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Interactive Intelligence Turns in Solid 3Q Earnings

November 01, 2012

When it comes to contact center solutions, context is important. Indeed, understanding context is critical for appreciating the third quarter earnings reported by industry leader, and arguably the industry bellwether, Interactive Intelligence.

In speaking with analysts to explain the latest earnings release, the company’s founder and CEO, Dr. Donald E. Brown, and its CFO, Stephen R. Head, painted an insightful view of an industry in transformation and a company that is leveraging the opportunities being created. As Dr. Brown noted during the Q&A, “We are focused on order growth. That is metric we are running business by. How the beans are counted is secondary to signing these deals and booking these deals.” Hence, while judging stock value is always a question of relativity, looking at the company from the perspective of its earnings per share and gross margin position without context might make one wonder why the bullishness. Fully valuing the context of what they are doing in the market is the reason the analysts seemed please and why the stock is reflecting that analyst appreciation.

The numbers bear a close look

 Below are the highlights of the latest quarter. The release provides a nine month view that is worth reviewing as well.

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.

In his prepared remarks, Dr. Brown noted, "We continue to execute well against our operating plan…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."

In short, he is delighted with the trajectory of the orders and the company’s ability to continue to build its pipeline and market share.

The cloud remains the pot of gold at the end of the rainbow

Returning to the context, as can be seen in the numbers, the company has bet big on investing in the cloud, and it is paying off in Interactive Intelligence becoming involved in bigger and bigger deals. In fact, as the company shifts to a more recurring revenue model based on the growth of cloud and professional services, and continues to invest in the infrastructure and people to capitalize and monetize what it sees as unique capabilities, the bets and the confidence seem justified. 

As Brown correctly noted, Gartner Group has placed Interactive Intelligence in that upper right hand leadership quadrant which is occupied by only four other companies in the space. Other industry researchers have consistently recognized the company as an industry leader based on its positioning with customers and its investments in innovations that are driving the market, and in head-to-head comparisons between vendors rank Interactive Intelligence number one.

The Q&A brought up some interesting points that are worth noting. For example, in previous earnings calls the company said that the adoption of the cloud was mostly a North American phenomenon, but it now says they are seeing strong adoption across all geographies. 

The explanation for the decrease in the percentage of business coming from partners was described as a combination of the company acquiring strategic partners and that its direct sales force has been responsible for most of the cloud business. 

Another reason for confidence going forward was Brown’s observation that as a result of being able to offer customers premises-based (still important), cloud and hybrid solutions that are flexible and saleable and are built on a common platform, Interactive Intelligence is uniquely capable of being opportunistic to ride the major trends shaping the contact center solutions market:

  • Infrastructure consolidation
  • Cloud adoption
  • The need for multi-channel interactions
  • Mobile customer service

It also was noteworthy, in line with the momentum for the cloud that Brown spent some time describing what he is calling “Pure Cloud.” This will be an offer in 2013 (date yet to be revealed) that entails less complex functionality and is aimed at the promising SMB market. It is based on a new strategy of leveraging open source capabilities and using Amazon Web Services for backend operations. This means Interactive will pay by the drink for backend operations, and will be able to provide a robust SMB offer for contact centers of 50-100 agents at very attractive prices and at good margins. He even indicated that while Pure Cloud will offer less functionality, it is actually extensible and could be used by very large organizations as well. “It gives us a dual threat,” he stated. 

As someone who has followed the contact center solutions (we used to call it call centers) market for several decades, while I hate to use the analogy the business is in a transitional period and in the midst of a “perfect storm.” Contact centers are in fact the top of companies supply chains, and interest at the C-level in improving the customer experience as the long-term way to create sustainable differentiated value has never been higher. Add to this the technology revolution of virtualization, socialization of IT, social networking, multi-channel marketing and the need to be mobile, and any evaluation of any company in this space must be looked at more on where they are going than anything else. 

Where Interactive Intelligence is going/leading is in helping customers properly monetize the market dynamics of that perfect storm by enabling them to transform themselves to be not just reactive but proactive. That is the context to view not just Interactive Intelligence but the market as well, and why attention should be paid to their innovation and order book. The next few quarters will be telling as to how well Dr. Brown and his team can execute against the market promise that is heading their way. Profits may have dipped but revenues were up, and the stock is at an a 52 week high. That is why I called this "solid" performance and the Street also likes what they see.

Edited by Rich Steeves

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