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| ININ > SEC Filings for ININ > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide our investors with an understanding of our past performance, our financial condition and our prospects and should be read in conjunction with other sections of this Quarterly Report on Form 10-Q. Investors should carefully review the information contained in this report under Part II, Item 1A "Risk Factors" and in the Part I, Item 1A "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The following will be discussed and analyzed:
· Forward-Looking Information
· Overview
· Financial Highlights
· Historical Results of Operations
· Liquidity and Capital Resources
· Critical Accounting Policies and Estimates
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended) that involves
risks and uncertainties which may cause actual results to differ materially from
those predicted in the forward-looking statements. Forward-looking statements
can often be identified by their use of such verbs as "expects", "anticipates",
"believes", "intend", "plan", "may", "should", "will", "would", "will be", "will
continue", "will likely result", or similar verbs or conjugations of such verbs.
If any of our assumptions on which the statements are based prove incorrect or
should unanticipated circumstances arise, our actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors,
including, but not limited to, unstable economic conditions, rapid technological
changes in the industry, our ability to maintain profitability, to manage
successfully our growth and increasingly complex third party relationships, to
maintain successful relationships with our current and any new partners, to
maintain and improve our current products and to develop new products and to
protect our proprietary rights adequately, and other factors set forth in our
Securities and Exchange Commission ("SEC") filings.
Overview
Interactive Intelligence, Inc. ("Interactive Intelligence", "we", "us" or "our") was formed in 1994 as an Indiana corporation and maintains its world headquarters and executive offices at 7601 Interactive Way, Indianapolis, IN 46278. Our telephone number is (317) 872-3000. We are located on the web at http://www.inin.com. We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended. These periodic and current reports and all amendments to those reports are available free of charge on the investor relations page of our website at http://investors.inin.com.
We are a leading provider of software application suites for Voice over Internet Protocol ("VoIP") business communications, and are increasingly leveraging our leadership position in the worldwide contact center market to offer our solutions to enterprises. In addition to the contact center sector, businesses utilize our solutions in industries including, but not limited to, teleservices, financial services (banks, credit unions), insurance, higher education (universities), healthcare, retail, technology, government and business services. Organizations that employ remote and mobile workers incorporate our solutions as well. For enterprises that rely on the Microsoft® Corporation ("Microsoft") platform, we offer a pre-integrated all-software Internet Protocol Private Branch Exchange phone and communications system that enables straightforward integration to Microsoft applications for data management. In all, our innovative software products and services are designed expressly for multichannel contact management, business communications and messaging using the Session Initiation Protocol ("SIP") global communications standard that supports VoIP. To supplement our software solutions, our product lineup includes a full-featured media server, media gateways and SIP proxy for IP-based communications networks and infrastructures. Our customers can deploy our solutions as an on-premise system at their site or as Communications as a Service ("CaaS").
Our application-based solutions are integrated on a single software platform. Overall, our platform has been developed to deliver security, broaden integration to business systems and end-user devices, enhance mobility for today's workforce, scale to thousands of users, and more wholly satisfy diverse business communications and interaction management needs in markets for:
· The Contact Center
· Enterprise IP Telephony
· Enterprise Messaging
By implementing our all-in-one solutions, businesses are able to unify multichannel communications media (phone, fax, e-mail and web chat); improve workforce performance, effectiveness and productivity; and more readily adapt to changing market and customer requirements. Organizations in the industries we serve are further able to reduce equipment and maintenance costs over traditional "multi-point" communications hardware, and additionally reduce the complexity of such non-integrated systems.
For further information on our business and the products and services we offer, refer to the Part I, Item 1 "Business" section of our Annual Report on Form 10-K for the year ended December 31, 2008.
Our management monitors certain key measures to assess our financial results. In particular, we track trends on product orders and contracted professional services and CaaS quarter to quarter and in comparison to the prior year and budget. We monitor our level of staffing which impacts our compensation expense, our largest expense. As noted below, as a result of the worldwide economic downturn, we have seen a negative impact on our orders received. In addition to orders and revenues, management reviews costs of revenue and operating expenses to ensure we are minimizing new expenditures and reducing costs, and we have adjusted our staffing levels to reduce expenses. Finally, management monitors diluted earnings per share, which is a key measure of performance that is also used by analysts and investors.
