Health Care and Economy and Technology

Interactive Intelligence posts profit, again: Communications software-maker nets modest earnings

August 1, 2005

Its profit may be modest. But after years of struggle, Interactive Intelligence Inc. knows the value of small gains.

They sure beat massive losses.

Last week, the Indianapolis-based software company reported a second-quarter profit of $290,000 on sales of $15.6 million. That compares with a profit of $304,000 on sales of $13.6 million posted during the same quarter last year.

It was the company's sixth consecutive profitable quarter, for a total of $1.4 million.

That's a big turnaround for the 340-employee company, which makes software that unifies business communications. Customers use Interactive's software to simplify and integrate the delivery of messages sent via phone, email or fax.

Before 2004, Interactive Intelligence booked losses in all but one of its first 18 quarters as a public company. Since inception in 1994, it has accumulated more than $60 million in losses.

Back in the 1990s, such losses were commonplace for fast-growing high-tech companies. Winning the race to quickly capture market share was touted as crucial. And Interactive Intelligence was considered perhaps Indiana's best prospect to become a leader in the New Economy.

After the dot-com bust, it became difficult to explain so much red ink to potential customers.

"Their challenge is that they developed a really creative technology, got caught up in the bust, and then repositioned, but are now in a more competitive marketplace," said Jim Wheeler, president of locally based technology trade association Electricore. "They've been forced into a much more cautious and realistic strategy, and that is the right answer."

Strict belt-tightening and a revised business plan kept the company afloat while many of its peers sunk. These days, Interactive Intelligence is one of two publicly traded software makers based in the state.

Each quarter of consistent profitability the company posts makes its software an easier sell, said Chief Financial Officer Stephen Head. Growing sales and flat expenses alleviate fears that Interactive Intelligence won't be around to service customers after they buy the software.

"For our prospects and current customers, [modest quarterly profit] has given them comfort that we are making strides in becoming consistently profitable, and that we will be in business for years to come," Head said in an e-mail response to IBJ's questions.

"Deciding to invest in a solution like ours is a significant financial decision, and our results have ... decreased the fear, uncertainty and doubt that our competition has used against us in the past."

Regular profits also bolster confidence on Wall Street. In the days before Interactive Intelligence's earnings announcement, company shares moved up to a 52-week high of $5.90, well above their $3.07 low last fall. Shares were trading at $5.21 late last week.

But investors are most interested in a high-tech company's potential for dynamic growth. The excitement of March 2000, when Interactive Intelligence shares briefly shot above $50, is long gone.

Interactive Intelligence remains much smaller than its main competitors, such as Avaya Inc., Cisco Systems Inc. and Nortel Networks. But those giants concentrate their sales on global corporations. Elizabeth Herrell, vice president and analyst of Cambridge, Mass.-based Forrester Research Inc., said Interactive Intelligence has established itself well as a vendor to small and midsize companies.

"They've managed to continue growing in a very tough market," she said. "There were a lot of companies that came out at the same time [as Interactive Intelligence] that I don't even know their names anymore."

While Interactive Intelligence still believes its software can be useful in any industry, Head wrote, it has increasingly targeted specific markets, including banks and credit unions, health care businesses and universities.

Most of Interactive Intelligence's revenue still comes from its original software product, Head said in his e-mail, which is used to manage call centers many companies set up to handle customer questions.

But Interactive Intelligence officials have their eyes on an emerging opportunity. The company recently created a subsidiary called Vonexus to target the market for telephone communications via the Internet.

Many companies have been wary of moving their telephone communications off traditional systems. The voice-over-Internet protocol, or VoIP, alternative was regarded as long on promise and short on reliability.

But innovation has made Internet-based telephone service an attractive alternative, Herrell said. And because Interactive Intelligence's newer IP software is fully integrated with its established call center products, the company is well-positioned.

"IP has taken years to catch on. But now that IP has hit mainstream, they can ride that wave and hopefully gather new customers," she said. "I think they'll be around for a while."
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