Interactive Intelligence Reports Fourth-Quarter and Full Year 2011 Financial Results

INDIANAPOLIS -- (BUSINESS WIRE) -- Interactive Intelligence Group Inc. (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced financial results for its fourth quarter and full year ended Dec. 31, 2011.

“Market demand was strong and we executed well during the fourth quarter, a combination that provided a strong finish to a year with record revenues,” said Interactive Intelligence founder and CEO, Dr. Donald Brown. “In 2011, we firmly established Interactive Intelligence as a vendor-of-choice at the high end of the contact center market. We continue to consistently grow faster than the overall market with our on-premise solutions and are emerging as a leader with our cloud-based offering.

“We show ever-increasing momentum among customer cloud deployments, which is the highest growth segment of our market. In 2012, we plan to capitalize on this momentum and step up investments to further enhance our brand recognition, extend our product capabilities and gain additional market share.

“Our order mix is expected to continue shifting toward the cloud, which combined with strategic investments in sales, marketing and development is expected to reduce our reported profitability from a near-term perspective. However, we’re confident in the long-term viability of our business model, and our ability to generate shareholder value. We’re addressing a multi-billion dollar market opportunity, and we’re taking focused action to grow the business for long-term financial success driven by increasing recurring revenue,” concluded Brown.

Fourth-Quarter 2011 Financial Highlights:

• Orders: Total orders increased 17 percent year-over-year, with cloud-based orders up over 500 percent year-over-year. The company signed 101 new customers during the fourth quarter of 2011, up 29 percent from 78 new customers during the same period in 2010, including 12 new customers for its cloud-based offering during the fourth quarter of 2011, up from 8 during the same period in 2010.
• Revenue: Total revenues were $57.7 million, with non-GAAP revenue of $58.0 million, an increase of 14 percent on a year-over-year basis. Recurring revenues, which include both maintenance contracts and cloud-based subscriptions, increased 23 percent to $24.4 million and accounted for 42 percent of total revenues. Cloud-based revenues increased 61 percent year-over-year to $3.8 million. Product revenues were $27.3 million and service revenues were $6.0 million, up 9 percent and 4 percent, respectively, compared to the fourth quarter of last year.
• Operating Income: GAAP operating income for the fourth quarter was $6.5 million, with an operating margin of 11.3 percent, compared to $9.1 million and an operating margin of 18.0 percent for the fourth quarter 2010. Non-GAAP operating income was $8.7 million with an operating margin of 15.0 percent, compared to $10.5 million and an operating margin of 20.7 percent for the fourth quarter of 2010. The year-over-year decline in operating margin was primarily due to the shift toward cloud-based orders, which are recognized ratably over the life of the contract, and away from on-premise product orders, which are typically recognized as revenue on an upfront basis.
• Net Income: GAAP net income for the fourth quarter was $4.6 million based on a 30.0 percent effective tax rate, and includes an adjustment of the full year effective tax rate down to 33.4 percent. This compares to GAAP net income of $7.1 million based on a 22.3 percent effective tax rate for the same period last year. GAAP diluted earnings per share (EPS) for the fourth quarter was $0.23 based on 19.9 million weighted average diluted shares outstanding, compared to $0.37 based on 19.3 million shares outstanding for the same period last year. Non-GAAP net income for the fourth quarter was $7.3 million based on a 16.6 percent effective tax rate, compared to $10.4 million based on a 0.5 percent effective tax rate for the same period last year. Non-GAAP EPS for the fourth quarter was $0.37, compared to $0.54 for the same period last year.

Full Year 2011 Financial Highlights:

• Orders: Total orders increased 28 percent compared to 2010, with product orders up 11 percent and cloud-based orders up 179 percent year-over-year. The company signed 301 new customers in 2011, up 16 percent from 259 new customers during 2010, including 42 new cloud customers during 2011, up 91 percent from 22 new customers during 2010. Cloud-based orders were 23 percent of total orders in 2011, up from 11 percent of total orders in 2010.
• Revenue: Total revenues were $209.5 million, with non-GAAP revenue of $210.1 million, an increase of 26 percent on a year-over-year basis. Recurring revenues, which include both maintenance contracts and cloud-based subscriptions, increased 33 percent to $91.4 million and accounted for 44 percent of total revenues. Cloud-based revenues increased 96 percent year-over-year to $12.2 million. Product revenues were $94.7 million and service revenues were $23.4 million, up 19 percent and 32 percent, respectively, compared to 2010.
• Operating Income: GAAP operating income was $21.6 million, with an operating margin of 10.3 percent, compared to $23.4 million and an operating margin of 14.1 percent for 2010. Non-GAAP operating income was $29.3 million, with an operating margin of 13.9 percent, compared to $27.8 million and an operating margin of 16.7 percent for 2010. The year-over-year decline in operating margin was primarily due to the shift toward cloud-based orders, which are recognized ratably over the life of the contract, and away from on-premise product orders, which are typically recognized as revenue on an upfront basis.