The table below shows our total revenues (in millions) for the most recent five quarters and the years ended December 31, 2008, 2007 and 2006 and the percentage change over the previous period (including the impact of reclassifications and adjustments for 2006 and 2007 as discussed in Note 1 of Notes to Condensed Consolidated Financial Statements in the respective year's Annual Report on Form 10-K).
Period Revenues Growth % Three Months Ended: March 31, 2009 $ 29.5 (6 )% December 31, 2008 31.3 4 % September 30, 2008 30.1 (2 )% June 30, 2008 30.6 4 % March 31, 2008 29.5 1 % Year Ended December 31: 2008 $ 121.4 10 % 2007 109.9 32 % 2006 83.0 32 % |
As shown in the 2008 annual growth rate and the quarterly growth rates in 2008 and for the first quarter of 2009, our revenue growth trend has slowed. We believe that this is primarily due to the downturn in the economy worldwide, which has resulted in longer sales cycles, as potential customers are hesitant to spend money on capital purchases. In addition, we have seen a decrease in our existing customers licensing additional software and purchasing hardware, in part because many customers are experiencing minimal growth in revenues or revenue reductions and some customers are reducing their number of employees.
Given the current economic conditions, we do not believe that we can accurately make predictions for the upcoming quarters. We will continue to focus on maintaining profitability through our sales and marketing efforts for our products and services and continued management of operating expenses. As our profitability allows, we will position the company for future growth through our research and development initiatives which may increase expenses in the future as we focus on these efforts.
Financial Highlights
During the first quarter of 2009, product revenues decreased $1.8 million compared to the same quarter in 2008, as a result of lower order activity across all product lines and all major regions. This decrease was offset by an increase in services revenues of $1.8 million primarily due to additional support fees and annually renewable license fees as well as a $383,000 increase in CaaS.
Our costs of product increased $398,000 during the first quarter of 2009 compared to the same period in 2008 due to additional hardware delivered by us.
Our costs of services and operating expenses, which include sales and marketing, research and development and general and administrative expenses, decreased for the three months ended March 31, 2009, compared to the same period in 2008, primarily due to a $400,000, or 1%, decrease in company-wide staffing at March 31, 2009, compared to March 31, 2008, and a decrease in travel and entertainment related costs of $536,000. Both decreases were partially offset by an increase in allocated rent and depreciation costs of $296,000 and $259,000, respectively, during the quarter ended March 31, 2009, compared to the same period in 2008, as a result of our opening additional offices and expanding some of our current offices subsequent to March 31, 2008.
Historical Results of Operations
The following table presents certain financial data, derived from our unaudited
statements of income, as a percentage of total revenues for the periods
indicated. The operating results for the three months ended March 31, 2009 and
2008 are not necessarily indicative of the results that may be expected for the
full year or for any future period.
Three Months Ended March 31,
2009 2008
Revenues:
Product 44 % 50 %
Services 56 50
Total revenues 100 100
Cost of revenues:
Product 12 11
Services 19 20
Total cost of revenues 31 31
Gross profit 69 69
Operating expenses:
Sales and marketing 31 34
Research and development 19 17
General and administrative 11 13
Total operating expenses 61 64
Operating income 8 5
Other income (expense):
Interest income, net -- 2
Other income (expense), net (1 ) --
Total other income (expense) (1 ) 2
Income before income taxes 7 7
Income tax expense (3 ) (3 )
Net income 4 % 4 %
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Comparison of Three Months Ended March 31, 2009 and 2008
Revenues
Product Revenues Three Months Ended March 31,
2009 2008
($ in thousands)
Product revenues $ 13,050 $ 14,845
Change from prior year period (12 )% 20 %
Percentage of total revenues 44 % 50 %
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Product revenues, which include software and hardware revenues, decreased $1.8 million during the first quarter of 2009 compared to the same period in 2008. During the three months ended March 31, 2009, the dollar amount of orders received was down 24% across all major regions and all product lines. This decrease was primarily due to the current economic conditions, which are causing companies to delay commitments for capital expenditures. Partially offsetting this decrease was an increase of 25% in the dollar amount of third party hardware orders primarily as a result of our increased marketing efforts during the quarter to encourage customers to purchase hardware from us rather than from other vendors.
Product revenues can fluctuate from period to period depending on the mix of contracts sold between perpetual licenses and annually renewable licenses. The majority of our product licenses are perpetual but we do also have certain customers with renewable term licenses. Perpetual orders are recognized when received, if other recognition criteria are satisfied, while renewable term licenses are deferred and generally recognized over one year. The impact of the mix of contracts on our product revenues occurs only in the year of a product order; subsequent renewal fees received for annually renewable licenses and renewal support fees for perpetual contracts are all allocated entirely to services revenues.
