Interactive Intelligence Group's (ININ) CEO Donald Brown On Preliminary Q2 2014 Results (Transcript)

Interactive Intelligence Group, Inc. (NASDAQ:ININ)

Q2 2014 Preliminary Earnings Conference Call

July 16, 2014 8:00 AM ET

Executives

Donald E. Brown – Chairman, President & Chief Executive Officer

Stephen R. Head – CFO, Secretary, Treasurer & SVP-Administration

Analysts

Shyam V. Patil – Wedbush Securities, Inc.

Mike Latimore – Northland Securities, Inc.

Craig Nankervis – First Analysis Securities Corp.

Tavis C. McCourt – Raymond James & Associates, Inc.

Ash Shah – OppenheimerFunds, Inc.

Matt E. Galinko – Sidoti & Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the Interactive Intelligence Preliminary Second Quarter 2014 Financial Results conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I'd now introduce your host for today's conference, Steve Head, Chief Financial Officer. You may begin

Stephen R. Head

Thank you, good morning and thank you for joining us today. As you know from the press release press release issued last night Interactive Intelligence announced preliminary information for the second quarter of 2014. For the purpose of this call is to provide a perspective on these results to the extent that we can at this time. Additional details will be provided during our second quarter 2014 earnings call scheduled for August 4 at 4:30 p.m.

With me on the call today is Don Brown, our Chairman of the Board, President, and CEO. Following the prepared remarks by Don and myself, we will then open the call for questions.

Please note that over the course of this conference call, we will make predictive statements about our preliminary results, our performance, plans, and objectives in an effort to assist you in understanding our company. The enterprise software industry, combined with the rapidly evolving uncertainties and 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 from the information presented during this call, and you should review the section on forward-looking statements contained in today's earnings release as well as our 2013 Form 10-K and other public filings with the SEC, 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 statement.

Also during this call, we will refer to non-GAAP financial measures. These non-GAAP results eliminate the impact of non-cash stock-based compensation expense and purchase accounting related adjustments. Management uses these non-GAAP financial measures in analyzing the business.

With that, I'll turn the call over to Don.

Donald E. Brown

Thanks, Steve, and thanks to everybody for joining us on the call today on such short notice. Our preliminary results for the quarter obviously fell short of expectations. And this is a disappointment to the team since we entered the quarter with a strong backlog. But we were impacted by the signing delay of some large premise based orders primarily in North America. And also we had expected to recognize revenue for certain product orders received in prior quarters, but were not able to recognize that revenue in the second quarter. And in that combination on a preliminary basis puts our total revenues in the range of $78 million to $80 million, or an increase of 2% 5% year-over-year and our non-GAAP operating loss is expected to be in the range of $6 million to $7 million.

As we have stated in the past, there is potential for variability in our reported results on a quarter-to-quarter basis considering that we have a hybrid cloud premises based business model. In addition to the fact, that we can close the number of sizable deals in any particular quarter. In regards to our cloud business, orders increased 68% in the second quarter year-over-year, when you factor out the blockbuster deal we received the largest cloud order in the Company's history in this quarter last year.

In addition, cloud-based revenues are expected to increase about 75% year-over-year and account for about 30% of recurring revenues, up from 22% in the second quarter of 2013. Despite the Q2 underperformance in premises orders, we continue to believe that Interactive Intelligence is well-positioned to maintain momentum in the cloud market long-term, especially given the recent launch of pure cloud.

As a reminder this is our next-generation effort that leverages modern open source technologies in the Amazon Web Services as the deployment back end. This will give us a multi-tenant solution that is ultra easy to deploy and capable of handling the needs of both very large and small customers. And do all of this in a much more efficient in a much lower operating costs.

We continue to be on track to release pure cloud directory and pure cloud social customer service in Q3 as well as pure cloud unified communications and pure cloud contact center in Q4. We are seeing strong interest and enthusiastic feedback from the pure cloud trials, which are taking place in some extremely large organizations.

In summary, while the results for this particular quarter were lower than we expected, I remain very confident in Interactive Intelligence’s future due to ongoing demand for our solution, a growing global pipeline of opportunities. Our commitment to innovation and our ability to execute our comprehensive plan for addressing the opportunity of the cloud.

With that let me turn it over to Steve.