• Net Income: GAAP net income was $14.8 million based on a 33.4 percent effective tax rate, compared to $14.9 million based on a 34.0 percent effective tax rate for 2010. GAAP EPS was $0.74 based on 19.9 million weighted average diluted shares outstanding, compared to $0.79 based on 18.9 million shares outstanding for 2010. Non-GAAP net income was $24.9 million based on a 16.7 percent effective tax rate, compared to $26.5 million based on a 1.8 percent effective tax rate for 2010 and non-GAAP EPS was $1.25, compared to $1.40 for 2010.
• Deferred Revenue: Total deferred revenue was $75.4 million as of Dec. 31, 2011, up 39 percent from $54.1 million at the end of 2010. Unrecognized future cloud contracts were $34.6 million as of Dec. 31, 2011, up 172 percent from $12.6 million at the end of 2010.

• Cash and Cash Flow: As of Dec. 31, 2011, the company had cash and cash equivalents and investments of $92.5 million, an increase compared to $85.9 million at the end of 2010. During 2011, the company generated operating cash of $21.4 million and used $13.4 million for acquisitions and $13.3 million for purchase of property and equipment, including significant fourth-quarter purchases to support facilities expansions and cloud operations.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included with this press release. An explanation of these measures is also included below under the heading “Non-GAAP Measures.”

Additional Fourth Quarter and Full Year 2011 Highlights:

• For the fourth quarter of 2011, the company had 6 orders over $1.0 million and 31 additional orders over $250,000, compared to 5 and 26, respectively, during the same period last year.
• For the full year 2011, the company had 17 orders over $1.0 million and 96 additional orders over $250,000, compared to 19 and 71, respectively, for 2010.
• The company launched Customer Interaction Center^™ (CIC) version 4.0, a major new release of its flagship all-in-one IP communications software suite, which added real-time speech analytics, increased scalability, Web portal access, and a private cloud deployment model.
• The company launched Quick Spin, a cloud-based communications-as-a-service trial program, providing a risk-free introduction to sophisticated applications with set-up time in minutes.
• The company was named among the Top 500 Software and Service Providers by Software Magazine for the eleventh consecutive year.
• The company was positioned in the Leaders Quadrant in Gartner’s Magic Quadrant for Contact Center Infrastructure, Worldwide report for the fourth consecutive year.
• The company was honored by Frost & Sullivan with its Company of the Year, Contact Center Systems North America award for the second consecutive year.
• The company was ranked by Forbes Magazine among America’s Best Small Companies for the second consecutive year.

Interactive Intelligence will host a conference call today at 4:30 p.m. Eastern time (EST) to review the company’s financial results for the fourth quarter and year end 2011. 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 fourth-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 Intelligence

Interactive Intelligence Group Inc. (Nasdaq: ININ) is a global provider of contact center automation, unified communications, and business process automation software and services. The company’s unified IP business communications solutions, which can be deployed on-premise or via the cloud, are ideal for industries such as financial services, insurance, outsourcers, collections, and utilities. 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 Service Providers. It employs more than 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 info@inin.com; on the Net: www.inin.com.

Non-GAAP Measures

The 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 certain amounts of income tax expense are 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)
				Three Months Ended								Year Ended
				December 31,								December 31,
				2011				2010				2011			2010
				(unaudited)				(unaudited)				(unaudited)
Revenues:
	Product			$	27,287			$	25,045			$	94,738		$	79,817
	Recurring				24,437				19,898				91,411			68,740
	Services				5,951				5,707				23,377			17,758
		Total revenues			57,675				50,650				209,526			166,315
Costs of revenues:
	Product				5,818				7,369				25,095			23,868
	Recurring				6,227				5,223				23,801			16,991
	Services				4,600				3,005				16,389			9,788
	Amortization of intangible assets				35				35				140			83
		Total cost of revenues			16,680				15,632				65,425			50,730
Gross profit					40,995				35,018				144,101			115,585
Operating expenses:
	Sales and marketing				18,339				13,134				63,039			47,072
	Research and development				9,522				7,786				35,626			28,349
	General and administrative				6,284				4,800				22,729			16,584
	Amortization of intangible assets				306				184				1,066			211
		Total operating expenses			34,451				25,904				122,460			92,216
Operating income					6,544				9,114				21,641			23,369
Other income (expense):
	Interest income, net				134				111				434			340
	Other income (expense)				(118	)			(118	)			144			(1,146	)
Total other income (expense)					16				(7	)			578			(806	)
Income before income taxes					6,560				9,107				22,219			22,563
Income tax expense					1,965				2,033				7,421			7,662
Net income				$	4,595			$	7,074			$	14,798		$	14,901
Net income per share:
Basic				$	0.24			$	0.39			$	0.79		$	0.85
Diluted					0.23				0.37				0.74			0.79
Shares used to compute net income per share:
Basic					18,908				17,956				18,714			17,563
Diluted					19,850				19,302				19,885			18,894

