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Filed by Interactive Intelligence Group, Inc. (an Indiana corporation)
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934

Subject Company: Interactive Intelligence, Inc. (an Indiana corporation)
Registration No. 333-173435
 
Interactive Intelligence Reports 2011 First-Quarter Operating Results
Revenues increase 36 percent; total orders up 55 percent

INDIANAPOLIS, April 25, 2011 -- Interactive Intelligence (Nasdaq: ININ), a global provider of unified IP business communications solutions, has announced operating results for the three months ended March 31, 2011.

The company reported revenues of $47.7 million, an increase of 36 percent from revenues of $35.0 million in the first quarter of 2010. Product revenues increased by 32 percent, recurring revenues by 30 percent, and services revenues by 88 percent compared to the 2010 first quarter.

First-quarter operating results included the following:
-  
On a generally accepted accounting principles (GAAP) basis, net income of $3.1 million in 2011, with diluted earnings per share (EPS) of $0.16, compared to net income of $1.9 million in 2010, or EPS of $0.10.
-  
Net income on a non-GAAP* basis of $5.5 million in 2011, with EPS of $0.28, compared to non-GAAP net income of $4.2 million in 2010, or EPS of $0.22.
-  
GAAP operating income of $4.9 million in 2011, up 23 percent from $4.0 million in 2010.
-  
Non-GAAP operating income of $6.8 million in 2011, up 34 percent from 2010.
-  
Other expense of $123,000 in 2011, compared to $733,000 in 2010, reflecting foreign currency translation losses in both years.
-  
An increase in cash flows from operations to $6.7 million in 2011, compared to $5.3 million in 2010.

For the first quarter of 2011, non-GAAP net income and EPS excluded charges for stock-based compensation of $1.3 million, or EPS of $0.07, purchase accounting adjustments of $510,000, or EPS of $0.03, and non-cash income tax expense of approximately $549,000, or EPS of $0.02.

For the first quarter of 2010, non-GAAP net income and EPS excluded charges for stock-based compensation of $1.0 million, or EPS of $0.05, and non-cash income tax expense of $1.2 million, or EPS of $0.07.

Cash and investment balances, including long-term investments, as of March 31, 2011, increased to $91.9 million with no debt.

“We again saw strong year-over-year order increases across all major geographies and product groups,” said Interactive Intelligence founder and CEO, Dr. Donald E. Brown. “Total orders were up 55 percent over the first quarter of 2010, which included a near tripling in cloud-based contracts year-over-year. We’re executing well on our sales and marketing plans and are benefiting from an increase in new opportunities as a result of our relationships with key strategic partners.”

During the first quarter of 2011, the company was also named a “2011 Service Leader” by CRM Magazine and a "Need to Know Vendor” by Computer Reseller News.

On April 11, 2011, Interactive Intelligence announced that it will ask shareholders at its 2011 annual shareholder meeting to vote on a proposal to reorganize the company as a holding company incorporated in Indiana. The annual meeting is scheduled for June 10, 2011 at 9 a.m., Eastern time (EDT) at the company's world headquarters located at 7601 Interactive Way, Indianapolis, Indiana 46278. Shareholders of record as of the close of business on April 21, 2011 will be entitled to vote by proxy or in person at the annual meeting.

Interactive Intelligence and Interactive Intelligence Group, Inc., its wholly owned subsidiary, have filed a registration statement with the Securities and Exchange Commission (SEC) that includes a preliminary proxy statement/prospectus and other relevant documents in connection with the proposed reorganization. More information regarding the proposed reorganization is available on the company's website at www.inin.com, under the "About Us" tab.

Interactive Intelligence will host a first quarter 2011 earnings conference call April 25 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 first 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, Inc.
Interactive Intelligence, 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 Software Magazine’s 2010 Top 500 Global Software and Services Suppliers, and Forbes Magazine’s 2010 Best Small Companies in America. Interactive Intelligence is also positioned in the leaders’ quadrant of the Gartner Magic Quadrant for Contact Center Infrastructure, Worldwide report (Feb. 22, 2010). The company employs more than 800 people and is headquartered in Indianapolis, Indiana. It has 19 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.

 
 
 
 
Interactive Intelligence Forward-Looking Statement Disclosure
This release contains 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.
 
* 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 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.
 
