Contact Center Solutions Featured Article

Interactive Intelligence Reports Q1 2013: 'Very Nice Quarter'

May 07, 2013

Interactive Intelligence Group, which in many ways serves as a bellwether for trends in the contact center solutions and unified IP business communications markets, reported its Q1 2013 financial results. Several financial analysts on the earnings call prefaced their questions to founder and CEO, Dr. Donald E. Brown, and its CFO, Stephen R. Head with a congratulatory “very nice quarter.” The company easily beat guidance and estimates on earnings and several other key measures of its health. It also continued its guidance that it will sustain healthy growth for the year. In short, while CFO Head said, “This was a good but not spectacular quarter,” the words “very nice” are actually a nice characterization for the sound performance.

The company was buoyed by continued significant growth in cloud orders. This included the announcement on the call of a “substantial” (well over $1 million) contract with a major retailer who will move from an Interactive premises-based solution to the cloud. Dr. Brown also was pleased with the results and prospects.

"During the first quarter of 2013, we had solid order growth in all our geographies and booked twice as many orders greater than $250,000 as we did in the first quarter last year," said Dr. Brown. "Our year-over-year revenue growth further highlights our ongoing traction with some of the world's largest global companies as they adopt our technology with on-premises deployments or by joining the move to the cloud. The rapid growth of our cloud-based orders and revenues continued to enhance the scale of our overall recurring revenues. We will continue to make those investments that drive growth in market share, particularly with our cloud-based offering, which remains the highest growth segment of our market."

Brown added: "We remain committed to innovation and extending our product capabilities, as evidenced by the recent launch of our cloud-based product for small contact centers. Looking forward, we are confident in our long-term strategy to expand our cloud business, thereby increasing our recurring revenues and consistently gaining market share. Based on our strong global pipeline, we are maintaining our 2013 total order growth forecast of 20 percent, with cloud-based orders expected to represent approximately half of total orders."

Interactive Intelligence Q1 2013 highlights

The numbers confirm Brown’s optimism. The results demonstrating the company’s vitality include:

  • Orders: Total orders increased by 31 percent from the first quarter of 2012, while cloud-based orders were up 42 percent over the first quarter of 2012 and comprised 31 percent of total orders. The company signed 39 contracts over $250,000, which included eight orders over $1 million, up from 17 orders over $250,000, including six orders over $1 million in the first quarter of 2012.
  • Revenues: Total revenues were $73.2 million, an increase of 39 percent over the first quarter of 2012. Recurring revenues, which include both maintenance and support from perpetual license agreements and cloud-based revenues, increased 22 percent to $33.8 million and accounted for 46 percent of total revenues. Cloud-based revenues increased 42 percent to $7.1 million. Product revenues were $28.0 million and services revenues were $11.4 million, up 44 percent and 101 percent, respectively, compared to the first quarter of 2012. During the first quarter of 2013, product revenues benefited from partial revenue recognition of a large order signed during the fourth quarter of 2012.
  • Total Deferred Revenues: Deferred revenues increased to $110.2 million as of March 31, 2013, from $77.8 million as of March 31, 2012. In addition, the amount of unbilled future cloud-based revenues as of March 31, 2013 increased to $95.8 million from $40.6 million at the end of the 2012 first quarter. The combination of deferred revenues and unbilled future cloud-based revenues was $206.0 million, up 74 percent from $118.4 million as of March 31, 2012.
  • Operating Income: GAAP operating income was $3.4 million for the first quarter of 2013, compared to $276,000 in same quarter last year. Non-GAAP* operating income was $6.2 million for the first quarter of 2013, with a non-GAAP operating margin of 8.5 percent, compared to $2.4 million and 4.6 percent, respectively, in the first quarter of 2012.
  • Net Income: GAAP net income for the first quarter of 2013 was $1.5 million, or $0.07 per diluted share based on 20.7 million weighted average diluted shares outstanding, and included a tax credit related to 2012 research and development of $600,000. These results compare to GAAP net income for the same quarter in 2012 of $189,000, or $0.01 per diluted share based on 20.0 million weighted average diluted shares outstanding.Non-GAAP net income for the first quarter of 2013 was $3.6 million, or $0.17 per diluted share, compared to non-GAAP net income of $1.9 million, or $0.09 per diluted share for the same quarter in 2012.
  • Cash, Cash Equivalents, and Investments: As of March 31, 2013, we had cash, cash equivalents, and investments of $81.9 million.
  • Cash Flows: The company used $1.0 million in cash flow for operating activities in the first quarter of 2013 and $3.6 million for capital expenditures, which included expansion of its cloud infrastructure, and received $5.7 million from the exercise of stock options.

