ININ Interactive Intelligence Grp., Inc.

Interactive Intelligence Group Inc. (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced operating results for the three and six months ended June 30, 2011.

The company reported revenues of $52.0 million, an increase of 34 percent over the second quarter of 2010. Product revenues were up 34 percent, recurring revenues increased by 35 percent, and services revenues increased 30 percent compared to the same quarter last year.

The company reported operating income on a generally accepted accounting principles (GAAP) basis of $5.5 million for the 2011 second quarter, up 18 percent from $4.7 million in the same quarter last year. Non-GAAP* operating income was $7.3 million for the second quarter of 2011, up 29 percent from $5.7 million in the second quarter of 2010.

"We are executing on our primary strategic initiatives," said Dr. Donald E. Brown, Interactive Intelligence founder and CEO. "We are moving up-market with more sales to larger customers, rapidly increasing revenues from our cloud-based solutions, successfully expanding our presence internationally, performing well in our targeted vertical markets, and seeing increased interest in our process automation capability. With the soon-to-be-released major enhancement to our flagship Customer Interaction Center™ product, we are well positioned to continue competing effectively in the second half of the year."

GAAP net income was $3.8 million, with diluted earnings per share (EPS) of $0.19, compared to $2.5 million, or EPS of $0.13, for the second quarter of 2010. Net income on a non-GAAP basis was $6.3 million, with EPS of $0.32, compared to $5.0 million, or EPS of $0.27, for the same quarter last year.

Non-GAAP net income and EPS for the 2011 second quarter exclude purchase accounting adjustments of $496,000, or EPS of $0.03, charges for stock-based compensation of $1.3 million, or EPS of $0.06, and non-cash income tax expense of approximately $727,000, or EPS of $0.04. For the second quarter of 2010, non-GAAP net income and EPS exclude charges for stock-based compensation of $964,000, or EPS of $0.06, and non-cash income tax expense of $1.5 million, or EPS of $0.08.

Cash and investment balances as of June 30, 2011 increased to $94.4 million. The company has no debt.

First-half 2011 results included the following:

• Total revenues of $99.7 million, a 35 percent increase over revenues of $73.8 million for the first half of 2010.
• GAAP operating income of $10.4 million, up from $8.6 million for the first half of 2010.
• Non-GAAP operating income of $14.0 million, compared to $10.7 million for the first half of 2010.
• GAAP net income of $6.9 million, or EPS of $0.35, compared to $4.3 million, or EPS of $0.23, for the first half of 2010.
• Non-GAAP net income of $11.8 million, or EPS of $0.59, compared to $9.1 million, or EPS of $0.49, for the same period last year.

For the first six months of 2011, non-GAAP net income and EPS exclude charges for purchase accounting adjustment of $1.0 million, or EPS of $0.05, stock-based compensation of $2.6 million, or EPS of $0.13, and non-cash income tax expense of $1.3 million, or EPS of $0.06. For the first half of 2010, non-GAAP net income and EPS exclude charges for stock-based compensation of $2.0 million, or EPS of $0.11, and non-cash income tax expense of $2.8 million, or EPS of $0.15.

Additional highlights in the second quarter of 2011 include the following:

• Certification by Joint Interoperability Test Command (JITC) for U.S. federal government deployments.
• Announcement of the upcoming release of CIC 4.0.
• Named by the Indiana Chamber of Commerce as a Best Place to Work.
• Inclusion in Gartner’s Contact Center Infrastructure leaders quadrant.**

As previously announced on July 5, 2011, the company acquired CallTime Solutions, a partner in the Australia and New Zealand markets to expand sales, support and service capabilities for direct customers and resellers throughout the region.

Interactive Intelligence will host a conference call July 25 at 4:30 p.m. Eastern time (EDT) featuring Dr. Brown and the company’s CFO, Stephen R. Head. A live Q&A session will follow opening remarks.

