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 nine months ended Sept. 30, 2011.

The company reported revenues of $52.1 million, an increase of 25 percent over the third quarter of 2010. On a generally accepted accounting principles (GAAP) basis, 2011 third-quarter operating income was $4.7 million, net income was $3.3 million, and diluted earnings per share (EPS) was $0.16, compared to operating income of $5.6 million, net income of $3.5 million, and EPS of $0.19 in the same quarter last year.

On a non-GAAP* basis, operating income was $6.6 million, net income was $5.8 million, and EPS was $0.29 in the third quarter of 2011, compared to operating income of $6.7 million, net income of $7.0 million, and EPS of $0.37 in the third quarter of 2010.

Non-GAAP operating income, net income, and EPS in the 2011 third quarter excluded the following: purchase accounting adjustments of $476,000, or EPS of $0.02; charges for stock-based compensation of $1.4 million, or EPS of $0.07; and non-cash income tax expense of $636,000, or EPS of $0.04. For the third quarter of 2010 these results excluded charges for stock-based compensation of $1.0 million, or EPS of $0.06; and non-cash income tax expense of $2.4 million, or EPS of $0.12.

Cloud-based orders received during the quarter more than doubled from the 2010 third quarter, increasing to 31 percent of total orders from 18 percent in the same quarter last year. Cloud-based transactions were entered into with 23 customers, up from nine in the 2010 third quarter. If the mix of premise- and cloud-based contracts had been the same in the third quarter of 2011 as it was in the third quarter of 2010, financial results for the third quarter of 2011 would have shown increases in reported results of approximately $4 million in revenues, $3 million in operating income, and $0.15 in EPS.

“There is clearly a market shift toward cloud-based contact centers and we are focused on extending our leadership position in the high end of this segment,” said Interactive Intelligence founder and CEO, Dr. Donald E. Brown. “We manage our business based on winning a customer and the long-term value of that customer. We look beyond the short-term revenue recognition effects of these transactions as we continue the strategy of building an increasing recurring revenue stream.

“We signed the largest deal in the company’s history during this third quarter, a $10 million five-year cloud contract with a peak of 4,200 agent seats and additional opportunities for expansion. We view this transaction with a recognized world-class vendor as yet another demonstration of both the breadth and architectural strength of our offering, particularly at the upper end of the market.”

Cash and investment balances as of Sept. 30, 2011 were $91.0 million. The company has no debt. During the quarter, the company used cash of $9.3 million to acquire CallTime Solutions, a reseller of the Interactive Intelligence solutions throughout Australia and New Zealand.

Deferred revenues increased to $65.7 million and unrecognized future cloud contracts increased to over $29.5 million at Sept. 30, 2011 from $62.1 million in recorded deferred revenues and $22.0 million in future cloud revenues at June 30, 2011.

Results for the first nine months of 2011 included:

• Total revenues of $151.9 million, a 31 percent increase from $115.7 million in 2010.
• GAAP operating income of $15.1 million, up from $14.3 million in 2010.
• Non-GAAP operating income of $20.6 million, compared to $17.3 million in 2010.
• GAAP net income of $10.2 million or EPS of $0.51, compared to $7.8 million, or EPS of $0.42 in 2010.
• Non-GAAP net income of $17.6 million, or EPS of $0.88, compared to $16.1 million, or EPS of $0.86 in 2010.

For the first nine months of 2011, non-GAAP net income and EPS excluded charges for purchase accounting adjustment of $1.5 million, or EPS of $0.07; stock-based compensation of $4.0 million, or EPS of $0.20; and non-cash income tax expense of $1.9 million, or EPS of $0.10. For the first nine months of 2010, non-GAAP net income and EPS excluded charges for stock-based compensation of $3.0 million, or EPS of $0.16; and non-cash income tax expense of $5.2 million, or EPS of $0.28.

In the third quarter of 2011 research firm, Frost & Sullivan, honored Interactive Intelligence with its “Company of the Year, Contact Center Systems, North America, 2011” award.