Services Revenues Three Months Ended March 31,
2009 2008
($ in thousands)
Services revenues $ 16,426 $ 14,638
Change from prior year period 12 % 23 %
Percentage of total revenues 56 % 50 %
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Services revenues include the portion of the license arrangements allocated to maintenance and support from annually renewable and perpetual contracts, license renewals of annually renewable contracts, and support fees for perpetual contracts, as well as professional services, education, CaaS and other miscellaneous revenues.
The increase in our services revenues during the first quarter of 2009 compared to the same period in 2008 was primarily due to our growing installed base of customers, both in number and size, and the related payments of annual license renewal fees and support fees for perpetual licenses. License renewal and support revenues, which comprise 76% of total services revenues, increased by $1.3 million, or 11%, during the three months ended March 31, 2009, compared to the same period in 2008. As we sign contracts and install our solutions with new end-customers and expand product usage at existing customers, we expect that our services revenues will continue to increase as customers renew licenses and pay for support on our software applications. The actual percentage fee charged for renewal of annually renewable licenses and perpetual support agreements as compared to the initial annually renewable license fee and perpetual license, respectively, is comparable on a relative percentage basis, and therefore, the mix of these types of contracts in the future is not expected to impact our future services revenues.
During the first quarter of 2009, CaaS revenues increased $383,000, or 85%, primarily due to an increase in the dollar amount of contracted CaaS services compared to the same period in 2008. Services revenues have and will fluctuate based on the dollar amount of orders and license renewals, the number of attendees at our educational classes, the amount of assistance our customers and partners need for implementation and installation and CaaS adoption. We anticipate these services revenues will continue to increase in the future if the number of our customers continues to increase.
Although we have not experienced a significant increase in our customers choosing not to renew their licenses and support fees, if more of our customers choose to not renew, those decisions could have an adverse effect on our future services revenue.
Cost of Revenues Three Months Ended March 31,
2009 2008
Cost of revenues: ($ in thousands)
Product $ 3,528 $ 3,130
Services 5,502 5,897
Total cost of revenues $ 9,030 $ 9,027
Change from prior year period -- % 25 %
Product costs as a % of product revenues 27 % 21 %
Services costs as a % of services revenues 33 % 40 %
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Costs of product consist of hardware costs, primarily for media server and Interaction Gateway appliances that we developed; servers, telephone handsets and gateways that we purchase and resell; royalties for third party software and other technologies included in our solutions; personnel costs; and, to a lesser extent, software packaging costs, which include product media, duplication and documentation. Costs of product can fluctuate depending on which software applications are licensed to our customers and partners, the third party software that is licensed by the end user from us as part of our software applications and the dollar amount of orders for hardware. Costs of product increased during the three months ended March 31, 2009 compared to the same period in 2008 primarily as a result of a $337,000 increase in hardware costs from $1.7 million to $2.0 million.
Costs of services consist primarily of compensation expenses for technical support, educational and professional services personnel and costs associated with our CaaS offering. These expenses decreased primarily due to a $360,000 decrease in compensation expense as a result of a 9% staffing decrease in our services personnel at March 31, 2009 compared to March 31, 2008. Travel related expenses also decreased $181,000, partially offset by a $130,000 increase in depreciation due to office expansions subsequent to March 31, 2008.
Gross Profit Three Months Ended March 31,
2009 2008
($ in thousands)
Gross profit $ 20,446 $ 20,456
Change from prior year period -- % 20 %
Percentage of total revenues 69 % 69 %
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Gross profit as a percentage of total revenues remained consistent during the first quarter of 2009, compared to the same period in 2008. Gross margin in any particular quarter is dependent upon revenues recognized versus costs of product and costs of services incurred and can vary.
Operating Expenses
Sales and Marketing Three Months Ended March 31,
2009 2008
($ in thousands)
Sales and marketing expenses $ 9,233 $ 10,178
Change from prior year period (9 )% 18 %
Percentage of total revenues 31 % 34 %
Percentage of net product revenues 97 % 87 %
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Sales and marketing expenses are comprised primarily of compensation expenses, travel and entertainment expenses and promotional costs related to our sales, marketing and channel management operations. Total compensation costs decreased $409,000 during the three months ended March 31, 2009, which was due primarily to a 13% decrease in our sales commissions during the three months ended March 31, 2009, compared to the three months ended March 31, 2008. Commissions paid to sales employees decreased due to the decrease in product revenues during the quarter. Travel and entertainment related expenses decreased by $207,000, as our employees limited these expenses. Outsourced services decreased $183,000, primarily due to a decreased use of outsourced services within our marketing efforts. In addition, our corporate marketing costs decreased $133,000, which included decreased advertising, brand promotions and public relations. Referral fees increased $104,000, as we paid more to third parties for customer referrals related to product orders during the most recent quarter.