Stephen R. Head

Thanks, Don. On a preliminary basis, total revenue as we’ve noted is expected to be in the range of $78 million to $80 million. For the second quarter of 2014, product revenues are expected to be between $21 million and $22 million. The primary reason for the shortfall was the delay in signing large premise orders in North America, and because we did not recognize two large contracts signed in prior quarters that we had expected to recognize in the second quarter of this year. After the second quarter recurring revenue, which includes both maintenance contracts and subscriptions excuse me is expected to be approximately $44 million to $45 million or up 25% or more year-over-year. And that includes the increased in cloud revenues to approximately $13.8 million. Services revenues are expected to be between $13 million and $14 million.

In regards to profitability, while we are still in the closing process we initially expect our second quarter non-GAAP operating loss to be in the range of $6 million to $7 million compared to our expectations of approximately break-even results. As we noted in the release, excluding the largest cloud-based order in the company’s history received in last year second quarter. Total orders did increased by 12% from the second quarter of 2013 and cloud-based orders were up 68%.

As a reminder, the second quarter results are preliminary and are subject to change based on the completion of our normal quarter-end review process. We’ll provide additional financial details and customary metrics on our quarterly earnings conference call on August 4.

And now, I’ll turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Shyam Patil of Wedbush. Your line is open.

Shyam V. Patil – Wedbush Securities, Inc.

Hi guys, thanks for hosting the call this morning. I just had a couple of questions. In terms of the two reasons that you cited. Could you maybe elaborate on those in terms of this slip deals the reason, was it the timing issue and if so kind of what was behind that? Was it competitive? And then on the revenue recognition was this on the cloud business or was it on premise? And just what just maybe more color what happened and kind of what to expect there?

Donald E. Brown

The large orders that we didn’t get. I think what we are learning continuing to learn is that as we go up market and get into these very large deals. They just take longer to get done than had been our experience previously. Just going through the legal process, the approval process in these large corporations is inherently unpredictable. And the way things have worked out we’ve had some blockbuster quarters here in the last couple of years, and when things come together and especially when we get a couple of those in the quarter things look great.

When we have a quarter like this one, where things just take longer to get the approvals, not because of competitive pressure or anything else, just these are big companies and they have their own processes that we are not able to impact in any significant way. Then we can end up with some meager looking results, and that is what happened this quarter.

So we're trying to learn from that, we're trying to be more realistic about how we forecast, especially the larger deals, the process we go through to qualify them before we even put them on our pipeline, forecast rather for the quarter. And then we are trying also, it's been a focus of this year we're making some lurching progress toward it to be less dependent upon the big deals, do a little bit less whale hunting, especially in North America and build up a better mass of midsize deals, which our pipeline shows that we are, we just didn't bring them through this quarter the way that we would have liked to.

Stephen R. Head

On the revenue recognition question Shyam, that was two different deals roughly $2 million each. One was Sallie Mae, which is a customer we have had for a while which we have been recognizing over time. And they signed an expansion of the professional services work.

As you remember, that contract required us to recognize over time as we delivered on professional services because professional services and the license agreement we're tied together. Since they expanded the work on professional services, which on one hand is a good thing, it’s more revenue over time.

It did cause us to recalibrate the amount of revenue we are recognizing in the current period, because we have to stretch it out now. And as a result we recognized much less revenue in Q2. That revenue will still be recognized, and I expect a significant portion of that this year. But it wasn't recognized in the second quarter as we had expected.

Donald E. Brown

So let me emphasize Steve's point there. And I think that’s kind of illustrative of the quarter in general. We were burned in that case because the customer placed additional orders with us that changed the revenue recognition to push it out of the quarter.

Stephen R. Head

And on the other one, we have a customer that is in deployment, is utilizing the software but has not signed off. In part because they have one additional piece of software that they licensed, but have not yet put in production and they haven’t signed off on the system. We were expecting that customer to sign off in the quarter. It didn't happen. So we’re continuing to evaluate how we account for that going forward. I expect we will pick-up a reasonable portion of that revenue in the remainder part of the year.

So in both of those cases it was just a delay in the revenue recognition timing. When we come out with our updated forecast for the remainder of the year, that we will talk about on August 4 we will factor these in as appropriate based on our continued analysis of the situation.

Shyam V. Patil – Wedbush Securities, Inc.

