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Interactive Intelligence Q1 2014 Results Highlight Cloud Power

May 06, 2014

Indianapolis, IN-based global customer experience software and services company Interactive Intelligence Group released its financial results for the first quarter of 2014 (Q1) ended March 31, 2014.  And, while there may have been bad weather over most of the Northern Hemisphere this winter, it did not hamper the company from turning in another impressive quarter, as the cloud continues provide reason for enthusiasm about the company’s strategy and its execution of that strategy.

The highlights of Q1 included: 

  • Total orders up 42 percent from 2013 first quarter.
  • Cloud-based orders increased 165 percent to 59 percent of total orders.
  • Deferred and unbilled future cloud-based revenues up 56 percent year-over-year. 

In his opening remarks, Interactive Intelligence Founder and CEO Dr. Donald Brown stated that: "We continue to execute on our strategy of aggressively capturing cloud communications market share…This success is essential to our goal of becoming the leading vendor in the overall contact center market.”

In what has been customary in his discussion of quarterly results, Brown repeated his observation that the context for viewing company results is its order rate growth driven in by increasing momentum of the cloud-based subscription business. He elaborated saying, "As we increasingly shift to a higher proportion of cloud-based orders and have more revenue deferred to future quarters, our reported short-term profitability is affected. But we look beyond this and remain committed to making investments that drive the growth of our business, particularly with our cloud-based offerings targeting the highest growth segment of our market. As a result, we continue to expect cloud-based orders to outpace our overall 2014 order growth and comprise 55 to 60 percent of total orders for the year."

First Quarter 2014 financial highlights include:

Orders: Total orders increased by 42 percent from the first quarter of 2013, with cloud-based orders up 165 percent to 59 percent of total orders. The company signed 34 orders over $250,000, which included nine orders over $1 million, compared to 39 orders over $250,000, including eight orders over $1 million in the same quarter last year. Average cloud-based orders from new customers increased to $935,000, compared to $788,000 in Q1 2013.

Revenues: Total revenues were $79.4 million, up 8 percent from Q1 2013. Recurring revenues, including support fees from on-premises license agreements and fees from cloud-based customers, increased 28 percent to $43.4 million and accounted for 55 percent of total revenues. Cloud-based revenues increased 85 percent to $13.1 million. Product revenues were $22.8 million and services revenues $13.2 million, compared to $28.0 million and $11.4 million, respectively, in the first quarter of 2013.

Total Deferred Revenues: Deferred revenues increased to $115.5 million, up from $110.2 million as of March 31, 2013. In addition, the amount of unbilled future cloud-based revenues increased to $205.5 million from $95.8 million at the end of the Q1 2013. The combination of deferred and unbilled future cloud-based revenues grew to $321.0 million, up 56 percent from $206.0 million as of March 31, 2013.

Operating Income (Loss): GAAP operating loss was $(4.8) million, compared to GAAP operating income of $3.4 million in the same quarter last year. Non-GAAP* operating loss was $(1.0) million, compared to non-GAAP operating income of $6.2 million in Q1 2013. The year-over-year decline was primarily due to the increase in cloud-based orders, which jumped from 31 percent of total orders in the first quarter of 2013, to 59 percent of total orders in the first quarter of 2014, and are recognized over the life of the contract.

Net Income (Loss): GAAP net loss was $(2.6) million, or $(0.12) per diluted share based on 20.7 million weighted average shares outstanding, compared to GAAP net income for the same quarter in 2013 of $1.5 million, or $0.07 per diluted share based on 20.7 million weighted average diluted shares outstanding. Net income for the first quarter of 2013 included a $600,000 U.S. federal research and development tax credit related to 2012.

In addition the company is debt-free and has cash, cash equivalents and investments totaling $104.9 million as of March 31, 2014, compared to $107.8 million at the end of 2013. This is a strong position for a company this size and serves as a nice foundation for a continuation of its investments not only in the cloud for recurring revenues but also enables it to participate in as the results show bigger deals and bring on additional human resources to assure they are aligned with the robust growth in the order rate.  And, the company generated $5.3 million in cash flow from operations in the quarter and used $8.1 million for capital expenditures, which included continued expansion of its cloud infrastructure.

The executives noted that despite challenging times there was strength in all categories and regions with the exception of some slight hiccups in Latin America and Japan, which they felt would be in line with guidance by the time year-end results were evaluated.  

It was not just financial highlights that Dr. Brown and CFO Stephen Head cited. Other recent highlights for the company include:   

  • Interactive Intelligence announced that it has entered into a letter of intent to acquire OrgSpan Inc., a privately held company that offers cloud-based enterprise social communications solutions.
  • The company unveiled its Global Alliance Program, which was designed to expand the company's ecosystem of solutions and relationships to increase partner opportunities and benefits.
  • Interactive Intelligence's channel director was named a CRN 2014 Channel Chief based on channel experience, program innovations, and channel-driven revenue.
  • The company created three new C-level positions to further strengthen its operations for improved global software and service delivery.

During the Q&A, Dr. Brown and CFO Head had some interesting observations relating to how investors and industry observers need to look at the company, and on why this quarter was one to appreciate. In fact, as somebody who has been on these calls for several years, it is nice to see that the financial analysts really do get all of the ramifications of what Dr. Brown described as, “Moving from a rather simple sales model to one that is more complex and nuanced now that we will be offering customers the three options of premises, single cloud and multi-tenant cloud.” 

It has taken some time to educate the financial markets that quarters that have small losses, are not bad things when the order book is growing, recurring revenues from subscriptions are an annuity stream and get accounted for obviously differently from a traditional premises-based sale, and that gross margins are impacted as high margin activities like professional services and maintenance are being replaced with lower margins because of the increase in cloud revenues as a total of the company overall revenues.  In fact, CFO Head explained that if the mix of cloud to premise this quarter had been the same as it was during the comparable quarter last year, Interactive Intelligence would have reported a profit instead of a loss and gross margins would look better.

One point of interest regarding the cloud was Dr. Brown’s explanation of the soon to be released PureCloud offering, the open source solution that will be running on AWS services. It will formally debut at the forthcoming Interactions 2014 event, the company’s annual global conference that will take place in Indianapolis, June 2-5. 

In response to a question, Dr. Brown explained that PureCloud is going to provide the company with tremendous market flexibility.  He cited the ability, for example, to handle large customers with bursty traffic which AWS is set up to handle easily, and the ability thanks to using AWS to go after markets Interactive Intelligence as demurred from because of price which now can be actively courted as price will not be a deterrent to the customer and the margins will be attractive for Interactive Intelligence.

He did note that it is always interesting to try and not overhang the market with a new product, but he thinks the company is doing a good job on explaining to existing and potential customers the value proposition of each of the options that will be offered. He also explained that he is expecting PureCloud to become a meaningful revenue contributor by Q3 and robustly being marketed and selling in Q4.

The session concluded on a high note with Head re-affirming guidance for the next quarter with the typical disclaimer that due to the volatility of the mix of customer premises sale vs. cloud and the way this impacted all of the numbers, the key was to look at continue order growth where they like what their pipeline looks like.  And, Dr. Brown reiterated his pleasure with the results saying there were indicative that the company is gaining market share from competitors, growing faster than the generic market, being asked to the table and being successful on bigger cloud and premises deals, and remains a recognized leader as an innovator as well as a great place to work.

In short, as the executives noted in closing, this was a more than solid way to start the year and establishes a great foundation to build on. The cloud, despite it meteorological physical characteristics is providing decidedly firm footing.

Edited by Rory J. Thompson