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 second-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 unified business communications solutions for contact center automation, enterprise IP telephony, and business process automation. The company’s solutions, which can be deployed via an on-premise or hosted model, include vertical-specific applications for insurance and collections. Interactive Intelligence was founded in 1994 and has more than 4,000 customers worldwide. The company is among Software Magazine’s 2010 Top 500 Global Software and Services Suppliers, and Forbes Magazine’s 2010 Best Small Companies in America. It employs approximately 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 income tax expense is primarily 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.

**Gartner Inc., Magic Quadrant for Contact Center Infrastructure, Worldwide, Drew Kraus, Steve Blood, Geoff Johnson, June 27, 2011.

About Gartner’s Magic Quadrant

The Magic Quadrant is copyrighted 2011 by Gartner, Inc. and is reused with permission. The Magic Quadrant is a graphical representation of a marketplace at and for a specific time period. It depicts Gartner's analysis of how certain vendors measure against criteria for that marketplace, as defined by Gartner. Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the "Leaders" quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

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) Unaudited               Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 Revenues: Product $ 24,495 $ 18,315 $ 45,261 $ 34,101 Recurring 22,043 16,322 42,789 32,247 Services   5,443   4,174     11,661   7,486   Total revenues   51,981   38,811     99,711   73,834   Costs of revenues: Product 6,392 5,502 12,588 10,301 Recurring 5,813 4,043 11,095 7,466 Services 3,919 2,144 7,631 4,318 Amortization of intangible assets   35   16     70   32   Total cost of revenues   16,159   11,705     31,384   22,117   Gross profit   35,822   27,106     68,327   51,717   Operating expenses: Sales and marketing 15,320 11,480 29,477 21,832 Research and development 8,714 6,945 16,861 13,370 General and administrative 6,024 4,013 11,119 7,849 Amortization of intangible assets   274   9     458   18   Total operating expenses   30,332   22,447     57,915   43,069   Operating income 5,490 4,659 10,412 8,648 Other income (expense): Interest income, net 92 67 135 109 Other income (expense)   256   (590 )   90   (1,365 ) Total other income (expense)   348   (523 )   225   (1,256 ) Income before income taxes 5,838 4,136 10,637 7,392 Income tax expense   2,011   1,680     3,715   3,068   Net income $ 3,827 $ 2,456   $ 6,922 $ 4,324     Net income per share: Basic $ 0.20 $ 0.14 $ 0.37 $ 0.25 Diluted 0.19 0.13 0.35 0.23   Shares used to compute net income per share: Basic 18,707 17,445 18,563 17,383 Diluted 19,933 18,772 19,860 18,740   Interactive Intelligence Group, Inc. Reconciliation of Supplemental