Interactive Intelligence will host a conference call Oct. 24, 2011 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 third-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 IntelligenceInteractive 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 Forbes Magazine’s 2011 Best Small Companies in America, and Software Magazine’s 2011 Top 500 Global Software and Services Suppliers. 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 MeasuresThe 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.

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 Nine Months Ended September 30, September 30, 2011 2010 2011 2010 Revenues: Product $ 22,190 $ 20,671 $ 67,451 $ 54,772 Recurring 24,185 16,595 66,974 48,842 Services   5,765   4,565   17,426   12,051   Total revenues   52,140   41,831   151,851   115,665   Costs of revenues: Product 6,689 6,198 19,277 16,499 Recurring 6,479 4,302 17,574 11,768 Services 4,158 2,465 11,789 6,783 Amortization of intangible assets   35   16   105   48   Total cost of revenues   17,361   12,981   48,745   35,098   Gross profit   34,779   28,850   103,106   80,567   Operating expenses: Sales and marketing 15,223 12,106 44,700 33,938 Research and development 9,243 7,193 26,104 20,563 General and administrative 5,326 3,935 16,445 11,784 Amortization of intangible assets   302   9   760   28   Total operating expenses   30,094   23,243   88,009   66,313   Operating income 4,685 5,607 15,097 14,254 Other income (expense): Interest income, net 165 120 300 229 Other income (expense)   172   337   262   (1,028 ) Total other income (expense)   337   457   562   (799 ) Income before income taxes 5,022 6,064 15,659 13,455 Income tax expense   1,741   2,561   5,456   5,629   Net income $ 3,281 $ 3,503 $ 10,203 $ 7,826     Net income per share: Basic $ 0.17 $ 0.20 $ 0.55 $ 0.45 Diluted 0.16 0.19 0.51 0.42   Shares used to compute net income per share: Basic 18,816 17,524 18,648 17,431 Diluted 19,946 18,695 19,890 18,731                     Interactive Intelligence Group, Inc. Reconciliation of Supplemental Financial Information (in thousands, except per share amounts) Unaudited   Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010   Net income, as reported $ 3,281 $ 3,503 $ 10,203 $ 7,826 Purchase accounting adjustments: Increase to revenues: Recurring 64 - 162 8 Services - 1 48 4 Reduction of operating expenses: Customer Relationships 257 9 625 27 Technology 35 16 105 48 Non-compete agreements 45 - 135 - Acquisition Costs   75   -   407   - Total   476   26   1,482   87 Non-cash stock-based compensation expense: Cost of recurring revenues 119 68 328 159 Cost of services revenues 36 18 71 69 Sales and marketing 458 332 1,283 974 Research and development 392 285 1,196 881 General and administrative   406   326   1,126   922 Total   1,411   1,029   4,004   3,005 Non-cash income tax expense   636   2,410   1,912   5,198 Non-GAAP net income $ 5,804 $ 6,968 $ 17,601 $ 16,116   Operating income, as reported $ 4,685 $ 5,607 $ 15,097 $ 14,254 Purchase accounting adjustments 476 26 1,482 87 Non-cash stock-based compensation expense   1,411   1,029   4,004   3,005 Non-GAAP operating income $ 6,572 $ 6,662 $ 20,583 $ 17,346   Diluted EPS, as reported $ 0.16 $ 0.19 $ 0.51 $ 0.42 Purchase accounting adjustments 0.02 0.00 0.07 0.00 