Great and then just one follow up. You're probably not ready to comment on the 20% order growth guidance for the year and whether or not you're going to revise that. Seems like that that could potentially come down, but putting this – your side and looking out to next year and the hereafter.

Do you still feel like 20% order growth is the right target? Given the pipeline your move-up market along with pure cloud, but not necessarily this year but just be on this year do you still feel like that’s still the right way to think about the growth trajectory of the overall business?

Donald E. Brown

We feel the underlying business is very strong. The core business certainly is continuing to grow with that rate as we illustrated having the one huge deal last year through a big bump in their and so we are still trying to consume that while growing at the same rate that makes the mathematics a little bit difficult as you can see.

But certainly our core business is continuing to grow at 20% we think that can continue into next year and beyond and while we haven't done any planning for next year yet, just on a qualitative level. We think pure cloud is going to greatly improve our competitive position and we will allow us to ramp up growth and we think easily maintain that sort of growth rate target.

Shyam V. Patil – Wedbush Securities, Inc.

Great thank you.

Operator

Thank you. Our next question comes from Mike Latimore of Northland Capital. Your line is open.

Mike Latimore – Northland Securities, Inc.

Good morning, thanks a lot. On the cloud bookings, did the cloud booking meet your sort of internal expectations in the quarter?

Donald E. Brown

I think that they we had pretty lofty expectations. Because again we have set the bar even including that huge deal for last year. So in North America they fell short of what we had wanted. As the numbers showed it is still a pretty hefty growth rate of that core business. We probably set the bar a little bit too high, so we fell short in that regard, but we are still pretty strong.

Mike Latimore – Northland Securities, Inc.

Right. But it wasn't sure just because of large deals pushing out? Or what was the main factor?

Donald E. Brown

Well, sure. Mainly because we set the bar too high I think we were a little bit unrealistic to expect it to grow at that rate with the tough comparison against that enormous quarter last year. So that’s the main factor. As I alluded earlier, I do think, we were taking a look at North America. We’ve been very lucky, not lucky, but very successful at winning huge deals here at the last couple of years.

And I think maybe we’ve become a little bit intoxicated with the idea of going after those huge deals, what I referred to as whale hunting. And so we still want to hit some more whales out there, but we’ve got a do better at making sure the sales forces focused on some other big fish, not just whales. So we're going to be taking some corrective steps. I think that probably did have some impact on the quarter maybe not in a material way, but it’s a trend that we’ve identified that we want to do something about.

Mike Latimore – Northland Securities, Inc.

All right. I mean just by my calculations it looks like the absolute dollars booked we're probably down sequentially. I guess, 2Q tends to be a little bit seasonally strong it seems like maybe or maybe seasonally weaker I mean any thoughts on kind of seasonality in cloud bookings?

Donald E. Brown

I’d like to Steve, Steve is looking through the numbers I will let him respond to that one.

Stephen R. Head

Well, we will go into some more metrics as we already stated Mike when have our call on August 4. But given that large contract we had a year-ago orders or down comes from the second quarter a year-ago. But they – we had a good, we had a pretty good second quarter, but we did not do as well as we had expected as Donna's already referenced.

Mike Latimore – Northland Securities, Inc.

Okay. And just in terms of the sales head count any changes to sales head count plans for the year?

Donald E. Brown

No, but we’ll talk more about some of those sorts of metrics on the August 4 call. But we at this point, we are in the process of evaluating a lot of different areas of the business and sales are spending a lot of time sales management assessing, how they are going about their prospecting and forecasting and sales processes and we are just addressing a lot of different areas of the business right now. But no, we really haven't made any changes to the staffing expectations in sales.

Mike Latimore – Northland Securities, Inc.

Okay, thanks.

Operator

Thank you. Our next question comes from Craig Nankervis of First Analysis. Your line is open.

Craig Nankervis – First Analysis Securities Corp.

Thanks, good morning. Could you talk Don about what your overall on premise growth outlook might be for the medium term? Do you think the premise business largely at the end of the day; as a flat business that it's up in single digits? Or could you see something more than that? How do you look over a longer period of time at your premise outlook?

Donald E. Brown

Well, I can – for any numerical trends I’ll let Steve comment on what we've seen so far. My perspective is that cloud is where the opportunity is. And so the implication of that is that premise will become less important over time. We still have a very robust premise business; there are still companies out there who are not believers in the cloud. I met with the VP of infrastructure at a big insurance company up in Chicago yesterday. And they made it very clear to me that they are you know there are some pieces around the edge, they are moving to cloud.