Financial Information (in thousands, except per share amounts) Unaudited           Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010   Net income, as reported $ 3,827 $ 2,456 $ 6,922 $ 4,324 Purchase accounting adjustments: Increase to revenues: Recurring 39 1 98 8 Services 17 1 48 3 Reduction of operating expenses: Customer Relationships 229 9 368 18 Technology 35 16 70 32 Non-compete agreements 45 - 90 - Acquisition Costs   131   -   332   - Total   496   27   1,006   61 Non-cash stock-based compensation expense: Cost of recurring revenues 103 60 208 91 Cost of services revenues 11 3 36 51 Sales and marketing 433 318 825 642 Research and development 395 298 803 596 General and administrative   333   285   721   596 Total   1,275   964   2,593   1,976 Non-cash income tax expense   727   1,547   1,276   2,788 Non-GAAP net income $ 6,325 $ 4,994 $ 11,797 $ 9,149   Operating income, as reported $ 5,490 $ 4,659 $ 10,412 $ 8,648 Purchase accounting adjustments 496 27 1,006 61 Non-cash stock-based compensation expense   1,275   964   2,593   1,976 Non-GAAP operating income $ 7,261 $ 5,650 $ 14,011 $ 10,685   Diluted EPS, as reported $ 0.19 $ 0.13 $ 0.35 $ 0.23 Purchase accounting adjustments 0.03 0.00 0.05 0.00 Non-cash stock-based compensation expense 0.06 0.06 0.13 0.11 Non-cash income tax expense   0.04   0.08   0.06   0.15 Non-GAAP diluted EPS $ 0.32 $ 0.27 $ 0.59 $ 0.49   Interactive Intelligence Group, Inc. Condensed Consolidated Balance Sheets (in thousands)             June 30, December 31, 2011 2010 (unaudited) Assets Current assets: Cash and cash equivalents $ 29,049 $ 48,300 Short-term investments 40,668 37,582 Accounts receivable, net 44,716 36,130 Deferred tax assets, net 3,770 5,499 Prepaid expenses 9,389 7,456 Other current assets   3,849     4,989   Total current assets 131,441 139,956 Long-term investments 24,677 - Property and equipment, net 13,314 10,336 Deferred tax assets, net 2,177 2,765 Goodwill 14,514 11,371 Intangible assets, net 13,169 11,001 Other assets, net   936     803   Total assets $ 200,228   $ 176,232     Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 16,557 $ 16,364 Accrued compensation and related expenses 6,221 6,553 Deferred product revenues 5,446 3,350 Deferred services revenues   46,480     43,281   Total current liabilities 74,704 69,548 Long-term deferred revenues 10,212 7,420 Other long-term liabilities   370     -   Total liabilities   85,286     76,968     Shareholders' equity: Preferred stock - - Common stock 187 182 Additional paid-in-capital 112,631 103,837 Accumulated other comprehensive loss (333 ) (290 ) Retained earnings (accumulated deficit)   2,457     (4,465 ) Total shareholders' equity   114,942     99,264   Total liabilities and shareholders' equity $ 200,228   $ 176,232     Interactive Intelligence Group, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)         Six Months Ended June 30, 2011 2010   Operating activities: Net income $ 6,922 $ 4,324