Where to Find Additional Information
Interactive Intelligence, Inc. and Interactive Intelligence Group, Inc. (ININ Group) have filed a registration statement that includes a preliminary proxy statement/prospectus and other relevant documents in connection with the proposed reorganization. INTERACTIVE INTELLIGENCE SHAREHOLDERS ARE URGED TO CAREFULLY READ THESE DOCUMENTS AND THE DEFINITIVE PROXY STATEMENT/PROSPECTUS, WHEN FILED AND MAILED, BECAUSE THEY CONTAIN AND WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED REORGANIZATION. The definitive proxy statement/prospectus will be mailed to Interactive Intelligence shareholders prior to the shareholder meeting. In addition, investors may obtain a free copy of the preliminary proxy statement/prospectus and other filings containing information about Interactive Intelligence, ININ Group, and the proposed reorganization, from the SEC at the SEC’s website at http://www.sec.gov. In addition, copies of the preliminary proxy statement/prospectus and other filings containing information about Interactive Intelligence, ININ Group, and the proposed reorganization can be obtained without charge by sending a request to Interactive Intelligence, Inc., 7601 Interactive Way, Indianapolis, Indiana 46278, Attention: Investor Relations; by calling (317) 872-3000; or by accessing them on Interactive Intelligence, Inc.’s investor relations Web page at http://investors.inin.com/.
 
Participants in the Solicitation
Interactive Intelligence, its directors, executive officers, certain other members of management, and employees may be deemed to be participants in the solicitation of proxies from the shareholders of Interactive Intelligence in favor of the proposed holding company reorganization. Additional information regarding the interests of potential participants in the proxy solicitation is included in the preliminary proxy statement/prospectus and will be included in the definitive proxy statement/prospectus and other relevant documents that Interactive Intelligence and ININ Group have filed and intend to file with the SEC in connection with the annual meeting of shareholders of Interactive Intelligence, Inc.
 
This press release is being made pursuant to and in compliance with the Securities Act of 1933, as amended, and does not constitute an offer of any securities for sale or a solicitation of an offer to buy any securities, nor shall there be any sale of the securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or jurisdiction. Any offer of the securities will be made solely by means of a prospectus included in the registration statement and any prospectus supplement that may be issued in connection with such offering.
 
Interactive Intelligence Inc. 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.

ININ-G

Contacts:
Stephen R. Head
Chief Financial Officer
Interactive Intelligence Inc.
+1 317.715.8412
steve.head@inin.com

Christine Holley
Director of Market Communications
Interactive Intelligence Inc.
+1 317.715.8220
christine.holley@inin.com

Follow Interactive Intelligence:
Twitter: http://www.inin.com/twitter
Blog: www.inin.com/blog
YouTube: http://www.inin.com/YouTube
Facebook: http://www.inin.com/facebook
LinkedIn: http://www.inin.com/linkedin

###

 
 
 

Interactive Intelligence, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
             
   
Three Months Ended
  
   
March 31,
  
   
2011
    
2010
  
Revenues:
            
Product
   $ 20,766     $ 15,786  
Recurring
     20,746       15,925  
Services
     6,218       3,312  
Total revenues
     47,730       35,023  
Costs of revenues:
                
Product
     6,196       4,799  
Recurring
     5,282       3,423  
Services
     3,712       2,174  
Amortization of intangible assets
     35       16  
Total cost of revenues
     15,225       10,412  
Gross profit
     32,505       24,611  
Operating expenses:
                
Sales and marketing
     14,157       10,352  
Research and development
     8,147       6,425  
General and administrative
     5,095       3,836  
Amortization of intangible assets
     184       9  
Total operating expenses
     27,583       20,622  
Operating income
     4,922       3,989  
Other income (expense):
                
Interest income, net
     43       42  
Other expense
     (166 )     (775 )
Total other income (expense)
     (123 )     (733 )
Income before income taxes
     4,799       3,256  
Income tax expense
     1,704       1,388  
Net income
   $ 3,095     $ 1,868  
                 
Net income per share:
                
Basic
   $ 0.17     $ 0.11  
Diluted
     0.16       0.10  
                 
Shares used to compute net income per share:
                
Basic
     18,417       17,320  
Diluted
     19,780       18,708  

 
 
 
 
Interactive Intelligence, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
(unaudited)
             
   
Three Months Ended
  
   
March 31,
  
   
2011
    
2010
  
             
Net income, as reported
   $ 3,095     $ 1,868  
Purchase accounting adjustments:
                