Non-cash stock-based compensation expense 0.07 0.06 0.20 0.16 Non-cash income tax expense   0.04   0.12   0.10   0.28 Non-GAAP diluted EPS $ 0.29 $ 0.37 $ 0.88 $ 0.86                 Interactive Intelligence Group, Inc. Condensed Consolidated Balance Sheets (in thousands)       September 30, December 31, 2011 2010 (unaudited) Assets Current assets: Cash and cash equivalents $ 24,629 $ 48,300 Short-term investments 44,162 37,582 Accounts receivable, net 43,020 36,130 Deferred tax assets, net 4,333 5,499 Prepaid expenses 12,292 7,456 Other current assets   4,258     4,989   Total current assets 132,694 139,956 Long-term investments 22,230 - Property and equipment, net 13,898 10,336 Deferred tax assets, net 1,580 2,765 Goodwill 23,914 11,371 Intangible assets, net 15,171 11,001 Other assets, net   1,091     803   Total assets $ 210,578   $ 176,232     Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 16,017 $ 16,364 Accrued compensation and related expenses 7,191 6,553 Deferred product revenues 5,826 3,350 Deferred services revenues   49,867     43,281   Total current liabilities 78,901 69,548 Long-term deferred revenues 9,963 7,420 Other long-term liabilities   350     -   Total liabilities   89,214     76,968     Shareholders' equity: Preferred stock - - Common stock 189 182 Additional paid-in-capital 115,841 103,837 Accumulated other comprehensive loss (404 ) (290 ) Retained earnings (accumulated deficit)   5,738     (4,465 ) Total shareholders' equity   121,364     99,264   Total liabilities and shareholders' equity $ 210,578   $ 176,232         Interactive Intelligence Group, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)                 Nine Months Ended September 30, 2011 2010   Operating activities: Net income $ 10,203 $ 7,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other non-cash items 4,968 3,219 Stock-based compensation expense 4,004 3,002 Tax benefits from stock-based payment arrangements (1,658 ) (4,528 ) Deferred income tax 828 (56 ) Accretion of investment income (1,261 ) (407 ) Changes in operating assets and liabilities: - - Accounts receivable (4,011 ) (325 ) Prepaid expenses (4,802 ) (1,778 ) Other current assets 623 (1,104 ) Other assets (288 ) (82 ) Accounts payable and accrued liabilities 760 7,143 Accrued compensation and related expenses (2,597 ) 723 Deferred product revenues 2,445 (717 ) Deferred services revenues   7,410     4,309   Net cash provided by operating activities   16,624     17,225     Investing activities: Sales of available-for-sale investments 55,596 15,565 Purchases of available-for-sale investments (83,083 ) (34,678 ) Purchases of property and equipment (7,439 ) (3,540 ) Acquisition, net of cash   (13,376 )   -   Net cash used in investing activities   (48,302 )   (22,653 )   Financing activities: Proceeds from stock options exercised 5,962 1,830 Proceeds from issuance of common stock 387 261 Tax benefits from stock-based payment arrangements   1,658     4,528   Net cash provided by financing activities   8,007     6,619     Net increase (decrease) in cash and cash equivalents (23,671 ) 1,191 Cash and cash equivalents, beginning of period   48,300     48,497   Cash and cash equivalents, end of period $ 24,629   $ 49,688     Cash paid during the period for: Interest $ 2 $ 1 Income taxes 2,539 