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and other non-cash items 3,080 2,133 Stock-based compensation expense 2,593 1,976 Tax benefits from stock-based payment arrangements (1,240 ) (2,789 ) Deferred income tax 1,517 (282 ) Accretion of investment income (1,660 ) (444 ) Changes in operating assets and liabilities: Accounts receivable (7,470 ) 3,699 Prepaid expenses (1,646 ) (558 ) Other current assets 1,296 (551 ) Other assets (133 ) (8 ) Accounts payable and accrued liabilities 46 2,554 Accrued compensation and related expenses (667 ) 57 Deferred product revenues 2,128 (32 ) Deferred services revenues   5,659     (2,128 ) Net cash provided by operating activities   10,425     7,951     Investing activities: Sales of available-for-sale investments 40,279 7,300 Purchases of available-for-sale investments (66,465 ) (27,078 ) Purchases of property and equipment (5,625 ) (2,042 ) Acquisition, net of cash (4,111 ) - Unrealized gain on investment   40     -   Net cash used in investing activities   (35,882 )   (21,820 )   Financing activities: Proceeds from stock options exercised 4,708 1,343 Proceeds from issuance of common stock 258 164 Tax benefits from stock-based payment arrangements   1,240     2,789   Net cash provided by financing activities   6,206     4,296     Net decrease in cash and cash equivalents (19,251 ) (9,573 ) Cash and cash equivalents, beginning of period   48,300     48,497   Cash and cash equivalents, end of period $ 29,049   $ 38,924     Cash paid during the period for: Interest $ 2 $ 1 Income taxes 1,106 520   Other non-cash item: Purchases of property and equipment payable at end of period $ 7 $ 247   Condensed Consolidated Statements of Income - GAAP (in thousands, except per share amounts) (unaudited)       2010   2011 Q1   Q2   Q3   Q4   Total Q1   Q2   Total             Revenues: Product $ 15,786 $ 18,315 $ 20,671 $ 25,045 $ 79,817 $ 20,766 $ 24,495 $ 45,261 Recurring 15,925 16,322 16,595 19,898 68,740 20,746 22,043 42,789 Services   3,312       4,174       4,565     5,707       17,758     6,218       5,443     11,661 Total revenues   35,023       38,811       41,831     50,650       166,315     47,730       51,981     99,711 Costs of revenues: Product 4,799 5,502 6,198 7,369 23,868 6,196 6,392 12,588 Recurring 3,423 4,043 4,302 5,223 16,991 5,282 5,813 11,095 Services 2,174 2,144 2,465 3,005 9,788 3,712 3,919 7,631 Amortization of intangibles   16       16       16     35       83     35       35     70 Total cost of revenues   10,412       11,705       12,981     15,632       50,730     15,225       16,159     31,384 Gross profit   24,611       27,106       28,850     35,018       115,585     32,505       35,822     68,327 Operating expenses: Sales and marketing 10,352 11,480 12,106 13,134 47,072 14,157 15,320 29,477 Research and development 6,425 6,945 7,193 7,786 28,349 8,147 8,714 16,861 General and administrative 3,836 4,013 3,935 4,800 16,584 5,095 6,024 11,119 Amortization of intangibles   9       9       9     184       211     184       274     458 Total operating expenses   20,622       22,447       23,243     25,904       92,216     27,583       30,332     57,915 Operating income   3,989       4,659       5,607     9,114       23,369     4,922       5,490     10,412 Other income (expense): Interest income, net 42 67 120 111 340 43 92 135 Other income (expense)   (775 )     (590 )     337     (118 )     (1,146 )   (166 )     256     90 Total other income (expense)   (733 )     (523 )     457     (7 )     (806 )   (123 )     348     225 Income before income taxes 3,256 4,136 6,064 9,107 22,563 4,799 5,838 10,637 Income tax expense   1,388       1,680       2,561     2,033       7,662     1,704       2,011     3,715 Net income $ 1,868     $ 2,456     $ 3,503   $ 7,074     $ 14,901   $ 3,095     $ 3,827   $ 6,922   Net income per share: Basic $ 0.11 $ 0.14 $ 0.20 $ 0.39 $ 0.85 $ 0.17 $ 0.20 $ 0.37 Diluted 0.10 0.13 0.19 0.37 0.79 0.16 0.19 0.35   Shares used to compute net income per share: Basic 17,320 17,445 17,524 17,956 17,563 18,417 18,707 18,563 Diluted 18,708 18,772 18,695 19,302 18,894 19,780 19,933 19,860   Condensed Consolidated Statements of Income - Non-GAAP (in thousands, except per share amounts) (unaudited)       2010   2011 Q1   Q2   Q3   Q4   Total Q1   Q2   Total             Revenues: Product $ 15,786 $ 18,315 $ 20,671 $ 25,045 $ 79,817 $ 20,766 $ 24,495 $ 45,261 Recurring 15,932 16,323 16,595 19,978 68,828 20,805 22,082 42,887 Services   3,314       4,175       4,566     5,707       17,762     6,249       5,460     11,709 Total revenues   35,032       38,813       41,832     50,730       166,407     47,820       52,037     99,857 Costs of revenues: Product 4,799 5,502 6,198 7,369 23,868 6,196 6,392 12,588 Recurring

