Interactive Intelligence Group, a global customer experience software and services company based in Indianapolis, IN, released its financial results for the third quarter of 2014 (Q3), which ended on September 30, 2014. The results continue a series of quarters in which the company’s focus on the cloud and the role it plays in overall performance continue to dominate both short-term results and long-term prospects. And, as in the past, the results reflect the challenges of evaluating not only Interactive Intelligence but all software solutions companies that are seeing more and more of their business shift from on-premises solutions to cloud-based and hybrid ones.
Interactive Intelligence’s third-quarter 2014 financial results illustrate the changes sweeping the software industry as a result of cloud adoption. However, the pipeline looks strong, the cloud business continues to grow and accounts for the largest and fastest-growing share of orders, and the introduction of the multi-tenant AWS-hosted PureCloud offering—scheduled for full release in the fourth quarter of this year—puts the company in a strong competitive position. In addition, this will allow Interactive to compete in the expanding all-in-one communications markets across the board, as its move to the cloud enables it to offer a competitive solution in unified communications (UC) and mobility—areas where it currently does not compete.
Plus, as revealed during the call, it gives the new Chief Marketing Officer, industry veteran Jeff Platon (see below), plenty to work with.
The transition continues as the cloud takes center stage
Below are the Q3 figures. Obviously, the cloud-related figures are the ones to focus on and understand. The 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, accounting for 68 percent of total orders. In the third quarter of this year, 56 orders were signed for more than $250,000, including 12 orders for more than $1 million, compared to 47 orders for more than $250,000, including 12 orders for more than $1 million in the same quarter last year.
Revenue: Total revenue was $89.5 million, up 15 percent from the third quarter of 2013. 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 was $13.6 million, compared to $26.9 million and $13.5 million, respectively, in the same quarter last year.
Total Deferred Revenue: As of September 30, 2014, deferred revenue was $107.5 million, compared to $108.7 million at the end of the third quarter of 2013, and the amount of unbilled future cloud-based revenue increased to $265.9 million from $153.0 million at the end of the third quarter of 2013. The combined total 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 third quarter of 2013.
Operating Income (Loss): GAAP operating loss was $(3.5) million, compared to GAAP operating income of $3.7 million in the third quarter of 2013. 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: The 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, net income 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 September 30, 2014, compared to $86.0 million as of June 30, 2014. Furthermore, with regard 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.
Commenting on the results, Interactive Intelligence founder and CEO Dr. Donald Brown stated,
“This quarter provided further evidence of our success in generating more revenue from our cloud-based services,” said Dr. Donald E. Brown, founder and CEO of Interactive Intelligence. “Orders for our cloud solutions not only doubled compared to the same quarter last year, but rose from less than half to more than 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 pronounced in sales to new customers than in follow-on sales to existing customers.”
“We continue to roll out our cloud solutions to new customers, which will help increase cloud revenue. 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 stated during the Q&A with financial analysts that he was “very pleased with our execution this quarter,” which exceeded guidance. In response to a question about competitive positioning, he also remarked that as the company’s PureCloud—an AWS-based, multi-tenant, self-service, self-sign-on solution—becomes available, “We believe we are strengthening our competitive position going forward.” This is in addition to the observation that the growth in the company’s cloud business reflects the lead it already holds in cloud-based customer experience solutions.
It should also be noted that PureCloud was the focus of most of the non-financial portion of the call. Both Brown and CFO Steven Head discussed the timeline for rollouts and revenue recognition. Regarding rollouts, Brown stated that the PureCloud Directory features will be generally available (GA) before the end of the year, with a phased introduction of the UC, contact center, and social features over the first few quarters of 2015. Head cautioned that, in terms of the overall impact on revenue for next year, while there is market enthusiasm for PureCloud around the world, a significant revenue impact—given that this is a pure cloud service—is unlikely to be seen until after 2014.
Brown also made an interesting observation in response to a question about the company’s Small Center solution, noting that they have learned a great deal about the market from that offering, and are also incorporating some of the best practices they’ve observed from their partner Zendesk regarding what SMBs value—which will be integral to PureCloud and explain why it should be attractive to companies of all sizes and in all regions.
In discussing the results, the executives also cited the trend over the past few quarters away from on-premises solutions and toward the cloud, which they do not expect to change, 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, and most recently served as CMO and executive vice president of marketing at Guttenberg Communications. During his 12-year tenure at Cisco, Platon helped develop the “Cisco Self-Defending Network” initiative, which drove revenue in the company’s security business from $240M to a market-leading $2.3B. He also spent a combined 13 years at McAfee, Exabyte, and Burroughs (formerly Unisys).
Brown noted that Platon brings with him a strong background in online marketing from his time at Cisco and McAfee, and said that his skills align well with the company’s plans for accelerating sales growth moving forward, particularly in the marketing of PureCloud.
All in all, it was a good quarter. It is certainly one that others in the industry—who are looking to the cloud as a major part of their business going forward—will take note of, as Interactive Intelligence continues to serve as a bellwether for where the industry is headed.
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