Interactive Intelligence Reports Q2 2014 Results- Keeps Eyes on the Long-Term Prize
Indianapolis, IN-based global customer experience software and services company Interactive Intelligence (News - Alert) Group released its financial results for the second quarter of 2014 (Q2) ended June 30, 2014. And, in line with a call with financial analysts a few weeks ago, the results were below earlier in the year expectations. Thanks to slippage in the on-premises business and longer sales cycles on some large orders in the growing cloud part of the business, revenue recognition for the Q2 and for the first half of the year left the company showing a slight loss in earnings.
Realities are when looking at a company such as Interactive Intelligence whose business model is transitioning from premises to cloud and from licenses to subscriptions that there is going to be as the company says, “variability” in earnings from quarter to quarter where just a few major deals, especially if they are premises ones where revenue recognition is on a much shorter fuse, can have huge impact.
A reasonable analogy for looking at this quarter and the first half of the year is when you are flying in an airplane. The flight may encounter some turbulence that make it some level of discomforting, but turbulence in the air is not a reason to fear since the plane is safe and the vast majority of the time lands at its appointed destination and even on time.
In the case of Interactive Intelligence’s 2Q 2014 financial results, they have hit a bit of turbulence. However, the pipeline looks good, the cloud business continues to increase and is the dominant and growing percentage of orders, and the introduction of the multi-tenant AWS hosted PureCloud offer due for full release in 4Q of this year puts the company in a great competitive position. In addition, it also will allow Interactive to play in the expanding all-in-one communications markets across the board as its move to the cloud enables it to compete with a competitive offering in unified communications (UC) and mobility areas where it currently does not.
A transitional quarter
Below are the numbers as to why 2Q with hindsight is likely to be evaluated as a transitional quarter. Reported results were as follows:
Second-Quarter 2014 Financial Highlights:
- Orders: Excluding the largest cloud-based order in the company's history that was received in the same quarter last year, total orders increased by 12 percent from the second quarter of 2013, with cloud-based orders up 69 percent and representing 52 percent of total orders. Including this large cloud-based order, total orders decreased by 38 percent year-over-year. During the quarter, the company signed 39 orders over $250,000, including 10 orders over $1 million.
- Revenues: Total revenues were $79.8 million, up 5 percent from the 2013 second quarter. Recurring revenues, including support fees from on-premises license agreements and fees from cloud-based customers, increased 27 percent to $44.6 million and accounted for 56 percent of total revenues. Cloud-based revenues increased 77 percent to $13.9 million. Product revenues were $21.5 million and services revenues $13.7 million, compared to $27.9 million and $13.2 million, respectively, in the second quarter of 2013.
- Total Deferred Revenues: Deferred revenues increased to $111.9 million, up from $108.3 million as of June 30, 2013. In addition, the amount of unbilled future cloud-based revenues increased to $224.8 million from $136.0 million at the end of the 2013 second quarter. The combination of deferred and unbilled future cloud-based revenues grew to $336.7 million, up 38 percent from $244.3 million as of June 30, 2013.
- Operating Income (Loss): GAAP operating loss was $(11.5) million, compared to GAAP operating income of $849,000 in the same quarter last year. Non-GAAP* operating loss was $(6.6) million, compared to non-GAAP operating income of $3.8 million in the second quarter of 2013. The year-over-year decline was primarily due to lower than anticipated product revenues, combined with increased sales and marketing expenses to capture cloud market share, and increased research and development expenses to accelerate time-to-market of Interactive Intelligence PureCloud?.
- Income Taxes: Income tax benefit for the second quarter was $4.6 million. The company's estimated annual effective tax rate is 41.0 percent.
- Net Income (Loss): GAAP net loss was $(6.8) million, or $(0.33) per diluted share based on 20.9 million weighted average shares outstanding, compared to GAAP net income in the same quarter of 2013 of $2.9 million, or $0.14 per diluted share based on 20.9 million weighted average diluted shares outstanding. GAAP net income for the second quarter of 2013 included an income tax benefit primarily related to a change in transfer pricing implemented in the second quarter of 2013.