3,392

3,983 4,234 5,155 16,764 5,177 5,710 10,887 Services   2,126       2,141       2,447     2,980       9,694     3,687       3,908     7,595 Total cost of revenues   10,317       11,626       12,879     15,504      

50,326

    15,060       16,010     31,070 Gross profit   24,715       27,187       28,953     35,226       116,081     32,760       36,027     68,787 Operating expenses: Sales and marketing 10,028 11,162 11,774 12,878 45,842 13,765 14,887 28,652 Research and development 6,127 6,647 6,908 7,489 27,171 7,739 8,319 16,058 General and administrative   3,525       3,728       3,609     4,383       15,245     4,506       5,560     10,066 Total operating expenses   19,680       21,537       22,291     24,750       88,258     26,010       28,766     54,776 Operating income   5,035       5,650       6,662     10,476       27,823     6,750       7,261     14,011 Other income (expense): Interest income, net 42 67 120 111 340 43 92 135 Other income (expense)   (775 )     (590 )     337     (118 )     (1,146 )   (166 )     256     90 Total other income (expense)   (733 )     (523 )     457     (7 )     (806 )   (123 )     348     225 Income before income taxes 4,302 5,127 7,119 10,469 27,017 6,627 7,609 14,236 Income tax expense   147       133       151     55       486     1,155       1,284     2,439 Net income $ 4,155     $ 4,994     $ 6,968   $ 10,414     $ 26,531   $ 5,472     $ 6,325   $ 11,797   Net income per share: Basic $ 0.24 $ 0.29 $ 0.40 $ 0.58 $ 1.51 $ 0.30 $ 0.34 $ 0.64 Diluted 0.22 0.27 0.37 0.54 1.40 0.28 0.32 0.59   Shares used to compute net income per share: Basic 17,320 17,445 17,524 17,956 17,563 18,417 18,707 18,563 Diluted 18,708 18,772 18,695 19,302 18,894 19,780 19,933 19,860   Supplemental Data (Dollars in thousands)                     2010 2011 Q1   Q2   Q3   Q4   Total Q1   Q2   Total

Non-GAAP Adjustments:

Purchase accounting adjustments: Increase to revenues: Recurring $ 7 $ 1 $ - $ 80 $ 88 $ 59 $ 39 $ 98 Services 2 1 1 - 4 31 17 48   Reduction of operating expenses: Customer relationships 9 9 9 139 166 139 229 368 Technology 16 16 16 35 83 35 35 70 Non-compete agreements - - - 45 45 45 45 90 Acquisition costs   -       -       -       89       89     201       131       332   Total purchase accounting adjustments $ 34     $ 27     $ 26     $ 388     $ 475   $ 510     $ 496     $ 1,006     Stock-based compensation expense: Costs of recurring revenues $ 31 $ 60 $ 68 $ 68 $ 227 $ 105 $ 103 $ 208 Costs of services revenues 48 3 18 25 94 25 11 36 Sales and marketing 324 318 332 256 1,230 392 433 825 Research and development 298 298 285 297 1,178 408 395 803 General and administrative   311       285       326       328       1,250     388       333       721   Total $ 1,012     $ 964     $ 1,029     $ 974     $ 3,979   $ 1,318     $ 1,275     $ 2,593     Non-cash income tax expense $ 1,241     $ 1,547     $ 2,410     $ 1,978     $ 7,176   $ 549     $ 727     $ 1,276    

Other Information:

Margins (GAAP): Product 69.6 % 70.0 % 70.0 % 70.6 % 70.1 % 70.2 % 73.9 % 72.2 % Recurring 78.5 % 75.2 % 74.1 % 73.8 % 75.3 % 74.5 % 73.6 % 74.1 % Services 34.4 % 48.6 % 46.0 % 47.3 % 44.9 % 40.3 % 28.0 % 34.6 % Overall 70.3 % 69.8 % 69.0 % 69.1 % 69.5 % 68.1 % 68.9 % 68.5 %   Year-over-year Revenue Growth (GAAP): Product 20.7 % 10.6 % 32.5 % 38.5 % 26.0 % 31.5 % 33.7 % 32.7 % Recurring 18.8 % 23.2 % 15.7 % 34.4 % 23.2 % 30.3 % 35.1 % 32.7 % Services 10.7 % 35.0 % 41.6 % 91.3 % 44.5 % 87.7 % 30.4 % 55.8 % Overall 18.8 % 18.0 % 26.1 % 41.2 % 26.6 % 36.3 % 33.9 % 35.0 %   Orders: Over $1 million 3 2 9 5 19 3 5 8 Between $250,000 and $1 million 11 18 16 26 71 24 27 51   Number of new customers 71 62 48 77 258 65 81 146   Average new customer order: Overall $ 135 $ 178 $ 318 $ 225 $ 206 $ 275 $ 245 $ 256 Cloud-based 535 446 617 139 401 488 282 404  

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