But that fundamentally they are very old conservative company and they are going to continue to buy stuff and deploy it in their data centers. So you know there are still companies out there, on the other hand I was at a Fortune 500 company met with the CIO about a month or so ago and he is very excited about the notion of moving all their core systems to the cloud. So this is a transitional time, but a lot of people are figuring it out and coming down on different sides of the equation.

But from what we see, we are going to be calm. And I think especially with pure cloud, we are going to become an extremely strong cloud company. So that part of our business, no matter what is going to outgrow the premises part. And so you know roughly we are thinking the premises part will stay flat and the cloud part is going to continue to grow at a rapid clip.

Craig Nankervis – First Analysis Securities Corp.

It was interesting at the analyst event you had a month or so ago, you talked about your largest pipeline that you've had and that the mix of that if I remember correctly. The mix of that was characterized as roughly half of that large pipe was for premise business. Correct me if I am wrong and sort of trying to figure out what to make of that, given what you've just said?

Stephen R. Head

Yeah, no I don't think so. I think the numbers I recall, when we had done our pipeline analysis and now I can't recall if this was worldwide or just North America. But the pipe at that time was something like 70% plus cloud.

Craig Nankervis – First Analysis Securities Corp.

It was, okay.

Stephen R. Head

Yeah.

Craig Nankervis – First Analysis Securities Corp.

I remember wrong.

Donald E. Brown

I think that was North America, but we are clearly seeing that move toward the cloud, on product orders have been down on the first two quarters and it showing in the revenue. We’ll again on August 4 talk about what we expect the expectation for the year. And then what happened in the second quarter as we've already said is that, from a revenue recognition standpoint there are some premises orders that we didn’t get signed.

So we have to continue to work with sales as they’re updating their forecast for the rest of the year and can talk more about what we expect the total year outlook to be. But you know the fact is on the first half of the year the product orders have been down year-over-year.

Craig Nankervis – First Analysis Securities Corp.

There were no – it sounds like there were no auditor hot buttons that in the way you are recognizing revenue for the quarter and given that what I assume is the case it was a little surprised at why interactive was so late to preannounce here and why we might not have heard from you guys a week or more earlier than we did, is there any comment on that part?

Donald E. Brown

Well, I mean Craig we do get you know in spite of not getting a few of the orders we expect that we did get quite a few orders and we have to analyze those contracts, and we do have our auditors review all of those contracts. And it takes them time, and we finally we’re working with them and had them signed off basically on our contracts as of yesterday.

So while there – we didn't have a difference in accounting until they look – we look through them and we determine the accounting and they have a chance to review what we determined. It just takes a certain amount of time and then the other half of it is not just the revenue, but it’s the bottom line and you know there is a number of financial metrics that we have internally that are tied to revenue and so we have to get the revenue determined then we can determine the rest. So it just takes with that much time and for what its worth we did have a holiday and between that caused us a little more delay.

Craig Nankervis – First Analysis Securities Corp.

Great.

Stephen R. Head

I'm going to jump in and just to add that the last thing we wanted to do was to rush out with a number and then come back and say, wait a second we discovered something and that number is off. So we took a couple of more days to try to make sure that we had as accurate picture as we could for you. But I will very much emphasize, there is nothing, no hint of impropriety or any sort of problem with the auditors, or anything like that around these numbers. We are just fairly conservative guys and we took a conservative approach in how quickly we wanted to push this information out.

Craig Nankervis – First Analysis Securities Corp.

Sure, thank you. And it’s really quickly, lastly. What is the pipeline that you are so excited about if we remove sort of four issues or however maybe the large premise orders in North America, and the two deals that we had revenue recognition. If we sort of take that off the table for a second. And you look at your tone of business for the second half versus what you might have expected your tone of business to be at the beginning of the year. How do those two aligned at this point in your mind Don?

Donald E. Brown

Well, let me just say it in this semi technical way, we have a killer pipeline. So those factors aside, and I’ll let Steve that’s why he has got more gray hair than I do. I let him worry about that stuff. My job is to figure out how we build new business. And the pipeline that we are putting together is certainly at a historic high and continues to grow. So I'm extremely excited about that and it’s really fun for me to see how much of that pipeline is now growing to be pure cloud.