Non-GAAP net loss for the second quarter was $(3.7) million, or $(0.18) per diluted share, compared to non-GAAP net income of $3.4 million, or $0.16 per diluted share in the same quarter of 2013.
In addition, the company is debt-free and has cash, cash equivalents and investments totaling $86.0 million as of June 30, 2014, compared to $104.9 million as of March 31, 2014. it be noted that being debt-free and still having this much cash allows the company to participate in larger deals and ride out the quarter to quarter turbulence as its business models adjust for the longer term where recurring revenues for instance become an even larger portion of the total revenue mix. It is also of note that in regards to cash flows, the company used $1.4 million for operating activities in the quarter and used $4.9 million for capital expenditures, which included continued expansion of its cloud infrastructure and $9.3 million in connection with an acquisition.
In commenting about the results, Interactive Intelligence founder and CEO Dr. Donald Brown (News - Alert) stated, "Our second-quarter revenues show the ongoing shift of our business to the cloud and were primarily impacted by lower than expected on-premises orders as well as the deferral of revenues from two sizable contracts we expected to recognize." He added that, "The shift to the cloud market is accelerating and will continue to result in more revenues being deferred to future quarters leading to greater overall growth of recurring revenue. Given the ongoing demand for our cloud-based offering and the strength of our pipeline globally, we remain committed to making investments that drive the growth of our business. With the release of our new multi-tenant Interactive Intelligence PureCloud offering expected in October, the company remains well positioned to gain market share and reduce cost of delivery."
While the company, based on the quarterly results, is adjusting its financial guidance for the year downward slightly, Brown and chief financial officer Stephen Head spent much of the call explaining how the company is transitioning and the various impacts it has in terms of how to think about not just where it is but where it is going.
For example, despite at this time offering customers only the directory functionality of PureCloud, Brown said that PureCloud already has a backlog of $50 million for a solution whose other major components—enhanced collaboration services, and advanced PBX (News - Alert) and contact center functionality—will not be available until the end of 2014 and whose revenue recognition will take time. Brown did say that he in fact believes that by the end of 2015 that PureCloud orders will surpass both premises and the companies single tenant hosted CaaS portfolio.
However, he did note that customers of those products should not worry about long-term support since it is quite clear that despite interest in the cloud, customers want options based on their unique requirements along with assurances of support. In response to a question during the session, Brown did explain that customers with existing solutions, especially CaaS ones, will be offered a nice glide path to PureCloud.
Where much of the Q&A was also spent was on further elucidation as to why PureCloud gives Interactive flexibility in the market which it believes provides it a solutions edge over competitors which is likely to widen. This included, being able to serve customers from 100 employees to over 100K with the full suite of communications and collaboration tools cited previously and at much better margins. There was also mention of the expectations about improving margins based on marketing being able to drive sales more efficiently and effectively, and the fact that PureCloud is attracting a lot of interest from channel partners because of the value-proposition it affords them on several fronts.
As Brown concluded, “We are about to get our ROI on the investment. PureCloud gross margins are much better than CaaS. Our focus now is on flattening the expense curve and growing our profitability.”
In short, while no company likes to report a quarterly loss when Wall Street is expecting a profit, if you look at the orders, the balance sheet and the technology pipeline, even in terms of turbulence this appears like a short duration and the plane is still on course for its destination, even if it gets there slightly behind schedule. After all, the world continues to go cloud. This includes large organizations with more and more of their mission-critical communications, and all customers who are looking to narrow their trusted vendor lists. In this world, touching all of the bases when it comes to real-time communications, UC, contact center solutions and sophisticated across enterprise customer engagement capabilities (big data and analytics), will be a major part of success going forward, and that is a prize Interactive Intelligence clearly has its eyes on.
Edited by Stefania Viscusi