It should be noted that while gross margins were down a bit, but still a respectable 64.6 percent overall, much of this is attributable to the buildout of data centers around the world, increased headcount and the continued investment in R&D - all of which management believes will be recognized in future quarters especially as the cloud business continues to increase the percentage of revenues that that are recurring in nature.  

Brown in fact had some interesting things to say on the subject of increasing recurring revenues. First, he cited the large retailer win as, “Validation of the cloud as deployment model and scale we can deliver.” He added, that what is happening with the cloud reminded him of when enterprises started adopting VoIP in 2005 noting, ” One distinct difference is competitors have yet to launch an effective cloud strategy.” He stated he remained fully committed to in essence making sure that through continued innovation and investment to the fleet and innovators will go the spoils.

Further indication of investing for the future included the areas where the company accomplished important competitive milestones during the quarter. The recent launch of the CaaS Small Center, a new cloud solution designed to give contact centers with under 50 agents a simple, cost-effective way to access the same sophisticated communications applications as the largest global centers was highlighted. Brown singled this out as not just a great opportunity to serve and “under-served market,” but also a means for getting broader brand visibility as well as putting competitors on notice that Interactive Intelligence would be a strong player in all market segments.

He also was quick to point out that because the product was being sold by a dedicated inside sales force it was not a distraction to either its focus on larger enterprise cloud sales, or to the company’s premises business which is still a good business for its channel partners. In addition, he noted that CaaS Small Center? already has orders and has been extremely well received which augers well for its potential in increasing recurring revenues.

In line with being a strong competitor around the world, the purchase of the customer support agreements of Amtel Communications Ltd., its New Zealand-based reseller, and the global data center buildout reflect the ongoing interest of building up presence in key geographies and the infrastructure needed to provide global reach.

Another highlight discussed was Interactive Intelligence’s release of an enhanced version of its Bay Bridge Decisions contact center forecasting, capacity planning and analysis product suite, which was designed to help customers reduce costs and improve service.  Brown said the acquisition of this asset last year is already paying dividends in terms of helping customers better and more efficiently serve their customers. He also touched on the importance going forward of Marketplace, the company’s e-commerce site that gives customers access to value-added applications from certified third parties along with access to templates and other business process automation capabilities developed in house.

Market bellwether

The reason Interactive Intelligence can be viewed as a bellwether is twofold. The first is the somewhat obvious one that it has made a bet that the cloud is going to be a significant if not dominant means for the delivery of contact center solutions across all customer sets, and looking back over the last several quarters this is a bet that is paying off. This is in terms of pure growth and for setting the table for a consistent revenue stream that stretches out over many years. It also represents the leading edge of the transformation that is taking place globally as the paradigm for the delivery of all IT functions changes. It has been observed that the contact center is the front door of enterprise value-chains. What this means, as improving the customer experience becomes a top C-level priority along with security, is that companies are going to invest in technology for what has traditionally been an area where such investments were not urgent. They are now.

Just as importantly, Interactive Intelligence is an interesting case study of a company that is successfully transforming itself to accommodate (actually drive) change. The shift from business models where selling hardware and software are based on getting margin from installation and service and licenses to one where literally “Everything” is a service has made it difficult for many companies adapt. Managing not just the internal cultural changes this shift necessitates to also managing channel partners needs and to be frank investor expectations, is no easy task. Interactive Intelligence particularly as illustrated by the congratulations from the financial analysts, has had a strategy in place to effectively manage its own transformation and as the quarter shows has been executing on that strategy quite well. There are lessons to be learned here. 

It has taken a while for Wall Street to get comfortable with Interactive Intelligence’s growing desire and reliance on recurring revenues. Ask any CPA about the challenges of revenue recognition and you will understand why this is has been an uphill battle. That said, it is clearly a battle that has been one. The orders back this up. So does the fact that the company has a good balance sheet with no debt, and is continuing to grow share in its areas of focus.

It now spans all customer segments with premises and cloud solutions, and is well positioned in growth opportunities like business process automation, business applications and accommodating the multi-channel requirements placed on effective customer interactions caused by the explosion of people using their mobile personal devices as their preferred means of communications. 

The next few quarters will be interesting to watch to see how well the bets the company has made can continue to meet or exceed investor and customer expectations. For this reporting season the consensus was well stated, “Very Nice Quarter.”   

Edited by Stefania Viscusi