716   Other non-cash item: Purchases of property and equipment payable at end of period $ 14 $ 22                           Condensed Consolidated Statements of Income - GAAP (in thousands, except per share amounts) (unaudited)     2010 2011 Q1   Q2   Q3   Q4   Total Q1   Q2   Q3   Total Revenues:     Product $ 15,786 $ 18,315 $ 20,671 $ 25,045 $ 79,817 $ 20,766 $ 24,495 $ 22,190 $ 67,451 Recurring 15,925 16,322 16,595 19,898 68,740 20,746 22,043 24,185 66,974 Services   3,312     4,174     4,565     5,707     17,758     6,218     5,443     5,765     17,426   Total revenues   35,023     38,811     41,831     50,650     166,315     47,730     51,981     52,140     151,851   Costs of revenues: Product 4,799 5,502 6,198 7,369 23,868 6,196 6,392 6,689 19,277 Recurring 3,423 4,043 4,302 5,223 16,991 5,282 5,813 6,479 17,574 Services 2,174 2,144 2,465 3,005 9,788 3,712 3,919 4,158 11,789 Amortization of intangibles   16     16     16     35     83     35     35     35     105   Total cost of revenues   10,412     11,705     12,981     15,632     50,730     15,225     16,159     17,361     48,745   Gross profit   24,611     27,106     28,850     35,018     115,585     32,505     35,822     34,779     103,106   Operating expenses: Sales and marketing 10,352 11,480 12,106 13,134 47,072 14,157 15,320 15,223 44,700 Research and development 6,425 6,945 7,193 7,786 28,349 8,147 8,714 9,243 26,104 General and administrative 3,836 4,013 3,935 4,800 16,584 5,095 6,024 5,326 16,445 Amortization of intangibles   9     9     9     184     211     184     274     302     760   Total operating expenses   20,622     22,447     23,243     25,904     92,216     27,583     30,332     30,094     88,009   Operating income   3,989     4,659     5,607     9,114     23,369     4,922     5,490     4,685     15,097   Other income (expense): Interest income, net 42 67 120 111 340 43 92 165 300 Other income (expense)   (775 )   (590 )   337     (118 )   (1,146 )   (166 )   256     172     262   Total other income (expense)   (733 )   (523 )   457     (7 )   (806 )   (123 )   348     337     562   Income before income taxes 3,256 4,136 6,064 9,107 22,563 4,799 5,838 5,022 15,659 Income tax expense   1,388     1,680     2,561     2,033     7,662     1,704     2,011     1,741     5,456   Net income $ 1,868   $ 2,456   $ 3,503   $ 7,074   $ 14,901   $ 3,095   $ 3,827   $ 3,281   $ 10,203     Net income per share: Basic $ 0.11 $ 0.14 $ 0.20 $ 0.39 $ 0.85 $ 0.17 $ 0.20 $ 0.17 $ 0.55 Diluted 0.10 0.13 0.19 0.37 0.79 0.16 0.19 0.16 0.51   Shares used to compute net income per share: Basic 17,320 17,445 17,524 17,956 17,563 18,417 18,707 18,816 18,563 Diluted 18,708 18,772 18,695 19,302 18,894 19,780 19,933 19,946 19,860   Supplemental Data (Dollars in thousands)   Margins (GAAP): Product 69.6 % 70.0 % 70.0 % 70.6 % 70.1 % 70.2 % 73.9 % 69.9 % 71.4 % Recurring 78.5 % 75.2 % 74.1 % 73.8 % 75.3 % 74.5 % 73.6 % 73.2 % 73.8 % Services 34.4 % 48.6 % 46.0 % 47.3 % 44.9 % 40.3 % 28.0 % 27.9 % 32.3 % Overall 70.3 % 69.8 % 69.0 % 69.1 % 69.5 % 68.1 % 68.9 % 66.7 % 67.9 %   Year-over-year Revenue Growth (GAAP): Product 20.7 % 10.6 % 32.5 % 38.5 % 26.0 % 31.5 % 33.7 % 7.3 % 97.8 % Recurring 18.8 % 23.2 % 15.7 % 34.4 % 23.2 % 30.3 % 35.1 % 45.7 % 107.7 % Services 10.7 % 35.0 % 41.6 % 91.3 % 44.5 % 87.7 % 