Increase to revenues:
                
  Recurring
     59       7  
  Services
     31       2  
Reduction of operating expenses:
                
Customer relationships
     139       9  
  Technology
     35       16  
Non-compete agreements
     45       -  
  Acquisition costs
     201       -  
Total
     510       34  
Non-cash stock-based compensation expense:
                
Cost of recurring revenues
     105       31  
  Cost of services
     25       48  
Sales and marketing
     392       324  
Research and development
     408       298  
General and administrative
     388       311  
Total
     1,318       1,012  
Non-cash income tax expense
     549       1,241  
Non-GAAP net income
   $ 5,472     $ 4,155  
                 
Operating income, as reported
   $ 4,922     $ 3,989  
Purchase accounting adjustments
     510       34  
Non-cash stock-based compensation expense
     1,318       1,012  
Non-GAAP operating income
   $ 6,750     $ 5,035  
                 
Diluted EPS, as reported
   $ 0.16     $ 0.10  
Purchase accounting adjustments
     0.03       0.00  
Non-cash stock-based compensation expense
     0.07       0.05  
Non-cash income tax expense
     0.02       0.07  
Non-GAAP diluted EPS
   $ 0.28     $ 0.22  

 
 
 

 
Interactive Intelligence, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
             
             
   
March 31,
    
December 31,
  
   
2011
    
2010
  
   
(unaudited)
        
Assets
            
Current assets:
            
Cash and cash equivalents
   $ 51,870     $ 48,300  
Short-term investments
     34,439       37,582  
Accounts receivable, net
     37,295       36,130  
Deferred tax assets, net
     5,112       5,499  
Prepaid expenses
     9,054       7,456  
Other current assets
     4,773       4,989  
Total current assets
     142,543       139,956  
Long-term investments
     5,566       -  
Property and equipment, net
     11,877       10,336  
Deferred tax assets, net
     2,494       2,765  
Goodwill
     14,567       11,371  
Intangible assets, net
     12,068       11,001  
Other assets, net
     931       803  
Total assets
   $ 190,046     $ 176,232  
                 
Liabilities and Shareholders' Equity
                
Current liabilities:
                
Accounts payable and accrued liabilities
   $ 15,139     $ 16,364  
Accrued compensation and related expenses
     5,303       6,553  
Deferred product revenues
     4,989       3,350  
Deferred services revenues
     47,109       43,281  
Total current liabilities
     72,540       69,548  
Deferred revenue
     8,935       7,420  
Total liabilities
     81,475       76,968  
                 
Shareholders' equity:
                
Preferred stock
     -       -  
Common stock
     186       182  
Additional paid-in-capital
     109,990       103,837  
Accumulated other comprehensive income
     (235 )     (290 )
Accumulated deficit
     (1,370 )     (4,465 )
Total shareholders' equity
     108,571       99,264  
Total liabilities and shareholders' equity
   $ 190,046     $ 176,232  

 
 
 
 
Interactive Intelligence, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
             
   
Three Months Ended
  
   
March 31,
  
   
2011
    
2010
  
             
Operating activities:
            
Net income
   $ 3,095     $ 1,868  
Adjustments to reconcile net income to net cash
                
provided by operating activities:
                
Depreciation, amortization and other non-cash items
     1,481       1,059  
Stock-based compensation expense
     1,318       1,012  
Tax benefits from stock-based payment arrangements
     (862 )     (1,251 )
Deferred income tax
     34       (150 )
Accretion of investment income
     (682 )     27  
Changes in operating assets and liabilities:
                
Accounts receivable
     (49 )     5,110  
Prepaid expenses
     (1,311 )     (346 )
Other current assets
     272       (47 )
Other assets
     (128 )     53  
Accounts payable and accrued liabilities
     (1,598 )     143  
Accrued compensation and related expenses
     (1,585 )     (1,304 )
Deferred product revenues
     1,793       (615 )
Deferred services revenues
     4,889       (214 )
Net cash provided by operating activities
     6,667       5,345  
                 
Investing activities:
                
Sales of available-for-sale investments
     21,028       2,550  
Purchases of available-for-sale investments
     (22,740 )     (7,828 )
Purchases of property and equipment
     (2,139 )     (985 )
Acquisition, net of cash
     (4,111 )     -  
Unrealized gain on investment
     26       -  
Net cash used in investing activities
     (7,936 )     (6,263 )
                 