Craig Nankervis – First Analysis Securities Corp.

Thank you very much.

Donald E. Brown

Sure.

Operator

Thank you. Our next question comes from Tavis McCourt of Raymond James. Your line is open.

Tavis C. McCourt – Raymond James & Associates, Inc.

Hey, thanks for taking the questions. Guys, Steve I have a technical one on the financials and then a bigger picture one for you Don. Based on your GAAP guidance for Q2 or your indication for Q2. Does that include kind of a normal tax benefit for net loss? Or should we factor in a relatively low tax expense?

And then Don, I mean I guess strategically is – as you guys go after bigger and bigger deals or have over the last couple of years is part of what’s going on here is the big legacy vendors in this space really don’t have a valid cloud competitor, so are they getting more aggressive at holding on to the premise business? Or is that kind of over thinking it at this stage. Thanks.

Donald E. Brown

I'll jump in the second one first. No I don’t think it’s overstating it. The legacy guys are really scrambling. And yeah it makes it a dogfight sometimes in these large premises deals where we are trying to displace one of the incumbents. Yeah, these guys are pulling out all the stops, because that’s really all they’ve got. They've got to work to try to save these current installs, and they are doing everything they can you know bring in their execs trying to have last minute meetings with the execs who are making these decisions. And so it’s a dogfight out there to get these deals done, it is slowing them down. Because they are seeing this business crumble around them. So the legacy deals, especially the large premises deals are very competitive in that way.

Stephen R. Head

On the tax expense tab, as we didn't included in this release. Our normal closing process is that, we prepared the financials and we work with our tax advisors and then with our auditors, two different firms and they evaluate that tax credit, in this case that we would be recognizing. And we happen gotten all the way through the process. So rather than, I would rather wait and comment on that, when we release on August 4, we just need to evaluate that we would be booking our credit and we have to evaluate, realize ability of that credit. And it’s just a process it takes a little more time than where we are at right now with the closing process.

Tavis C. McCourt – Raymond James & Associates, Inc.

Okay, so the GAAP operating loss that you mentioned that’s an EBIT loss – that’s correct?

Stephen R. Head

It’s a non-GAAP operating loss at this point.

Tavis C. McCourt – Raymond James & Associates, Inc.

Okay, and then Steve, on the cloud revenue this quarter, 13.7 – I guess it looks like they were up a few $100,000 sequentially which is less than sequential growth that you had historically for cloud revenues. I remember on a last conference call, you had mentioned something about revenues being artificially high. Can you remind about that and kind of how should we think about the sequential revenue growth for cloud, given that the strong order growth?

Stephen R. Head

Yeah, well I think the best reference point is to the year-over-year in some ways which is 75% growth. We do have one large customer that we’ve talked about that has the significant usage on the first quarter and that inflated the first quarter usage numbers. And that we expected the second – didn’t expect to see the significant growth in the second quarter, but we clearly expect growth during the third and fourth quarters of this year.

Tavis C. McCourt – Raymond James & Associates, Inc.

Okay, thanks a lot.

Operator

Thank you, again. (Operator Instructions) Our next question comes from Ash Shah of OppenheimerFunds. Your line is open.

Ash Shah – OppenheimerFunds, Inc.

Guys. Couple of questions first. Can you talk a little bit about size of these deals like how – how much bigger are they – in the past? So if you are just taking aren’t to close do you feel it’s just the size of the deal or they going to consider go into cloud or is there something more to it than that?

Donald E. Brown

Well, there are both of those dynamics at play now that I think do tend to elongate these deals. In some cases it's fairly clear cut as I mentioned like the large insurance company in Chicago. But for a lot of companies, they do want to go through that thought process even if they’re not committed to it there sometimes they're obligated to at least look into that possibility we put together our cloud quote for them they – you get sticker shock may be at the long-term implications of subscription model and then revert back to their original thinking and that ends up pushing those deals out.

But we are just dealing with more large deals and a couple years ago for us a million dollar deals was a large deal. And now we are talking about orders of magnitude more than that and so we are still learning the ropes a little bit about how you deal with those sorts how you working with the political ladder to verify especially the timing of those deals which is the biggest pain for us to try to predict them in any given quarter. But we are getting better and better and each one that we win puts us in a better position in terms of credibility.

