ININ Interactive Intelligence Grp., Inc.

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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