Interactive Intelligence Group, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
(unaudited)
			Three Months Ended								Year Ended
			December 31,								December 31,
			2011				2010				2011				2010
Total revenues, as reported			$	57,675			$	50,650			$	209,526			$	166,315
Purchase accounting adjustments				315				80				525				92
Non-GAAP total revenues			$	57,990			$	50,730			$	210,051			$	166,407
Recurring revenues, as reported			$	24,437			$	19,898			$	91,411			$	68,740
Purchase accounting adjustments				309				80				471				88
Non-GAAP recurring revenues			$	24,746			$	19,978			$	91,882			$	68,828
Recurring revenues gross profit as reported			$	18,210			$	14,675			$	67,610			$	51,749
Purchase accounting adjustments				309				80				471				88
Non-cash stock-based compensation expense				89				68				422				227
Non-GAAP recurring revenues gross profit			$	18,608			$	14,823			$	68,503			$	52,064
GAAP recurring revenues gross margin				74.5	%			73.8	%			74.0	%			75.3	%
Non-GAAP recurring revenues gross margin				75.2	%			74.2	%			74.6	%			75.6	%
				.
Services revenues, as reported			$	5,951			$	5,707			$	23,377			$	17,758
Purchase accounting adjustments				35				25				101				94
Non-GAAP services revenues			$	5,986			$	5,732			$	23,478			$	17,852
Services revenues gross profit as reported			$	1,351			$	2,702			$	6,988			$	7,970
Purchase accounting adjustments				6				-				54				4
Non-cash stock-based compensation expense				35				25				101				94
Non-GAAP services revenues gross profit			$	1,392			$	2,727			$	7,143			$	8,068
GAAP services revenues gross margin				22.7	%			47.3	%			29.9	%			44.9	%
Non-GAAP services revenues gross margin				23.3	%			47.6	%			30.4	%			45.2	%
Operating income, as reported			$	6,544			$	9,114			$	21,641			$	23,369
Purchase accounting adjustments				849				388				2,331				475
Non-cash stock-based compensation expense				1,294				974				5,298				3,979
Non-GAAP operating income			$	8,687			$	10,476			$	29,270			$	27,823
GAAP operating margin				11.3	%			18.0	%			10.3	%			14.1	%
Non-GAAP operating margin				15.0	%			20.7	%			13.9	%			16.7	%
Net income, as reported			$	4,595			$	7,074			$	14,798			$	14,901
Purchase accounting adjustments:
Increase to revenues:
	Recurring			309				80				471				88
	Services			6				-				54				4
Reduction of operating expenses:
	Customer Relationships			261				139				886				166
	Technology			35				35				140				83
	Non-compete agreements			45				45				180				45
	Acquisition Costs			193				89				600				89
	Total			849				388				2,331				475
Non-cash stock-based compensation expense:
	Cost of recurring revenues			89				68				422				227
	Cost of services revenues			35				25				101				94
	Sales and marketing			394				256				1,677				1,230
	Research and development			374				297				1,570				1,178
	General and administrative			402				328				1,528				1,250
	Total			1,294				974				5,298				3,979
Non-cash income tax expense				522				1,978				2,434				7,176
Non-GAAP net income			$	7,260			$	10,414			$	24,861			$	26,531
Diluted EPS, as reported			$	0.23			$	0.37			$	0.74			$	0.79
Purchase accounting adjustments				0.04				0.02				0.12				0.03
Non-cash stock-based compensation expense				0.07				0.05				0.27				0.21
Non-cash income tax expense				0.03				0.10				0.12				0.37
Non-GAAP diluted EPS			$	0.37			$	0.54			$	1.25			$	1.40