Ash Shah – OppenheimerFunds, Inc.

So with these deals over 5 million each or something like that? Is that we're talking about?

Stephen R. Head

Yeah, we have a number of certainly deals in that order of magnitude. Actually quite a few of that in larger magnitudes.

Ash Shah – OppenheimerFunds, Inc.

[Indiscernible]

Donald E. Brown

After you referring to the deals that…

Ash Shah – OppenheimerFunds, Inc.

Yes.

Donald E. Brown

… didn’t get signed in the quarter.

Ash Shah – OppenheimerFunds, Inc.

Yes, that’s exactly.

Donald E. Brown

Yeah, I don’t think that those particular deals were $5 million deals they were multi million dollar deals so it's somewhere between $1 million and $5 million.

Ash Shah – OppenheimerFunds, Inc.

Okay.

Donald E. Brown

So they were large deals, but just to want – we do have a lot deals that are even larger than that…

Ash Shah – OppenheimerFunds, Inc.

Yeah

Donald E. Brown

…working on.

Ash Shah – OppenheimerFunds, Inc.

Yeah. I'm just curious on the timing of the push are they looking hay lets instead of doing you know let’s just move to cloud instead of doing on premises.

Donald E. Brown

Well, there is some of that of course, we announce this new pure cloud direction of the conference and so customers want to take they want to better understanding of how that factors into things. I know of at least one order in excess of $5 million that we were expecting, well in order that was – I believe we were expecting something on the order of $15 million and ended up being we got an order but it was a partial order much less than that. A fraction of that, so that was one that came as a big surprise.

Ash Shah – OppenheimerFunds, Inc.

Because they went to cloud or…

Donald E. Brown

Yeah, it was just an order they ended up placing a smaller cloud order and we expect to see the rest of it. But it was something that we were counting on to fill the big chunk of the quarter that we ended up not getting that was well an excess of $5 million.

Ash Shah – OppenheimerFunds, Inc.

Do you think some companies are going to push out or pushing out orders in your view of the new pure cloud product as well?

Donald E. Brown

Well, fortunately we are not seeing a whole lot, we are not seeing companies differ just saying, hey tell you what we’re just not going to order until pure cloud is out. We are not seeing a lot of companies who just want more of a breathing on what is that mean from me, if I go ahead and order cash today. And we are trying to address that by making it contractually easy for them to migrate to pure cloud at some point in the future when they are ready. So I don’t think it’s so much causing orders to slip as just elongating their sales cycles a little bit as we’ve got a deal with those questions.

Ash Shah – OppenheimerFunds, Inc.

And in terms of the cloud bookings being below expectations for the quarter, do you think that’s a sales force issue or market issue or an expectation issue that you had set up internally?

Donald E. Brown

Oh, I blame everything on sales. I have to take some responsibility for that one I think to expect their sales guys to have put up a huge quarter on top of an enormous deal that we got this quarter last year was probably not realistic. And I was probably a little bit unfair to them. But I do think their execution issues, as I say the biggest one that we are looking at is just the easy intoxication with those big orders. It becomes very attractive to sales guys to see the big $40 million, $50 million order and say, hey I want to go after that instead of working on 10 or 12 smaller orders. So we’ve got to work on that and I think Paul is taking the appropriate steps to make sure people's minds are right.

Ash Shah – OppenheimerFunds, Inc.

What steps are those?

Donald E. Brown

Well, just to changing the way the sales force is directed how they are split up into different segments of the market. For next year, we will be looking at commission schemes and those sorts of things to make sure that, well we want to reward people for booking those big orders. We don’t want those to become the be-all and end-all that every sales person strives for. So there are several just blocking and tackling ways that we can address that, some we’re taking into short-term. But we’ve got some good ideas, but how we can address those next year and beyond.

Ash Shah – OppenheimerFunds, Inc.

Is that something you’ve been working on for the whole year or is it something you just going to start working on now?

Donald E. Brown

Well it is something we have worried about for a while. This quarter has really made us sit up and take notice that how dependent we are on some of these big orders and the timing of them. And so we are not making any drastic changes. We think we’ve got a good strong business; we never have wanted to run it on our quarter to quarter basis, because we don’t feel like that’s the right way to build a long-term business.