Financing activities:
                
Proceeds from stock options exercised
     3,881       691  
Proceeds from issuance of common stock
     96       158  
Tax benefits from stock-based payment arrangements
     862       1,251  
Net cash provided by financing activities
     4,839       2,100  
                 
Net increase in cash and cash equivalents
     3,570       1,182  
Cash and cash equivalents, beginning of period
     48,300       48,497  
Cash and cash equivalents, end of period
   $ 51,870     $ 49,679  
                 
Cash paid during the period for:
                
Interest
   $ -     $ 1  
Income taxes
     842       318  
                 
Other non-cash item:
                
Purchases of property and equipment payable at end of period
   $ 746     $ 57  

 
 
 
 
Condensed Consolidated Statements of Income - GAAP
                                
(in thousands, except per share amounts)
                                    
(unaudited)
                                    
   
2010
  
2011
  
      Q1       Q2       Q3       Q4    
Total
       Q1  
                                               
Revenues:
                                              
Product
   $ 15,786     $ 18,315     $ 20,671     $ 25,045     $ 79,817     $ 20,766  
Recurring
     15,925       16,322       16,595       19,898       68,740       20,746  
Services
     3,312       4,174       4,565       5,707       17,758       6,218  
Total revenues
     35,023       38,811       41,831       50,650       166,315       47,730  
Costs of revenues:
                                                
Product
     4,799       5,502       6,198       7,369       23,868       6,196  
Recurring
     3,423       4,043       4,302       5,223       16,991       5,282  
Services
     2,174       2,144       2,465       3,005       9,788       3,712  
Amortization of intangibles
     16       16       16       35       83       35  
Total cost of revenues
     10,412       11,705       12,981       15,632       50,730       15,225  
Gross profit
     24,611       27,106       28,850       35,018       115,585       32,505  
Operating expenses:
                                                
Sales and marketing
     10,352       11,480       12,106       13,134       47,072       14,157  
Research and development
     6,425       6,945       7,193       7,786       28,349       8,147  
General and administrative
     3,836       4,013       3,935       4,800       16,584       5,095  
Amortization of intangibles
     9       9       9       184       211       184  
Total operating expenses
     20,622       22,447       23,243       25,904       92,216       27,583  
Operating income
     3,989       4,659       5,607       9,114       23,369       4,922  
Other income (expense):
                                                
Interest income, net
     42       67       120       111       340       43  
Other income (expense)
     (775 )     (590 )     337       (118 )     (1,146 )     (166 )
Total other income (expense)
     (733 )     (523 )     457       (7 )     (806 )     (123 )
Income before income taxes
     3,256       4,136       6,064       9,107       22,563       4,799  
Income tax expense
     1,388       1,680       2,561       2,033       7,662       1,704  
Net income
   $ 1,868     $ 2,456     $ 3,503     $ 7,074     $ 14,901     $ 3,095  
                                                 
Net income per share:
                                                
Basic
   $ 0.11     $ 0.14     $ 0.20     $ 0.39     $ 0.85     $ 0.17  
Diluted
   $ 0.10     $ 0.13     $ 0.19     $ 0.37     $ 0.79     $ 0.16  
                                                 
Shares used to compute net income per share:
                                          
Basic
     17,320       17,445       17,524       17,956       17,563       18,417  
Diluted
     18,708       18,772       18,695       19,302       18,894       19,780  

 
 
 

Condensed Consolidated Statements of Income - Non-GAAP
                          
(in thousands, except per share amounts)
                                    
(unaudited)
                                    
   
2010
    
2011
  
      Q1       Q2       Q3       Q4    
Total
       Q1  
                                               
Revenues:
                                              
Product
   $ 15,786     $ 18,315     $ 20,671     $ 25,045     $ 79,817     $ 20,766  
Recurring
     15,932       16,323       16,595       19,978       68,828       20,805  
Services
     3,314       4,175       4,566       5,707       17,762       6,249  
Total revenues
     35,032       38,813       41,832       50,730       166,407       47,820  
Costs of revenues:
                                                
Product
     4,799       5,502       6,198       7,369       23,868       6,196  
Recurring
     3,392       3,983       4,234       5,155       16,764       5,177  
Services
     2,126       2,141       2,447       2,980       9,694       3,687  
Total cost of revenues
     10,317       11,626       12,879       15,504       50,326       15,060  
Gross profit
     24,715       27,187       28,953       35,226       116,081       32,760  
Operating expenses:
                                                
