Wireless Connectivity

Indianapolis, IN-based global customer experience software and services company Interactive Intelligence (News - Alert) Group released its financial results for the third-quarter of 2014 (Q3) ended September 30, 2014.  The results continue a series of quarters where the company’s focus on the cloud and the role it is playing in overall results continues to dominate the short-term results as well as the long term prospects. And, as in the previous quarter, results are in line with the challenges of evaluating not just Interactive Intelligence but all software solutions companies who are seeing more and more of their business move away from premises-based solutions to cloud and hybrid ones.

Interactive Intelligence’s 3Q 2014 financial results are illustrative of the changes roiling the software industry as a result of cloud adoption.  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.

Plus, as revealed during the call, it gives new Chief Marketing Officer, industry vet Jeff Platon (see below) a lot to work with.

The transition continues as cloud dominates

Below are the Q3 numbers. Obviously the cloud-related numbers are the ones to pull out and understand.  Reported results were as follows:

 Third -Quarter 2014 Financial Highlights:

Orders: Total orders increased 46 percent from the third quarter of 2013, with cloud-based orders up 104 percent to represent 68 percent of total orders. In the third quarter of this year, 56 orders were signed over $250,000, including 12 orders over $1 million, compared to 47 orders over $250,000, including 12 orders over $1 million in the same quarter last year.

Revenue: Total revenue was $89.5 million, up 15 percent from the 2013 third quarter. Recurring revenue, including support fees from on-premises license agreements and fees from cloud-based customers, increased 28 percent to $48.1 million and accounted for 54 percent of total revenue. Cloud-based revenue increased 70 percent to $14.7 million. Product revenue was $27.8 million and services revenue $13.6 million, compared to $26.9 million and $13.5 million, respectively, in the same quarter last year.

Total Deferred Revenue: As of Sept. 30, 2014, deferred revenue was $107.5 million, compared to $108.7 million at the end of the 2013 third quarter, and the amount of unbilled future cloud-based revenue increased to $265.9 million from $153.0 million at the end of the 2013 third quarter. The combination of deferred and unbilled future cloud-based revenue grew to $373.4 million, up 43 percent from $261.7 million at the end of the 2013 third quarter.

Operating Income (Loss): GAAP operating loss was $(3.5) million, compared to GAAP operating income of $3.7 million in the 2013 third quarter. Non-GAAP* operating income was $0.5 million, compared to non-GAAP operating income of $6.7 million in the same quarter last year.

Income Taxes: Income tax benefit was $1.3 million, with an estimated annual effective tax rate of 41.0 percent.

Net Income (Loss): GAAP net loss was $(2.1) million, or $(0.10) per diluted share based on 20.9 million weighted average diluted shares outstanding, compared to GAAP net income in the same quarter of 2013 of $1.6 million, or $0.08 per diluted share based on 21.2 million weighted average diluted shares outstanding.

Non-GAAP net income:  For Q3 was $0.3 million, or $0.01 per diluted share, compared to non-GAAP net income of $4.1 million, or $0.20 per diluted share in the same quarter last year.

In addition, the company had cash, cash equivalents, and investments totaling $69.6 million as of Sept. 30, 2014, compared to $86.0 million as of June 30, 2014. And, in regards to cash flows the company used $6.9 million for operating activities in the third quarter and $4.0 million for capital expenditures, including the continued expansion of its cloud infrastructure, and capitalized $5.1 million for PureCloud development costs.

In commenting about the results, Interactive Intelligence founder and CEO Dr. Donald Brown (News - Alert) stated,

“This quarter showed further evidence of our success in generating more revenue from our cloud-based services,” said Dr. Donald E. Brown, Interactive Intelligence founder and CEO. “Orders for our cloud solutions not only doubled from the same quarter last year, but moved from less than half to over two-thirds of our total orders received. This growth and shift to the cloud occurred across all of our major geographic markets, and was more prominent among sales to new customers compared to existing follow-on sales.”

“We continue to deploy our cloud solutions for new customers, which will contribute to increasing cloud revenues. We expect that the first release of our new multi-tenant PureCloud solution this quarter will further accelerate this trend,” Brown concluded.

As noted, the company’s cloud business continues to make impressive strides, and CEO Brown during the Q&A with the financial analysts stated that he was, “very pleased with execution this quarter,” which exceeded guidance. He also in response to a question about competitive positioning remarked that as the company’s PureCloud AWS-based multi-tenant, self-service, self-sign on capabilities come online that, “We think we are improving our competitive position going forward.” This is on top of an observation that the growth in the company’s cloud business is indicative of the lead it already enjoys when it comes to cloud-based customer experience solutions.

It should also be noted that PureCloud was the center of most of the non-numbers part of the call. Both Brown and CFO Steven Head discussed the timeline for rollouts and revenue recognition. On the rollout front, Brown stated that the PureCloud Directory capabilities will be going GA before the end of the year with a phased introduction of the UC, contact center and social elements over the first few quarters of 2015. Head cautioned that in terms of overall impact on revenues for next year that while there is market enthusiasm for PureCloud around the world, significant revenue impact since this is a pure cloud service will not likely be seen until beyond 2014.

Brown also made an interesting observation in answer to a question about the company’s Small Center solution when he noted that they have learned a lot about the market from the offer, and also are applying some things they like in terms of how to address it from partner Zendesk in terms of what SMBs appreciate, which will be integral to PureCloud and why it should be attractive to companies of all sizes and all regions.

In discussing the results, the executives also cited the trend over the last few quarters away from premises solutions and toward the cloud, which they do not see changing although they believe it has slowed.

Finally, Brown announced that Interactive Intelligence has a new Chief Marketing Officer, Jeff Platon. He was a top marketing executive at Cisco Systems (News - Alert), and recently was CMO and executive VP-marketing at Guttenberg Communications.  In his dozen-year stint at Cisco, Platon helped craft its "Cisco Self Defending Network" push, which sparked revenues of its security business from $240M to a market leading $2.3B. He also worked a combined 13 years at McAfee (News - Alert), Exabyte and Burroughs, the former Unisys.

Brown noted that Platon brings with him a strong online marketing background from experience at Cisco and McAfee, and whose skills he said fit well with the company’s intentions on how to accelerate sales growth going forward, particularly in the marketing of PureCloud.

All in all a nice quarter. It is certainly one that others in the industry looking to the cloud as major parts of their business going forward will take note of as Interactive Intelligence continues to be a bell weather of where the industry is heading.