Interactive Intelligence Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
					Year Ended
					December 31,
					2011				2010
					(unaudited)
Assets
Current assets:
	Cash and cash equivalents				$	28,465			$	48,300
	Short-term investments					40,589				37,582
	Accounts receivable, net					56,331				36,130
	Deferred tax assets, net					8,952				5,499
	Prepaid expenses					11,474				7,456
	Other current assets					4,966				4,989
		Total current assets				150,777				139,956
Long-term investments						23,415				-
Property and equipment, net						18,304				10,336
Deferred tax assets, net						-				2,765
Goodwill						22,696				11,371
Intangible assets, net						15,029				11,001
Other assets, net						2,581				803
Total assets					$	232,802			$	176,232
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities				$	16,545			$	16,364
	Accrued compensation and related expenses					8,870				6,553
	Deferred product revenues					3,870				3,350
	Deferred services revenues					57,423				43,281
		Total current liabilities				86,708				69,548
Long-term deferred revenues						14,141				7,420
Deferred tax liability, net						1,688				-
Other long-term liabilities						291				-
Total liabilities						102,828				76,968
Shareholders' equity:
	Preferred stock					-				-
	Common stock					190				182
	Additional paid-in-capital					119,644				103,837
	Accumulated other comprehensive loss					(193	)			(290	)
	Retained earnings (accumulated deficit)					10,333				(4,465	)
		Total shareholders' equity				129,974				99,264
Total liabilities and shareholders' equity					$	232,802			$	176,232

Interactive Intelligence Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
				Year Ended
				December 31,
				2011				2010
				(unaudited)
Operating activities:
Net income				$	14,798			$	14,901
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation, amortization and other non-cash items				6,915				4,621
	Stock-based compensation expense				5,298				3,979
	Tax benefits from stock-based payment arrangements				(3,336	)			(6,285	)
	Deferred income tax				(524	)			(245	)
	Accretion of investment income				(1,165	)			(235	)
	Gain on disposal of fixed assets				4				-
	Changes in operating assets and liabilities:
		Accounts receivable			(13,313	)			(2,040	)
		Prepaid expenses			(2,888	)			(1,423	)
		Other current assets			(85	)			(1,054	)
		Other assets			(1,778	)			(114	)
		Accounts payable and accrued liabilities			(782	)			10,350
		Accrued compensation and related expenses			(918	)			1,370
		Deferred product revenues			489				(2,329	)
		Deferred services revenues			18,675				7,201
Net cash provided by operating activities					21,390				28,697
Investing activities:
Sales of available-for-sale investments					73,119				21,815
Purchases of available-for-sale investments					(98,205	)			(42,978	)
Purchases of property and equipment					(13,280	)			(5,478	)
Acquisition, net of cash					(13,376	)			(15,328	)
Net cash used in investing activities					(51,742	)			(41,969	)
Financing activities:
Proceeds from stock options exercised					6,671				6,440
Proceeds from issuance of common stock					510				350
Tax benefits from stock-based payment arrangements					3,336				6,285
Net cash provided by financing activities					10,517				13,075
Net decrease in cash and cash equivalents					(19,835	)			(197	)
Cash and cash equivalents, beginning of period					48,300				48,497
Cash and cash equivalents, end of period				$	28,465			$	48,300
Cash paid during the period for:
Interest				$	3			$	1
Income taxes					2,835				853
Other non-cash item:
Purchases of property and equipment payable at end of period				$	70			$	23

Supplemental Data
(in thousands, except per share amounts)
(unaudited)
				2010																				2011
				Q1				Q2				Q3				Q4				Total				Q1				Q2				Q3				Q4				Total
Margins (GAAP):
	Product				69.6	%			70.0	%			70.0	%			70.6	%			70.1	%			70.2	%			73.9	%			69.9	%			78.7	%			73.5	%
	Recurring				78.5	%			75.2	%			74.1	%			73.8	%			75.3	%			74.5	%			73.6	%			73.2	%			74.5	%			74.0	%
	Services				34.4	%			48.6	%			46.0	%			47.3	%			44.9	%			40.3	%			28.0	%			27.9	%			22.7	%			29.9	%
	Overall				70.3	%			69.8	%			69.0	%			69.1	%			69.5	%			68.1	%			68.9	%			66.7	%			71.1	%			68.8	%
Year-over-year Revenue Growth (GAAP):
	Product				20.7	%			10.6	%			32.5	%			38.5	%			26.0	%			31.5	%			33.7	%			7.3	%			9.0	%			18.7	%
	Recurring				18.8	%			23.2	%			15.7	%			34.4	%			23.2	%			30.3	%			35.1	%			45.7	%			22.8	%			33.0	%
	Services				10.7	%			35.0	%			41.6	%			91.3	%			44.5	%			87.7	%			30.4	%			26.3	%			4.3	%			31.6	%
	Overall				18.8	%			18.0	%			26.1	%			41.2	%			26.6	%			36.3	%			33.9	%			24.6	%			13.9	%			26.0	%
Orders:
	Over $1 million				3				2				9				5				19				3				5				3				6				17
	Between $250,000 and $1 million				11				18				16				26				71				24				27				14				31				96
Number of new customers					71				62				48				78				259				65				81				54				101				301
Average new customer order:
	Overall			$	135			$	178			$	318			$	225			$	206			$	275			$	240			$	316			$	257			$	267
	Cloud-based				535				446				617				139				401				488				282				3,691				689				720

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