Sales and marketing
     10,028       11,162       11,774       12,878       45,842       13,765  
Research and development
     6,127       6,647       6,908       7,489       27,171       7,739  
General and administrative
     3,525       3,728       3,609       4,383       15,245       4,506  
Total operating expenses
     19,680       21,537       22,291       24,750       88,258       26,010  
Operating income
     5,035       5,650       6,662       10,476       27,823       6,750  
Other income (expense):
                                                
Interest income, net
     42       67       120       111       340       43  
Other income (expense)
     (775 )     (590 )     337       (118 )     (1,146 )     (166 )
Total other income (expense)
     (733 )     (523 )     457       (7 )     (806 )     (123 )
Income before income taxes
     4,302       5,127       7,119       10,469       27,017       6,627  
Income tax expense
     147       133       151       55       486       1,155  
Net income
   $ 4,155     $ 4,994     $ 6,968     $ 10,414     $ 26,531     $ 5,472  
                                                 
Net income per share:
                                                
Basic
   $ 0.24     $ 0.29     $ 0.40     $ 0.58     $ 1.51     $ 0.30  
Diluted
     0.22       0.27       0.37       0.54       1.40       0.28  
                                                 
Shares used to compute net income per share:
                                          
Basic
     17,320       17,445       17,524       17,956       17,563       18,417  
Diluted
     18,708       18,772       18,695       19,302       18,894       19,780  

 
 
 

Supplemental Data
                                    
(Dollars in thousands)
                                    
                                     
   
2010
    
2011
  
      Q1       Q2       Q3       Q4    
Total
       Q1  
Non-GAAP Adjustments:
                                              
Purchase accounting adjustments:
                                              
Increase to revenues:
                                              
Recurring
   $ 7     $ 1     $ -     $ 80     $ 88     $ 59  
Services
     2       1       1       -       4       31  
                                                 
Reduction of operating expenses:
                                                
Customer relationships
     9       9       9       139       166       139  
Technology
     16       16       16       35       83       35  
Non-compete agreements
     -       -       -       45       45       45  
Acquisition costs
     -       -       -       89       89       201  
Total purchase accounting adjustments
   $ 34     $ 27     $ 26     $ 388     $ 475     $ 510  
                                                 
Stock-based compensation expense:
                                                
Costs of recurring revenues
   $ 31     $ 60     $ 68     $ 68     $ 227     $ 105  
Costs of services revenues
     48       3       18       25       94       25  
Sales and marketing
     324       318       332       256       1,230       392  
Research and development
     298       298       285       297       1,178       408  
General and administrative
     311       285       326       328       1,250       388  
Total
   $ 1,012     $ 964     $ 1,029     $ 974     $ 3,979     $ 1,318  
                                                 
Non-cash income tax expense
   $ 1,241     $ 1,547     $ 2,410     $ 1,978     $ 7,176     $ 549  
                                                 
Other Information:
                                                
Margins (GAAP):
                                                
Product
     69.6 %     70.0 %     70.0 %     70.6 %     70.1 %     70.2 %
Recurring
     78.5 %     75.2 %     74.1 %     73.8 %     75.3 %     74.5 %
Services
     34.4 %     48.6 %     46.0 %     47.3 %     44.9 %     40.3 %
Overall
     70.3 %     69.8 %     69.0 %     69.1 %     69.5 %     68.1 %
                                                 
Year-over-year Revenue Growth (GAAP):
                                                
Product
     20.7 %     10.6 %     32.5 %     38.5 %     26.0 %     31.5 %
Recurring
     18.8 %     23.2 %     15.7 %     34.4 %     23.2 %     30.3 %
Services
     10.7 %     35.0 %     41.6 %     91.3 %     44.5 %     87.7 %
Overall
     18.8 %     18.0 %     26.1 %     41.2 %     26.6 %     36.3 %
                                                 
Orders:
                                                
Over $1 million
     3       2       9       5       19       3  
Between $250,000 and $1 million
     11       18       16       26       71       24  
                                                 
Number of new customers
     71       62       48       77       258       65  
                                                 
Average new customer order:
                                                
Overall
   $ 135     $ 178     $ 318     $ 225     $ 206     $ 275  
Cloud-based
     535       446       617       139       401       488