ININ

Interactive Intelligence Group, Inc. (ININ)

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Interactive Intelligence, Inc. (ININ)

Q3 2008 Earnings Call Transcript

October 27, 2008, 4:30 pm ET

Executives

Don Brown – Chairman, President and CEO

Steve Head – CFO, VP of Finance and Administration, Secretary and Treasurer

Paul Weber – VP of Sales for North America

Analysts

Varun Chadha – Raymond James

Irit Jakoby-Elrad – Susquehanna

Tavis McCourt – Morgan Keegan & Co

Gramy Rein [ph] – Bears Capital

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Interactive Intelligence third quarter 2008 earnings conference. As a reminder, today's call is being recorded. At this time, all lines are in a listen-only mode, later we will announce the opportunity for questions and instructions will be given at that time on how to signal (Operator instructions).

At this time, I would like to turn the conference over to Dr. Don Brown, President and CEO of Interactive Intelligence. Please go ahead, sir.

Don Brown

Okay thanks for joining us everybody. Presenting with me on the call today is Steve Head, our CFO, and we also have on the phone Paul Weber, our VP of Sales for North America. After our discussion and concluding remarks, we will have a Q&A session at which time we will available to answer your questions and for any of you not able to ask questions today, you can follow up with Steve after the call.

Hopefully you've received the Q3 earnings release by now. If not it's available up on our Web site. Before we get any further into the call, Steve will present the standard legal disclaimer.

Steve Head

Thanks Don. Over the course of this conference call, we will make predictive statements about our results, performance, plans and objectives in an effort to assist you in understanding our company. The enterprise software industry combined with the rapidly evolving uncertainties in the economic environment makes predictions challenging and problematic. These predictive statements are forward-looking statements under Federal Securities laws. Our actual results could differ materially as a result of a variety of potential risks and uncertainties. For more information, you should look to our 2007 Form 10-K, which we filed with the SEC and which describes factors, risks, and uncertainties that could cause our actual results to differ. The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Also, during this call, we may refer to non-GAAP financial measures. These non-GAAP results eliminate the impact of non-cash stock option expense and non-cash income tax expense and benefits. Management uses these non-GAAP financial measures in analyzing the business.

Now Don will provide some overview comments on the just completed quarter.

Don Brown

Thanks Steve. As usual I will hit the highlights and then Steve will dig into the numbers and I will come back for some more comments. For the third quarter, we recognized revenues at $30.1 million, up 3% over last year. We received orders from 81 new customers with one exceeding $1 million and 14 others over a $0.25 million. As we reported in the release, our lower overall revenue growth is associated with a lower dollar amount of orders received from existing customers. The dollar amount was less than our historical trends, our conclusions continue to be the same as in the second quarter of this year that we are seeing no evidence that the add-on orders from our installed base are going away or being replaced by competitors however customers are obviously being cautious in the current economic environment and their business may be affected by likened demand for their services.

We achieved record service revenues in the quarter of $15.4 million, an increase of 12% from the third quarter last year and we are reporting non-GAAP income and EPS in the earnings release on a non-GAAP basis. Earnings for the third quarter were $2 million or $0.11 per diluted share, this compares to $3.8 million or $0.19 per diluted share in the third quarter last year.

I will now turn it over to Steve.

Steve Head

As usual, I'll comment on our operating performance, then the balance sheet and cash flows. Regarding the operating performance, I want to point out two major items that impact information that we will discuss. First on a GAAP basis, we recorded income tax expense of $699,000 in the third quarter of 2008 which compares to a benefit of $37,000 in the same quarter last year. As we discussed in prior calls, we recorded a large tax credit in the fourth quarter of 2007 to recognize differed tax assets related to tax operating loss and credit carry-forwards. As a result of recognizing that asset, we are now recording tax expense most of which does not require cash payments. On a non-GAAP basis our tax expense was only $64,000.

Second we recorded non-cash stock-option expenses of $439,000 for our third quarter of 2008 compared to $812,000 from the third quarter of 2007. During the third quarter of this year, we reversed option expense recorded earlier in the year. This expense related to stock options which could be earned based on annual company performance, financial performance. The expense is reversed based on it being improbable that the options will be earned.

Turning to orders, our (inaudible) continued to generate the majority of orders with 57% of the orders coming from the channel during the third quarter. As Don stated, we signed 81 new customers in the quarter for our contacts center enterprise messaging, and IP PBX solutions. The overall average new customer order in the quarter was $110,000, with an average new contact center customer order of $125,000. North America provided 75% of the orders which is up from a more typical 67% while EMEA was 15% of the orders down from a more typical 22%. The shortfall in EMEA orders is due in part to the seasonally slow summer holiday period. Also we were involved in several large opportunities which were not closed in the quarter as we saw opportunities outside have somewhat longer sales cycles.

Read the rest of this transcript for free on seekingalpha.com