35			35			105
	Non-compete agreements						-			-			-			45			45				45			45			45			135
	Acquisition Costs						-			-			-			89			89				201			131			75			407
	Total						34			27			26			388			475				510			496			476			1,482
Non-cash stock-based compensation expense:
	Cost of recurring revenues						31			60			68			68			227				105			103			119			327
	Cost of services revenues						48			3			18			25			94				25			11			36			72
	Sales and marketing						324			318			332			256			1,230				392			433			458			1,283
	Research and development						298			298			285			297			1,178				408			395			392			1,195
	General and administrative						311			285			326			328			1,250				388			333			406			1,127
	Total						1,012			964			1,029			974			3,979				1,318			1,275			1,411			4,004
Non-cash income tax expense							1,241			1,547			2,410			1,978			7,176				549			727			636			1,912
Non-GAAP net income						$	4,155		$	4,994		$	6,968		$	10,414		$	26,531			$	5,472		$	6,325		$	5,804		$	17,601
Operating income, as reported						$	3,989		$	4,659		$	5,607		$	9,114		$	23,369			$	4,922		$	5,490		$	4,685		$	15,097
Purchase accounting adjustments							34			27			26			388			475				510			496			476			1,482
Non-cash stock-based compensation expense							1,012			964			1,029			974			3,979				1,318			1,275			1,411			4,004
Non-GAAP operating income						$	5,035		$	5,650		$	6,662		$	10,476		$	27,823			$	6,750		$	7,261		$	6,572		$	20,583
Diluted EPS, as reported						$	0.10		$	0.13		$	0.19		$	0.37		$	0.79			$	0.16		$	0.19		$	0.16		$	0.51
Purchase accounting adjustments							0.00			0.00			0.00			0.03			0.03				0.03			0.02			0.02			0.07
Non-cash stock-based compensation expense							0.05			0.05			0.06			0.05			0.21				0.07			0.06			0.07			0.20
Non-cash income tax expense							0.07			0.08			0.12			0.10			0.37				0.02			0.04			0.04			0.10
Non-GAAP diluted EPS						$	0.22		$	0.26		$	0.37		$	0.55		$	1.40			$	0.28		$	0.31		$	0.29		$	0.88

Currency Component
(dollars in thousands)
Revenue:							Currency Component forthe Quarter Ended					Currency Exchange Rateinto USD as of					Impact of 1% Change inExchange Rate per
		Currency					September 30, 2011					September 30, 2011					$100 million in Revenue
		USD					79%					--					--
		Euro					11%					1.3598					149,578
		GBP					4%					1.5628					62,512
		AUD					3%					0.9793					29,379
		CAD					2%					0.9684					19,368
		Other					1%					Insignificant					--
							100%										$ 260,837
Expense:							Currency Component forthe Quarter Ended					Currency Exchange Rateinto USD as of					Impact of 1% Change inExchange Rate per
		Currency					September 30, 2011					September 30, 2011					$100 million in Revenue
		USD					83%					--					--
		Euro					5%					1.3598					67,990
		GBP					4%					1.5628					62,512
		AUD					3%					0.9793					29,379
		CAD					2%					0.9684					19,368
		Other					3%					Insignificant					--
							100%										$ 179,249

ININ-G

Interactive IntelligenceStephen R. Head, +1 317-715-8412Chief Financial Officer[email protected]orChristine Holley, +1 317-715-8220Senior Director of Market Communications[email protected]

Source: Interactive Intelligence Group Inc.

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