Research and Development Three Months Ended March 31,
2009 2008
($ in thousands)
Research and development expenses $ 5,626 $ 4,965
Change from prior year period 13 % 27 %
Percentage of total revenues 19 % 17 %
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Research and development expenses are comprised primarily of compensation and depreciation expenses. Research and development expenses increased during the three months ended March 31, 2009, as compared to the same period in 2008, primarily due to an increase in compensation expense of $470,000, resulting from a 10% staffing increase in our research and development personnel at March 31, 2009 compared to March 31, 2008. In addition, the rent allocated to research and development increased by $177,000 due to the staffing additions in the research and development department and our office expansions at our world headquarters subsequent to March 31, 2008.
We believe that investment in research and development is critical to our future growth and competitive position in the marketplace and is directly related to timely development of new and enhanced solutions that are central to our business. As a result, we expect research and development expenses will continue to increase in future periods as our profitability allows.
General and Administrative Three Months Ended March 31,
2009 2008
($ in thousands)
General and administrative expenses $ 3,296 $ 3,827
Change from prior year period (14 )% 25 %
Percentage of total revenues 11 % 13 %
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General and administrative expenses are comprised of compensation expense and general corporate expenses that are not allocable to other departments, such as legal and other professional fees and bad debt expense. General and administrative expenses decreased during the three months ended March 31, 2009, as compared to the same period in 2008, primarily due to a decrease in compensation expense of $172,000, as a result of an 11% staffing decrease in our general and administrative personnel at March 31, 2009 compared to March 31, 2008. Travel and entertainment related expenses decreased $108,000 during the first quarter of 2009, compared to the same period in 2008. Professional and outsourced services also decreased by $97,000 and $70,000, respectively. Professional services decreased due to a decrease in general accounting and legal fees, and outsourced services decreased due to a decrease in tax accounting fees. Bad debt costs decreased $71,000 due to strong collections and no bad debt write-offs during the most recent quarter.
Other Income (Expense)
Interest Income, Net Three Months Ended March 31,
2009 2008
($ in thousands)
Cash, cash equivalents and short-term investments (average) $ 45,720 $ 47,882
Interest income 108 459
Return on investment (annualized) 0.9 % 3.8 %
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Interest earned on investments decreased due to lower interest rates during the quarter ended March 31, 2009, compared to the same period in 2008. We continue to monitor the allocation of funds in which we have invested to maximize our return on investment while utilizing safe investment alternatives within our established investment policy.
Other Income (Expense), Net Three Months Ended March 31,
2009 2008
($ in thousands)
Other income (expense) $ (298 ) $ 97
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Other income (expense), net includes foreign currency transaction gains and losses. Foreign currency transaction gains and losses can fluctuate based on the amount of revenue that is generated in certain international currencies, particularly the Euro, and the exchange gain or loss that results from foreign currency disbursements and receipts. The expense for the first three months of 2009 consisted of $298,000 of losses compared to $209,000 of gains related to foreign currency transactions for the same period during 2008. In addition, we had $112,000 of foreign tax withholdings at March 31, 2008 that were reserved during 2008, as a result of a study of our foreign tax withholding from which we determined that we had sufficient and appropriate foreign source income to record our foreign withholdings as a credit for tax purposes instead of as a deduction to net income.
Income tax expense Three Months Ended March 31,
2009 2008
We incurred $878,000 of income tax expense during the three months ended March 31, 2009 compared to $925,000 of income tax expense recorded during the three months ended March 31, 2008. Of the $878,000 of income tax expense incurred during the first quarter of 2009, $79,000 is expected to result in cash payments and the remaining $799,000 was associated with the utilization our deferred tax assets.
Liquidity and Capital Resources
We generate cash from the collections we receive related to licensing our products and from annual license renewals, maintenance and support and other services revenues. We use cash primarily for paying our employees (including salaries, commissions and benefits), leasing office space, paying travel . . .
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