But you know there is some small steps that we are taking even here at midyear to really emphasize to sales people that we want them and expect them in order to achieve the sort of recognition that we lay out for them, that they’ve got to bring in more new deals and that just going out and signing one blockbuster deal that’s not enough. That even if you sign a $15 million deal you are going to have to sign some other new logos in order to really get the sort of recognition and credit that we want them to go after.

Ash Shah – OppenheimerFunds, Inc.

Is your expectation that cloud bookings would be up sequentially, Q2 over Q1? I am just trying to figure out if you're missing your cloud bookings number internally, what were you kind of expecting?

Stephen R. Head

Well, we’ve never talked about specific order expectation and but clearly, as we have already said, we came in below where we expected to be. So it was not a stronger quarter, as we had hoped it would be. So we did sign quite a few new customers, we will talk some of those metrics and signed a number of million dollar deals and $250,000 deals and all of those things. We will talk about those metrics, on August 4, but you know what really prompted the preannouncement as a fact that product revenues came in short and as a result that affects the bottom line.

Ash Shah – OppenheimerFunds, Inc.

But I mean on top of that, if your orders are not, what you expect and it’s hard to get that 20% order number that you recently lay out as well.

Donald E. Brown

Yeah, I will refer back to what we said in prepared remarks, that our cloud business, orders increased 68% year-over-year when you exclude the one outlier last year. So, we look at that and believe that our core cloud business continues to grow at a very rapid pace.

Ash Shah – OppenheimerFunds, Inc.

Okay thank you guys very much.

Donald E. Brown

You bet.

Operator

Thank you. Our next question comes from Matthew Galinko of Sidoti. Your line is open.

Matt E. Galinko – Sidoti & Co. LLC

Yeah, thanks for taking the question. I'm just wondering if the timing of Interactions June maybe got a few more customers thinking about your cloud maybe if that had any impact on the closings in the quarter?

Donald E. Brown

Well, we knew that that was a possibility. And sure, when you have an event at the end of the second quarter when it’s talking about our product – our brand new product. And especially one of the customers can’t buy it. There is no way that it can have a positive impact on the current quarter’s business.

So, we approach that with some trepidation, but we felt like we had no choice, but to go ahead and announce this product customers want to know they come to that conference wanting to know what’s coming and they need that confidence from us is a technology company that we’ve got a next act. We got something else up our sleeve.

So as I said we are not aware of any cases where large orders that we were expecting to happen in the second quarter slipped because customers said, we are just going to wait for Q4 or Q3 for pure cloud. But customers have a lot of questions about pure cloud they are very excited – we’re excited about pure cloud and so that lengthens the sales cycles if nothing else.

Matt E. Galinko – Sidoti & Co. LLC

Gotcha. And then maybe one more I know that Interactions, at the Analyst Day you talked a little bit about you know pushing on the channel a little bit more with pure cloud to possibly, move a little bit more back to that traditional model. So I am just curious, if you see that sort of one of the paths that take to smooth out order flow and sort of back over the next couple of years.

Donald E. Brown

Yeah, it is I mean its part of the larger strategy which is just to do more midsize deals, as I said we love $40 million, $50 million deals will take us many of those as we can get, but what we do really like to do would be to fill the fun all with lots and lots of $1 million, $2 million, $3 million, $4 million deals. And we do believe that the channel can help in that sort of range.

So it’s been nice to see our channel partners, embrace pure cloud some of their early trials that we are doing have been in conjunction with existing channel partners we attracting new channel partners. So we do want to engage the channel more effectively then we were able to with the first generation cash product we have an essence had to go around the channel and do it ourselves.

But I think there’s greater recognition in general in the market of what the direction for cloud is we’ve got more channel partners coming to us and saying we are ready to jump on Board with cloud in general and it’s certainly looks like pure cloud is the vehicle that we can drive. So that is definitely part of our strategy to are really engage the channel especially as we launch pure cloud.

Matt E. Galinko – Sidoti & Co. LLC

Great. Thanks.

Operator

Thank you. I'm not showing any further questions in queue. I would like to turn the call back over to management for any further remarks.

Donald E. Brown

Okay, well, thanks everybody. I just want to emphasize that, we feel that our core businesses are very strong. We are excited about where we are going and I think we’ve got great solution especially as business moves to the cloud we will give you more information about this current quarter and our outlook for the year at our schedule call on August 4. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program. You may all disconnect to everyone have a great day.

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