Today, Interactive Intelligence reported its first quarter earnings and turned in solid results. In fact, much of the call with analysts, featuring the company’s founder and CEO, Dr. Donald E. Brown, and its CFO, Stephen R. Head, centered on how a robust move to the cloud by new and large customers, along with the structuring of a large contract for a premises customer, meant the quarter was actually better than it might appear because of deferred revenue recognition.
Investments in cloud, sales and marketing and R&D starting to pay off
The release that accompanied the earnings tells the tale of not just the silver but the gold to be found in the cloud, as well as how investments in various parts of the business —new data centers around the world, strategic global acquisitions and investments in sales, marketing, support and R&D, have positioned the company for continued leadership and profitable growth.
Here are the highlights for 1Q 2012:
- Orders: Cloud-based orders increased 19 percent and total orders increased 6 percent, both compared to the first quarter of 2011. The company signed 60 new customers during the first quarter of 2012, including 11 new customers for its cloud-based offering. The average new customer cloud-based order was $748,000, up from $488,000 during the same quarter last year.
- Revenues: Total revenues were $52.8 million, an increase of 11 percent on a year-over-year basis. Recurring revenues, which include both maintenance and cloud revenues, increased 31 percent to $27.6 million and accounted for 52 percent of total revenues. Cloud-based revenues increased 81 percent year-over-year to $5.0 million. Product revenues were $19.4 million and services revenues were $5.7 million, compared to $20.4 million and $6.2 million, respectively, for the first quarter of last year.
- Total Deferred Revenues: Deferred revenues increased to $77.8 million as of March 31, 2012 compared to $61.0 million as of March 31, 2011. The amount of unbilled future cloud-based revenues as of March 31, 2012 increased to $40.6 million from $18.6 million as of March 31, 2011. The combination of deferred revenues and unbilled future cloud revenues was $118.4 million as of March 31, 2012, up 49 percent compared to $79.6 million as of March 31, 2011.
- Operating Income: GAAP operating income for the first quarter was $3 million, compared to $4.9 million for the first quarter of 2011. Non-GAAP operating income was $2.4 million, compared to $6.8 million for the first quarter of 2011. The year-over-year decline in operating income was primarily due to the shift toward cloud-based orders, which are recognized over the life of the contract. In addition, as previously discussed, the company increased investments in sales and marketing, as well as research and development during the first quarter of 2012 to expand its product leadership and its share in the cloud-based market.
- Net Income: GAAP net income for the first quarter was $0.2 million, or $0.01 per diluted share based on a 34 percent effective tax rate and $20.0 million weighted average shares outstanding. This compares to GAAP net income of $3.1 million, or $0.16 per diluted share based on a 35.5 percent effective tax rate and 19.8 million weighted average shares outstanding for the same period last year.Non-GAAP net income for the first quarter was $1.9 million, or $0.09 per diluted share based on a 24 percent annual effective non-GAAP tax rate. This compares to non-GAAP net income of $5.5 million, or $0.28 per diluted share for the same period last year.
In the prepared remarks, CEO Brown noted, "Our first quarter was highlighted by rapid growth in cloud-based revenue, which continues to have a positive impact on the growth and scale of our overall recurring revenues…For the first quarter, a higher mix of cloud-based orders and the structure of certain product orders resulted in more revenues being deferred to future quarters. These factors also contributed to the 48 percent year-over-year growth in our total billed and unbilled deferred revenues. We are optimistic about our outlook for the remainder of the year, and we are maintaining our revenue, order growth and profitability guidance for 2012."
He added: "Our pipeline of opportunities is strong and growing, and we believe we are well positioned to leverage the sales and marketing, and research and development investments we are making in our business. We continue to gain share at the high end of the contact center market, and we believe our continued success in winning large cloud customers supports our view that we have a sustainable long-term advantage in the fastest growing segment of the overall contact center market."
Understanding the confidence
There is a difference between what on their face may be mediocre numbers on the income statement versus the more holistic view of the company based on orders, deferred income, and directionality of the market and product mix. Indeed, it is on all of these fronts as to why the management leadership is confident in their guidance about growth for the next quarter and for the entire year. Brown and Head took turns pointing out several reasons for optimism:
- Brown stated that the pipeline is increasing around the world and, “we are in deals we never dreamed of years ago...momentum is spreading from North America to other regions.”
- The cloud is the fastest growing segment of contact center solutions, and Interactive Intelligence is the recognized leader in the space.
- While cloud solutions represented 60 percent of new business in the quarter, the rollout of CIC 4.0 which started in December and is just now getting all of its migration tools, the coming integration of Interaction Process Automation into the cloud offering in the next few months, and the growth of recurring revenues from Communications as a Service (CaaS) subscriptions means not just more revenues based on orders and known upgrades but more stability and visibility as cloud becomes a greater part of the mix and those deferred revenues start to kick in.
There were a couple of interesting questions asked as financial analysts sought “more color” about the deferred revenues, and in answer to a question Brown and Head both pointed out that the good news about cloud being a larger percentage of revenues than previous guidance suggested, validating the investments made and keeping Interactive Intelligence the leader in contact center solutions’ hottest growth market by technology and geography. The investments are what gave the company its thought and market leadership and will continue to provide what they believe is significant differentiated value. In fact, having deferred revenue and a problem most companies would like to have.
On the closely watched issue of cash on hand and cash flow, the company has less cash because of acquisitions but no debt and a strong balance sheet and cash flow.
There was also an interesting question as to whether customers make the decision on whether to move to the cloud or consultants help them. Brown noted that one of the reasons for the rise in the average sale and Interactive’s participation in deals they used to only dream of is that large enterprises are coming to them saving we are “dead set on moving to the cloud.” Interactive Intelligence not only has the most comprehensive offer, but it is making the short list of consideration because some of the large customers have told potential vendors if you don’t have a great cloud offer we will not look at you. Brown also reiterated the point that one of the big moves in IT right now is toward centralization, and moving to the cloud is the perfect way to optimize enterprise IT and communications resources which are being centralized and virtualized for a host of strategic and compliance reasons.
Finally, it should be noted with all of the emphasis on things related to the cloud that the premises business is still and will likely long remain the mainstay of Interactive Intelligence’s business. As the company points out, the interest in CIC 4.0 is strong and is just ramping up. They also like to emphasize that because of the flexibility in their architecture customers can move functionality easily from premises to the cloud and back to premises-based on what their specific needs are over time, particularly in regards to things like centralization and regulatory compliance.
I mentioned this in an interview I conducted with Jason Alley, Solutions Marketing at Interactive Intelligence back in March. The evolution of contact center solutions means that vendors have to be agile in terms of giving the customer what is right for them. Interactive Intelligence has made the investments in flexibility and in the hot growth area of the cloud which positions them well both now and going forward. A pretty good quarter when all things are considered, I’d say.
Edited by Jamie Epstein