30.4 % 26.3 % 132.8 % Overall 18.8 % 18.0 % 26.1 % 41.2 % 26.6 % 36.3 % 33.9 % 24.6 % 105.7 %   Orders: Over $1 million 3 2 9 5 19 3 5 3 11 Between $250,000 and $1 million 11 18 16 26 71 24 27 14 65   Number of new customers 71 62 48 77 258 65 81 54 200   Average new customer order: Overall $ 135 $ 178 $ 318 $ 225 $ 206 $ 275 $ 245 $ 316 $ 272 Cloud-based 535 446 617 139 401 488 282 3,691 733                             GAAP to Non-GAAP Reconciliation (in thousands, except per share amounts) (unaudited)     2010 2011 Q1   Q2   Q3   Q4   Total Q1   Q2   Q3   Total Net income, as reported $ 1,868 $ 2,456 $ 3,503 $ 7,074 $ 14,901 $ 3,095 $ 3,827 $ 3,281 $ 10,203 Purchase accounting adjustments: Increase to revenues: Recurring 7 1 - 80 88 59 39 64 162 Services 2 1 1 - 4 31 17 - 48 Reduction of operating expenses: Customer Relationships 9 9 9 139 166 139 229 257 625 Technology 16 16 16 35 83 35 35 35 105 Non-compete agreements - - - 45 45 45 45 45 135 Acquisition Costs   -   -   -   89   89   201   131   75   407 Total   34   27   26   388   475   510   496   476   1,482 Non-cash stock-based compensation expense: Cost of recurring revenues 31 60 68 68 227 105 103 119 327 Cost of services revenues 48 3 18 25 94 25 11 36 72 Sales and marketing 324 318 332 256 1,230 392 433 458 1,283 Research and development 298 298 285 297 1,178 408 395 392 1,195 General and administrative   311   285   326   328   1,250   388   333   406   1,127 Total   1,012   964   1,029   974   3,979   1,318   1,275   1,411   4,004 Non-cash income tax expense   1,241   1,547   2,410   1,978   7,176   549   727   636   1,912 Non-GAAP net income $ 4,155 $ 4,994 $ 6,968 $ 10,414 $ 26,531 $ 5,472 $ 6,325 $ 5,804 $ 17,601   Operating income, as reported $ 3,989 $ 4,659 $ 5,607 $ 9,114 $ 23,369 $ 4,922 $ 5,490 $ 4,685 $ 15,097 Purchase accounting adjustments 34 27 26 388 475 510 496 476 1,482 Non-cash stock-based compensation expense   1,012   964   1,029   974   3,979   1,318   1,275   1,411   4,004 Non-GAAP operating income $ 5,035 $ 5,650 $ 6,662 $ 10,476 $ 27,823 $ 6,750 $ 7,261 $ 6,572 $ 20,583   Diluted EPS, as reported $ 0.10 $ 0.13 $ 0.19 $ 0.37 $ 0.79 $ 0.16 $ 0.19 $ 0.16 $ 0.51 Purchase accounting adjustments 0.00 0.00 0.00 0.03 0.03 0.03 0.02 0.02 0.07 Non-cash stock-based compensation expense 0.05 0.05 0.06 0.05 0.21 0.07 0.06 0.07 0.20 Non-cash income tax expense   0.07   0.08   0.12   0.10   0.37   0.02   0.04   0.04   0.10 Non-GAAP diluted EPS $ 0.22 $ 0.26 $ 0.37 $ 0.55 $ 1.40 $ 0.28 $ 0.31 $ 0.29 $ 0.88                           Currency Component

(dollars in thousands)

  Revenue:

Currency Component forthe Quarter Ended

Currency Exchange Rateinto USD as of

Impact of 1% Change inExchange Rate per

    Currency

September 30, 2011

September 30, 2011

$100 million in Revenue

USD 79% -- -- Euro

11%

1.3598 149,578 GBP 4% 1.5628 62,512 AUD 3% 0.9793 29,379 CAD 2% 0.9684 19,368 Other 1% Insignificant -- 100% $ 260,837    

Expense:

Currency Component forthe Quarter Ended

Currency Exchange Rateinto USD as of

Impact of 1% Change inExchange Rate per

Currency

September 30, 2011

September 30, 2011

$100 million in Revenue

USD 83% -- -- Euro 5% 1.3598 67,990 GBP 4% 1.5628 62,512

AUD

3% 0.9793 29,379 CAD 2% 0.9684 19,368 Other 3%   Insignificant -- 100% $ 179,249  

ININ-G